Module 2: Chapter 9, 10, 13
A country's GDP is being measured by expenditure. Various categories of expenditure are recorded as follows: Households' spending on domestic and foreign consumption = $110bn, Firms' spending on capital goods = $15bn, Firms' addition to inventories = $1bn, Government spending on services = $10bn, Government spending on capital goods = $2bn, Government transfers (social security etc) = $10bn, Exports = $12bn, Imports = $10bn. What is the correct estimate of GDP?
$140bn
The figure shows the wage-setting curve and the real wage w*. Which of the following statements is correct?
The unemployment rate is 5%.
Ceteris paribus, in which of the following cases would the wage-setting curve shift up?
A more generous unemployment insurance scheme.
Figure 9.16 is the Lorenz curve associated with a particular labour market equilibrium. In a population of 100, there are 10 firms, each with a single owner, 80 employed workers, and 10 unemployed workers. The employed workers receive 60% of the total income as wages. The Gini coefficient is 0.36. In which of the following cases would the Gini coefficient increase, keeping all other factors unchanged?
A rise in the unemployment rate. A rise in the workers' productivity while the real wage is unchanged.
The figure describes the effect of immigration on unemployment in the labour market. The labour market equilibrium is at A and C before and after the influx of immigration, respectively. Based on this figure, which of the following statements is correct?
All incumbent workers are no worse off in the new equilibrium.
(The Economy Question 13.4, modified) Which of the following would increase GDP?
An increase in government spending. A decline in imports, holding all other components of GDP constant.
The figure depicts Matthew's choice of consumption in periods 1 and 2. He has an income of $100 in period 1 and no income in period 2. The interest rate is 20%. Based on the figure, which of the following statements is correct?
At A, Matthew makes no savings.
(The Economy Question 9.8) Figure 9.12 depicts the labour market when there has been a negative aggregate demand shock. Based on this information, which of the following statements is correct?
At B, the firms are able to make higher profits by lowering the wage.
The following diagram depicts a firm's isoprofit curves and demand curve, given the economy-wide demand. Which of the following statements is correct?
At B, the marginal rate of substitution is (p*-W)/q*.
Figure 10.4 depicts Julia's choice of consumptions in periods 1 and 2. She has no income in period 1 (now) and an income of $100 in period 2 (later). The current interest rate is 10%. Based on this information, which of the following statements is correct?
At E, Julia is on the highest possible indifference curve given her feasible set.
(The Economy Question 9.7) Which of the following statements is correct regarding the effects of a rise in the real wage on the labour supply of a worker?
At high wage levels, the income effect dominates the substitution effect, leading to lower labour supply.
(The Economy Question 9.5) The following diagram depicts the price-setting curve. Based on this information, which of the following statements is correct?
At point C, the real wage is too low and the markup is too high. Therefore the firm is able to increase profit by lowering prices and hiring more workers.
Which of the following statements about the price-setting curve is correct?
At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximising level.
The figure depicts Mark's choice of consumption in periods 1 and 2. He has no income in period 1 and an income of £132 in period 2. Based on the figure, which of the following statements is correct?
B = £40.
The figure depicts the labour market when there has been a negative aggregate demand shock. Which of the following statements is correct?
B is not a Nash equilibrium outcome.
(The Economy Question 10.8) Which of the following statements is correct?
Base money is broad money minus bank money.
The diagram depicts four possible feasible frontiers for Marco, who has $120 worth of grain in period 1 and no income in period 2. In scheme 1, he can store the grain that he does not consume in period 1. This results in a 25% loss of the grain due to pests and rotting. In scheme 2, he can sell the grain that he does not consume and lend the money at a 15% interest rate. In scheme 3, he can invest the remaining grain (e.g. plant it as seed) at a return of 40%. Finally in scheme 4, he can invest the entire amount of grain and borrow against his future income at an interest rate of 20%. Which of the following numbers is correct?
D = $140.
(The Economy Question 9.3) Figure 9.5 depicts the wage-setting curve and how it is derived using the best response function of the employees and the isocost lines for effort of the employers. Based on this figure:
In a country where the stigma attached to unemployment is high, the wage-setting curve would be lower.
(The Economy Question 13.2) The following graph shows the relationship between real GDP growth and change in unemployment for the US between 1961 and 2013.
With real GDP falling by 2.8% in 2009, the predicted rise in the unemployment rate would have been 2.3%.
In the current year, your economy is expected to make exports of $100bn and to import $80bn-worth of goods and services. When it comes to measuring GDP (or aggregate demand) the net effect of your external sector is to:
External trade added $20bn to GDP.
In the current year, your economy is expected to make exports of $80bn and to import $100bn-worth of goods and services. When it comes to measuring GDP (or aggregate demand) the net effect of your external sector is to:
External trade reduces GDP by $20bn.
(The Economy Question 13.3) Which of the following statements is correct regarding measuring GDP?
GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production.
The following diagram depicts Julia's choice of consumption now and consumption later (next period). She has no income now and an income of $115 later. The current interest rate is 15%. Based on this information, which of the following statements is correct?
If Julia borrows $80 to spend now, she will have $23 to spend later.
(The Economy Question 10.2) Mr Bond has wealth of £500,000. He has a market income of £40,000 per year, on which he is taxed 30%. Mr Bond's wealth includes some equipment, which depreciates by £5,000 every year. Based on this information, which of the following statements is correct?
If Mr Bond decides to spend 60% of his net income on consumption and the rest on investment, then his investment is £9,200.
(The Economy Question 9.1) Which of the following statements is correct?
If all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup.
The figure depicts the model of wage setting by the union. Which of the following statements is correct?
Workers exert higher effort under union bargaining than when the firm selects its profit-maximising wage level.
(The Economy Question 13.6) Figure 13.12 shows the consumption choice of a consumer over two periods. His initial endowment is (y, y), that is, an income y in both periods, which is depicted by point A. If possible, the consumer prefers to consume the same amount in both periods. The interest rate is r. Now assume that there has been a temporary shock such that the income in period 1 is reduced to y′, while the period 2 income is expected to return to y. Assume that a credit-constrained consumer is not able to borrow at all. Based on this information, which of the following statements is correct?
If the consumer is not credit-constrained, then he will consume c′ in both periods such that c′ = y − (c′ − y′)(1 + r) (income minus repayment in period 2).
(The Economy Question 9.4) Figure 9.8 depicts the market's demand curve and the firm's isoprofit curves. Based on this information, which of the following statements is correct?
If the firm finds itself producing at point C, it can increase its profit by selling more units at a lower price.
(The Economy Question 13.7) The following diagram shows the path of income for a household that receives news about an expected rise and fall in future income at the depicted times.
If the household is credit-constrained and has 'weakness of will', then its consumption will match precisely its income path.
(The Economy Question 10.6) Figure 10.10 depicts four possible feasible frontiers for Marco, who has $100 worth of grain in period 1 (now) and no income in period 2 (later). In scheme 1, he can store the grain that he does not consume in period 1. This results in 20% loss of the grain due to pests and rotting. In scheme 2, he can sell the grain that he does not consume and lend the money at 10%. In scheme 3, he can invest the remaining grain (for example by planting it as seed) for a return of 50%. Finally in scheme 4, he can invest the entire amount of grain and borrow against his future income at 10%. Based on this information, which of the following statements is correct?
If the rate of borrowing increases, the feasible frontier for scheme 4 tilts inwards from the point 150 on the vertical axis (becomes steeper).
Which of the following statements are correct?
In a competitive goods market the buyers are price-takers, while in a labour market the buyers of employment (the firms) are price-setters. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labour markets the sellers receive economic rents.
Based on the figure shown, which country's unemployment rate shows the least sensitivity to the rate of GDP growth?
Japan
You are given the following data for the five countries. The numbers are in thousands. Of the five countries, which of the following statements is correct?
Japan has the lowest unemployment rate.
(The Economy Question 10.10, modified) The following diagram depicts Julia's choice of consumptions in periods 1 (now) and 2 (later) under different interest rates. She has no income in period 1 but an income in period 2 against which she can borrow. Based on this information, which of the following statements are correct?
Julia will unambiguously increase her consumption in period 1 after an interest rate cut. The graph of interest rate (vertical axis) versus period-1 consumption (horizontal axis) is downward sloping.
The diagram depicts Marco's choice of consumptions in periods 1 and 2. He has $100 worth of grain in period 1 and no income in period 2. Marco has two choices. In scheme 1, he can sell the grain that he does not consume and lend the money at 10%. In scheme 2, he can invest the grain that he does not consume (e.g. planting as seed) for a return of 50%. Which of the following statements is correct?
Marco cannot do any better with the two feasible frontiers that are shown than consumption choice B.
(The Economy Question 10.5, modified) Figure 10.6 depicts Marco's choice of consumption in periods 1 (now) and 2 (later). He has $100 worth of grain in period 1 and no income in period 2. Marco has two choices. In scheme 1, he can store the grain that he does not consume in period 1. This results in a loss of 20% of the grain due to pests and rotting. In scheme 2, he can sell the grain that he does not consume and lend the money at 10%. Based on this information, which of the following statements is correct?
Marco will always be on a higher indifference curve under scheme 2 than under scheme 1. With scheme 2, if Marco consumes $68 worth of grain in period 1, he can consume $35 worth of grain in period 2.
The diagram depicts Marco's choice of consumptions now and later (next period). He has $100 worth of grain now and no income later. Marco has two choices. In scheme 1, he can store the grain that he does not consume now. This results in a loss of 20% of the grain due to pests and rotting. In scheme 2, he can sell the grain that he does not consume and lend the money at 10%. Based on this information, which of the following statements is correct?
Marco will unambiguously consume more later under scheme 2 than in scheme 1.
The diagram depicts Marco's choice of consumptions in periods 1 and 2. He has $100 worth of grain in period 1 and no income in period 2. Marco decides to consume $65 worth of grain in period 1, sell the remaining grain and lend the money at an interest rate of 10%, which he uses to buy grain for his consumption in period 2 (point A). Which of the following statements regarding his balance sheet is correct?
Marco's liabilities remain at $0 at all times.
Which of the following statements is correct?
Money allows purchasing power to be transferred between consumers.
Which term can be defined as "A set of strategies, one for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else"?
Nash equilibrium
(The Economy Question 10.1) Which of the following statements are correct?
Net income is the maximum amount that you can consume and leave your wealth unchanged.
(The Economy Question 10.11, modified) Which of the following statements are correct regarding the principal-agent problem?
One solution for the principal-agent problem in loans is for the borrower to provide equity. The principal-agent problem leads to credit rationing in the loans market.
The figure depicts indifference curves for consumption today and consumption later for Abraham and Sarah. Which of the following statements is correct?
Sarah is more likely to want to consume all her income now than Abraham.
Consider two figures showing the long-run growth of real per capita GDP in the UK (in logs). The left shows the period 1875 to roughly 2010 (best fit line y = 0.0156x + 7.7734, R-squared = 0.9445). The right shows the period 1950 to roughly 2014 (best fit line y = 0.0214x + 8.7782, R-squared = 0.9889). Which of the following is correct?
Since 1950, the annual rate of growth of GDP per capita has been more rapid than the average rate of growth over the whole period since 1875.
The following diagram depicts Julia's choice of consumption in periods 1 (now) and 2 (later) when the interest rate is 78%. She has no income in period 1 and an income of $100 in period 2. She chooses the consumption choice G. Based on this information, which of the following statements regarding Julia's balance sheet is correct?
The asset after consumption but before repaying the loan in period 2 is 62.
(The Economy Question 10.9) The following example is a simplified balance sheet of a commercial bank. Based on this information, which of the following statements is correct? AssetsLiabilitiesCash and reserves£2mDeposits£45mFinancial assets£27mSecured borrowing£32mLoans to other banks£10mUnsecured borrowing£20mLoans to households and firms£55m Fixed assets£6m Total assets£100mTotal liabilities£97m
The bank's leverage is 33.3.
(The Economy Question 9.6) Figure 9.11 depicts the labour market model. Consider now a reduction in the degree of competition faced by the firms. Which of the following statements is correct regarding the effects of reduced competition?
The equilibrium real wage falls.
The figure depicts a labour market. Now consider an inflow of half a million immigrant workers who are all looking for employment (rather than intending to start up a business). Which of the following statements is correct?
The firms' marginal cost of production is temporarily reduced.
The figure shows the log of UK real GDP per capita between 1875 and 2010. Which of the following is correct?
The growth of GDP between 1950 and 1965 was above the long-run average.
The following diagram depicts a firm's isoprofit curves and demand curve, given the economy-wide demand. Which of the following statements is correct?
The isoprofit curves would be steeper for lower W.
The following diagram depicts a firm's demand curve given the economy-wide demand, and its tangent isoprofit curve. The firm faces a linear demand curve. The workers' average product of labour λ equals 1. At B, which of the following statements is correct?
The marginal rate of substitution is -0.1.
Consider an economy with firms selling differentiated products, where the only input to production is labour. Which of the following statements is correct?
The more inelastic the demand curve faced by the firm, the higher the markup set by the firm.
The diagram depicts Marco's choice of consumptions in periods 1 and 2. He has $100 worth of grain in period 1 and no income in period 2. Marco decides to invest the entire amount of grain, which gives a return of 50%, and borrow against this future income at a 10% interest rate in order to consume $80 in period 1 (point A). Which of the following statements regarding his balance sheet is correct?
The net worth after consumption in period 1 is $20.
The diagram depicts four possible feasible frontiers for Marco, who has $100 worth of grain now and no income later. In scheme 1, he can store the grain that he does not consume now. This results in some loss of the grain due to pests and rotting. In scheme 2, he can sell the grain that he does not consume and lend the money. In scheme 3, he can invest the remaining grain (e.g. plant it as seed). Finally in scheme 4, he can invest the entire amount of grain and borrow against his future income. The value at point A equals $80, at point B equals $144, at point C equals $168, and at point D equals $140. Based on this information, which of the following statements is correct?
The rate of return from purely investing grain is 40%.
(The Economy Question 9.11) Figure 9.20 depicts the effect of union wage-setting. What can we conclude from this figure?
The resulting bargained wage-setting curve will be above the wage-setting curve with no union.
(The Economy Question 13.1) The following is the graph of the natural log of UK real GDP per capita between 1875 and 2014: Based on this information, which of the following statements is correct?
The slope of the best-fit straight line is the average annual growth rate.
The following diagram depicts a firm's demand curve given the economy-wide demand, and its tangent isoprofit curve. The firm faces a linear demand curve. The workers' average product of labour λ equals 1. The firm produces at point B. Now suppose the wage rate W falls to 20. At B, which of the following statements is correct now?
The slope of the demand curve is -0.1.
(The Economy Question 10.3) Figure 10.3a depicts Julia's indifference curves for consumption in periods 1 (now) and 2 (later). Based on this information, which of the following statements is correct?
The slope of the indifference curve is the marginal rate of substitution between the consumption in the two periods.
The diagram depicts Mary's choice of consumptions in periods 1 and 2. She has no income in period 1 and an income of $100 in period 2. In scenario 1 the interest rate is 78%, while in scenario 2 it falls to 10%. Based on this information, which of the following statements is correct?
The substitution and income effects of the interest rate fall work in the opposite directions for consumption in period 2.
(The Economy Question 9.10, modified) Figure 9.16 depicts the model of a labour market where there are 90 million workers. The current labour market equilibrium is at A. Now consider the case where the total labour supply is increased to 100 million. Based on this information, which of the following statements are correct regarding the adjustment process in the labour market?
The wage-setting curve shifts downward. Initially, unemployment doubles.
(The Economy Question 10.12) In an economy with a population of 100, there are 80 farmers and 20 lenders. The farmers use the funds to finance the planting and tending of their crops. The rate of profit for the harvest is 12.5%, while the interest rate charged is 10%. Compare the following two cases: Case A: All farmers are able to borrow. Case B: Only 50 farmers are able to borrow. Based on this information, which of the following statements is correct?
There is a 10% increase in the Gini coefficient in Case B compared to Case A.
In an economy with a population of 100, there are 80 farmers and 20 lenders. The farmers use the funds to finance the planting and tending of their crops. The rate of profit for the harvest is 12.5%, while the interest rate charged is 10%. Compare the following two cases:
There is a 16.7% increase in the Gini coefficient in Case B compared to Case A.
The figure depicts the price-setting curve. Assume that the average product of labour λ is given. Based on this figure, which of the following statements is correct?
To go from A to B, the firm would be raising its price.
Based on the figure shown, which country's unemployment rate shows the most sensitivity to the rate of GDP growth?
US
Which of the following statements regarding labour unions and wage bargaining is correct?
Unions may choose to restrain their use of bargaining power.
Which of the following statements is correct?
Unlike in the competitive goods market, the exercise of power affects outcomes in the labour market.
Which of the following statements is correct?
When savers buy bonds they are lending money in the money market.
The diagram depicts Julia's choice of consumption now and consumption later. She has no income now and an income of $100 later (next period). Based on this information, which of the following statements is correct?
When the interest rate is 78%, the maximum that Julia can borrow now is $56 (rounded to the nearest dollar).
The figure depicts the price-setting curve. Assume that the average product of labour λ is given. Based on this figure, ceteris paribus, which of the following statements is correct?
With higher differentiation between products, the average product of labour remains the same but the profit-setting curve falls.
Which term can be defined as "The total output in an economy, across all sectors and regions"?
aggregate output
Which term can be defined as "The stock of money in circulation, which is defined as the sum of bank money and the base money that is in the hands of the non-bank public"?
broad money
Which term can be defined as "Alternating periods of faster and slower (or even negative) growth rates"?
business cycle
Based on the figure shown, by how much does a one percent increase in growth reduce the unemployment rate in Spain?
by 0.3597 percentage points
Which term can be defined as "An asset that a borrower pledges to a lender as a security for a loan"?
collateral
Which term can be defined as "A description of individuals who are able to borrow only on unfavourable terms"?
credit-constrained
Which term can be defined as "A description of individuals who are unable to borrow on any terms"?
credit-excluded
Which of the following statements is correct?
depreciation is a flow variable
Which term can be defined as "The ratio of the number of employed to the population of working age"?
employment rate
(The Economy Question 9.2) Which of the following statements is correct?
employment rate = employed ÷ population of working age
Which term can be defined as "The number of people seeking work but without jobs, which is determined by the intersection of the wage-setting and price-setting curves"?
equilibrium unemployment
Which term can be defined as "Changes in taxes or government spending in order to stabilize the economy"?
fiscal policy
Which term can be defined as "Financial instruments issued by governments that promise to pay flows of money at specific intervals"?
government bonds
Which term can be defined as "A situation in which the value of an entity's assets is less than the value of its liabilities"?
insolvent
Which term can be defined as "Goods held by a firm prior to sale or use, including raw materials, and partially-finished or finished goods intended for sale"?
inventory
Which of the following would not be recorded on a balance sheet?
investment
Which term can be defined as "Expenditure on newly produced capital goods and buildings"?
investment
Which term can be defined as "The combination of the real wage and the level of employment determined by the intersection of the wage-setting and the price-setting curves"?
labour market equilibrium
Which term can be defined as "Total output divided by the number of hours or some other measure of labour input"?
labour productivity
For banks or households, the value of assets divided by the equity stake in those assets is called the
leverage ratio.
Which term can be defined as "Ease of buying or selling a financial asset at a predictable price"?
liquidity
Which term can be defined as "The risk that an asset cannot be exchanged for cash rapidly enough to prevent a financial loss"?
liquidity risk
Which term can be defined as "Central bank actions aimed at influencing economic activity through changing interest rates or the prices of financial assets"?
monetary policy
Which term can be defined as "The actual amount received in payment for work, in a particular currency"?
nominal wage
Which of the following would decrease inequality measured by the Gini coefficient?
the degree of competition faced by firms is increased
Which term can be defined as "The value of exports minus the value of imports"?
trade balance
Which term can be defined as "The ratio of the number of the unemployed to the total labour force"?
unemployment rate
The figures depict the wage-setting curve and how it is derived using the best response function of the employees and the isocost lines for effort of the employers. U_1 and U_2 are unemployment rates. Which of the following statements is correct?
w_5 is the Nash equilibrium wage when the unemployment rate is U_2.
