ECON 2030 First Hour Exam Any Semester Pentamber 32, 2001 Prof. Roger W. Garrison

3. This country’s minimum wage legislation has had the effect of A. increasing the wage rate for farm workers (even though the legal minimum does not apply to agriculture). B. redistributing income from high-and-medium- income families to low-income families. C. eliminating many low-skill, entry-level jobs. D. guaranteeing a living wage to all able-bodied people who want to be a member of this country’s labor force.

4. The level of unemployment consistent with sustainable prosperity has long been believed to be A. in the range of 2 to 3 percent. B. in the range of 3 to 4 percent. C. in the range of 4 to 5 percent. D. in the range of 5 to 6 percent.

26. Ferris Beuller graduated from college during the Bush recession. He spent 1990 looking in vain for reasonable employment. Totally discouraged, he spent 1991 playing Minesweeper on his girlfriend’s computer. The Bureau of Labor Statistics would classify Mr. Buller (in 1991) as A. self-employed. B. institutionally unemployed. C. a discouraged worker. D. structurally unemployed.

5. In the Keynesian view, the most unstable, or unpredictable, component of spending is that done by A. consumers. B. the investment community. C. unemployed workers. D. the government.

27. “Who You Gonna Call After the Next Bust?” Louis Uchitelle argues that for macroeconomic stabilization, we will–and should–call on A. the government. B. industrial leaders. C. citizen action groups. D. academic economists.

2. The current rate of unemployment in this country, as announced by the BLS on Friday, September 1, is A. 4.1 percent. B. 4.6 percent. C. 5.1 percent. D. 5.6 percent.

9. During this election year, Prophetess Mary is earning a fairly good income, partly by making predictions about the outcome of the Bush-Gore race for the presidency. She will earn about $15,000 this year, out of which she’ll spend about $12,500. Next year, with no election to stimulate her business, her income may fall to $10,000, out of which she may spend $9,500. On the basis of these data (and assuming no taxes), we can calculate that Prophetess Mary’s marginal propensity to consume (MPC) is A B C D

C Y C = a+bY 15,000 12,500 10,000 9,500 5,000 3,000 MPC = b = slope = 3,000 / 5,000 = 0.60

9. During this election year, Prophetess Mary is earning a fairly good income, partly by making predictions about the outcome of the Bush-Gore race for the presidency. She will earn about $15,000 this year, out of which she’ll spend about $12,500. Next year, with no election to stimulate her business, her income may fall to $10,000, out of which she may spend $9,500. On the basis of these data (and assuming no taxes), we can calculate that Prophetess Mary’s marginal propensity to consume (MPC) is A B C D

10. But suppose Prophetess Mary’s Bush-Gore predictions turn out to be exactly wrong, and her business dries up completely. Even with her income dropping (temporarily, she hopes) to zero in 2001, she will engage in consumption spending (symbolized by “a”) in the amount of A. $2,500. B. $3,000. C. $3,500. D. $4,000.

C Y C = a+bY 15,000 12,500 10,000 9,500 5,000 3,000 MPC = b = slope = 0.60 C = a + bY 10,000 9,500 9,500 = a (10,000) a = 9,500 – 6,000 a = 3,500 C = a + bY a = 3,500

10. But suppose Prophetess Mary’s Bush-Gore predictions turn out to be exactly wrong, and her business dries up completely. Even with her income dropping (temporarily, she hopes) to zero in 2001, she will engage in consumption spending (symbolized by “a”) in the amount of A. $2,500. B. $3,000. C. $3,500. D. $4,000.

The two diagrams show the saving- investment relation- ships for a wholly private economy as seen by Marshal- lians, who believe that markets work, and by Keynesians, who believe that perversities are especially dominant in this market. Note that Saving (S) and Investment (I) are measured horizontally in one diagram and vertically in the other. Answer Questions 11 through 16 with the aid of these diagrams.

11. The Marshallians don’t explicitly show the level of income. Their presumption, however, is that A. economic depression is the norm. B. The whole labor force earns the minimum wage. C. full employment is achieved by wage-rate adjustments. D. government policy will create and maintain a fully employed economy.

12. Suppose that income earners become more thrifty. The increased saving, in the Marshallian view, will cause A. the interest rate to fall and investment to increase. B. the interest rate to rise and investment to increase. C. the interest rate to fall and investment to decrease. D. the interest rate to rise and investment to decrease. S’

A. must be true by definition. B. can only be the result of accident. C. is brought about by market forces. D. is possible only if saving equals zero. 13. The Keynesian diagram shows that equilibrium income equals full-employment income, i.e., Y eq = Y fe. For a wholly private economy, this equality, according to the Keynesians

14. The Keynesians would claim that a shift in the saving function in the direction of increased thrift will cause A. the interest rate to fall and investment to increase. B. income to rise and investment to increase. C. both income and investment to remain unchanged. D. income to fall but investment to remain unchanged. S’

16. According to the Keynesians, the saving function A. is unstable. B. is as stable as the consumption function. C. shifts with changes in the rate of interest. D. is usually steeper than the consumption function.

15. If, with Y eq = Y fe, investment increases, the Keynesians would expect to see A. sustainable increases in real output and real income. B. inflation but no sustained increase in real output. C. overall decreases in prices and wage rates. D. an increase in full-employment income.

6. In about the middle of each month, the BLS releases the new CPI data. CPI stands for A. consumer price index, which, over time, tracks the economy’s inflation rate. B. commercial production index, which tracks the economy’s marketable output. C. consumer price index, which measures the extent of monopoly power in the business community. D. commercial production index, which measures the extent of inventory excesses or inventory deficiencies.

Consider the mixed economy of Colandia. The government collects no taxes even though it spends $50 per year. Investment spending is also $50. The marginal propensity to consume in Colandia is 5/8. Full-employment income is estimated to be $640. (All figures are in billions of dollars, but you can dispense with the nine zeroes.) Answer Questions 17 through 25 on the basis of these data and the information depicted in the diagram. T = 0 G = 50 I = 50 b = 5/8

17. According to the diagram, how much do the Colandians spend on consumption goods even when their incomes fall (temporarily) to zero? A. $0. B. $50. C. $100. D. $150.

18. What is the marginal propensity that characterizes the Colandians’ saving behavior? A. MPS = 5/8. B. MPS = 1/2. C. MPS = 3/8. D. MPS = 1/4. MPC = b = 5/8 MPS = 1 - b = 1 - 5/8 MPS = 3/8

19. What equation describes the saving behavior of the Colandians? A. S = /8 Y. B. S = /8 Y. C. S = /8 Y. D. S = /8 Y. C = a + bY S = -a + (1 - b)Y S = /8 Y

20. At what level of income would Colandians spend $450 on consumption goods? A. $560. B. $640. C. $720. D. $800. C = /8 Y 450 = /8 Y 5/8 Y = 400 Y = 640 $450

21. How much will Colandians save when their income is $560? A. -$50. B. $0. C. $60. D. $160. S = /8 Y S = /8 (560) S = S = 160 $160

22. How much are total expenditures (C + I + G) in Colandia when income is $560? A. $400. B. $450. C. $500. D. $550. E = C + I + G E = /8 Y E = /8 (560) E = = 500 $500

23. With income at $560, what is the extent of the excess or depletion of inventories? A. excess inventories in the amount of $60. B. excess inventories in the amount of $160. C. depletion of inventories in the amount of $60. D. depletion of inventories in the amount of $160. $60

24. Where is the equilibrium that the spiraling of income and expenditures will bring about in Colandia? A. Y eq = $400. B. Y eq = $480. C. Y eq = $560. D. Y eq = $640. Y = C + I + G Y = /8 Y Y - 5/8 Y = 150 3/8 Y = 150; Y = 400

25. How much will the Colandians be saving when the Keynesian adjustments have established an equilibrium? A. $0. B. $50. C. $100. D. $150. S = /8 Y S = /8 (400) S = S = 100 $100

7. Keynesian policy advisors might recommend a general tax cut if they believe the economy is experiencing A. inflation. B. frictional unemployment. C. cyclical unemployment. D. structural unemployment.

8. If a mixed economy that operates in accordance with the Keynesian vision settles into a circular flow in which tax revenues equal government spending and saving equals investment, we can say that A. the marginal propensity to save is equal to zero. B. the economy is in Keynesian equilibrium but may be in a depression. C. the marginal propensity to save is equal to the marginal propensity to consume. D. the economy is experiencing neither cyclical unemployment nor inflation.

Full-employment income in Algoria is estimated to be $8,500, but the equilibrium level of income is only $7,600. (These figures are in millions of dollars.) On average, when Algorians earn an additional three dollars of income, they spend two and save one. Answer the next three questions on the basis of this information. 30. If government spending is used to achieve full employment in Algoria, by how much would govern- ment spending have to be increased? A. $150. B. $300. C. $450. D. $900. /\Y = 1/(1-b) /\G 900 = 3 /\ G /\ G = 300

Full-employment income in Algoria is estimated to be $8,500, but the equilibrium level of income is only $7,600. (These figures are in millions of dollars.) On average, when Algorians earn an additional three dollars of income, they spend two and save one. Answer the next three questions on the basis of this information. 31. If, instead, policy makers choose to use tax policy to achieve full employment in Algoria, by how much would taxes have to be cut? A. $150. B. $300. C. $450. D. $900. /\ Y = -b/(1-b) /\ T 900 = -2 /\ T /\T = -450

32. Suppose that the Algorian government is moved by the spirit of fiscal integrity, which requires that all changes in government spending be accompanied dollar-for-dollar by changes in the level of taxation. With this constraint in place, how could full employment without inflation be achieved? A. Increase both government spending and the level taxation by $450. B. Decrease both government spending and the level taxation by $450. C. Increase both government spending and the level taxation by $900. D. Decrease both government spending and the level taxation by $900.

29. Consider a typical dispute between conservative and not- so-conservative politicians during a period in which the economy is experiencing full employment without inflation. The conservative politicians, who tend to think in terms of supply and demand rather than income and expenditures, recommend that the government reduce both government spending and the level of taxation by $100 billion so the private sector will have a greater role in allocating the economy’s resources. The not-so-conservative politicians, who seriously doubt the ability of the market to function on its own, claim that this policy would cause both output and income to A. fall by $100 billion. C. remain unchanged. B. rise by $100 billion. D. fall by more than $100 billion.

28. Government-spending policy and tax policy can be used as alternative means of stimulating the economy. Suppose that, in a very stimulant-sensitive economy, an increase in government spending of $45 billion would raise income by $450 billion. That same increase in income could be achieved by implementing a tax cut of A. $40 billion. B. $45 billion. C. $50 billion. D. $55 billion. /\ Y = 1/(1-b) /\ G 450 = 1/(1-b) 45 1/(1-b) = 450/45 = 10 -b/(1-b) = -9 /\Y = -b/(1-b) /\T 450 = -9 /\ T /\T = 450/(-9) /\T = -50 Go to Colandia