UCI Macroeconomic Theory Work

MULTIPLE CHOICE SECTION (20 points, 2 points each):

1)Total spending in the economy is equal to:





2)Physical investments (I) are likely to increase when

A.disposable income increases

B.loan rates decrease

C.the stock market crashes

D.loan rates increase

3)Which of the following situations is likely to determine an increase in real GDP per capita in the US?

A.an increase in total real GDP in the economy, while the US population

does not change

B.a decrease in the US population while real GDP remains constant

C.an increase in the US population combined with a decrease in real GDP

D.both a and b

4)If price rises, what happens to demand for a product?

A.It increases.

B.It decreases.

C.It does not change.

D.Uncertain-economic theory has no answer to this question

5)Why does quantity demanded decrease when price increases?

A.People choose to reduce consumption of the item.

B.People “drop out” of the market for the item.

C.People find substitutes for the item.

D.All of the above are correct.

6)China is the world’s largest wheat producer. If China’s domestic product grew by eleven percent in the previous year, it implies that

A.production of wheat grew by more than eleven percent.

B.products other than wheat grew by less than eleven percent.

C.China’s overall output grew by eleven percent.

D.production of wheat is declining in China.

7)Which of the following is a true measure of national output?

A.GDP at market price

B.Nominal GDP

C.GDP in current dollars

D.GDP in constant dollars

8)Suppose the economy experiences a sudden increase in output but a decrease in prices. Then, most likely:

A.the AS curve has shifted leftward, while AD has not moved

B.the AD curve has shifted leftward, while the AS curve has not moved

C.the AD curve has shifted rightward, while the AS curve has not moved

D.the AS curve has shifted rightward, while the AD curve has not moved

9)Whirlpool Corporation buys steel in sheets to manufacture refrigerators. Whirlpool also buys a new factory and a metal press to mold the steel. Which purchases are included in GDP?

A.the steel

B.the steel, the factory, and the metal press

C.the factory and the metal press

D.the steel and the metal press

10. You can spend $10 for lunch and you would like to purchase two cheeseburgers. When you get to the restaurant, you find out the price for cheeseburger has increased from $5 to $6, so you decide to purchase just one cheeseburger. This is best described as:

Α. the substitution effect of a price change

B. the income effect of a price change

C. a decrease in the buyer’s reservation price.

D. an increase in the buyer’s reservation price.


Question 1(5 points)

Suppose a US distributor of cars buys a car produced in Japan that costs 1000$. The US distributor sells the car for 1300$ to a US household. Explain how these transactions affect GDP Y, consumption C, investment I, government spending G, exports X and imports M. Reminder: Y = C + I + G + X −M.


Question 2(5 points)

Explain why it is preferable to use real as opposed to nominal values when comparing GDP over time.


Question 3 (15 points)

You are the chair of the council of Economic Advisors for the State of ΝΥ. You propose a reduction in state income taxes as a way to help the local economy out of the recession. The governor (mostly concerned about tax revenue as all politicians) tells you that he is against your policy. His idea is that such a policy would generate growth, which is always inflationary and that this economy cannot bear any higher inflation rates. How do you react? Do you agree or disagree? Why? Explain your answer.


Question 4(10 points)

The demand for home computers has increased, yet the price has fallen. Explain this apparent paradox.


Question 5(10 points).

Please answer the following questions:

1. Please explain why the FED started giving an interest rate on excess reserves during the Great Recession.

2. Please explain how it is possible for the FED by controlling money supply to control the nominal interest rate in the economy.


Question 6(15 points)

In Macroland public or government spending (G) is relatively unproductive, when compared to private real investment (I). Policy makers want to stimulate private investment, but politically they cannot accept inflation arising as a result of this policy. Therefore, they want to keep AD stable while still stimulating real investment. One of the members of the Council of Economic Advisors says there’s nothing they can do then.

a) Do you think he is right? Yes / No

b) If he is wrong, what is the best fiscal policy for the government and monetary authorities facing this situation?


Question 7(20 points)

After a boat rescues everyone else from Gilligan’s Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows coconuts and catches fish. Last year he harvested 1000 coconuts and caught 500 fish. He values one fish as worth two coconuts. The Professor gave 200 coconuts to Gilligan in exchange for help in the harvest, and he gave Gilligan 100 fish in exchange for collecting worms for use in fishing. The Professor stored 100 of his coconuts in his hut for consumption at some future time. Gilligan consumed all his coconuts and fish. In terms of fish, what is the GDP of Gilligan’sIsland? What are consumption and investment? Whatare the incomes of the Professor and Gilligan?


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