Economics Homework 1

Economics Homework 1

Due: before Noon of April 12 (Friday)

Please send it to TA at

1.A competitive firm sells its output for $30 per unit. The marginal product of the 10th worker is 20 units of output per day; the marginal product of the 11th worker is 16 units of output per day. The firm pays its workers a wage of $150 per day.

a. / For the 11th worker, the value of the marginal product of labor is $120.
b. / For the 11th worker, the value of the marginal product of labor is $480.
c. / For the 11th worker, the value of the marginal product of labor is $600.
d. / For the 11th worker, the value of the marginal product of labor is $2,400.

2.A profit-maximizing, competitive firm for which the marginal product of labor is diminishing also experiences

a. / a perfectly inelastic supply of labor.
b. / a perfectly elastic supply of labor.
c. / a downward-sloping demand for labor.
d. / an upward-sloping demand for labor.

3.If the demand curve for computer games shifts to the left, then the value of the marginal product of labor for computer game authors will

a. / rise.
b. / fall.
c. / remain unchanged.
d. / rise or fall; either is possible.

4. Which of the following statements is correct? An individual worker's labor supply curve

a. / can never be backward sloping.
b. / slopes backward if that person responds to a higher wage by taking fewer hours of leisure per week.
c. / slopes backward if that person responds to a higher opportunity cost of leisure by working fewer hours per week.
d. / slopes upward if that person works the same number of hours per week, regardless of the opportunity cost of leisure.

5.Which of the following is included in U.S. GDP?

a. / the value of production by an American working in Morocco
b. / the value of production by a Moroccan working in the U.S.
c. / Both (a) and (b) are correct.
d. / Neither (a) nor (b) is correct.

6.Which of the following is not included in U.S. GDP?

a. / unpaid cleaning and maintenance of houses
b. / services such as those provided by lawyers and hair stylists
c. / the estimated rental value of owner-occupied housing
d. / production of foreign citizens living in the United States

7.Which of the following is included in the investment component of GDP?

a. / households’ purchases of newly constructed homes
b. / net additions to firms’ inventories
c. / firms’ purchases of capital equipment
d. / All of the above are correct.

8.A good is produced by a firm in 2007, added to the firm’s inventory in 2007, and sold to a household in 2008. As a result, on net,

a. / 2007 GDP increased and 2008 GDP decreased.
b. / 2007 GDP decreased and 2008 GDP increased.
c. / 2007 GDP did not change and 2008 GDP increased.
d. / 2007 GDP increased and 2008 GDP did not change.

9.If a U.S. citizen buys a television made in Korea by a Korean firm, then

a. / U.S. net exports decrease and U.S. GDP decreases.
b. / U.S. net exports are unaffected and U.S. GDP decreases.
c. / U.S. net exports are unaffected and U.S. GDP is unaffected.
d. / U.S. net exports decrease and U.S. GDP is unaffected.

10.Steph living in America buys a designer dress produced by an American-owned fashion shop in France. As a result, U.S. consumption increases, U.S. net exports

a.decrease, U.S. GDP is unaffected, but U.S. GNP increases.

b.decrease, U.S. GDP increases, but U.S. GNP is unaffected.

c.decrease, U.S. GNP increases, but French GDP is unaffected.

d.are unaffected, U.S. GDP is unaffected, but French GDP increases.

11.A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result

a.U.S. investment and GDP increase, but German GDP is unaffected.

b.U.S. investment and German GDP increase, but U.S. GDP is unaffected.

c.U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods.

d.U.S. investment, U.S. GDP, and German GDP all increase.

12.Suppose an economy produces only eggs and ham. In 2005, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham are sold at $4 per pound. In 2004, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2005,

a. / nominal GDP is $400, real GDP is $500, and the GDP deflator is 80.
b. / nominal GDP is $400, real GDP is $500, and the GDP deflator is 125.
c. / nominal GDP is $500, real GDP is $400, and the GDP deflator is 80.
d. / nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.

Use the following table to answer the next questions.

GDP / $110
Income Earned by Citizens Abroad / $5
Income Foreigners Earn here / $15
Depreciation / $4
Retained earnings / $5

13.GNP (Gross National Product) for this economy is

a.$96.

b.$100.

c.$105.

d.$110.

14.NNP for this economy is

a.$100.

b.$96.

c.$90.

d.$88.

15.To calculate the CPI, the Bureau of Labor Statistics uses

a. / the prices of all goods and services produced domestically.
b. / the prices of all final goods and services.
c. / the prices of all consumer goods.
d. / the prices of some consumer goods.

16.The market basket used to calculate the CPI in Aquilonia is 4 loaves of bread, 6 gallons of milk, 2 shirts, and 2 pairs of pants. In 2005, bread cost $1.00 per loaf, milk cost $1.50 per gallon, shirts cost $6.00 each, and pants cost $10.00 per pair. In 2006, bread cost $1.50 per loaf, milk cost $2.00 per gallon, shirts cost $7.00 each, and pants cost $12.00 per pair. Using 2005 as the base year, what was Aquilonia’s inflation rate in 2006?

a. / 4 percent
b. / 11 percent
c. / 19.6 percent
d. / 24.4 percent

17.Suppose the price of gasoline increases rapidly and consumers respond by buying a smaller quantity of gasoline. The consumer price index

a. / reflects this price increase accurately.
b. / understates this price increase due to the substitution bias.
c. / overstates this price increase due to the income bias.
d. / overstates this price increase due to the substitution bias.

18.Suppose lawn mowers are part of the market basket used to compute the CPI. Suppose also that the quality of lawn mowers improves while the price of lawn mowers stays the same. If the Bureau of Labor Statistics is able to precisely adjust the CPI for the improvement in quality, then, other things equal,

a. / the CPI will rise.
b. / the CPI will fall.
c. / the CPI will stay the same.
d. / lawn mowers will no longer be included in the market basket.

19.Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent?

a. / substitution bias and introduction of new goods
b. / introduction of new goods and unmeasured quality change
c. / substitution bias and unmeasured quality change
d. / income bias and substitution bias

20.If the price of Italian shoes imported into the United States increases, then

a. / both the GDP deflator and the consumer price index will increase.
b. / neither the GDP deflator nor the consumer price index will increase.
c. / the GDP deflator will increase, but the consumer price index will not increase.
d. / the consumer price index will increase, but the GDP deflator will not increase.

21.Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2 for 1931 and 207 for 2007. Ruth's 1931 salary was equivalent to a 2007 salary of about

a. / $5,874.
b. / $1,089,474.
c. / $1,216,000.
d. / $16,560,000.

22.The consumer price index was 225 in 2006 and 236 in 2007. The nominal interest rate during this period was 6.5 percent. What was the real interest rate during this period?

a. / 1.6 percent
b. / 4.9 percent
c. / 6.82 percent
d. / 11.4 percent

23.Consider two countries. Country A has a population of 1,000, of whom 800 work 8 hours a day to make 128,000 final goods. Country B has a population of 2,000, of whom 1,800 work 6 hours a day to make 270,000 final goods.

a. / Country A has higher productivity and higher real GDP per person than country B.
b. / Country A has lower productivity and lower real GDP per person than country B.
c. / Country A has higher productivity, but lower real GDP per person than country B.
d. / Country B has lower productivity, but higher real GDP per person than country B.

24.If an economy with constant returns to scale were to double its physical capital stock, its available natural resources, and its human capital, but leave the size of the labor force the same,

a. / its output would stay the same and so would its productivity.
b. / its output and productivity would increase, but less than double.
c. / its output and productivity would increase by more than double.
d. / None of the above is correct.

25.We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that

a. / Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation.
b. / Bond A was issued by the General Electric Corporation and Bond B was issued by the state of California.
c. / Bond A has a term of 20 years and Bond B has a term of 1 year.
d. / All of the above are correct.

26.Municipal bonds pay a relatively

a. / low rate of interest because of their high default risk and because the interest they pay is subject to federal income tax.
b. / low rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.
c. / high rate of interest because of their high default risk and because federal taxes must be paid on the interest they pay.
d. / high rate of interest because of their low default risk and because the interest they pay is not subject to federal income tax.

27.The primary advantage of mutual funds is that they

a. / always make a return that "beats the market."
b. / allow people with small amounts of money to diversify.
c. / provide customers with a medium of exchange.
d. / All of the above are correct.

28.Henry buys a bond issued by Ralston Purina, which uses the funds to buy new machinery for one of its factories.

a.Henry and Ralston Purina are both investing.

b.Henry and Ralston Purina are both saving.

c.Henry is investing; Ralston Purina is saving.

d.Henry is saving; Ralston Purina is investing.

29.In a small closed economy investment is $20 billion and private saving is $22 billion. What are public saving and national saving?

a. / $24 billion and $2 billion
b. / $20 billion and -$2 billion
c. / $2 billion and $24 billion
d. / -$2 billion and $20 billion

30.According to the definitions of private and public saving, if Y, C, and G remained the same, an increase in taxes would

a. / raise both private and public saving.
b. / raise private saving and lower public saving.
c. / lower private saving and raise public saving.
d. / lower private and public saving.

31.Suppose that in a closed economy GDP is equal to 11,000, taxes are equal to 2,500, consumption equals 7,000, and government purchases equal 3,000. What are private saving and public saving?

a. / 1,500 and -500, respectively
b. / 1,500 and 500, respectively
c. / 1,000 and -500, respectively
d. / 1,000 and 500, respectively

32.If there is a surplus of loanable funds, then

a. / the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
b. / the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
c. / the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
d. / the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

33.Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market?

a. / an increase in the supply of or a decrease in the demand for loanable funds
b. / an increase in the supply of or an increase in the demand for loanable funds
c. / a decrease in the supply of or a decrease in the demand for loanable funds
d. / a decrease in the supply of or an increase in the demand for loanable funds

34.Suppose the U.S. offered a tax credit for firms that built new factories in the U.S.. Then

a. / the demand for loanable funds would shift rightward, initially creating a surplus of loanable funds at the original interest rate.
b. / the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.
c. / the supply of loanable funds would shift rightward, initially creating a surplus of loanable funds at the original interest rate.
d. / the supply of loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.

35.You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15 percent. Rank these three options from highest present value to lowest present value.

a. / Option 1; Option 2; Option 3
b. / Option 3; Option 2; Option 1
c. / Option 2; Option 3; Option 1
d. / Option 3; Option 1; Option 2

36.If a person is risk averse, then she has

a. / diminishing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
b. / diminishing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.
c. / increasing marginal utility of wealth, implying that her utility function gets flatter as wealth increases.
d. / increasing marginal utility of wealth, implying that her utility function gets steeper as wealth increases.

37.Roger determines that if Aim Corporation has high revenues, then Zest Corporation will have low revenues, and that if Aim Corporation has low revenues, Zest Corporation will have high revenues. He buys stock in both corporations.

a. / He has reduced firm-specific risk but not market risk.
b. / He has reduced market risk, but not firm-specific risk.
c. / He had reduce both firm-specific risk and market risk.
d. / He has reduced neither firm-specific risk nor market risk.

38.Some individuals would like to have a job, but they have given up looking for a job after an unsuccessful search. These individuals are called

a. / unattached workers, and they are classified by the Bureau of Labor Statistics as unemployed.
b. / unattached workers, and they are not classified by the Bureau of Labor Statistics as unemployed.
c. / discouraged workers, and they are classified by the Bureau of Labor Statistics as unemployed.
d. / discouraged workers, and they are not classified by the Bureau of Labor Statistics as unemployed.

39.John is a stockbroker. He has had several job offers, but he has turned them down because he thinks he can find a firm that better matches his tastes and skills. Curtis has looked for work as an accountant for some time. While the demand for accountants doesn’t appear to be falling, there seems to be more people applying than jobs available.

a. / John and Curtis are both frictionally unemployed.
b. / John and Curtis are both structurally unemployed.
c. / John is frictionally unemployed, and Curtis is structurally unemployed.
d. / John is structurally unemployed, and Curtis is frictionally unemployed.

40.Unemployment insurance

a. / reduces search effort and raises unemployment.
b. / reduces search effort and lowers unemployment.
c. / increases search effort and raises unemployment.
d. / increases search effort and decreases unemployment.

41.When a minimum-wage law forces the wage to remain above the level that balances supply and demand, there are

a. / more workers willing to work than there are jobs, so some workers are unemployed.
b. / fewer workers willing to work than there are jobs, so some workers are unemployed.
c. / more workers willing to work than there are jobs, so unemployment decreases.
d. / fewer workers willing to work than there are jobs, so unemployment decreases.

42.If the wage is kept above the equilibrium wage for any reason, the result is

a. / cyclical unemployment.
b. / frictional unemployment.
c. / seasonal unemployment.
d. / structural unemployment.

43.Which of the following does not create unemployment by keeping wages above the equilibrium level?

a. / efficiency wages
b. / job search
c. / minimum-wage laws
d. / unions

44.M1 includes

a. / currency.
b. / demand deposits.
c. / travelers' checks.
d. / All of the above are correct.

45.In a system of 100-percent-reserve banking,

a. / banks do not accept deposits.
b. / banks do not influence the supply of money.
c. / loans are the only asset item for banks.
d. / All of the above are correct.

46.To decrease the money supply, the Fed can

a. / buy government bonds or increase the discount rate.
b. / buy government bonds or decrease the discount rate.
c. / sell government bonds or increase the discount rate.
d. / sell government bonds or decrease the discount rate.

47.In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then

a. / M1 would increase.
b. / M1 would decrease.
c. / M1 would not change.
d. / M1 might rise or fall.

48.The money supply increases when the Fed

a. / lowers the discount rate. The increase will be larger the smaller the reserve ratio is.
b. / lowers the discount rate. The increase will be larger the larger the reserve ratio is.
c. / raises the discount rate. The increase will be larger the smaller the reserve ratio is.
d. / raises the discount rate. The increase will be larger the larger the reserve ratio is.

49.Which of the following actions would have the combined effect of raising the money supply and raising the money multiplier?

a. / The Fed sells bonds and raises the reserve requirement
b. / The Fed sells bonds and lowers the reserve requirement
c. / The Fed buys bonds and raises the reserve requirement
d. / The Fed buys bonds and lowers the reserve requirement

50.The manager of the bank where you work tells you that your bank has $5 million in excess reserves. She also tells you that the bank has $300 million in deposits and $255 million dollars in loans. Given this information you find that the reserve requirement must be

a. / 50/255.
b. / 40/255.
c. / 50/300.
d. / 40/300.