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Economics Challenge: 1999 Regional Exam #2
Answers
Federal Reserve Bank of San Francisco Economics Challenge
District Final
November 16, 1999
Macroeconomics
1. b. Gross Domestic Product includes consumption, gross investment,
government spending on goods and services, and net exports. Gross investment
is equal to net investment plus capital consumption allowances
| 2. c. The formula is real income |
= |
nominal income
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*
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100
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GDP deflator
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In this case
1650 = x
3. a. This is an example of seasonal unemployment.
4. b. The changes mentioned in a, c, and d would shift the aggregate
demand curve from AD2 to AD1.
5. d. Price level, real output, and income would all fall if the
aggregate demand curve declined without a change in the aggregate supply
curve.
6. b. A shift in the aggregate supply curve from AS1 to AS2 would
lead to the desired outcome of an increase in real output without an increase
in the price level.
7. c. This index measures the change in the price of a select
number of stocks that are traded on the New York Stock Exchange.
8. d. Quality changes in products are very difficult to quantify.
As a result, it is likely that the consumer price index overstates the
rate of price increases.
9. a. With inflation, borrowers repay loans with money that is
worth less than the original loan amount. If inflation is anticipated,
the lender demands a higher interest rate to off set this change. If inflation
is not anticipated, there is no such interest offset and the borrower
gains from inflation.
10. c. The currency holdings of the non-bank public are included
in M1. Savings deposits, currency in bank vaults, and certificates of
deposit are not included in this monetary aggregate.
11. a. An increase in government spending of $200 times the multiplier
of 5 results in an increase in equilibrium income of $1,000.
12. c. If this country is at point C, it is investing more than
at any other attainable point. This gives it its best chance for future
growth. Point A is not an attainable point.
13. c. One of the functions of the Federal Reserve is to conduct
the monetary policy of the United States. It does not have direct control
over currency in circulation, the volume of loans, or the short and long
term interest rates, though its policy may have an impact on all of these
variables.
14. a. A purchase of bonds increases the reserves of the banking
system.
15. b. When interest rates are high, interest-bearing bonds yield
a relatively high return.
Microeconomics
1. d. Only d is an explanation of the production possibility curveÌs
concavity.
2. c. The opportunity cost is defined as the loss of the next
best alternative. In this case, the satisfaction she sacrifices is from
not buying the next best alternative to the car.
3. c. In this case, only alternative c is correct in regard to
the demand curve.
4. d. The initial equilibrium was at point A. The introduction
of an attractive substitute for airline travel would lower the demand
curve to D2, leaving the supply curve unchanged. As a result, the equilibrium
price would fall, as would the equilibrium quantity.
5. a. An increase in demand would lead to an increase in equilibrium
quantity and price. This can be observed in Diagram 2, from question 4.
In this case, we can observe a shift from D2 to D1, an increase in demand,
leading to an increase in price and quantity.
6. b. If demand is elastic, then the relative change in quantity
is greater than the relative change in price. (The formula for elasticity
is relative change in quantity divided by relative change in price.) If
this is so, the increase in quantity of tickets sold will more than offset
the decrease in price, increasing revenue to the basketball teams.
7. c. As a result of this legislation, as illustrated by the diagram,
the quantity of heating oil supplied falls, while the quantity of heating
oil demanded rises. The result is a shortage of heating oil.
8. c. The options a, b, and d are not correct in a competitive
market.
9. b. For a firm in a monopolistically competitive industry, marginal
revenue is below the market price.
10. b. This is the reason why marginal revenue is less than price
for firms in monopoly, oligopoly, or monopolistic competition.
11. c.
12. d. The market cannot be relied on to correct market failures
due to externalities. Externalities can be positive or negative, and exist
in production and consumption
13. a. Initially the equilibrium quantity and price were Q2 and
P2. After the tax, the new price is P1 and the new quantity Q1. The rectangle
P1 x Q1 has a considerably larger area than the rectangle P2 x Q2. Thus
total spending on cigarettes rose after the tax, though the quantity sold
decreased.
14. d. As described above, the initial equilibrium was Q2 * P2.
After the tax, the quantity sold declined from Q2 to Q1. The market price
rose to P1, but of this total price, P1 - P3 is paid to the government
in the form of tax.
15. d. In the case of a sole proprietorship, liability for losses
is not limited to the business assets.
International Economics
1. a. The IMF does not have the power to establish exchange rates,
nor impose development policies on member nations.
2. b. Speculation and the resulting destabilization of the foreign
exchange market has been the major negative effect of increased capital
mobility between nations.
3. d.
4. d. Only this option is correct.
5. a. The increased inefficiency of a barter economy has lead
to a decrease in efficiency in industrial production and considerable
time and resources are spent looking for mutually acceptable trades. This
has been one of the causes of the decrease in the Gross Domestic Product.
6. a. The opportunity cost of producing one baseball (two baseball
bats) in Alpha, is less than the opportunity cost of producing one baseball
in Beta (4 baseball bats). Thus, Alpha would export baseballs and import
baseball bats, even though Alpha has an absolute advantage in both.
7. a. Dumping is defined as exporting a product at a price below
cost of production.
8. b. If the discount rate is reduced, foreign demand for American
dollars would fall and the value of the dollar on the foreign exchange
market would also fall.
9. a. A tariff is a tax which would decrease the volume of imports
and exports. Its effect on trade restriction differs from that of a quota.
10. c. The increase of imports of agricultural products into Japan
would benefit Japanese consumers of food; the increase of imports of automobiles
into the United States, through reduction of restrictions on such imports,
would benefit Japanese automakers by expanding their markets.
11. a. The import of foreign goods sold at lower cost than domestic
goods competing with them, has helped to dampen inflationary pressures
in the United States.
12. a.
13. c. Expansionary monetary policy in the European Union countries,
with the resulting fall of interest rates in this currency bloc, would
lead to a decrease in demand of Euros by investors. This would likely
lead to an appreciation in the value of the dollar relative to the Euro.
14. b. A recession in the European Union, with a reduction in
income, would lead to a reduction of imports into the EU. This would lead
to a reduced demand for dollars on the foreign exchange market.
15. b. The decrease in interest rates following an expansionary
monetary policy would lead to a decline in the value of the dollar, as
explained above. This will increase United States exports and reduce United
States imports, reinforcing the expansionary effect of monetary policy.
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