ECON 2020 Practice Final Exam

Question 1

• The economy is suffering from a short-run fluctuation.

• Price level is less than expected.

• Output is less than potential.

• Conclusion: The short-run fluctuation was caused by a decrease in aggregate demand.

Question 2

• Economy of Kashyyyk:

  • Nominal growth rate: 7.5%

  • Inflation: 2.8%

  • Population growth rate: 1.6%

• Growth rate in Real GDP per capita:

  • Real GDP Growth ≈ Nominal GDP Growth - Inflation Rate = 7.5 - 2.8 = 4.7

  • Real GDP per capita Growth ≈ Real GDP Growth - Population Growth = 4.7 - 1.6 = 3.1

• Answer: 3.10%

Question 3

• Federal Reserve decreases the required reserve ratio.

• Expectation: Money supply to increase and aggregate demand to increase.

Question 4

• Economy of Korriban:

  • Adult population: 700,000

  • Employed persons: 580,000

  • Labor force: 628,000

• Unemployment rate:

  • Unemployed = Labor Force - Employed = 628,000 - 580,000 = 48,000

  • Unemployment Rate = (Unemployed / Labor Force) * 100 = (48,000 / 628,000) * 100

• Answer: 7.64%

Question 5

• Aggregate production function:

  • Increasing all inputs by the same amount: Constant returns to scale.

  • Increasing one input: Diminishing returns to scale.

Question 6

• Economy of Tatooine (closed economy):

  • GDP: $658 billion

  • Consumption spending: $423 billion

  • Taxes: $140 billion

  • Government budget surplus: $23 billion

• Calculations:

  • Government Spending = Taxes - Budget Surplus = 140 - 23 = $117

  • National Savings = GDP - Consumption - Government Spending = 658 - 423 - 117 = $118

  • Private Savings = GDP - Taxes - Consumption = 658 - 140 - 423 = $95

• Answer: National savings = $118 billion, private savings = $95 billion

Question 7

• Economy is in long-run equilibrium.

• Aggregate demand increases.

• Impact: Price level will be greater than expected, and output will be greater than potential in the short run.

Question 8

• Movie Real Box Office Earnings:

  • Jurassic Park: $997.27 million

  • Harry Potter and the Sorcerer’s Stone: $981.66 million

  • Avengers: $989.21 million

  • Barbie: $984 million

• Highest real box office earnings: Jurassic Park

Question 9

• U.S. engages in free trade.

• U.S. places tariffs on imports.

• Expectation: Consumer surplus to decrease and producer surplus to increase.

Question 10

• Economy is suffering from stagflation.

• Federal Reserve action to correct the economy: None of the options provided (open market sale of bonds, decreasing the interest paid on reserves, decreasing taxes) would independently correct stagflation.

Question 11

• Exchange rates:

  • $1 = 0.94 Euro

  • Price level in U.S.: 313.5

  • Price level in Germany: 288.9

• Real exchange rate calculation: (0.94 * 313.5) / 288.9 = 1.02

• Goods are relatively more expensive in the United States.

Question 12

• Comparative advantage:

  • Revan: 44 cheesecakes, 70 bagels

  • Bastila: 52 cheesecakes, 86 bagels

• Calculations:

  • Revan opportunity cost of 1 cheesecake = 70/44 = 1.59 bagels

  • Bastila opportunity cost of 1 cheesecake = 86/52 = 1.65 bagels

• Conclusion: Revan has a comparative advantage in the production of cheesecakes, and Bastila has a comparative advantage in the production of bagels.

Question 13

• Economy of Trandosha:

  • Consumption spending: $654 million

  • Investment spending: $187 million

  • Government spending: $104 million

  • Exports: $89 million

  • Imports: $55 million

• GDP Calculation: 654 + 187 + 104 + 89 - 55 = $979 million

Question 14

• Intersection of the short-run Phillips curve and the long-run Phillips curve determines the expected inflation rate.

Question 15

• Bank Balance Sheet:

  • Reserves: $144,620

  • Loans: Unknown

  • Securities: $18,650

  • Deposits: Unknown

  • Debt: $21,360

  • Bank Capital: $42,800

• Required reserve ratio: 8.5%

• Calculation:

  • Deposits = Reserves / Required Reserve Ratio = 144,620 / 0.085 = $1,701,411.76

  • Assets = Liabilities

  • Reserves + Loans + Securities = Deposits + Debt + Bank Capital

  • $144,620 + Loans + $18,650 = $1,701,411.76 + $21,360 + $42,800

  • Loans = $1,701,411.76 + $21,360 + $42,800 - $144,620 - $18,650 = $1,602,301.76

• Loans = Total Assets - Reserves - Securities

  • Total Assets = Deposits + Debt + Bank Capital = 1701411.76 + 21360 + 42800 = 1765571.76

• Loans = 1765571.76 - 144620 - 18650 = $1,602,301.76

• Answer: None of the provided answers are correct based on provided data. The expected answer should be $1,602,301.76

Question 16

• Price level: 16

• Nominal GDP: $128,000

• Velocity of money: 3.2

• Equation of exchange: M * V = P * Y

  • Where:

    • M = Money Supply

    • V = Velocity of Money

    • P = Price Level

    • Y = Real GDP

    • P * Y = Nominal GDP

• M = (P * Y) / V = ($128,000) / 3.2 = $40,000

Question 17

• Prices lower than expected, output greater than potential: A new technology that allows us to harness electricity from saltwater is invented

Question 18

• Nominal GDP in Year 3:

  • Lightsabers: Quantity = 460, Price = $212

  • Beskar: Quantity = 155, Price = $540

  • Space Stations: Quantity = 12, Price = $9000

• Nominal GDP = (460 * 212) + (155 * 540) + (12 * 9000) = 97520+83700+108000 = $289,220

Question 19

• Real GDP in Year 5 (Base Year = Year 1):

  • Lightsabers: Quantity = 500, Price (Year 1) = $184

  • Beskar: Quantity = 165, Price (Year 1) = $525

  • Space Stations: Quantity = 14, Price (Year 1) = $7500

• Real GDP = (500 * 184) + (165 * 525) + (14 * 7500) = $313,800

Question 20

• Growth rate in Real GDP per capita in Year 4:

  • Real GDP in Year 4:

    • Lightsabers: Quantity = 480, Price (Year 1) = $184

    • Beskar: Quantity = 160, Price (Year 1) = $525

    • Space Stations: Quantity = 11, Price (Year 1) = $7500

  • Year 4 Real GDP = (480 * 184) + (160 * 525) + (11 * 7500) = 88320 + 84000 + 82500 = $254,820

  • Real GDP in Year 3:

    • Lightsabers: Quantity = 460, Price (Year 1) = $184

    • Beskar: Quantity = 155, Price (Year 1) = $525

    • Space Stations: Quantity = 12, Price (Year 1) = $7500

  • Year 3 Real GDP = (460 * 184) + (155 * 525) + (12 * 7500) = 84640 + 81375 + 90000= $256,015

  • Population in Year 4 = 1400

  • Population in Year 3 = 1250

  • Real GDP per capita in Year 4 = 254820/1400= 182.01

  • Real GDP per capita in Year 3 = 256015/1250= 204.812

  • Growth Rate = (182.01-204.812)/204.812 *100 = -11.13%

Question 21

• Recession: A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

• Year 2: Real GDP is not provided, can not be confidently be derived accurately.

• Year 3: Real GDP is $256,015

• Year 4: Real GDP is $254,820

• Year 5: Real GDP is $313,800

• Recession happened in year 4.

Question 22

• Aggregate demand has fallen by $800 billion.

• Marginal propensity to consume (MPC) is 60% (0.6).

• Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.6) = 1 / 0.4 = 2.5

• Increase in spending = Change in Aggregate Demand / Multiplier = 800 / 2.5 = $320 billion

Question 23

• Price level is decreasing: The economy is experiencing deflation.

Question 24

• Short-run aggregate supply is upward sloping because of Sticky prices.

Question 25

• Arguments in favor of enacting tariffs: Infant industry, National security, Bargaining chip

Question 26

• Economy of Somov Rit:

  • Adult population: 480,000

  • Employed persons: 375,000

  • Unemployed persons: 45,000

• Labor force participation rate:

  • Labor Force = Employed + Unemployed = 375,000 + 45,000 = 420,000

  • Labor Force Participation Rate = (Labor Force / Adult Population) * 100 = (420,000 / 480,000) * 100 = 87.50%

Question 27

• Real growth rate: 1.6%

• Velocity is constant: 3.5

• Money supply increases by 3.8%

• Inflation rate = Growth in Money Supply - Real Growth Rate = 3.8 - 1.6 = 2.2%

Question 28

• Cost of the basket in Year 5:

  • Vibranium: Quantity = 11, Price = $1060

  • Adamantium: Quantity = 36, Price = $402

• Cost of basket = (11 * 1060) + (36 * 402) = 11660 + 14472 = $26,132

Question 29

• CPI in Year 3 (Base Year = Year 1):

  • Cost of Basket in year 3:

  • Vibranium: Quantity = 11, Price = $1000

  • Adamantium: Quantity = 36, Price = $386

  • Cost of basket in year 3 = (11 * 1000) + (36 * 386) = 11000 + 13896= $24896

  • Cost of the basket in Year 1:

    • Vibranium: Quantity = 11, Price = $948

    • Adamantium: Quantity = 36, Price = $384

  • Cost of basket in year 1 = (11 * 948) + (36 * 384) = 10428 + 13824 = $24252

• CPI = (Cost of basket in current year/ Cost of basket in base year) *100

• CPI = (24896/24252)*100= 102.66%

Question 30

• Inflation rate in Year 2:

  • CPI in year 2

  • Cost of Basket in year 2:

  • Vibranium: Quantity = 11, Price = $988

  • Adamantium: Quantity = 36, Price = $390

  • Cost of basket in year 2 = 11 * 988 + 36 * 390 = 10868 + 14040 = 24908

  • Cost of the basket in Year 1:

    • Vibranium: Quantity = 11, Price = $948

    • Adamantium: Quantity = 36, Price = $384

  • Cost of basket in year 1 = (11 * 948) + (36 * 384) = 10428 + 13824 = $24252

  • CPI = (Cost of basket in current year/ Cost of basket in base year) *100

  • CPI in year = (24908/24252)*100= 102.7
    

  • CPI in year 1 = 100

  • Inflation rate = ((102.7-100)/100)*100 = 2.7%

Question 31

• Increase economic growth by increasing human capital per worker: Universal healthcare

Question 32

• Nominal exchange rate rises: Net exports decrease and GDP decreases.

Question 33

• Government increases taxes by $450 million.

• Marginal propensity to consume (MPC) is 75% (0.75).

• Change in aggregate demand = -MPC / (1-MPC) * Change in taxes

• Multiplier = - 0.75 / (1 - 0.75) = -0.75 / 0.25 = -3

• Change in Aggregate Demand = -3 * 450 = -$1,350 million

• Aggregate demand decreases by $1,350 million.

Question 34

• Initial reserves: $500 billion

• Initial required reserve ratio: 8% (0.08)

• Open market sale of bonds: $40 billion

• New required reserve ratio: 10% (0.10)

• Decrease in Money supply due to $40 billion bonds sold: -40/0.08 = -500 billion

• Money multiplier = 1/0.08= 12.5

• New Money multiplier = 1/0.1 = 10

• Initial money supply = 500 * 12.5 = 6250 Billion

• New reserves = 500-40 = 460

• New money supply = 460*10= 4600

• Change in money supply = 6250-4600 = 1650

• The money supply decreased by $1,650 billion

Question 35

• Amount of GDP that an economy produces whenever the unemployment rate is at the natural rate is called potential GDP.

Question 36

• Federal Reserve is attempting to conduct contractionary monetary policy: Increase the discount rate.

Question 37

• Economy is in short-run equilibrium B.

• Economy naturally adjusts and fixes itself: The economy will reach long-run equilibrium at Point F

Question 38

• Nominal interest rate last year: 4.70%

• Consumer Price Index increased from 301.7 to 308.9.

• Real interest rate = Nominal interest rate - Inflation rate.

• Inflation rate = (308.9-301.7)/301.7 * 100 = 2.38%

• Real interest rate = 4.7-2.38 = 2.32

• Therefore the real interest rate last year is 2.32%

Question 39

• Economy is growing: Cyclical unemployment is negative, and the unemployment rate is less than the natural rate of unemployment.

Question 40

• Government decides to pass a new investment tax credit: Expect the real interest rate to increase and the equilibrium quantity of loanable funds to increase.

Question 41

• Economic growth is shown as a shift to the right in long-run aggregate supply.

Question 42

• Bank Balance Sheet:

  • Reserves: $28,500

  • Loans: $241,500

  • Securities: $80,000

  • Deposits: $285,000

  • Debt: $45,000

  • Bank Capital: $20,000

• Bank does not hold excess reserves.

• Bank’s assets increase in value by 4.5%:

  • Total Assets = 28500+241500+80000= 350000

  • New total assets = 350000 * 1.045 = 365750

  • New bank capital = liability - old assets

  • New bank capital= 365750- (285000+45000) = 35750

Question 43

• Purchasing power parity (PPP) holds.

• Federal Reserve increases the money supply: Expect the U.S. dollar will depreciate.

Question 44

• Hestizo took out a fixed rate loan last year at nominal interest rate of 5.6%.

• Bank expected inflation to be 3.4%.

• Inflation actually turned out to be 4.2%.

• The real interest rate that Hestizo paid on the loan was 1.4% and Hestizo benefitted from unexpected inflation

Question 45

• Interest rates are lower and expansionary monetary policy is ineffective: The economy is said to be facing a liquidity trap.

Question 46

• Which of the following sums of money would you prefer if the interest rate is 5%?

• a. $9,000 received today

• b. $10,930 received in 4 years

• c. $13,335 received in 8 years

• d. $14,650 received in 10 years

• future value = present value * (1+r)^t

• future value= 9000 * (1+0.05)^4= 10940

• future value= 9000 * (1+0.05)^8= 13300

• future value= 9000 * (1+0.05)^{10}= 14660

• Therefore if the interest rate is 5% you'd be indiferent

Question 47

• Federal Reserve is attempting to hold unemployment below the natural rate.

• Economy starts in long-run equilibrium A.

• In the short-run, expect the economy to move to a point B

Question 48

• Federal Reserve is attempting to hold unemployment below the natural rate.

• Economy starts in long-run equilibrium A.

• In the long-run, expect the economy to move to a point D

Question 49

• Demand for U.S. goods and services on the world market begins to decrease: Expect the value of the U.S. dollar in the exchange markets to decrease.

Question 50

• Amount of total surplus from free trade is greater than the total surplus under a tariff.