SL 151 Bremmer I Name CM Spring 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 Discrimination keeps an economy operating at some point inside its production possibilities curve 2 Free trade allows a country to consume a bundle of goods that lies above its production possibilities curve 3 A simultaneous increase in supply and demand must lead to an increase in the equilibrium price and quantity 4 An effective price ceiling causes a surplus 5 When demand is elastic an increase in price will lead to increased consumer expenditures on the product 6 The price elasticity of supply decreases the longer the time period 7 Import quotas produce the same amount of revenue for the government as a tariff 8 When marginal product is positive but falling output is increasing at a decreasing rate 9 When the average product curve is at its maximum point average total cost is minimized 10 If every firm in a perfectly competitive constant cost industry has an increase in fixed cost in the short run neither the market price nor the market quantity will change 11 In the long run an increase in demand in a perfectly competitive decreasing cost industry will cause a fall in the market price and an increase in the market output 12 A monopoly will maximize total revenue by producing that output where MR MC 13 When marginal costs decrease a monopoly will usually lower its price and increase its level of output 14 If a U S consumer buys a pair of shoes made by an American owned firm in Italy consumption and imports increase but there is no change in U S GDP 15 Official unemployment statistics overstate unemployment because discouraged workers who are not actively seeking work are counted as unemployed 16 Unanticipated inflation benefits creditors and savers 17 Holding everything else constant if the U S dollar becomes stronger U S net exports will increase 18 As one moves down the aggregate demand curve both the price level and the interest rate decline 19 If the economy experiences an inflationary gap Keynesian countercyclical policy calls for bigger deficits and an increase in the money supply 20 The Board of Governors of the Federal Reserve is a seven member board each one serving a 14 year term Page 1 Part II Multiple Choice Questions 3 points each Indicate the best answer for each question on the answer sheet provided 1 A B C Which of the following will cause the demand curve for product A to shift to the left An increase in the price of substitute product B D An increase in money income if A is a normal good An increase in money income if A is an inferior good E An increase in the price of good A A decrease in the price of complementary product C 2 A B C D E Assume a country produces guns and butter and its production possibilities curve is a linear negatively sloped line As the country produces more guns the opportunity cost of guns decreases the opportunity cost of guns increases the opportunity cost of guns remains constant no conclusion can be made about the opportunity cost of guns as their production increases it can also produce more butter 3 A B C D E Which of the following would cause a production possibilities curve to shift to the left An increase in capital An increase in the unemployment rate to a level above the natural rate An increase in the educational attainment of the population An increase in labor supply None of the above would cause the production possibilities curve to shift to the left Answer the next three questions on the basis of the production possibilities curves in Table I for Country I and Country II Table 1 Production Possibilities for Country Production Possibilities for Country I II A B C D E A B C D E Fish 8 6 4 2 0 Fish 16 12 8 4 0 Chips 0 10 20 30 40 Chips 0 12 24 36 48 4 A B C D E On the basis of the information in Table 1 we can say that both Countries I and II have specialized resources and exhibit the law of increasing cost the opportunity cost of 1 fish in Country I is 3 chips Country II should export both fish and chips while Country I exports neither of the two goods Country II should export fish while Country I should export chips Country II should export chips while Country I should export fish 5 A B C Referring to the data in Table 1 which of the following would be a feasible terms of trade between Countries I and II 1 fish for 4 chips D 2 fish for 4 chips 1 fish for 6 chips E None of these answers would be a feasible terms of trade that benefits both countries 1 fish for 7 chips 6 Refer to Table 1 Assume that prior to specialization and trade Country I was producing combination C and Country II was producing combination B If these two countries now specialize completely in accordance with comparative advantage the total gains from specialization and trade would be A 8 fish and 2 chips D 4 fish and 6 chips B 10 fish and 4 chips E None of these answers C 0 fish and 8 chips 7 A B C A leftward shift of a product s supply curve might be caused by An improvement in the relevant technique of production D A decrease in the price of the product A decline in the prices of needed inputs E Some firms leaving the industry An increase in the per unit subsidy paid to firms 8 A B C Assume the equilibrium price and quantity both decrease Which of the following best explains this occurrence A simultaneous increase in demand and decrease in supply D An increase in demand A simultaneous decrease in demand and increase in supply E A decrease in supply A simultaneous increase in both demand and supply Page 2 9 A B C As price increases along a downward sloping linear demand curve the price elasticity of demand increases D the firm s total revenue will always increase the price elasticity of demand decreases E the firm s total revenue will always decrease the price elasticity of demand does not change 10 Which type of unemployment is most likely to lead to unemployed workers to retrain or relocate A cyclical unemployment B structural unemployment C frictional unemployment D seasonal unemployment 11 Suppose there are two economies Country I and Country II Both of these countries have the same production possibilities curves producing capital and consumer goods Also assume both of these countries are currently producing the same point on each production possibilities curve If Country I then decides to devote more resources to capital goods relative to