How effective government policy can be with regard to changing interest rate or taxes?

CALIFORNIA LUTHERAN UNIVERSITY

Global Economy:

Final Exam: Term 2 (Year 2019)

IMPORTANT: Please type your answers so they can be read without any problem

Please answer the two segments of the questions by following the given instruction for a total point of 300:

• Twenty questions with suggested answers. Please select the correct answer, provide your reasons for it, and if needed present your calculations or graphs as needed. This segment of the questions has 200 points divided by 10 points for each correct response.
• This segment has three questions out of which you need to ONLY select two questions and answer them. These questions require structured and brief response. Your response is in essay format and please provide your calculations or graphs if needed. This segment has 100 points divided by 50 points for each complete and correct answer. There are fractional points in this segment of the exam and it depends on the quality of responses and proportion of relevant answer.

Part One for 200 Points:

1. If a U.S.-owned manufacturing firm closes its American plant and moves its

production facilities and American employees to Austria,

1. S. GDP falls and U.S. GNI rises
2. S. GNP falls, and Austrian GNI rises
3. c) Austrian GDP rises and Austrian GNI is unchanged
4. d) Real U.S. GDP rises but nominal U.S. GDP falls
5. e) None of the above

Explain your answer:

2. If a certain type of machine costs $1500 per year and annually produces output that

sells for $3 per unit according to the production schedule

 

Machines: 0          1          2          3          4          5          6          7

Output       0          900      1700    2400    3000    3550    4000    4400

 

then the optimal number of machines of this type is

1. 2
2. 3
3. 4
4. 5
5. 6 or more

Explain your answer:

3. The rate at which a country saves its income has no effect on
4. its long run growth rate
5. its short run GDP
6. its long run standard of living
7. its investment behavior
8. its interest rates

Explain your answer:

4. Growth accounting for China demonstrates that
5. Unlike the Asian tiger economies such a Singapore, rapid economic growth has been largely driven by capital accumulation
6. Like the Asian tiger economies such a Singapore, rapid economic growth has been largely driven by capital accumulation
7. Unlike the Asian tiger economies such a Singapore, rapid economic growth has been largely driven by rapid population growth
8. Like the Asian tiger economies such a Singapore, rapid economic growth has been largely driven by rapid population growth
9. Like the Asian tiger economies such a Singapore, low investment rates have held back Chinese growth

Explain your answer

5. Rent-seeking differs from entrepreneurship in that rent-seeking
6. is conducted for profit; entrepreneurship is not
7. involves risk taking; entrepreneurship does not
8. is a zero-sum game; entrepreneurship is not
9. involves innovations; entrepreneurship does not
10. is illegal; entrepreneurship is not

Explain your answer:

6. Cultural and social forces, such as religious prohibitions on certain activities or

ethical norms regarding effort

1. have no effect on economic output, and so are deliberately excluded from growth accounting
2. are not captured in the production functions used for growth accounting
3. are assumed to influence total factor productivity
4. are measured as part of labor input
5. are treated as ‘social capital’ in the production function

Explain your answer:

7. Which of the following would not give workers some degree of monopoly power?
8. learning by doing
9. labor unions
10. highly specialized human capital
11. high rates of short-term unemployment
12. high costs of job turnover and training incurred by employers

Explain your answer:

8. Unemployment insurance benefits increase productivity most by
9. shortening the duration of unemployment
10. providing replacement rates that are lower than real wages
11. shifting government funds away from less productive ventures
12. helping to improve the match-up between jobs and workers
13. weakening monopoly power

Explain your answer:

9. Which of the following is not an example of intra-industry trade?
10. England exports beef to Ireland, and imports Irish potatoes
11. the Dutch export elm trees and import lumber products
12. Canadians touring the US side of Niagara Falls stay in US motels while Americans touring the Canadian side stay in Canadian hotels
13. Russia exports oil and imports capital equipment
14. Norwegians deposit funds in Swiss banks while the Swiss buy insurance from Norway

Explain your answer:

10. Country A has a large pool of skilled workers earning $50 per hour and a small pool of unskilled workers earning $18 per hour. Country B has a small pool of skilled workers earning $60 per hour and a large pool of unskilled workers earning $8 per hour.  Trade theory predicts that if A and B engage in international trade with each other,
11. real wages paid to skilled workers will fall in A
12. unskilled wages will become more unequal between A and B
13. real incomes will become more equal within B
14. the wages of unskilled workers in B will fall
15. wages to all workers in both countries will rise

Explain your answer:

11. Who among the following is likely to have the highest marginal propensity to consume out of current income?
12. a rational consumer who intends to behave strictly according to the permanent income hypothesis
13. a risk averse consumer facing a high degree of uncertainty
14. a low-income consumer facing borrowing constraints
15. a working age consumer looking forward to retirement
16. a wealthy parent who is currently accumulating funds to bequeath to his heirs

Explain your answer:

Consider an individual who enters adulthood and the labor force at age 18, expects to work 5 years at a real income of $10,000 per year, anticipates earning a real income of $40,000 per year from age 23 to 63, expects to retire with a $10,000 annual pension, and live until age 78.  Suppose the interest rate is zero, and the individual seeks perfectly smooth consumption across his adult lifetime.

12. In the absence of borrowing constraints, then beginning at age 18, the individual should consume
13. all of his income as he receives it each year
14. $10,000 every year
15. $20,000 every year
16. $30,000 every year
17. $25,000 every year

Explain your answer:

Consider the following production function for a delivery service.

Number of trucks:                   0            1          2          3          4          5

Number of deliveries:             0          100      170      230      280      300

Each delivery generates $200 in gross revenue, and the tax rate is 10 percent on profits.  Each truck costs $11,000.

13. The optimal number of trucks is
14. 1
15. 2
16. 3
17. 4
18. 5

Explain your answer:

14. Which of the following correctly describes a theory of wage behavior during the business cycle?
15. Real Business Cycle theory holds that workers are relatively unresponsive to wage changes
16. Classical theory holds that nominal wages are inflexible
17. Keynesian theory holds that real wages may rise during recessions, preventing labor markets from clearing
18. Rational expectations theory holds that workers continue to anticipate wage increases during recessions
19. Marxist theory holds that unions cause recessions by keeping wages too high

Explain your answer:

15. A sudden, unexpected increase in the economy’s prevailing wage level due to a general strike threat would
16. shift the aggregate demand curve out and push equilibrium prices down
17. shift the aggregate demand curve in and push equilibrium output down
18. shift the short run aggregate supply curve in and push equilibrium prices up
19. shift the Phillips Curve in and increase the natural rate of unemployment
20. shift the long run aggregate supply curve out and push equilibrium prices down

Explain your answer:

16. When depositors transfer funds from savings accounts to checking accounts,
17. M2 falls and M1 rises, while M3 remains constant
18. b) M1 rises while M2 and M3 remain constant
19. c) Both M1 and M2 increase, while M3 falls
20. d) M3 falls while M1 and M2 remain constant
21. e) M1 falls, M3 rises, and M2 remains constant

Explain your answer:

17. According to the quantity theory of money,
18. the quantity of money determines the long run equilibrium price level
19. the amount of money in the economy determines the long run quantity of output
20. money affects the aggregate supply curve, while the aggregate demand curve determines real output
21. the money supply only affects the economy in the long run, not in the short run
22. the full-capacity level of output determines the supply of money needed in the economy

Explain your answer:

18. Consider the following (hypothetical) cash economy with no banks. The money

supply consists entirely of $1000 in currency.  Output is currently at potential.  The government is currently faced with a $100 budget deficit and chooses not to raise taxes, but instead prints $100 more currency with which to balance its budget.  The long run result is likely to be

1. an interest rate of 10%
2. an inflation rate of 10%
3. a 10% increase in the velocity of money
4. a 10% growth rate of real GDP
5. a 10% increase in the national debt

Explain your answer:

19. Which of the following is the most appropriate model for a central bank conducting discretionary stabilization policy?
20. observe what the unemployment rate has been in recent periods, estimate the difference from the natural rate, and adjust the money supply accordingly
21. observe the current level of GDP, estimate the output gap between actual and potential GDP, and adjust bank reserve requirements accordingly
22. observe the past and current trade-weighted exchange rate, estimate the difference from purchasing power parity, and adjust income taxes accordingly
23. predict the future inflation rate based on current and recent trends in economic variables, estimate the difference from the target rate, and tighten or loosen lending accordingly
24. disregard current trends and simply keep the money supply growing at a rate equal to the long run growth rate of GDP

Explain your answer:

20. Targeting interest rates and targeting the money supply are equivalent if
21. money demand is stable
22. banks hold no excess reserves
23. exchange rates are fixed
24. central banks practice inflation targeting
25. consumers exhibit rational expectations

Explain your answer:

Part Two for 200 Points:

 

PLEAE answer ONLY two of the following three questions and NOT more-😊

 

1. Policies and economic changes affecting consumption have far-reaching consequences on people and the state of an economy. Please provide concise answers to the following questions:

 

1. What will happen to consumption (present or future) if interest rate goes up?
2. How effective government policy can be with regard to changing interest rate or taxes?
3. Economic impact of having strong and supportive social security in old age on saving behavior of people within various countries?
4. Study of business cycles is one of the key topics in study of macroeconomics. Give short and concise answers to the following questions:
5. In early 1980s increase in price of oil forced a number of governments to increase interest rate. Why have they done so and do you agree with such decision?
6. Real business cycle theory implies that negative total factor productivity shocks cause recession. What do you think such shocks might be
7. Explain if the central bank is engaged in expansionary or contractionary monetary policy under each of the following circumstances and explain the likely impact on real GDP, rate of unemployment, and price level:

1. Selling securities to the commercial banks
2. Buying securities from commercial banks
3. Lowering discount rate
4. Increasing its auctioning of reserves.
5. Lowering its required reserve ratio