Final Exam

1. When gross investment is positive, net investment:

a. is always zero; b. must be negative; c. must be positive; d. may be either positive or negative.

2. From an economist’s perspective, which of the following is not considered to be an investment?

a. construction of a new factory; b. purchase of shares of company stock;

c. the building of an apartment complex; d. additions to inventories at steel plants.

3. If real GDP in a year was $3,668 billion and the GDP price deflator was 112, then nominal GDP in that year was approximately:

a. $3,846 billion ; b. 3,925 billion; c. 4,108 billion; d. 4379 billion.

4. Given the supply of butter, an increase in the price of margarine will tend to:

a. increase the demand for butter; b. increase the demand for margarine; c. raise the price of butter; d. lower the price of butter.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. inelastic; b. unitary elastic c. elastic; d. perfectly elastic.

6. The interest rate effect indicates that a(n):

a. fall in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

b. fall in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.

c. increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.

d. increase in the supply of money will increase interest rates and decrease interest-sensitive consumption and investment spending.

7. The purely competitive firm above will:

a. shut down; b. produce with short-run losses; c. produce with long-run economic profits;

d. produce with short-run profits.

8. Which of the following is true of a purely competitive firm in the long-run equilibrium?

a. average fixed cost equal price; b. marginal cost equals marginal product;

c. price equals marginal cost; d. average variable cost equals marginal cost.

9. In long-run equilibrium under conditions of pure competition and productive efficiency, all firms produce at minimum:

a. marginal cost; b. total cost; c. average total cost; d. average variable cost.

10. According to utility theory, when total utility reaches a maximum, then marginal utility is:

a. increasing; b. decreasing; c. at a minimum; d. equal to zero.

1. Explain the three reasons given for the downward slope of the aggregate demand curve. Which reason do economists believe is more plausible and why?

2. What information is embodied in a budget line? What information is contained in an indifference curve? What shifts will occur in the budget line as money income (a) increases and (b) decreases? What shifts will occur in the budget line as the product price shown on the vertical axis (a) increases (b) decreases? Hint: a graph would help.

3. Why do economists worry about "multiple counting" and calculate only the "value added" in the production process? Hint: an example might help.

1. The next four questions refer to the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year.

Year Units of Output Price per unit

1               16                     $2

2               20                      3

3               30                      4

4               36                      5

5               40                      6

a. If year 2 is the base year, give the price index (in percent) for year 3.

b. Give the nominal GDP for year 4.

c. What is the real GDP for year 4?

d. Tell which years you would deflate nominal GDP and which years you would inflate nominal GDP in finding real GDP.

2. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in each instance.

a. A monthly scholarship check received by an economics student.

b. The purchase of a new tractor by a farmer.

c. The cashing in of a savings bond.

d. The services of a mechanic in fixing the radiator in his own car.

e. Social security checks received by a retired person.

f. an increase in business inventories.

g. Income received from interest on a corporate bond.

3. Explain what happens to AFC, AVC, ATC, and MC in these three situations: (a) auto mechanics receive a 10% wage increase; (b) property taxes decrease; (c) auto dealers institute a one-time promotional campaign; (d) .

4. Explain why the competitive firm will continue to produce in the short run when price is below average total costs but above average variable costs. In the long run, will the firm continue to produce? Explain why or why not. Hint: a diagram might help.