Practice Midterm 1 Answer Key Econ 1102 Name 1 RP TA Name 1 RP Section Number 1 RP NO programmable calculators NO cell phones NO notes NO collaboration with other students Time limit 50 minutes Each page may have has its own directions Follow the directions carefully Clearly indicate which question you are answering Replacement points are added to score of the page on which they are earned The only exception is the 3RP given for Name Section and TA Name these are added to your total score For full credit graphs must be completely LABELED and math work shown Be sure to justify your answers clearly and precisely for full credit Rambling incoherent or illegible responses shall be penalized even if correct Points are rewarded for answers consistent with those your instructor would give to the same question This exam is 6 pages including this front page numbered 1 6 1 2 3 4 RP Total QUESTION SET 1 25 points 2RP Must show equations and values used for full credit 1 5 pts What are 5 characteristics of a market system Any answer that incorporates 6 of the following into a coherent legible response receives full credit a Extensive Private Property Rights b Freedom of Enterprise and Choice c Self interest as the primary motivating force d Competition e Existence of markets and prices f Active but limited government 2 5 pts Why do economists use RGDP per capita to study cross country welfare even though there is reason to believe that it doesn t capture the general quality of life very well Discussed the following 3 reasons in class may have additional reasons from recitation discussion Strong correlation between GDP and other quality of life factors This is one reason listing the factors separately will not count for additional reasons GDP data is available for many countries Countries have good incentive to collect accurate GDP data for tax purposes 3 3pts What are the 3 assumptions economists make about firms a Firms act to maximize profits b Firms produce goods with a technology that requires resounces c Resources are limited 4 3 pts What are the 3 assumptions economists make about consumers a People are rational b People have unlimited wants c People have limited income 5 4 pt What are the four components of aggregate demand Consumption Investment Government Expenditure Net Exports 6 5 pts What distinguishes Modern Economic Growth from historical growth patterns According to in class discussion what part of the following sentence is incorrect and why Modern Economic Growth has made rich countries richer and poor countries poorer Note The question has 2 parts must answer both to get full credt 1 Modern growth is characterized by sustained growth in real GDP per capita over long periods of time Pre 1800 s economic growth was essentially zero 2 Poor countries have yet to experience modern growth i e sustained growth whereas rich countries have So while it is true that the rich are getting richer the poor aren t getting poorer they re not growing 7 2 RP What is the largest componest of USA GDP C I G or NX Consumption 1102 Practice Midterm Page 2 of 6 QUESTION SET 2 25 points 1RP Must show equations and values used for full credit 8 4 pts Using the data provided on page 6 draw the Econland PPF in 1982 placing bread on the x axis Indicate a point where this economy might be if it is producing efficiently 9 2 pts Suppose Econland is involved in a war that destroys most of its bread and gas factories Show how your Econland PPF diagram would change See above 10 3 pts Draw an AD AS diagram that shows an economy in AD AS equilibrium 12 11 For the following four questions show how the AD SR AS or the LR AS line would shift your diagram above Assume you start at equilibrium unless stated otherwise Briefly explain your answer 11 3 pt The government decides to build more roads and highways This is an increase in government purchases G which increases AD 12 3 pt There is a sudden increase in oil prices This is an increase in costs for all firms which reduces SR AS A poor but well run country wants to increase their economic growth and hires you to be their economic advisor 13 2 pt You decide to increase growth by improving one of the country s production factors Clearly state the production factor you will increase and the goal of the growth policy you use to achieve it Improve human capital by increasing food consumption and thereby nutrition Note Human capital is the production factor increasing food consumption is the goal of the policy 14 2pt Give an example of a growth policy that could achieve the goal you stated above Price ceiling on food 15 6 pt Show an economic analysis of your policy and why it could work Clearly state any potential problems your policy could create NOTE You will earn zero points if you give the same answer as the practice exam Price of Food Imposing the price ceiling lowers the price of food making it more affordable This increases quantity demanded Because of the price ceiling there is a decrease in the quantity supplied This will result in food shortages Competitive Equilibrium Price Price Ceiling Quantity of Food Competitive Equilibrium Quantity 16 1 RP The most recent recession has occasionally been dubbed a man cession as men have been more likely to lose their jobs Is the observation that men are more likely to lose their jobs than women during a recession a feature unique to this recession No 1102 Practice Midterm Page 3 of 6 QUESTION SET 3 25 points 1RP Must show equations and values used for full credit 17 10 pts Draw and label a flow diagram with three agents consumers profit earning firms rest of world and three places of exchange factor market output market financial market On your diagram clearly mark each component we use to calculate GDP 18 10 pts Suppose the following four actions occur in the USA How much would these combined actions add to US GDP in 2010 Give a brief explanation justifying your answer a A Japanese carpenter living and working in the USA purchases 3 000 worth of materials used directly in the production of a garage which is then sold to Smith a Canadian living in the USA for 17 000 b Isabella goes to land she owns cuts down a tree and uses the wood to build a garage for personal use that is worth 15 000 c You purchase a used computer from a friend for 400 d Joe spends 4500 to purchase land 1000 on a stereo and 20 on a haircut e Ford builds 10 cars valued at 20 000 in a factory in China a 17 000 since the garage is a new final good for
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