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2009 Economics Subject Test

Part I. Multiple Choice (30 questions, 60 points in total)

Choose only ONE best answer.

1 E 2 D 3 E 4 B 5 B6 B 7 D 8 C 9 C 10 A11 D 12 A 13 C 14 D 15 D16 D 17 C 18 B 19 A 20 C21 D 22 B 23 A 24 D 25 C26 A 27 B 28 D 29 D 30 C

1. An increase in the quantity demanded could be caused by:

a. an increase in the price of substitute goods

b. a decrease in the price of complementary goods

c. an increase in consumer income levels

d. all of the above

e. none of the above

ANS: E

2. The above figure illustrates the labor market for local fast food

restaurants. What would be the effects of a minimum wage

imposed at $4 per hour?

a. a shortage of 200 hours

b. a shortage of 100 hours

c. a surplus of 200 hours

d. nothing because the minimum wage has no effect on the

Questions are printed onboth sides of the paper.

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equilibrium price and quantity.

ANS: D

3. In the electric power industry, residential customers have

relatively __________ demands for electricity compared with large

industrial users and generally are charged __________ rates.

a. similar, similar

b. elastic, lower

c. elastic, higher

d. inelastic, lower

e. inelastic, higher

ANS: E

4. The fact that the fourth plate from the All You Can Eat Country

Buffet generated more satisfaction than the fifth plate is an

example of

a. increasing marginal utility.

b. diminishing marginal utility.

c. diminishing total utility.

d. the paradox of value.


ANS: B

5. When the wage rate increases from $5.00 to $7.50 per hour, Bob

works more hours because

a. his income effect outweighs his substitution effect.b. his substitution effect outweighs his income effect.

c. his income and substitution effects offset each other exactly

and his demand for labor increases.

d. his income and substitution effects offset each other exactly

and his supply of labor increases.

ANS: B

6. For a short-run cost function which of the following statements is

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(are) not true?

a. The average fixed cost function is monotonically decreasing.

b. The marginal cost function intersects the average fixed cost

function where the average variable cost function is aminimum.

c. The marginal cost function intersects the average variable

cost function where the average variable cost function is a

minimum.

d. The marginal cost function intersects the average total cost

function where the average total cost function is a minimum.

e. b and c

ANS: B

7. The figure shows the market for books before and after a sales

tax is introduced. The tax on books is ____ a book, buyers pay

____ of tax per book, and the governments tax revenue is ____a

week.a. $1.20; $0.80; $4

b. $0.80; $1.20; $12

c. $0.40; $0.40; $4

d. $1.20; $0.80; $12

ANS: D

8. If price exceeds average costs under pure competition, morefirms will ______ the industry, supply will __________, and price will

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be driven __________.

a. enter; decrease; down

b. exit; decrease; up

c.enter; increase; down

d. exit; increase; up


ANS: C

9. A hot dog vendor on a street corner wants to increase the total

revenue from selling hot dogs. The price elasticity of demand for

the hot dogs is 1.1. Hence the vendor will

a. raise the price of a hot dog as high as possible.

b. do whatever it takes to sell as many more hot dogs as

possible.

c. lower the price of a hot dog.

d. work harder to reduce the costs of production.

ANS: C

10. For goods and services that are perfect substitutes, the

consumers indifference curves are ____ lines.

a. straight, negatively sloped

b. L-shaped

c. negatively sloped, bowed-outward

d. negatively sloped, bowed-inward

ANS: A

11. The average product of labor reaches its maximum

a. at the minimum point of the total product curve.

b. where the slope of total product curve is steepest.

c. where the slope of the total product curve is zero.

d. where marginal and average product are equal.

ANS: D

12. The demand curve for a normal good shifts leftward if income

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________ or the expected future price ________.

a. decreases; falls

b. decreases; rises

c.increases; falls

d. increases; rises

ANS: A

13. In perfect competition, the marginal revenue of an individual

firm

a. is zero.

b. is positive but less than the price of the product.

c. equals the price of the product.

d. exceeds the price of the product.

ANS: C

14. Which of the following is ALWAYS true for a single-price

monopolist in equilibrium?

a. P > MC

b. P > MR

c. MR = MC

d. all of the above


ANS: D

15. Which of the following is FALSE regarding the long run for a firm

in monopolistic competition?a. The firms can earn an economic profit because of product

differentiation.

b. Marginal cost equals average total cost.

c. Output is produced at minimum average total cost.

d. all of the above


ANS: D

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16.Trinkets, Inc., an importer of brass items, began the year with an

inventory worth $20 million. At the close of the year, the value of

their inventory was $24 million. If all else was unchanged, we can

conclude thata. net exports increased by $4 million.

b. investment expenditures decreased by $4 million.

c. net exports did not change.

d. investment expenditures increased by $4 million.


ANS: D

17. If the economy is at the natural rate of unemployment,

a. real GDP > potential GDP.

b. real GDP < potential GDP.

c. real GDP = potential GDP.

d. All of the above can occur when the economy is at the natural

rate of unemployment

ANS: C

18.The capital stock ____ depreciation and ____ investment.

a. increases because of; is unaffected by

b. decreases because of; increases because of

c. is unaffected by; is unaffected by

d. increases because of; decreases because of

ANS: B

19.The largest component of GDP in the expenditures approach is

a. personal consumption expenditures.

b. gross private domestic investment.

c. government spending on goods and services.

d. net exports.


ANS: A

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20. Suppose the working age population in Tiny Town is 100 people.

If 25 of these people are NOT in the labor force, the ________

equals ________.

a.unemployment rate; 25/100 100

b. unemployment rate; 25/75 100

c. labor force; 75

d. labor force; 25/100 100

ANS: C

21. The real wage rate rises if the money wage rate ________.

a. and the price level change by the same proportion

b. rises and the price level rises by the same percentage

c. rises more slowly than the price level

d. rises more rapidly than the price level

ANS: D

22. The natural rate of unemployment

a. falls with an increase in cyclical unemployment.

b. rises with an increase in structural unemployment.

c. rises with an increase in cyclical unemployment.

d. rises with a decrease in frictional unemployment.

ANS: B

23. Suppose that the MPC = 0.75 and there are no taxes or imports.

Then a $100 decrease in autonomous spending causes

equilibrium expenditure toa. decrease by $400.

b. increase by $400.

c. decrease by $750.

d. increase by $750.


ANS: A

24. Which of the following will affect the size of the multiplier?

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I. marginal propensity to import

II. marginal propensity to consume

III. marginal income tax rate

a.I only

b. II only

c. I and II only

d. I, II, and III

ANS: D

25. Measures of Fed policy activity include

I. The budget deficit or surplus.

II. The federal funds rate.

III. The growth rate of M2.

a. I and II.

b. I and III.

c. II and III.

d. I, II, and III.

ANS: C

26. In the above figure, at the price level of 140 and real GDP of

a. $12 trillion, firms will not be able to sell all their output.

b.$4 trillion, firms will not be able to sell all their output.

c. $4 trillion, consumers will not be able to buy all the goods and

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services they demand.

d. $12 trillion, consumers will not be able to buy all the goods

and services they demand.

ANS: A

27. Based on the figure above, short-run equilibrium occurs at the

price level of

a. 120 and real GDP of $4 trillion.

b. 130 and real GDP of $8 trillion.

c. 140 and real GDP of $12 trillion.

d. 130 and real GDP of $12 trillion.

ANS: B

28. Based on the figure above, the economy will be in a long-run

macroeconomic equilibrium at a price level of

a. 90

b. 100

c. 110

d. 120


ANS: D

29. Which of the following is true about the long-run aggregate

supply curve?

a. It is vertical at the level of potential GDP.

b. It shows the relationship between the price level and real GDPwhen wages and other costs are at an equilibrium level.

c. It does not shift in response to temporary changes in

aggregate demand.

d. all of the above


ANS: D

30. When the quantity of capital increases, then the

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a. LAS curve shifts rightward and the SAS curve does not shift.

b. SAS curve shifts rightward and the LAS curve does not shift.

c. SAS curve shifts rightward and the LAS curve shifts rightward.

d.SAS curve shifts rightward and the LAS curve does shiftsleftward.

ANS: C

Part II. Essay Questions (4 questions, 10 points each, 40

points in total)

Write your answer in the paper provided. Show your calculations

and justifications to your answer (points are in brackets after the

question).

1. Because bagels and cream cheese are often eaten together, they

are complements.

We observe that both the equilibrium price of cream cheese and

the equilibrium quantity of bagels have risen. What could be

responsible for this pattern a fall in the price of flour or a fall in

the price of milk? Illustrate and explain your answer. (note: flour

is an ingredient in bagels, and milk is an ingredient in cream

cheese.)

Answer: a fall in the price of flour.

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2. Assume that the market for cardboard is perfectly competitive. In

each of the following scenarios, should a typical firm continue to

produce or should it shut down in the short run? Draw a diagram

that illustrates the firms situation in each case.a. Minimum ATC=$2.00 Minimum AVC=$1.50 Market

price=$1.75

b. MR=$1.00Minimum AVC=$1.50Minimum ATC=$2.00

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Answer:

a. The firm will continue to produce.

At the output where P=$1.75=MR=MC, the competitive firm

is making a loss (PAVC so that it can cover some fixed costs.

b. The firm will shut down.

When the price (=MR for competitive firm) is $1.00, lower

than minimum AVC, the firm will shut down because when it

operates, it will incur more loss.

3. The below shows the quantities produced in the TCM 101

economy and the prices in 2005 and 2006. (10%)

2005 2006(base period) (current

MCATC

AVC

P=1.75

MC ATC

AVC

P=1.00

Q

Q

$

$

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period)Items

Quantities

Price

Quantities

Price

Balls 100 $1 160 $0.5

Bats 20 $5 70 $22.5

a. Use the Chain-Weighted Output index to calculate the growth

rate of real GDP in 2006. (6%)

b. Use the Chain-Weighted Output index to find the real GDP in

year 2006. (2%)

c. Continue on b, calculate the GDP deflator in 2006. (2%)

Answer:

a. 2.93.(1) Nominal GDP in 2005 = $200, and nominal GDP in

2006=$1655.

(2)Value of the 2006 outputs at 2005 prices = $510. Using

2005 prices, the growth rate is (510-

200)/200x100%=155%.

(3)Value of the 2005 outputs at 2006 prices = $500. Using

2006 prices, the growth rate is (1655-

500)/500x100%=231%.(4)The growth rate of real GDP is (155%+231%)/2=193%

b. $586.

Real GDP in 2005 is $200 and the real growth rate is 193%,

so the real GDP in 2006 is 200x(100%+193%).

c. 282

Nominal GDP/Real GDPx100%=1655/586x100=282

4. According to the classical view, why does an increase in saving

not decrease the total level of spending? Would this be true if

interest rate were not flexible? (10%)

Answer:

If interest rate is flexible (according to the classical view), the

increase in saving will lower the interest rate and raise the

private investment so that aggregate spending does not

decrease as a result. In case it is not flexible, the private

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investment will not change so that the aggregate spending will

be lower.

Though the increase in saving (decrease in consumption) causes

the aggregate demand to fall below the aggregate supply in thegoods market, it will also cause the interest rate to drop (if it is

flexible) in the money market. As a result, the private investment

will increase. The increase in private investment offsets the drops

in aggregate consumption so that the aggregate spending does

not change according to Says Law.

However, if the interest rate is not flexible so that this channel

through the money market is blocked, the private investment will

not change. The aggregate spending will decrease if the saving

increases.

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