SV 151 Bremmer I Name CM February 9 2010 3rd In Class Exam Chapters 9 11 14 Part I Multiple Choice 3 points each For each of the following questions indicate the best answer in the space provided 1 A B C Holding everything else constant which of the following would cause an increase in U S net exports A decrease in the real GDP of a U S trading partner D An increase in the U S price level An increase in the nominal interest rate E A weaker U S dollar A decrease in the price level of a U S trading partner 2 A B C Everything else held constant which of the following would cause a decrease in investment A decrease in the level of government regulation D An increase in capacity utilization Real GDP is increasing and businesses expect profits to increase E A decrease in the price of capital An increase in business taxes 3 A B C Holding everything else constant which of the following would cause an increase in consumption A decrease in stock and bond prices D An increase in taxes An increase in the price level E An increase in the nominal interest rate An increase in future expected income 4 Assume a perfectly competitive constant cost industry is in long run equilibrium If the government imposes a 1 per unit excise tax on every firm industry in the long run A the market price will increase exactly by 1 D the market price will decrease by exactly 1 B the market price will increase by less than 1 E the change in the market price is indeterminate C the market price will increase by more than 1 5 A B C D E Assume a perfectly competitive decreasing cost industry is composed of identical firms Suppose every firm is in short run equilibrium and incurring a loss In the long run firms will exit the industry and the short run market supply curve will shift to the left input prices increase and the average total cost and marginal cost curves of the typical firm will shift up input prices decrease he average total cost and marginal cost curves of the typical firm will shift down Both A and B Both A and C Figure 1 6 In Figure 1 if the monopoly was regulated and the firm was only permitted to earn a fair return it would set price equal to A 0A B 0B C 0C D 0D 7 In Figure 1 if the monopoly is unregulated and it wished to maximize profits the firm would charge price A 0A and produce output 0E C 0C and produce output 0F B 0D and produce output 0E D 0B and produce output 0G 8 In Figure 1 if the monopoly is regulated and the regulatory commission wished to set a price that would permit allocative efficiency the price would be A 0A B 0B C 0C D 0D 9 A B C D E In Figure 1 if the monopoly is regulated and the regulatory commission forced the firm to charge the price that achieves allocative efficiency the firm would be making a normal profit be maximizing profits be earning economic profits would require a subsidy in order to operate in the long run Both B and C Page 1 10 A B C D E According to the loanable funds model a decrease in the price level will result in an increase in household savings causing the supply of loanable funds to shift to the right cause an increase in the nominal interest rate cause household wealth to decrease as their money balances are worth less cause a decrease in bond prices All of the above 11 A B C D Cyclical unemployment is the result of a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs the search process of matching workers with jobs a business cycle recession the ups and downs of inflation 12 If the GDP deflator in a given year is less than 100 then for that year nominal GDP real GDP A equals B is less than C is greater than D may be greater than less than or equal to 13 Imagine that you borrow 1 000 for one year and at the end of the year you repay the 1 000 plus 100 of interest If the expected inflation rate was 7 what was the real interest rate you paid A 17 percent B 10 percent C 7 percent D 3 percent E 3 percent 14 Which of the following causes the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of joblessness A Unemployed persons who falsely report themselves to be actively looking for a job C Discouraged workers B People employed full time in the job they desire D Inflation 15 A B C D E Which of the following would not be included in U S GDP The purchase of U S government bonds A German owned firm builds a new factory in Tennessee A U S TV manufacturer fails to sell 1 000 new TVs to customers so the 1 000 new TVs are added to the firm s inventories The purchase of a brand new house in Indianapolis A Japanese owned firm in Indiana buys a new tool and die machine made by a Chinese owned firm in Ohio Part II Short Answer Questions 55 points total For each of the following questions give a concise but complete answer When appropriate use math graphs or equations to help explain your answer Completely label all graphs If you require more space write on the back of each page indicating that you have done so 1 Using two diagrams one showing the market demand and supply curves and the other showing the short run average cost curves of a typical firm illustrate and describe the derivation of the long run industry supply curve for a perfectly competitive increasing cost industry 10 points Page 2 2 During the current recession the federal government budget deficit has increased the Federal Reserve has increased the money supply and the nominal interest rate has fallen Using a diagram showing the demand and supply of lonable funds illustrate and explain these shocks and their affect on the nominal interest rate Given the change in the nominal interest rate what happens to bond prices consumption investment and net exports 10 points 3 Figure 2 shows the demand and long run industry supply curve for a perfectly competitive constant cost industry Answer the following questions using Figure 2 10 points Figure 2 A Label the competitive price PC and the competitive output QC writing your answers on Figure 2 2 points B Now assume the perfectly competitive industry becomes monopolized with no change in cost conditions On Figure 2 draw the monopolist s marginal revenue curve and label the monopoly s profit maximizing price PM and output QM 3 points C Using your answers in parts A and B label the appropriate points on Figure 2 and fill in the values in Table …