SL 151 Bremmer I Fall 2006 Name CM Final Exam Test Booklet Part I True False Questions 1 point each Indicate on the answer sheet provided whether each of the following statements is true T or false F 1 If supply is perfect elastic an increase in demand causes an increase in output but there is no change in price 2 A negative cross price elasticity of demand implies that the two products are substitutes 3 When a country allows trade and becomes an exporter of a good domestic consumers are better off and domestic producers are worse off 4 When an excise tax is imposed the combined loss of consumer surplus and producer surplus exceeds the tax revenues that the government receives 5 When marginal product is falling average product must also fall 6 The vertical distance between the average total cost curve and the average variable cost equals average fixed cost which decreases as output increases 7 If the production possibilities curve is a linear negatively sloped line the opportunity cost of a given product remains constant as production of the good increases 8 If a country produces two goods consumer goods and capital goods the present position on its production possibilities curve will not influence the future location of the curve 9 If the current price is above the equilibrium price a shortage results 10 A simultaneous decrease in both demand and supply results in a definite decrease in the equilibrium price but the change in the equilibrium quantity is indeterminate 11 If borrowers expect future inflation to increase then they will borrow more now as they expect to pay back the loan with money that is worth less 12 Official unemployment statistics overstate unemployment because discouraged workers who are not actively seeking work are counted as unemployed 13 Inflation means that the price of every good is rising 14 In the long run macro model if workers acquire more education the demand for labor increases and real wages rise 15 Referring to Figure 1 if the economy was experiencing stagflation at point B accommodating policy would return the economy to point A 16 Referring to Figure 1 if the economy was initially at point A an increase in the money supply will ultimately move the economy to point D in the long run 17 One source of economies of scale is increased specialization of labor and capital 18 Given a perfectly competitive decreasing cost industry an increase in demand means a lower price and a larger output in the long run 19 A pure monopolist will shut down in the short run if P ATC 20 Transfer payments such as social security or unemployment compensation are included in G when calculating GDP Page 1 Part II Multiple Choice Questions 3 points each Indicate the best answer for each question on the answer sheet provided 1 Referring to Figure 2 which of the following statements is true A Resources in the economy are not specialized and resources are equally suited to producing either SUVs or compact cars B The bundle of goods at point E can be produced with current resources and current technology but to do so would involve inefficient use of resources C The bundle of goods at point D is unobtainable given current resources and current technology D Comparing points B and C the opportunity cost of producing one more compact car is greater at point B than it is at point C E None of the above statements are true 2 A B C D E Everything else held constant which of the following would shift the production possibilities curve to the left An increase in the labor supply An increase in the unemployment rate to a level that is greater than the natural rate of unemployment An improvement in technology A decrease in the supply of natural resources Both B and D 3 Referring to Figure 3 which of the following statements is false A Both production possibilities curve a and production possibilities curve b exhibit the law of increasing costs B The shift in the production possibilities curve from curve a to curve b implies an improvement in the technology of producing consumer goods but no change in the technology of producing capital goods C Referring to curve a everything else held constant the choice of point P will lead to more rapid economic growth than would the choice of point N D A movement from point N to point P would imply that society has chosen a different set of outputs E Given production possibilities curve b while the country can t produce the bundle of goods at point L free trade may allow the country to consume the bundle of goods at point L Answer the next three questions on the base of Figure 4 which shows the production possibilities curves for Italy and Greece 4 A B C D E Referring to Figure 4 the diagrams suggest that Italy should import both X and Y from Greece production in both countries is subject to increasing costs Greece should export product X and Italy should export product Y Italy should export product X and Greece should export product Y Greece should import both X and Y from Italy 5 Referring to Figure 4 which of the following is feasible terms of trade at which goods X and Y might be exchanged A 1X for 0 5Y B 1X for 2 5Y C 1X for 1 5Y D 1X for 3Y E 1Y 0 25X 6 Referring to Figure 4 Assume that prior to specialization and trade Italy was at point I and Greece was at point G on their respective production possibilities curves After both countries specialize according to comparative advantage the resulting gains from trade will be A 25 X B 15X and 5Y C 10Y D 25Y E 5X and 15Y 7 A B C D E 8 A B C D E Figure 5 shows the demand and supply curves for good X Referring to Figure 5 which of the following would cause the demand curve to shift from D1 to D2 A decrease in the price of X A decrease in income assuming X is a normal good An increase in the price of good K assuming K and X are complements A decrease in the price of good S assuming S and X are substitutes Consumers expect the future price of good X to increase Figure 5 shows the demand and supply curves for good X Referring to Figure 5 which of the following would cause the supply curve to shift from S1 to S2 An increase in the price of X A decrease in the price of an input used in the production of good X The government imposes a 1 per unit excise tax on producers of good X A decrease in the number of firms producing good X Firms expect the future price of good X to increase Page 2 9 A B C D E An analysis of the market for good X shows that the price of a complement good Y is declining At the same time