FORM A

Name

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Department of EconomicsOhio Wesleyan UniversityDelaware, Ohio

Economics 110Principles of EconomicsFall, 2007Robert J. Gitter

Final Exam

This examination is 100 points and will count 20% of your final grade. Please read the exam overbefore starting. You will have 2 hours to complete the exam. Please note the point values for eachquestion. No books, notes, or any source of outside help is permitted. You are to answer allquestions.

PLEASE LABEL ALL CURVES AND THE AXES ON ALL GRAPHS,

(14 points) a .In the space to the right please drawthe Long Run Aggregate Supply Curve, the ShortRun Aggregate Supply and the Short RunAggregate Demand Curve. Label them LRAS,SRAS and SRAD.

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b. Please label the axes

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c. In the space to the right please draw the LongRun Phillips Curve and the Short Run PhillipsCurve. Label the axes.

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d. Should the Short Run Phillips Curve touch thevertical axes? Explain why in tenns of economicevents.

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e. Suppose the Fed took action to reduce interest rates. Which curve or curves in the Top diagramwould shift in the short run? Explain why the curve (or curves) would shift.

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f. Show the shift you discussed in the TOP diagram. Label the new curve or curves with a 2, e.g.,SP AM2.

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g. In the second diagram, show what happens with the Short Run Phillips Curve. Label it with a 2

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h. In the second diagram show what happens in the long run. Label it with a 3.

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2. (12 points) The T -Account for Manufacturers Bank is given below.

Manufacturers Bank

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If~ serve Requirement was ltO %, what would be the required level of reserves?

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d,:'If the Fed lowered the Reserve Requirement, would Manufacturers Bank make more loans?Explain why or why not.

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d, Let us assume that the Marginal Propensity to Consume was .75. What would be thenumerical value of the multiplier? (The spending multiplier, not the money multiplier.)

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e. If the government took the $20,000 and spent it, would we get the full multiplier effect?Explain why or why not.

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f. What would be the final change in GDP from this $20,000 increase in spending'

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Suppose that Lorraine has $20,000 deposited in this bank. Her money is part of the$100,000 in deposits. If the government sold Lorraine a $20,000 bond, and she took moneyout of the bank to pay for it, would this affect the amount of loans made by the bank?Explain why or why not.

3. (2 points) The text and lectures have stated several costs of inflation. C;~te one such cost andexplain it. " , ,

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States is given in the graph to the right. a~.(~

a. What is the equilibrium price? p .(

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b. Show the level of consumer surplus by theletter " A " in the graph.

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c. What if the world price was $2. If the United Stateswere to allow imports, what would be the price ofpineapples in the United States?

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d. Show the net change in surplus by the letter "8" if the United States were to allow imports ofpineapples. ~ ~ ,P-- + c.,"' (

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5. (4 points) a. Anytime the government spends money, it has basically three ways of obtaining themoney. State them.

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b. Which of the three is the most inflationary?

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Is the demand for tchotchkes elastic, inelastic or unitary?b

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In class we discussed several factors that tend to make the demand for a good inelastic.

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(3 points) Give an example of something that is an economic cost, but not an accounting

cost.

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6. (4 points) The supply and demand for salmon fromAlaska is given in the graph to the right. Show theImpact of an increase in the price of Atlantic -sarmon,caughf1ir"CIille, on the mar~Alaskan salmon.Shift anv relevant curves arid fill in the blank-s-D"e!ow

9. (5 points) Suppose that the infonnation for a perfectly competitiv~,finn is given below.You may assume the price of the product they sell is $5. " i ,

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Cost

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b. What quantity should the firm produce? Why is that the best quantity?

10. (3 points)a. There are three basic types of unemployment. Which one or ones do NOT exist when we

are at the rate of Natural Unemployment?

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b. State a type of unemployment that DOES exist when we are at the natural rate ofunemployment and give an example of someone who would be unemployed for this reason

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11. ( 5 points) Suppose we look at the nation of Mendocino. What they Pf9duced in 2005 and 2006as well as the prices are given below. I;, ; j

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b. Calculate Real GDP for 2005, /" ,..-( r # -'(/ F-e ~vJ.

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Calculate Nominal GDP for 2006.c. vi-r .2.u~ { /"..1 ('"'41

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Calculate the Implicit Price Deflator for 2006.e.

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Multiple ChoiceIdentify the letter of the choice that best completes the statement or answers the question.

13 12. The opportunity cost of an item isa. the number of hours needed to earn money to buy the item.

(!J) what you give up to get that item.c. usually less than the dollar value of the item.d. the dollar value of the item.

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~ 13 Refer to Figure 2-6. What is the opportunity cost to society of the movement from point A to point C?a. 50 baseballs " ;1(8) 100baseballs g,\f'(> (;1" IC/v '.:>~J-(t~ .J

c. 100 bananasd. 300 bananas

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Amount Produced in 24 Hours'Baskets

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Birdhouses

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~ 14. Refer to Table 3-3. Montana has a co~ve advantage ina. baskets and Missouri has a comparative advantage in birdhouses.

&> birdhouses and Missouri has a comparative advantage in baskets.c. neither good and Missouri has a comparative advantage in both goods.d. both goods and Missouri has a comparative advantage in neither good.

15. Refer to Table 3-3. If Montana and Missouri trade based on the principle of comparative advantage,Montana will export

)1,; baskets and Missouri will export birdhouses. ('C:tJ birdhouses and Missouri will export baskets. ."""1". ~ A v ," I J..

c. neither good and Missouri will export both goods.d. both goods and Missouri will export neither good.

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A binding price floor in a market is seta. above equilibrium price and causes a shortage.

@ above equilibrium price and causes a surplus.c. below equilibrium price and causes a surplus.d. below equilibrium price and causes a shortage.

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13 7 Refer to Figure 15-6. To maximize its profit, a monopolist would choose which of the following outcomes?a. 100 units of output and a price of $10 per unit

<1)) 1 00 units of output and a price of $20 per unit /'11l. :",., C 6> ~ -1 """'

c. 150 units of output and a price of$15 per unit 0 (" .~d. 200 units of output and a price of $20 per unit v~ /> -v

c 18. Monopolistic competition differs from perfect competition because in monopolistically competitive marketsa. there are barriers to entry .b. all firms can eventually earn economic profits. I

(9 each of the sellers offers a somewhat different product. ~ /} (> { ..,d. strategic interactions between firms is vitally important.Table 18-2Consider the following daily production data for Davis Golf Balls, Inc. Davis Golf Balls, Inc. sells golf ballsfor 50 cents each and pays the workers a wage of $30 a day.

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c.19. Refer to Table 18-2. What is the value of the marginal product of the second worker?

a. $50b. $62.50

(j) $75d. $150

A- 20..Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regardipg .these two practices,which of the following statements is correct? ./- I;; , ./I ,""

CJi Only Ralph's payments are included in GDP. L1.J1#1J. /'1, , " a'Qf"J ""' {~(.t: lJ

b. Ralph's payments as well as the estimated value of Mike's mowing services are included ,..,C) ~

in GDP. t'"U '/Py;c. Neither Ralph's payments nor the estimated value of Mike's mowing services is included

in GDP .d. Ralph's payments are definitely included in GDP, while the estimated value of Mike's

mowing services is included in GDP only if Mike voluntarily provides his estimate of thatvalue to the government.

13 21 The price index was 128.96 in 2006 and, between 2005 and 2006, the inflation rate was 24 percent. Theprice index in 2005 was lA I ' ...1 "',;)..;. .1'. -,a. 30.95. D ,. :2."" , -/. ~ J."" f' ~ --b. 104.00. ,.. 1.'1 I'J. ) r ..1..,/

.c. 104.96. 1.1.Y-.ft, .~J.- ;2.IIf1r r' ."1.'fP;:; d. 106.67.

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a. knowledge and skills that workers acquire through education, training, and experience.b. stock of equipment and structures that is used to produce goods and services. Jc. total number of hours worked in an economy. I) ~ t .,d. same thing as technological knowledge.

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~ 23 Jack is a full-time unpaid homemaker not currently searching for other work. Jill is a full-time student whois not looking for a job. Who does the BLS count in the labor force?a. only Jackb. only Jill J ,( / ~,,~ i ...c. both Jack and Jill Ne I r' .PI"' J [ .""I ~ ...~ -

@ neither Jack nor Jill

~4. When the Federal Reserve conducts open-market operations to increase the money supply, ita. redeems Federal Reserve notes. I

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c. raises the discount rate.d. decreases its lending to member banks.

A25 If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest

rate would

13 26. For a number of years Canada and many European countries have had higher average unemployment ratesthan the United States. This suggests that these countries vt t'~a. have higher average inflation rates than the United States. t:""f

~ /(§1 have long-run Phillips curves to the right of the United States'.c. may have less generous unemployment compensation or lower minimum wages.d. All of the above are consistent with the evidence on unemployment rates. t/;,1f """'

(f) increase 3 percentage points.b. increase, but by less than 3 percentage points.c. decrease, but by less than 3 percentage points.d. decrease by 3 percentage points.

'A- 21 ~ important factor in the decline of the U.S. textile industry over the past 100 orcso years isW foreign competitors that could produce quality textile goods at low cost. .b. lower prices of goods that are substitutes for clothing. " i

c. a decrease in Americans' demand for clothing, due to increased incomes and the fact thatclothing is an inferior good.

d. the fact that the minimum wage in the U.S. has failed to keep pace with the cost of living.

~28 In the early 1980s, U .S. economic policy was directed toward reducing inflatiori. What would you haveexpected to observe during this short period of time?a. Inflation fell and unemployment fell.b. Inflation and unemployment were both unaffected. A J

@ Inflation fell and unemployment increased. /T/J t d. Inflation fell and unemploymel\TWiiiiiiO\,anged.

Extra Credit (2 points if answered correctly ~no more than one absence in this portion of the course.)

What is meant by the term adaptive expectations?

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