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Economics Challenge: 1999 Regional Exam #1
Answers
Federal Reserve Bank of San Francisco Economics Challenge
District Final
November 16, 1999
Macroeconomics Answers
1. c. The sum of consumption, gross investment, exports minus
imports, and government spending is 1,300.
2. b. The formula for deflating nominal income to real income
is:
Nominal Income/CPI * 100 = Real income
Applying this formula to deflate the income of $20,000 by the CPI of
125:
20,000/125 *100 = 16,000
As a result, your real income has risen from 10,000 to 16,000 or by 60%.
3. c. The formula for the multiplier is 1/1-MPC = 1/1-.8 = 1/.2 =
5.
4. b. Since full employment income is below equilibrium income,
this economy is characterized by an inflationary gap. Policy actions to
reduce consumption or investment could eliminate the gap.
5. d. All but this choice are characteristics of the Keynesian
consumption function.
6. b. To achieve full employment equilibrium, the policy action
taken must be one that shifts the aggregate demand. An increase in government
spending will shift the aggregate demand curve towards the right, increasing
GDP.
7. a. Any policy which would move the economy to full employment
would require a shift in the AD curve, a movement along the AS curve,
and higher prices.
8. b. Increases in resource productivity or technological progress
is one of the major sources of economic growth.
9. a. A progressive tax system means that as income falls, the
marginal tax rate paid by individuals also falls. This means that tax
revenues will fall more than income in a recession.
10. a. The deposit of $1,000 will initially increase the demand
deposits of the banking system by the same amount. The money multiplier
here is 1/.1= 10. This means that an increase in the reserves of the banking
system caused by MariettaÌs cash deposit, will eventually increase the
demand deposits of the banking system by $10,000, including the initial
deposit.
11. d. Purchases of bonds on the open market is an expansionary
monetary policy.
12. b. Sales of bonds on the open market reduces the reserves
of the banking system. Here the reserves are reduced by $100,000. With
a money multiplier of 5 (1/.2) the eventual effect on the money supply
of this monetary policy action is a decrease of $500,000.
13. d. The Federal Reserve does not approve (or disapprove) major
or minor loans made by financial intermediaries.
14. a. An increase of the interest rate in the United States will
increase demand for United States assets by foreign investors. This will
increase their demand for the United States dollar and increase its value
on the foreign exchange market.
15. d. Both components of this policy combination are expansionary.
Microeconomics Answers
1. a. MaryÌs economic cost of occupying the home is the amount
she could get by renting it out.
2. b. At point C on the production possibility frontier, fewer
VCRs and more televisions are being produced.
3. d. The increase in sales of digital video disk players will
decrease demand for video tapes, moving from Demand1 to Demand2. The reduction
in cost of production will shift the supply curve from Supply 1 to Supply
2. The new equilibrium is at Point D.
4. d. The decrease in supply would lead to an increase in price
and decrease in quantity. The increase in demand would lead to an increase
in price and an increase in quantity. As a result, the price of computers
will increase but the change in the number of computers sold cannot be
determined.
5. a. If demand is elastic, an increase in price results in a
fall in total revenue.
6. d. For a price ceiling to be effective, the ceiling price must
be set below the equilibrium price of P2.
7. c. The imposition of rent control is most likely to result
in a decrease in the quantity of rental units available, as at this lower
price, quantity supplied will decrease.
8. c Already issued stock and bonds are traded on a perfectly
competitive market. None of the other markets listed meet the criteria
for perfect competition.
9. b. A seller in a perfectly competitive market faces a demand
curve which is horizontal, as the firm can sell as much as it wants at
the market price.
10. b. The profit maximizing monopolist produces at the quantity
where marginal revenue equals marginal cost. Here this is quantity OD.
The price charged is determined by the height of the demand curve at this
point, or price of DG. The total revenue is therefore OA times OD, or
the area of the rectangle OADG.
11. d. If the industry is perfectly competitive, then the price
will fall to the point where the demand curve intersects with the marginal
cost curve, or point OB. At that price the firms will sell a total of
OJ of output.
12. d. Satisfaction from a given budget is maximized when resources
are allocated so that the marginal utilities of all goods consumed are
proportional to the opportunity cost of consuming these goods.
13. a. A minimum wage of W1 will raise wages from OW2 to OW1 and
reduce employment from ON2 to ON1. As a result the total wage income of
workers will change from the rectangle 0W2EN2, which is equivalent to
the rectangle OW1AN1.
14. a. The Rodriguez familyÌs tax liability is $5,000. The table
can also be presented as
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Taxable Income
(in $s)
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Tax Liability
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0 - 4,999
5,000 - 9,999
10,000-14,999
15,000-19,999
20,000-24,999
25,000-29,999
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0
10% of amount over $5,000
$500 plus 20% of amount over $10,000
$1,500 plus 30% of amount over $15,000
$3,000 plus 40% of amount over $20,000
$5,000 plus 50% of amount over $25,000
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15. c. Public goods are characterized by nonrival consumption
and difficulty in excluding any consumers from benefiting them. Thus we
have a "free rider" problem, as no one has an incentive to reveal
his/her preference or demand for a public good.
International Economics Answers
1. b. Americans need foreign exchange if they are going to invest
in foreign countries.
2. d. An increase in American demand for Mexican pesos, all other
things unchanged, will reduce the value of the dollar and increase the
value of the peso in the foreign exchange market. As a result it will
increase the number of dollars that are required to purchase any given
amount of pesos.
3. a. A booming United States economy will cause consumers in
the United States to buy more goods abroad. Their higher income may also
tempt them to take more trips abroad. All of these will increase the supply
of United States dollars.
4. d. If the value of the dollar in the foreign exchange market
decreases, imports to the United States become more expensive in terms
of dollars. Also exports from the United States become cheaper to other
countries in their own currency. As a result, the balance of payments
deficit will be decreased (or eliminated).
5. a. Imports and exports of merchandise, visible imports and
exports, are included in the balance of current account. The other mentioned
items are capital transactions.
6. c. The value of the dollar will rise. An increase in real interest
rates and a decrease in inflation are both factors that will increase
the value of the dollar in the foreign exchange market.
7. a. As nominal and real interest rates decline, the value of
the dollar declines. As a result, exports are more competitive internationally
and imports are more expensive. This increase in net exports will reinforce
the impact of counter cyclical monetary policy by increasing aggregate
demand.
8. a. Alpha has no comparative advantage in either commodity relative
to Beta and therefore has no incentive to trade.
9. a. Alpha has an absolute advantage in the production of both
cloth and wine, but a comparative advantage in the production of cloth.
Alpha can obtain a bottle of wine for one yard of cloth. Beta has an opportunity
cost of a little less than one-half of a yard of cloth.
10. a. The total benefits to domestic car companies from tariffs
or quotas are less then the loss to consumers.
11. b. Dumping implies that the foreign country is importing steel
at a price lower than their domestic costs of production.
12. d. A major function of the World Bank is to make loans to
countries to help them undertake development projects. The other choices
are not functions of the World Bank.
13. c. Countries in transition from a command to a market economy
have tended to reduce or remove the social safety net that existed.
14. c. Voluntary export restraints (VER) are not voluntary and
are usually adopted only after heavy pressure from the importing country
that uses the implicit or explicit threat of adopting quotas if the "voluntary"
restraint is not adopted. Examples include the arrangement that limits
the import of textiles and clothing into the United States.
15. d. Capitalism is not characterized by capital being more important
than labor in production.
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