SL 151 Name CM Bremmer Fall 2008 Answer Sheet and Short Answer Questions Final Exam Exam Booklet PART I TRUE T or FALSE F 1 point each PART II MULTIPLE CHOICE 3 points each 1 11 1 11 21 31 2 12 2 12 22 32 3 13 3 13 23 33 4 14 4 14 24 34 5 15 5 15 25 35 6 16 6 16 26 36 7 17 7 17 27 37 8 18 8 18 28 38 9 19 9 19 29 39 10 20 10 20 30 40 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 Your grade depends on well you explain your answer 1 Worldwide the average coffee grower has increased the amount of acreage under cultivation over the past few years The result has been that the average coffee plantation produces significantly more coffee than it did 10 to 20 years ago Unfortunately for the growers however this also has been a period in which their total revenues have plunged Illustrate and explain this phenomenon using the demand and supply curves of coffee Carefully explain why coffee grower revenues have declined 10 points 2 Suppose the American Red Cross is a supplier to the perfectly competitive domestic blood market Unlike other suppliers however the Red Cross is strictly nonprofit its goal is to sell as much blood as possible without making an economic profit If the American Red Cross incurs a loss then it will minimize its losses just like a profit maximizing firm Given its goals describe the short run supply curve of blood for the American Red Cross Explain its shape 10 points 3 A student argues If a monopolist finds a way of producing a good at lower cost the firm will not lower its price Because the firm is a monopoly it will keep the price and quantity the same and just increase its profit Do you agree Use a graph showing the monopolist s demand and average cost curves to illustrate and explain your answer 10 points 4 Assume the economy is at full employment Using the aggregate demand aggregate supply model illustrate and explain the short run effects of the bursting of the housing bubble and the corresponding fall in housing prices Using your graph illustrate and explain how the self correcting mechanism will return the economy to full employment output in the long run Given the fall in housing prices illustrate and explain how fiscal and monetary policy can be used to return the economy to full employment in the short run 10 points 5 How do the short run and long run aggregate supply curves differ on assumptions and appearance Explain What will happen to the short run aggregate supply curve if expected inflation increases What will happen to the long run aggregate supply curve if the government enacts laws that increase social security payments 10 points Page 1 6 Assume the economy is at full employment Using the aggregate demand aggregate supply model illustrate and explain the short run effects of an increase in stock prices Using your graph illustrate and explain how the self correcting mechanism will return the economy to full employment output in the long run What would happen to the equilibrium price level and full employment GDP if there was a simultaneous increase in economic growth Explain 10 points Page 2 SL 151 Bremmer I Name CM Fall 2008 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 Unanticipated inflation benefits debtors and hurts creditors 2 If expected inflation increases the demand for loanable funds will shift to the right the supply of loanable funds will shift to the left and the equilibrium nominal interest rate will increase 3 Holding everything else constant a fall in interest rates results in a weaker dollar and an increase in net exports 4 If the current level of real GDP is greater than the full employment level nominal wages will increase and the short run aggregate supply curve will shift upwards 5 In the short run attempts to reduce the federal government deficit will result in a fall in the price level and a decrease in real GDP 6 If two goods are substitutes a decline in the price of one will cause an increase in the demand for another 7 If the price elasticity of demand equals 0 6 total revenue will increase if price increases 8 Diminishing returns initially sets in when marginal costs start to increase 9 An increase in the fixed costs causes the ATC curve and the MC curve to shift upwards 10 The long run average cost curve is U shaped because of the law of diminishing marginal returns 11 If marginal cost is increasing average total cost must also be increasing 12 In the short run a perfectly competitive firm will produce that output where the distance between price and the ATC curve is as large as possible 13 The long run effect of an increase in demand for decreasing cost perfectly competitive industry is a fall in price and an increase in output 14 Both a perfectly competitive firm and a pure monopolist will maximize profits by producing that output where MR MC 15 A pure monopolist will maximize revenue by producing that output where MR 0 16 Transfer payments such as social security or unemployment compensation are included as government spending when calculating GDP 17 If the production possibilities curve is a linear downward sloping line resources are specialized 18 If the unemployment rate falls toward the natural rate of unemployment the production possibilities curve will shift to the right 19 Free trade allows a country to consume a bundle of goods that lies above its production possibilities curve 20 An effective price ceiling causes a surplus Page 3 Part II Multiple Choice Questions 3 points each Indicate the best answer for each question on the answer sheet provided 1 Referring to the production possibilities curves shown in Figure 1 which of the following statements is true A The shape of the production possibilities curves indicates that resources are not specialized and resources are perfectly shiftable between the production of civilian goods and war goods B Given production possibilities curve a the bundle of goods at point X is unobtainable given current resources and current technology C Given production possibilities curve c point Y is feasible but it would imply unemployed resources D The shift from production possibilities