Common Final Exam Econ 201 Ol2 Spring 2014 Multiple Choice

Common Final Exam Econ 201 Ol2 Spring 2014i Multiple Choice 40 Quest

Identify the core assignment question: The task involves answering 40 multiple-choice questions covering various economic topics, including business cycles, GDP, inflation, unemployment, fiscal and monetary policy, and economic growth. Additionally, there are five short answer questions requiring detailed explanations on property rights and economic growth, international comparisons of GDP, autonomous consumption changes, investment theories, and the effects of stabilization policies.

Paper For Above instruction

The comprehensive analysis of economic concepts tested in this exam underscores the importance of understanding fundamental macroeconomic principles. These principles are pivotal in analyzing economic fluctuations, growth, and policy impacts. This paper synthesizes key topics by addressing each question systematically, illustrating core economic theories, and integrating scholarly perspectives to provide informed, detailed responses.

Analysis of Multiple-Choice Questions

Business cycles represent extensions used to describe fluctuations in gross domestic product (GDP), characterized by periods of economic expansion and contraction (Mankiw, 2021). The growth rate of real GDP, from 2011 to 2012, calculated as ((104.4 - 100) / 100) * 100, yields approximately 4.4%, aligning with the option B. When considering imports and exports, economists include net exports—exports minus imports—as a component of GDP, acknowledging their significant contribution to economic activity (Blanchard, 2017). Nominal GDP measurement utilizes current prices, not projected or past prices, ensuring the valuation reflects the price levels at the time (Mankiw, 2021). Private investment expenditures exclude consumption of used goods, which do not directly contribute to current productive capacity, focusing instead on new capital goods (Pindyck & Rubinfeld, 2018). Components of GDP encompass consumer purchases of finished goods, government spending, and net exports, but not the purchase of used goods, as their transaction does not generate new production (Blanchard, 2017).

Regarding the calculation of contribution to GDP, Cassie’s Coffee House’s value added per cup—subtracting ingredient costs from the price—serves as the contribution, here, 89 cents minus 33 cents, totaling 56 cents. The labor force includes both employed individuals and those actively seeking employment, excluding the discouraged workers not looking for work (Mankiw, 2021). A person not in the labor force, like Sam, is categorized accordingly, emphasizing the distinction between unemployment and labor force participation. The inflation rate between 2011 and 2012, given CPI changes from 111 to 122, is approximately ((122 - 111) / 111) 100 ≈ 10%, indicating a significant increase. The unemployment rate in June 2012, based on employed and unemployed figures, calculates approximately (12,749,000 / (142,415,000 + 12,749,000)) 100 ≈ 8.2%.

Juanita’s situation as someone who quit her job but actively seeks new employment exemplifies frictional unemployment, reflecting normal labor market turnover. The chain-weighted index increase from 180 to 188 in Panama reflects an inflation rate of approximately ((188 - 180)/180) 100 ≈ 4.4%. The production function in economics, as discussed by Robert Solow, is often specified as Y = F(K, L), representing output as a function of capital and labor; technological progress (A) is incorporated separately or as an augmenting factor (Solow, 1956). The contribution of technological progress to GDP growth, here, is derived by subtracting capital and labor growth, resulting in approximately 1.7%.*

Referring to the diagrams and curves (not provided visually here), an increase in the saving rate shifts the curve from s1Y to s2Y, corresponding to higher savings and investment, leading to greater capital accumulation. The commodity price fall causes the international trade effect, raising net exports as domestic goods become relatively cheaper. Movement in aggregate demand curves, such as from AD2 to AD1, can result from increased taxes or decreased government spending, which shift the aggregate demand downward, impacting output and prices. A decrease in taxes typically results in higher output and stable prices, assuming the long-run aggregate supply curve is vertical (Mankiw, 2021).

Workers' wage contracts often being long-term and sticky wages are significant because, in the short run, wages do not adjust immediately to economic conditions, affecting overall employment and output levels. When demand for hot dogs drops, firms cut production and employment to match reduced demand, illustrating the typical short-run response in microeconomic equilibrium. The emphasis on supply-side economics highlights the role of tax policies in influencing aggregate supply through incentives for investment and work (Laffer, 1981). Automatic stabilizers, such as unemployment benefits and progressive taxes, help minimize economic fluctuations by smoothing out shocks (Kydland & Prescott, 1982).

The multiplier effect, determined by the marginal propensity to consume (MPC), increases as the MPC increases, reflecting higher propensity to spend out of additional income. The change in savings and loan institutions’ financial health in the late 1970s was due to high interest rate payments and low returns from past investments, creating a mismatch that precipitated a crisis (Formaini, 2001). When an individual withdraws funds, the banking multiplier effect determines the impact on deposits, with a reserve ratio of 25% leading to a potential reduction of $60,000 * (1 - 0.25) = $45,000 in deposits, illustrating the process of money creation.

The reserve ratio affects the bank’s excess reserves and capacity for lending; with $200,000 in deposits and reserves of $45,000, excess reserves amount to $5,000, given the reserve requirement of 10%. The reserve ratio is calculated by dividing required reserves by total deposits—in this case, $15,000 / $50,000 = 30%. The Federal Reserve’s policy to increase the money supply typically involves decreasing reserve requirements, encouraging banks to lend more freely. Selling government bonds reduces the money supply by extracting liquidity from the economy, affecting interest rates and credit availability (Mishkin, 2019).

Raising interest rates generally discourages borrowing and reduces the money supply, which can temper inflationary pressures (Friedman, 1968). The aggregate demand/supply model indicates that intersection points determine long-run prices and output levels, with short-run fluctuations caused primarily by demand shifts (Blanchard, 2017). In the short run, an increase in the money supply increases output because prices and wages are sticky, temporarily permitting higher production (Mankiw, 2021). When actual GDP exceeds potential output, inflationary pressures build, prompting price increases and shifts in demand.

The expectations-enhanced Phillips curve emphasizes that, if actual inflation equals expected inflation, unemployment remains stable at the natural rate. A velocity of money of 2 with a nominal GDP of $10 trillion suggests a money supply of $5 trillion, following the equation MV = PY. Unanticipated inflation temporarily reduces unemployment but, once anticipated, firms and workers adjust, restoring the natural rate. During recessions, unemployment rises while the budget deficit tends to increase, reflecting automatic stabilizers’ role and fiscal responses to economic downturns (Blanchard, 2017).

Finally, financing a government deficit via monetary expansion (printing money) increases the debt burden if borrowing from the public also occurs. If the total deficit is $375 billion with $225 billion financed by money creation, then the remaining borrowed amount from the public equals $150 billion, exemplifying fiscal-monetary interactions (Friedman, 1968).

References

• Blanchard, O. (2017). Macroeconomics (7th ed.). Pearson.
• Friedman, M. (1968). The Role of Monetary Policy. American Economic Review, 58(1), 1-17.
• Laffer, A. B. (1981). The Laffer Curve: Past, Present, and Future. The Heritage Foundation.
• Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
• Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets (12th ed.). Pearson.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1), 65-94.
• Kydland, F. E., & Prescott, E. C. (1982). Time to Build and Aggregate Fluctuations. Econometrica, 50(6), 1345-1370.