SL 151 Name CM Bremmer Winter Quarter 2005 2006 Answer Sheet and Short Answer Questions Final Exam Exam Booklet PART I TRUE T or FALSE F PART II MULTIPLE CHOICE 1 F 11 F 1 D 11 C 21 D 31 C 2 T 12 T 2 B 12 E 22 A 32 D 3 F 13 T 3 C 13 D 23 B 33 B 4 T 14 T 4 B 14 C 24 C 34 C 5 F 15 F 5 D 15 D 25 B 35 B 6 F 16 T 6 B 16 D 26 E 36 D 7 F 17 T 7 D 17 B 27 D 37 D 8 F 18 F 8 B 18 A 28 D 38 D 9 F 19 F 9 C 19 E 29 D 39 C 10 T 20 F 10 D 20 C 30 E 40 E Part III Short Answer Questions 60 points Give a complete but concise answer for each of the following questions Answer each question with complete sentences Use math graphs or equations to help explain each answer If you require more space write on the back indicating that you have done so and clearly labeling each answer 1 Assume a profit maximizing monopolist is earning economic profits in the short run Illustrate and explain what happens to the monopolist s price and output if the government imposes a 1 per unit excise tax on the monopolist 10 points 2 During the past year the growing economies of China and India resulted in increased demand for crude oil while the political and military uncertainties of the Middle East and the hurricanes in the Gulf of Mexico decreased the supply of crude Using two supply and demand curves one showing the world market for crude and the other showing the U S market for gasoline illustrate and explain how the shocks to the world crude market affected the U S gasoline market 10 points 3 Assume a constant cost perfectly competitive industry produces an inferior good Using two graphs one showing the market demand and supply curves of the good and the other showing the average cost curves of t he typical firm illustrate and describe how a prolonged recession affects the industry and the typical firm both in the short and long run 10 points Page 1 4 Using the aggregate demand aggregate supply model illustrate and describe the short run and the long run effects of a decrease in taxes Explain what happens to consumption investment net exports the price level employment the interest rate and output both in the short and long run 10 points 5 Using the AD SRAS LRAS model illustrate and describe the short run effect of an increase in crude oil prices a negative supply shock Policymakers can either use accommodating policy or let the selfcorrecting mechanism return the economy to full employment Use your graph to illustrate and describe how these two approaches differ 10 points 6 Use the simple money multiplier model to answer the following questions Assume that there is no change in currency no change in time deposits and banks don t hold excess reserves 10 points A Fill in the blanks below indicating whether the given variable increases or decreases after an open market purchase 4 points open market purchase reserves loans deposits money supply B Below are two consolidated balance sheets for all depository institutions The balance on the left is the initial balance sheet The required reserve ratio is 5 All numbers are in billions of dollars Now assume the government conducts an open market purchase buying 5 billion of government securities from depository institutions Fill in the blanks in the balance sheet on the right to show what happens to reserves loans and deposits after the deposit expansion or contraction process is over and there are no positive or negative excess reserves 6 points Consolidated Balance Sheet of Depository Institutions After the Deposit Expansion or Contraction Process Is Over Assets Liabilities Net Worth Consolidated Balance Sheet of Depository Institutions Before Open Market Purchase Assets Liabilities Net Worth Reserves 10 Gov t Securities 30 Loans Deposits 200 Reserves Gov t Securities 160 Loans Page 2 25 Deposits SL 151 Bremmer I Name CM Winter 2005 2006 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 A simultaneous increase in supply and demand must lead to an increase in equilibrium price and an increase in equilibrium quantity 2 A positive cross price elasticity of demand indicates that the two goods are substitutes 3 Referring to Figure 1 a technological advance in the production of food would cause the production possibilities curve to shift from curve C 2 F2 to C 3 F2 4 Referring to Figure 1 the production possibilities curve will shift from C 2 F2 to C 1 F1 if the natural resources are being depleted 5 If the price elasticity of demand for good X equals 1 34 then as the price of X falls firms total revenue also falls 6 Referring to Figure 2 if the price ceiling is set at price 0B then a shortage equal to LG occurs 7 When marginal product of the variable input begins to decrease total product or total output also begins to decrease 8 If a lump sum tax of 100 is imposed on a firm its ATC curve will shift up by a vertical distance equal to 100 9 Diseconomies of scale are caused by diminishing marginal returns 10 When firms leave the perfectly competitive industry depicted in Figure 3 input prices decrease 11 In the short run a profit maximizing perfectly competitive firm will not produce if price is less than ATC 12 If the price elasticity of demand for a monopolist s product is equal to one then the monopolist s marginal revenue equals 0 and the firm is maximizing total revenue 13 Without regulation monopolists will produce at an output level where the marginal benefit is greater than the marginal cost 14 If an economy is characterized by persistent inflation then nominal GDP will usually be greater than real GDP 15 Unanticipated inflation benefits creditors and savers 16 In the long run classical macroeconomic model if the money supply doubles the price level doubles but the real wage remains constant 17 Holding everything else constant the demand for loanable funds decreases during a recession and the interest rate falls 18 According to the self correcting mechanism if there is an inflationary or expansionary gap the short run aggregate supply curve shifts to the right 19 If the Fed fears inflation it will decrease aggregate demand by buying government securities 20 The case for activist policy is stronger when the self correcting mechanism occurs promptly and there are long policy lags Page 3 Part II Multiple Choice Questions 3 points each Indicate the best answer for each question on the answer sheet provided 1 Which of the following statements is true about the