Macro Econ HW 1 & 2

Suppose that this year a small country has a GDP of $100 billion. Also assume that Ig = $30 billion, C = $60 billion, and Xn = - $10 billion. How big is G

$20 billion

Suppose that California imposes a sales tax of 10 percent on all goods and services. A Californian named Ralph then goes into a home improvement store in the state capital of Sacramento and buys a leaf blower that is priced at $200. With the 10 percent sales tax, his total comes to $220. How much of the $220 paid by Ralph will be counted in the national income and product accounts as private income (employee compensation, rents, interest, proprietors' income, and corporate profits)?

$200

A small economy starts the year with $1 million in capital. During the course of the year, gross investment is $150,000 and depreciation is $50,000. How big is the economy's stock of capital at the end of the year

1,100,000

Assume that demand for a commodity is represented by the equation P = 10 - 0.2Qd* Supply is represented by the equation P = 2 + 0.2Qs' a. Using the equilibrium condition Qs = Qd, determine equilibrium price. b. Now determine equilibrium quantity.

10−0.2Qd=2+0.2Qs. 10−0.2Q=2+0.2Q. 0.2Q+0.2Q=8 0.4Q=8 The equilibrium quantity is: Q=8/0.4=20 P=10−0.2Q P=10−0.2×20 P=10−4=6 Price= $6 P=2+0.2Q P=2+0.2×20 P=2+0.2×20 P=2+4=6

Suppose that you are given a $100 budget at work that can be spent only on two items: staplers and pens. If staplers cost $10 each and pens cost $2.50 each, then the opportunity cost of purchasing one stapler is:

4 pens: (4 × $2.50 = $10) to purchase a stapler.

Tina walks into Ted's sporting goods store and buys a punching bag for $100. That $100 payment counts as _______________ for Tina and _______________ for Ted.

Expenditure; income.

True or False. Because price stickiness only matters in the short run, economists are comfortable using just one macroeconomic model for all situations

False

If the demand for a firm's output unexpectedly decreases, you would expect that its inventory would:

Increase or remain the same, depending on whether prices are sticky

Which of the following transactions would count in GDP? Kerry buys a new sweater to wear this winter Patricia receives a Social Security check Roberto gives his daughter $50 for her birthday Latika sells $1,000 of General Electric stock Karen buys a new car Amy buys a used car

Kerry buys a new sweater to wear this winter Karen buys a new car

An increase in _______ GDP guarantees that more goods and services are being produced by an economy.

Real

The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data. 1968 | $924.80 | 22.01 1978 | 2308.80 | 40.40 1988 | 5115.40 | 66.98 1998 | 8808.50 | 85.51 2008| 14456.40| 108.48

Real GDP 1968=$924.80/(22.01/100)=$4201.73 inflating 1978=$2308.80/(40.40/100)=$5714.85 inflating 1988=$5115.40/(66.98/100)=$7637.21 increasing 1998=$8808.50/(85.51/100)=$10301.13 inflating 2008=$14456.40/(108.48/100)=$13326.33 deflating

Which of the following items will be included in official U.S. GDP statistics? Robert paying Ted for a haircut in Chicago. Money spent to clean up a local toxic waste site in Ohio. The dollar value of the annoyance felt by local citizens living near a noisy airport in Georgia. Revenue generated by illegal marijuana growers in Oregon. Revenue generated by legal medical marijuana sales in California. Emily and Rhonda trading an hour of dance lessons for a haircut in Dallas.

Robert paying Ted for a haircut in Chicago. Money spent to clean up a local toxic waste site in Ohio. Revenue generated by legal medical marijuana sales in California

Use marginal cost/marginal benefit analysis to determine if the following statement is true or false: "The optimal amount of pollution abatement for some substances, say, dirty water from storm drains, is very low; the optimal amount of abatement for other substances, say, cyanide poison, is close to 100 percent."

True

Consider a specific example of the special-interest effect and the collective-action problem. In 2012, it was estimated that the total value of all corn production subsidies in the United States was about $3 billion. The population of the United States was approximately 300 million people that year. a. On average, how much did corn subsidies cost per person in the United States in 2012? (Hint: A billion is a 1 followed by nine zeros. A million is a 1 followed by six zeros.) b. If each person in the United States is only willing to spend $0.50 to support efforts to overturn the corn subsidy, and if antisubsidy advocates can only raise funds from 10 percent of the population, how much money will they be able to raise for their lobbying efforts? c. If the recipients of corn subsidies donate just one percent of the total amount that they receive in subsidies, how much could they raise to support lobbying efforts to continue the corn subsidy? d. By how many dollars does the amount raised by the recipients of the corn subsidy exceed the amount raised by the opponents of the corn subsidy?

a. 10 (3 billion/300million) b. 15,000,000 [ we first calculate the number of individuals willing to fund the antisubsidy advocates. Since only 10 percent of 300 million are willing to provide funding, we have 30 million people providing funding (= 0.10 × 300 million). Each of these individuals is only willing to provide $0.50. This results in a total funding of $15 million (= $0.50 × 30 million).] c. 30,000,000 (= 0.01 × $3 billion) d. 15,000,000 (= $30 million - $15 million)

Monthly Rent D S $3000 12,500 17,500 2,500 15,000 15,000 2,000 17,500 12,500 1,500 20,000 10,000 1,000 22,500 7,500 a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied? Market equilibrium rental price is: Market equilibrium quantity is: b. If the local government can enforce a rent-control law that sets the maximum monthly rent at $2,000, will there be a surplus or a shortage? Of how many units? How many units will actually be rented each month? c. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that can be charged is $3,000 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? How many units will actually be rented each month?

a. 2,500 per month 15,000 apartments b. shortage 5,000 apartments per month 12,500 apartments c. surplus 5,000 apartments per month 12,500 apartments

Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex are shown in the table below. $ candy Tex Dex Rex total 8 2 3 2 _ 7 4 4 _ 14 6 _ 5 10 21 5 8 _ 14 28 4 10 7 18 _ b. Which buyer demands the least at a price of $5? The most at a price of $7? c. Which buyer's quantity demanded increases the most when the price is lowered from $7 to $6? d. Which direction would the market demand curve shift if Tex withdrew from the market? What if Dex doubled his purchases at each possible price? e. Suppose that at a price of $6, the total quantity demanded increases from 21 to 31 . Is this a "change in the quantity demanded" or a "change in demand"?

a. 7, 6, 6, 6, 35 b. Dex Rex c. Rex d. To the left To the right e. change in demand

Assume that a national restaurant firm called BBQ builds 20 new restaurants at a cost of $1 million per restaurant. It outfits each restaurant with an additional $200,000 of equipment and furnishings. To help partially defray the cost of this expansion, BBQ issues and sells 400,000 shares of stock at $30 per share. What is the amount of economic investment that has resulted from BBQ's actions? How much purely financial investment took place?

a. The restaurant firm builds 10 new restaurants at a cost of $1 million each, which results in $10 million (= $1 million × 10 restaurants built) worth of economic investment. In addition to each structure, it costs $300,000 in equipment and furnishings for each restaurant. This results in an additional $3 million (= $300,000 × 10 restaurants) worth of economic investment. Combining the two, we have $13 million (= $10 million + $3 million) worth of economic investment. b. Since the company sold 200,000 shares at $35 per share, the financial investment is $7 million (= 200,000 × $35).

Decide whether each of the following descriptions most closely corresponds to being part of a command system, a market system, or a laissez-faire system. a. A woman who wants to start a flower shop finds she cannot do so unless the central government has already decided to allow a flower shop in her area: b. Shops stock and sell the goods their customers want but the government levies a sales tax on each transaction to fund elementary schools, public libraries, and welfare programs: c. The only taxes levied by the government are to pay for national defense, law enforcement, and a legal system designed to enforce contracts between private citizens:

a. command system b. market system c. laissez-faire system

a. "If you compare a list of today's most powerful and profitable companies with a similar list from 30 years ago, you will see lots of new entries:" b. "Managers in the old Soviet Union often sacrificed product quality and variety because they were being awarded bonuses for quantitative, not qualitative, targets:" c. "Each day, central planners in the old Soviet Union were tasked with setting 27 million prices—correctly:" d. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest:"

a. creative destruction b. incentive problem c. coordination problem d. invisible hand

How (if at all) do each of the following events affects the location of a country's production possibilities curve? a. The quality of education increases: b. The number of unemployed workers increases: c. A new technique improves the efficiency of extracting copper from ore: d. A devastating earthquake destroys numerous production facilities:

a. curve shifts outward b. no change c. curve shifts outward d. curve shifts inward

Suppose that you initially have $100 to spend on books or movie tickets. The books start off costing $25 each and the movie tickets start off costing $10 each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? a. Your budget increases from $100 to $150 while the prices stay the same: b. Your budget remains $100, the price of books remains $25, but the price of movie tickets rises to $20: c. Your budget remains $100, the price of movie tickets remains $10, but the price of a book falls to $15:

a. increase b. decrease c. increase

Assume that candle wax is traded in a perfectly competitive market in which the demand curve captures buyers' full willingness to pay while the supply curve reflects all production costs. For each of the following situations, indicate whether the total output should be increased, decreased, or kept the same in order to achieve allocative and productive efficiency. a. Maximum willingness to pay exceeds minimum acceptable price: b. MC > MB: c. Total surplus is at a maximum: d. The current quantity produced exceeds the market equilibrium quantity

a. increased b. decreased c. kept the same d. decreased

a. The unemployment rate in the United States was 5.1 percent in September 2015: b. A U.S. software firm discharged 15 workers last month and transferred the work to India: c. An unexpected freeze in central Florida reduced the citrus crop and caused the price of oranges to rise: d. U.S. output, adjusted for inflation, increased by 2.4 percent in 2014: e. Last week Wells Fargo Bank lowered its interest rate on business loans by one-half of 1 percentage point: f. The consumer price index rose by 0.2 percent from August 2014 to August 2015:

a. macroeconomic b. microeconomic c. microeconomics d. macroeconomics e. microeconomics f. macroeconomics

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units. a. 3,000 units at which MC = $10 and MB = $13: b. 11 units at which MC = $4 and MB = $3: c. 43,277 units at which MC = $99 and MB = $99: d. 82 units at which MC < MB: e. 5 units at which MB < MC:

a. more b. fewer c. current number d. more e. fewer

Match each of the following characteristics or scenarios with either the term negative externality or the term positive externality. a. Overallocation of resources: b. Tammy installs a very nice front garden, raising the property values of all the other houses on her block: c. Market demand curves are too far to the left (too low): d. Underallocation of resources: e. Water pollution from a factory forces neighbors to buy water purifiers:

a. negative externality b. positive externality c. positive externality d. positive externality e. negative externality

a. The next-best thing that must be forgone in order to produce one more unit of a given product: b. The pleasure, happiness, or satisfaction obtained from consuming a good or service: c. The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity: d. Making choices based on comparing marginal benefits with marginal costs:

a. opportunity cost b. utility c. economics d. marginal analysis

Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A. Suppose also that each of the three techniques shown in the table below will produce the desired output. Resources $unit 1 2 3 labor 3 4 5 3 land 4 2 4 2 capital 2 2 4 5 ente. ability 2 4 2 4 a. With the resource prices shown, which technique will the firm choose? Why? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? b. Assume now that a new technique, technique 4, is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? c. Suppose that an increase in the labor supply causes the price of labor to fall to $1.50 per unit, all other resource prices remaining unchanged. Which technique will the producer now choose? d. Evaluate this statement: "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible." Does your answer to part c, above, bear out this contention?

a. technique 2 represents the least-cost combination profit $6 expand [multiply the price per unit of each resource by the amount of the resource employed by the technique and add these together. For example, the cost of technique 1 equals $3 × 5 (labor cost) + $4 × 2 (land cost) + $2 × 2 (capital cost) + $2 × 4 (entrepreneurial cost) = $15 + $8 + $4 + $8 = $35. The same process is applied to techniques 2 and 3. The firm will choose technique 2, because it produces the output at the least cost ($34 compared to $35 for techniques 1 and 3). Economic profit will be $6 (= $40 - $34), causing the industry to expand. Expansion in this industry will continue until prices decline to where total revenue equals total cost of $34 and no additional firms will want to enter the industry.] b.yes c. technique 1 d. yes

Below is a production possibilities table for consumer goods (automobiles) and capital goods (forklifts): Type: A B C D E Automobiles 0 2 4 6 8 Forklifts 30 27 21 12 0 a.Upon what specific assumptions is this production possibilities curve based? b. If the economy is at point C, what is the (opportunity) cost of 2 more automobiles? What is the (opportunity) cost of 6 more forklifts? Which characteristic of the production possibilities curve reflects the law of increasing opportunity costs: its shape or its length? c. If the economy characterized by this production possibilities table and curve were producing 3 automobiles and 20 forklifts, what could you conclude about its use of available resources? The economy is ________ its available resources. d. Is production at a point outside the production possibilities curve currently possible? Could a future advance in technology allow production beyond the current production possibilities curve? Could intentional trade allow a country to consume beyond its current production possibilities curve?

a.Full employment, fixed supplies of resources, fixed technology, and two goods b. 9.0 forklifts (move from point C to D, 21-12) 2.0 automobiles (move from point C to B, 4-2) Shape c. underutilizing d. no, yes, yes

Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from $60 million to $120 million between one year and the next. a. Assuming that the price of gold increased by 100 percent over the same period, by what numerical amount did Glitter Gulch's real output change? b. If the price of gold had not changed, what would have been the change in Glitter Gulch's real output?

a.If the price of gold had not changed, what wouldhave been the change in Glitter Gulch's real output?Since the price doubled andthe sales revenue doubled between one year and the next, this implies that thecompany sold and mined the same amount of gold over the period. The change inreal output is 0. b.If the price of gold did not change and sales revenue doubled, the amount of goldsold and mined must have doubled. The change in real output is $60 million (=$120 million (new revenue) - $60 million (old revenue)).

True or False. The term economic investment includes purchasing stocks, bonds, and real estate.

false

o an economist, a government program is too big if an analysis of that program finds that MB __ MC

is less than

Tammy Hall is the mayor of a large U.S. city. She has just established the Office of Window Safety. Because windows sometimes break and spray glass shards, every window in the city will now have to pass an annual safety inspection. Property owners must pay the $5-per-window cost—and by the way, Tammy has made her nephew the new head of the Office of Window Safety. This new policy is an example of:

rent seeking

A few hundred U.S. sugar makers lobby the U.S. government each year to make sure that the government taxes imported sugar at a high rate. They do so because the policy drives up the domestic price of sugar and increases their profits. It is estimated that the policy benefits U.S. sugar producers by about $1 billion per year while costing U.S. consumers upwards of $2 billion per year.

rent-seeking behavior the collective-action problem the special-interest effect

______ occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures.

unfunded liabilities