Examination & answer sheet Examination sheet only Course Title Major Number of Sheets Number of Sheets Principles of Economics BE IR Permitted Items Page(s) Final Examination Page(s) Instructor’s Name Date of Exam Samuel Amponsah Please fill in all the items in the square below with a fountain pen or ballpoint pen Do NOT use pencil 2017/01/20 Student Name Student ID No(Pen, pencil, eraser and calculator ) Writing Utensil Fountain pen or ballpoint pen ※ Please submit your examination paper after the exam Principles of Economics Fall Semester 2016 Friday, January 20, 2017 Time: 9:30 – 10:30 Instructions: Please read carefully Answer should be as concise as possible This is a closed book exam You are not allowed to use notes or any other aids The exam consists of two parts, totaling 100 points: Section A: Multiple Choice 25 questions (40 points) Section B: Short-Answers/Problem solving questions, answer (60 points) For Section A: Multiple Choice Choose the correct letter answer For Section B: Short answer/Problem Solving Show all your work to receive full mark The answer sheet provides you adequate space to answer each question on the exam You can ask for extra answer sheet Section A: Section B: Total: SECTION A – Multiple-Choice Questions Use the following table to answer the questions that follows Identify the choice that best completes the statement or answers the question Consider the following data to answer the questions that follow 1 Which country has the lowest average living standard? BE IR Student ID a A b B c C d D e E Major Name Mark You bought stock in 2010 for $100 and you sold it in 2012 for $200 You used a broker to sell the stock for you, and he charged you $20 This transaction contributed to GDP a $200 b $20 c $220 d $100 e $120 Consider the following data that gives the quantity produced and unit price for three different goods across two different years to answer the questions that follow: Assume that the base year is 2012 What was the growth rate of real GDP between the two years? a 1.67% b 0% c 3.2% d 2.4% e 4.4% All three types of unemployment: a are bad for the economy b create a shortage of workers in the workforce c are good for the economy d are difficult on households e are always the same level Which of the following is an example of frictional unemployment? a Raymond loses his job as a steel worker because the economy is in a downturn b Chad graduates with his master’s degree in economics and is searching for an analyst job c Edith has decided to retire after 35 years of working at the state prison d Cameron quits his job at the circus to volunteer for the Red Cross e Jasmine loses her job as a newspaper editor because the publication has gone digital The Great Recession was most similar to which of the following downturns? a the Great Depression b the 2001 recession c the 1990 recession d the 1982 recession e the 1930 recession The natural rate of unemployment is: a the average unemployment rate during a recession b equal to zero percent c constant over time d the typical rate of unemployment when the economy is growing normally e equal to the rate of cyclical unemployment The big difference between the Great Recession and the recession of 1982 was: a b c d e how the economy recovered after the recessions had officially ended the increase in the unemployment rate that occurred during each recession the quarterly real gross domestic product (GDP) growth rates at the official start of each recession the length of each recession the total decline in the economy during each recession Suppose a basket of goods and services has been selected to calculate the consumer price index (CPI) and 2002 has been chosen as the base year In 2002, the basket’s cost was $76.00; in 2004, the basket’s cost was $79.50; and in 2006, the basket’s cost was $85.00 The value of the CPI was: a 100 in 2002 b 108 in 2004 c 120 in 2006 d at least 118 in 2007 e no more than 90 in 2001 10 Inflation is occurring in a nation; the implication(s) of this is/are: a both real and nominal wages are rising b both real and nominal wages are falling c almost none, because most wages increase at about the same rate as inflation d holding nominal wages constant, the real wage would rise e holding nominal wages constant, the real wage would fall 11 Michael Chang buys only tennis rackets during a particular year During the year in question, the price of all goods rises by 10% on average, but the price of tennis rackets remains the same Which statement is correct? a Michael benefits from inflation b Michael does not experience inflation because he only buys tennis racquets c No matter what Michael buys, he experiences inflation d Michael does not benefit from inflation e We can’t conclude anything from the information given 12 Your firm expands its output in a time when demand appears to be increasing Demand for all goods is increasing because of inflation, and consumers want to buy all goods faster because their real purchasing power is falling due to inflation This situation could indicate that: a your firm experienced future price uncertainty b your firm experienced menu costs c your firm experienced money illusion d your firm experienced deflation e your firm experienced a price confusion problem 13 Foreign entities: a are generally borrowers of domestic (U.S.) loanable funds b are generally lenders in the domestic (U.S.) loanable funds c typically require a greater inflation premium than domestic borrowers d typically require a smaller inflation premium than domestic borrowers e are not concerned about the U.S interest rate compared to their own, since it is illegal for them to lend in the United States 14 You are an entrepreneur about to start your first business Based on this statement: a you are most likely to be a borrower concerned mostly about the real interest rate you will earn b you are most likely to be a lender concerned mostly about the real interest rate you will earn c you are most likely to be a borrower concerned mostly about the nominal interest rate you will earn d you are most likely to be a lender concerned mostly about the nominal interest rate you will earn e you would only be concerned with whether inflation was greater or less than the nominal rate of interest based on the Fisher equation 15 If interest rates rise, holding all else constant, this would cause: a an increase in both the demand and supply of loanable funds b a decrease in both the demand and supply of loanable funds c an increase in the supply of loanable funds but a decrease in the demand for loanable funds d an increase in the quantity supplied of loanable funds but a decrease in the quantity demanded of loanable funds e an increase in the supply of loanable funds but a decrease in loanable funds 16 Assume an epidemic hits a nation hard As a result, people now have lower life expectancies The most likely result would be: a a higher supply of loanable funds b a higher demand for loanable funds c a lower supply of loanable funds d higher productivity of capital e a decrease in equilibrium interest rates 17 The measurement of personal savings may be distorted by: a increased college tuition costs b reduced college tuition costs c higher marginal tax rates d greater levels of home equity e lower levels of home equity 18 Assume the market for loanable funds is in equilibrium at 5% interest Assuming that firms become more pessimistic about future profits, all else being equal: a the equilibrium interest rate would rise and the equilibrium quantity would fall b both the equilibrium interest rate and the equilibrium quantity would rise c both the equilibrium interest rate and the equilibrium quantity would fall d the equilibrium interest rate would fall and the equilibrium quantity would rise e the equilibrium real rate of interest would become negative and the equilibrium quantity would remain unchanged 19 Direct finance occurs when: a savers go directly to borrowers for funds b borrowers deposit funds into banks, which then loan these funds to savers c savers deposit funds into banks, which then loan these funds to borrowers d borrowers go directly to savers for funds e banks get involved with financing 20 The equation for the interest rate of a bond is: a b c d e 21 All else equal, the smaller the default risk: a the higher the face value of the bond b the higher the price of the bond c the lower the price of the bond d the lower the face value of the bond e the higher the interest rate of the bond 22 What is the highest rating a bond can receive from the rating firm Standard and Poor’s (S&P)? a A+ b A++ c AA d AAA e A 23 If a bond cannot be resold in secondary markets: a the demand for that security will increase b the demand for that security will decrease c the supply for that security will increase d the supply and the demand for that security will decrease e the supply and the demand for that security will increase 24 Which of the following is an advantage of the Dow Jones Industrial Average (the Dow)? a It provides historical data all the way back to 1896 b It weighs the stock prices by the market value rather than by only the price of the stock c It tracks over 500 companies, making it a very broad representation of the stock market d It resets on January of every year to the value of 10,000 to make it easy to track e It includes both stocks and bonds in its weighting 25 The bonds sold by the U.S government to pay for the national debt are called: a treasury securities b mortgage-backed securities c securitizations d debt securities e tradable securities Section B: Short answers/Problem Solving, answer three out of the four questions A) Draw a graph to illustrate the phases of the business cycle Be sure to identify the length of a contraction and an expansion Identify a peak and a trough B) Explain why real GDP is preferred to nominal GDP as a measure of economic growth C) Identify three reasons why GDP is not a perfect measure of a nation’s well-being A) In NBC’s hit TV show 30 Rock, actor Dean Winters plays Dennis Duffy who works as a beeper salesman in New York City Because beepers are an old technology that has been taken over by cell phones, Dennis loses his job B) What type of unemployment is Dennis experiencing? C) What is something the government can to limit this type of unemployment? D) Explain two shortcomings of using the official unemployment rate as an economic indicator I) You are given the following information about an economy: Labor force: 167 million Not in the labor force: 33 million Employed: 145 million A) What is the unemployment rate? B) What is the relevant population? C) What is the labor force participation rate? II) What would one expect to happen to the labor force participation rate if the following situations occurred? A) A large percentage of the workforce retires B) The government begins to subsidize current workers who go back to school full-time to attain an advanced degree C) The government offers a transfer payment to discouraged workers and to unemployed workers A) Arguably there are three reasons why the consumer price index (CPI) overstates inflation List the reasons and explain each one B) Why would knowing the cost of living index be important in real life? (Hint: Consider the following scenario You get two job offers: one in San Francisco paying $80,000 per year and the other in Dallas paying $68,000per year) C) Explain the notion of money illusion in specific detail I) When firms seek funding to pay for resources for production they go to the loanable funds market There are two different paths through the loanable funds market List these two routes and describe the difference between them II) Using a supply and demand model for bonds, answer the following questions regarding bonds issued by Apple A) Show the effects of an increase in the default risk of Apple B) Show the effects if Apple’s bond rating goes from AA to AAA II) Answer the following questions regarding stocks A) Why would a firm sell stocks instead of bonds? B) What are some benefits, from the buyer’s perspective, of stock ownership? ... following is an example of frictional unemployment? a Raymond loses his job as a steel worker because the economy is in a downturn b Chad graduates with his master’s degree in economics and is