ECON 202-001 Drexel University Summer 2008 Assignment 2 Due date: July 29, 2008 Instructor: Yuan Yuan Name This homework has up to 10 points bonus. Question 1 (40 points, 2 points each): MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ANSWER SHEET: 1) 11) 2) 12) 3) 13) 4) 14) 5) 15) 6) 16) 7) 17) 8) 18) 9) 19) 10) 20) 1) Which of the following would you expect to increase the equilibrium interest rate? A) a decrease in the profitability of investment projects firms are considering B) a change from an income tax to a consumption tax C) an increase in the budget deficit D) an increase in the percentage of income after net taxes that households save 1) 2) When an economy faces diminishing returns, A) the per-worker production function shifts to the left. B) the slope of the per-worker production function becomes steeper as output increases. C) the per-worker production function shifts to the right. D) the slope of the per-worker production function becomes flatter as output increases. 2) 3) During a recession, spending on tends to fall more dramatically than spending on. A) necessities; luxuries B) durable goods; nondurable goods C) food; cars D) nondurable goods; durable goods 3) 1
4) Which of the following is not one of the three sources of technological change? A) better means of organizing and managing production B) increases in human capital C) additional amounts of existing capital D) better machinery and equipment 4) Figure 9-3 5) Refer to Figure 9-3. Which of the following is consistent with the graph depicted above? A) An expected recession decreases the profitability of new investment. B) The government runs a budget deficit. C) Technological change increases the profitability of new investment. D) Taxes are changed so that real interest income is taxed rather than nominal interest income. 5) 6) Some economists argue that the apparent slowdown in economic growth in the United States during the mid-1970s may not really have reduced the standard of living because A) changes in well-being are accurately reflected in statistics measuring economic growth. B) significant improvements in the quality of services occurred although the quantity of these services did not increase much during this time. C) spending on new government regulations such as the Clean Air Act increased output dramatically without increasing the standard of living of Americans. D) higher production costs from higher oil prices raised production and transportation costs and reduced output. 6) 7) Which of the following is an example of the way the financial markets in the United States can encourage technological progress more efficiently than other countries? A) Because the financial market in the United States is so large, the quantity of trading in corporate stocks and bonds makes those investments less liquid. B) The level of legal protection for investors in the United States is relatively low. C) Banks in the United States are more willing to take on risk because the government guarantees each bank cannot lose more than $100,000 on any given loan that defaults. D) Even when entrepreneurs cannot secure sufficient funding for projects from banks, venture capital firms may be willing to lend money. 7) 2
Figure 10-1 8) Refer to Figure 10-1. Suppose the per-worker production function in the figure above represents the production function for the U.S. economy. If the U.S. decided to double its support of university research, this would cause a movement from A) B to C. B) B to A. C) A to B. D) D to C. 8) 9) Which of the following best explains why productivity growth in the United States has been faster than in other leading industrialized nations? A) There are fewer government regulations in the United States regarding the way firms can hire and fire workers. B) The financial systems of foreign countries are generally more efficient than those in the United States. C) Job mobility in the United States is more restricted than it is in many foreign countries. D) European countries have more flexible policies regarding the number of hours employees are permitted to work. 9) 10) Consider two countries, A and B. In country A, real GDP per capita is $6,000. In country B, real GDP per capita is $9,000. Based on the "catch up" theory of the economic growth model, what would you predict about the growth rates in real GDP per capita across these two countries? A) The economic growth model makes no predictions regarding differences in growth rates of real GDP per capita across the two countries. B) The growth rate of real GDP per capita will be lower in country A than it is in country B. C) The growth rate of real GDP per capita in country A and country B will be the same. D) The growth rate of real GDP per capita will be higher in country A than it is in country B. 10) 3
11) Which of the following can explain why some countries have not experienced relatively high growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita? A) Countries that are relatively poor are likely to have a lower quality of health care. B) Many of these developing countries do not have a functioning court system that can enforce laws. C) Countries that are relatively poor are more likely to experience wars and revolutions. D) all of the above 11) 12) Countries that are more globalized tend to have A) lower levels of real GDP per capita. B) higher growth rates in real GDP per capita. C) a higher likelihood of war or revolution. D) lower levels of foreign direct investment. 12) 13) Which of the following is a true statement regarding the economic growth model's predictions and how it actually affects the real world? A) The growth model predicts that poor countries will never catch up with rich countries, but lower-income industrialized countries are catching up to higher-income industrialized countries as a group. B) The growth model predicts that poor countries should catch up with rich countries, but developing countries are not catching up to lower-income industrialized countries as a group. C) The growth model predicts that poor countries will catch up with rich countries, but lower-income industrialized countries are not catching up to higher-income industrialized countries as a group. D) The growth model predicts that poor countries will catch up with rich countries, and this is what we observe across all developmental categories of countries. 13) 14) The static aggregate demand and aggregate supply curve model helps explain A) long term growth. B) output fluctuations in an individual market. C) price fluctuations in an individual market. D) short term fluctuations in real GDP and the price level. 14) 15) The aggregate demand curve shows the relationship between the and. A) inflation rate; quantity of real GDP demanded B) price level; quantity of real GDP demanded C) nominal interest rate; quantity of real GDP demanded D) real interest rate: quantity of real GDP supplied 15) 16) An increase in the price level will A) move the economy up along a stationary short run aggregate supply curve. B) move the economy down along a stationary short run aggregate supply curve. C) shift the short run aggregate supply curve to the right. D) shift the short run aggregate supply curve to the left. 16) 17) The level of long run aggregate supply is NOT affected by A) changes in technology. B) changes in the number of workers. C) changes in the capital stock. D) changes in the price level. 17) 4
18) Potential GDP is also referred to as A) full-employment GDP. B) balanced-budget GDP. C) politico-economic GDP. D) realized GDP. 18) 19) Long run macroeconomic equilibrium occurs when A) aggregate demand equals short run aggregate supply and they intersect at a point on the long run supply curve. B) aggregate demand equals short run aggregate supply. C) structural and frictional unemployment equals zero. D) output is above potential GDP. 19) 20) Stagflation is often a result of A) a negative supply shock. B) an increase in aggregate demand. C) a decrease in aggregate demand. D) an increase in aggregate supply. 20) 5
Question 2 (9 points): Explain three reasons why the productivity slowdown of 1973-1995 occurred? Question 3 (16 points): 1) Explain three reasons why the AD curve is downward sloping. Label each of these reasons / effects. (9points) 2) Explain why the LRAS curve is vertical. (3 points) 3) Explain the two reasons why the SRAS curve is upward sloping. (4 points) Question 4 (25 points, 5pts each): Verbally and graphically explain in the short-run what will happen to AD, SRAS, GDP and the equilibrium price level P in the U.S. as a result of the following events. In each case explain why the AD and/or SRAS curve moves. 1) In September of 2007, the Federal Reserve Board Open Market Committee voted to lower interest rates for the first time that year. 2) President Bush lowered income taxes for individuals in 2001. Explain how this policy affects the aggregate demand curve. 3) Spending on the war in Iraq is essentially categorized as government purchases. Suppose the government increased the spending on the war in Iraq. 4) Canada is experiencing a boom in economic activity. Canada is one of the US main trading partners. How will this increase in Canadian GDP affect AD in the US? 5) Skilled workers leave their home country to seek out better opportunities in the U.S. Question 6 (10 points) Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short run aggregate supply, unemployment, wage rates, equilibrium GDP and the price level. Question 7 (Extra credits: 10 points) What are three key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model? Using the dynamic aggregate demand and aggregate supply model to verbally and graphically explain inflation when total spending increases faster than total production.