Final Exam -- Spring 1996

rainbow bar Part A. True-False Questions (1 point each). Instructions: Indicate on the answer sheet provided whether each of the following questions are true (T) or false (F).
1. Given production possibilities (a) depicted in Figure 1, the combination of civilian and war goods indicated by point Y is unattainable to this economy.
2. Given the production possibilities curves depicted in Figure 1, the movement from curve (a) to curve (b) indicates an improvement in war goods technology but not civilian goods technology.
3. Surpluses drive competitive prices up; shortages drive them down.
4. If the demand for wheat is highly price inelastic, a bumper crop may reduce farm incomes.
5. An effective price ceiling will result in persistent shortages of a product.
6. Referring to Figure 2, both firms are selling their products in purely competitive markets.
7. In Figure 2, the demand for Firm A's product is perfectly inelastic.
8. According to Figure 2, the demand for Firm B's product is elastic at all prices below $4.
9. Diseconomies of scale stem primarily from the difficulties in managing and coordinating a large-scale business enterprise.
10. The law of diminishing marginal utility explains why short-run production costs eventually begin to increase at an increasing rate.
11. The steeper the slope of the aggregate expenditures line, the smaller the value of the autonomous spending multiplier.
12. Lower than expected inflation benefits creditors.
13. By increasing access to information about job openings, the government can lower frictional unemployment.
14. In GDP accounting, G includes the interest paid on the debt.
15. When money is used to compare the relative values of other goods, it is being used as a medium of exchange.
16. The Fed's primary tool of monetary policy is changes in the reserve ratio.
17. If the Fed raised the required reserve ratio, excess reserves would also increase.
18. The reserves of commercial banks are an asset to commercial banks and a liability to the Federal Reserve System.
19. The impact of monetary policy will be lessened if the money demand curve is steep.
20. The impact of monetary policy will be greater if the Keynesian investment function is flatter.
rainbow bar Part B. Multiple Choice (3 points each). Indicate on the answer sheet provided the best answer for each of the following questions.
1. Which of the following will not shift a nation's production possibilities curve?
A. The discovery of new superconductivity materials which makes manufacturing more efficient.
B. An increase in the rate of unemployment.
C. The wide spread application of irrigation to its agricultural land.
D. The acquisition of more education and training by its labor force.
E. All of the above will shift the production possibilities curve.
2. If the production possibilities curve was a straight line, this would imply that:
A. the opportunity cost of producing either good increases as more of each is produced.
B. the law of increasing costs is present.
C. economic resources are perfectly shiftable between the production of the two products.
D. that resources are specialized and some are more suited for the production of a particular good.
E. All of the above except C.
3. Referring to Figure 3, starting at point A, the opportunity cost of producing each successive unit of tractors is:
A. the reciprocal of the output of tractors.
B. 8, 6, 4, and 2 units of bread.
C. 2, 4, 6, and 8 units of bread.
D. a constant 2 units of bread.
E. a constant 5 units of bread.
Table 1
Alpha's Production Possibilities
A B C D E
Fish (tons) 80 60 40 20 0
Chips (tons) 0 5 10 15 20
Beta's Production Possibilities
A B C D E
Fish (tons) 240 180 120 60 0
Chips (tons) 0 10 20 30 40


4. The production possibilities curves in Table 1 show that:
A. Beta has a comparative advantage in producing chips.
B. Alpha has a comparative advantage in catching fish.
C. Alpha is subject to constant costs and Beta is subject to increasing costs.
D. Beta is more efficient than Alpha both catching fish and in producing chips.
E. the production possibilities curve for both countries is bowed outward.
5. Referring to Table 1, Beta:
A. will export both fish and chips to Alpha.
B. will not realize gains from specialization and trade.
C. should specialize in producing chips and trade with Alpha for fish.
D. should specialize in catching fish and trade with Alpha for chips.
E. None of the above.
6. Which of the following generalizations is correct?
A. The more inelastic the demand for a product, the larger the portion of an excise tax which is borne by sellers.
B. The more inelastic the supply of a product, the larger the portion of an excise tax which is borne by buyers.
C. The more elastic the demand for a product, the larger the portion of an excise tax which is borne by buyers.
D. The more elastic the supply of a product, the larger the portion of an excise tax which is borne by buyers.
E. None of the above.
Answer the next two questions on the basis of Figure 4 in which S is the before-tax supply curve and St is the supply curve after the imposition of an excise tax.
7. In Figure 4, the total tax payment to government is shown by area(s):
A. A only.
B. A + B + C + E + F.
C. A + B.
D. A + B + C.
E. E + F.
8. In Figure 4, the total amount of tax paid by consumers is shown by area(s):
A. A + B + F.
B. A + B.
C. A only.
D. A + B + C.
E. E + F.
9. Which of the following statements is not generally correct?
A. The price elasticity of demand is greater the longer the time period under consideration.
B. The larger the number of close substitutes available, the greater will be the price elasticity of demand for a particular product.
C. The price elasticity of demand is greater for necessities than it is for luxuries.
D. The larger an item is in one's budget, the greater the price elasticity of demand.
E. A perfectly inelastic demand curve is depicted as a vertical, straight line.
10. Figure 5 shows two parallel demand curves. On the basis of this diagram we can say that:
A. between prices P1 and P2, the price elasticity of demand is greater for D1 than for D2.
B. between prices P1 and P2, the price elasticity of demand is greater for D2 than for D1.
C. between prices P1 and P2, the price elasticity of demand is the same for the two demand curves.
D. Not enough information is given to compare the two price elasticities.
In Figure 6, S1 and D1 represent the original supply and demand curves and S2 and D2 represent the new curves. Answer the next two questions on the basis of this diagram.
11. In Figure 6, the indicated shift in supply may have been caused by:
A. an increase in the price of the product.
B. a decrease in the number of firms in the industry.
C. the elimination of a per unit subsidy that producers where receiving from the government.
D. the development of more efficient machinery for producing this commodity.
E. Both A and D.
12. In Figure 6, the indicated shift in demand may have been caused by:
A. a decrease in the price of the product.
B. a decline in incomes if the good is inferior.
C. a decline in the price of a substitute good.
D. a decline in the number of buyers.
E. Both A and B.
13. Referring to Figure 7, diminishing returns sets in at point and output is maximized
at point .
A. A; B.
B. A; D.
C. B; D.
D. C; D.
E. B, C.
14. The law of diminishing marginal returns explains:
A. why there are diseconomies of scale.
B. why short-run marginal cost eventually increases with increases in output.
C. the decline in average fixed cost as more output is produced.
D. increases in wage rates as labor becomes more scarce.
E. why the additional satisfaction a consumer derives from consuming a product eventually begins to fall as the consumer buys more of the product.
15. Based on Figure 8, which of the following statements is true?
A. The marginal cost at Q1 is the slope of line 0A.
B. The marginal cost at Q2 is the slope of line 0B.
C. The average total cost of producing Q2 is the slope of line 0B.
D. Both A and C.
E. Both B and C.
16. A firm may experience economies of scale if:
A. labor becomes more specialized as plant size increases.
B. capital becomes more specialized as plant size increases.
C. the firm is more likely to receive volume discounts on the price of the inputs it purchases as plant size and output increases.
D. the marginal product of labor increases as more labor is added to a fixed capital stock.
E. All of the above except D.
Answer the next four questions using Figure 9. All data are for a profit-maximizing (or loss-minimizing) firm in the short run.
17. The firm depicted in Figure 9 is selling under conditions of:
A. pure monopoly.
B. perfect competition.
C. monopolistic competition.
D. oligopoly.
E. a dominant firm.
18. In Figure 9, if the product price is P3, the firm will:
A. shut down.
B. produce Q5 units and earn only normal profits.
C. produce Q4 units and make economic profits.
D. produce Q1 units and earn only normal profits.
E. produce Q4 units and make only normal profits.
19. In Figure 9, if product price is P2, the firm will:
A. shut down.
B. produce Q2 units and make an economic profit.
C. produce Q2 units and incur a loss that is greater than fixed cost in absolute value.
D. produce Q2 units and make only normal profits.
E. produce Q2 units and incur a loss that is less than fixed cost in absolute value.
20. Referring to Figure 9, which of the following statements are true?
A. The firm will produce an output of Q1 when the price is equal to P1.
B. At output Q1, average fixed cost is equal to P3 - P1.
C. The firm's short-run supply curve is equal to the entire MC curve.
D. Production is only profitable when the price is at P2.
E. At price P1, the firm will shut down in the short run.
21. Figure 10 depicts a constant-cost, perfectly competitive industry in short-run equilibrium. Based on Figure 10, what will happen in the long run, assuming industry demand is constant?
A. Firms will exit. D. All of the above.
B. Price will increase. E. None of the above.
C. Profits will increase.
22. Figure 11 shows the linear, downward sloping demand curve facing a monopolist. Which of the following statements is not correct?
A. At point V, the price elasticity of demand is equal to 1.
B. Area 0QVS is greater than the area 0RWT.
C. The price elasticity of demand is greater at W than at V.
D. The monopolist will maximize revenue at output equal to line segment 0S.
E. The monopolist must lower price to sell more output.
23. Referring to Figure 12, in the short run, the profit-maximizing (or loss minimizing) monopolist will:
A. shut down.
B. produce output 0A and incur a loss.
C. produce output 0A and earn economic profits.
D. produce output 0B and incur a loss.
E. produce output 0B and earn economic profits.
24. Which of the following statements about a pure monopoly is not correct?
A. The monopolist produces a good with no close substitutes.
B. There are barriers to entry that keep out potential competitors.
C. In the short run, the profit-maximizing (or loss-minimizing) monopoly will shut down if P is less than AVC.
D. The firm must earn economic profits in the short run.
E. The firm may earn economic profits in the long run.
25. In America, the largest component of GDP is:
A. consumption.
B. investment.
C. imports.
D. government spending on goods and services.
E. exports.
26. Kimberly voluntarily quit her job as an insurance agent to return to school to earn an MBA degree. With degree in hand, she is now searching for a position in management. Kimberly presently is:
A. cyclically unemployed.
B. structurally unemployed.
C. not a member of the labor force.
D. frictionally unemployed.
E. None of the above.
27. Unanticipated inflation:
A. helps savers.
B. hurts borrowers and helps lenders.
C. hurts people who live on a fixed income.
D. leads to confused market signals and menu costs.
E. Both C and D.
28. A shift of the aggregate demand (AD) curve to the right will have the greatest impact on the price level (P) if:
A. the aggregate demand curve is very flat.
B. the aggregate demand curve is very steep.
C. the aggregate supply (AS) curve is vertical.
D. the aggregate supply (AS) curve is upward sloping.
E. the aggregate supply (AS) curve is horizontal.
29. In the simple Keynesian macroeconomic model, the C0 term in the consumption function could be expected to increase if:
A. the interest rate increased.
B. the level of household debt was at an all-time high.
C. households expect future income to fall.
D. the wealth of consumers increased.
E. the stock of durable goods owned by households was at an all-time high.
30. Which of the following would cause the Keynesian investment function to shift to the right?
A. A decrease in the interest rate.
B. A decrease in expected profits.
C. An increase in the corporate income tax rate.
D. An increase in the price of capital.
E. None of the above.
31. In the simple Keynesian 45 model, if lump-sum taxes are decreased by $10 billion and the equilibrium GDP increases by $40 billion as a result, we can conclude that:
A. the mpc is 0.8.
B. the lump sum tax multiplier is equal to -4.
C. the autonomous spending multiplier is equal to 5.
D. All of the above.
E. None of the above.
32. Referring to the simple Keynesian 45 model discussed in class, suppose the autonomous spending multiplier is 4 and lump sum taxes are increased by $16. We can predict that:
A. the equilibrium level of GDP will increase by $64.
B. the equilibrium level of GDP will decrease by $64.
C. the equilibrium level of GDP will increase by $48.
D. the aggregate expenditures function will shift downward by $12.
E. inflation will occur.
33. Discretionary fiscal policy which decreases the federal government budget deficit has the same impact upon equilibrium GDP as does:
A. an increase in autonomous net exports (NX0).
B. a decrease in autonomous consumption (C0).
C. an increase in autonomous investment (I0).
D. All of the above.
E. Both A and C.
34. Using the model of the money market discussed in class, an increase in the money supply implies:
A. a decrease in the interest rate.
B. an increase in the interest rate.
C. a decrease in bond prices.
D. an increase in bond prices.
E. Both A and D.
35. Using the model of the money market discussed in class, an increase in GDP implies that:
A. the money demand curve shifts to the right.
B. the equilibrium interest rate will increase.
C. the money supply curve will shift to the left.
D. Both A and B.
E. Both B and C.
36. According to Keynes' speculative demand for money, speculators in the bond market will be likely to sell bonds:
A. when the interest rates is high.
B. when the interest rate is low.
C. when the opportunity cost of holding money is high.
D. if future capital gains are expected.
E. All of the above except B.
37. An increase in the money supply usually:
A. decreases the interest rate and causes the aggregate expenditures (AE) curve to shift down.
B. decreases the interest rate and causes the aggregate expenditures (AE) curve to shift up.
C. increases the interest rate and causes the aggregate expenditures (AE) curve to shift down.
D. increases the interest rate and causes the aggregate expenditures (AE) curve to shift up.
38. If the Federal Reserve officials attempt to pull the economy out of a recession when the price level is relatively stable, the policies they would most likely use would be to:
A. sell government securities and increase the discount rate.
B. buy government securities and decrease the discount rate.
C. sell government securities and decrease the discount rate.
D. buy government securities and increase the discount rate.
39. A bank makes a loan to a borrower, who takes part of the loan in cash and the remainder of the loan in the form of a checkable deposit. The maximum amount by which the commercial banking system can increase the money supply by lending will therefore:
A. increase because the quantity of the reserves transferred to other banks will increase and make more loans available throughout the system.
B. remain the same because it does not matter whether the loan amount is taken in currency or a checkable deposit.
C. decrease because the quantity of reserves transferred to other banks has increased from taking part of the loan in cash.
D. decrease because the quantity of the reserves transferred to other banks has decreased from taking part of the loan in cash.
40. Which of the following best describes what occurs when the Fed sells government securities?
A. There is an increase in the size of commercial bank reserves, the money supply increases, and the interest rate falls, thereby causing an increase in investment spending and GDP.
B. There is a decrease in the size of commercial banks' excess reserves, the money supply increases, and the interest rate falls, thereby causing a decrease in investment spending and GDP.
C. There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and the interest rate rises, thereby causing a decrease in investment spending and GDP.
D. There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and the interest rate rises, thereby causing an increase in investment spending and GDP.
rainbow bar Part C. Short Answer Questions (60 points). Give a complete, but concise answer for each of the following questions. Answer each question with complete sentences. When appropriate, use math, graphs, or equations to help explain your answers.
1. "A decrease in supply will lead to an increase in the price, which decreases demand, thus lowering price. Thus, a decrease in supply has no effect on the price of a good." Evaluate this statement. (10 points)
2. Discuss the short-run and long-run impacts on a perfectly competitive, constant-cost industry of a $1 per unit subsidy given to every firm in the industry. (10 points)
3. Discuss the impact of an increase in fixed cost on the price and output of a profit-maximizing monopolist. (10 points)
4. "In the short run, any attempt to reduce the federal government budget deficit will make any recession worse." Explain using the Keynesian 45 macroeconomic model. (10 points)
5. The process of translating money supply changes into changes in demand, output and the price level is called the transmission mechanism. Discuss the Keynesian view of cause-effect chain which results from an increase in the money supply. (10 points)
6. Answer the following questions on the basis of the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. Show your work for partial credit.

Assets Liabilities and net worth
Reserves $51 Checking Deposits $140
Securities 100 Capital Stock 130
Loans 109
Property 10
A. How many excess reserves (if any) are in the banking system? (3 points)
B. What is the maximum amount by which the commercial system can expand the money supply by lending? (4 points)
C. Given your answers in part (B), what does the new balance sheet of the consolidated banking system look like when the deposit expansion process is over? (3 points)
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