What will be the equilibrium nominal wage rate per hour

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Second Midterm Exam - II

I. Binary Choice Questions:

 1) GM produces a car at a factory in Mexico and then sells it to Mark at a car dealership in California. Assume that the only product or service involved in this transaction is the car. Does this contribute to USA GDP?

a) Yes

b) No

2) Suppose the nominal GDP in 2005 is equal to the nominal GDP in 2006. If the GDP deflator for 2006 is greater than the GDP deflator for 2005, then which of the following must be true? Assume that the base year used to calculate real GDP is constant for this question.

a) The real GDP in 2005 must be greater than the real GDP in 2006.

b) The real GDP in 2006 must be greater than the real GDP in 2005.

3) In 2010 Sprite produced 7000 cans of soda and each can of soda had a price of $1. However, in 2010 Sprite was only able to sell 2000 cans of sodas and the remaining cans of soda were placed in Sprite's inventories. What was Sprite's contribution to GDP in 2010?

a) $2000

b) $7000

4) The consumer price index (CPI) does not account for

a) the introduction of new goods.

 b) goods whose prices change.

5) The CPI, based upon a fixed market basket, will overestimate the inflation rate when  

a) consumers actually purchase greater quantities of the goods and services than are in the fixed market basket

b) consumers actually purchase smaller quantities of the goods and services then are in the fixed market basket.

Refer to the following information for the next question.

Qingdao is a beautiful beach city in east China, and the population of Qingdao is approximately 1,000,000. Of those, 15% are under 16 years of age and 5% are already retired, and 10% fall into the category "not in the civilian labor force". Of the remaining people, there are 20% part-time workers, 20% who are underemployed, and 60% full-time employees.

6) Based on the above information, what is the labor participation rate as a percentage of the total population?

a) 70%

b) 80%

7) Casabla is a Country which has hyperinflation. Workers in Casabla receive their paychecks twice a month and must go to the bank to cash their paycheck before they can immediately use these funds to purchase groceries. A worker in Casabla is trying to decide if she should go to the bank twice a month to cash each check or take both checks to the bank at the end of the month in order to save her time and energy. Assume the worker wants to maximize her purchasing power. What is her optimal number of trips to the bank given this information?

a) twice per month

b) less than twice per month

8) Suppose that Jenny loans Harry $100 that is due at the end of year. Jenny expects the inflation rate for the year to be 10% and she charges Harry 20% on this loan. Suppose that the actual rate of inflation for the year is 15%. Given this information, who benefits from this unanticipated inflation?

a) Jenny

b) Harry

9) Both lenders and borrowers expect inflation to rise by 3% next year. However, inflation for the year actually only goes up 1%. The real interest rate is

a) lower than anticipated.

b) higher than anticipated.

10) The government runs a deficit during 2010 and finances this deficit by borrowing in the loanable funds market. In 2011 the government runs a balanced budget. Given this information and holding everything else constant, in the market for loanable funds the interest rate in 2010 is

a) Higher than the interest rate in 2011.

b) Lower than the interest rate in 2011.

II. Multiple Choice Questions:

11)  Suppose real GDP in 1990 is $20 million and real GDP in 2000 is $50 million. Also suppose that the GDP deflator in 1990 is 125 and the GDP deflator in 2000 is 50. What is the percent change in nominal GDP from 1990 to 2000?

a) No change

b) Rises by 250%

c) Drops by 250%

d) Rises by 50%

Use the following table to answer the next question.

Year

GDP Deflator

1991

92

1992

98

1993 

100

1994

104

12) Assume nominal GDP is decreasing every year. Which year must have the highest real GDP?

a) 1991

b) 1992

c) 1993

d) 1994

Refer to the following information for the following two questions.

Assume Country A's economy consists of only carrots, beets and phones and that the quantity sold and the price for the three products are given in the following table.

 

2005

2006

Good

Quantity

Price/Unit

Quantity

Price/Unit

Carrots

20

$3

5

$5

Beets

3

X

3

$2

Phones

5

$4

7

Y

13) Suppose nominal GDP in 2005 is $86. What must be the value of X?

a) $1

b) $2

c) $3

d) $4

14) Suppose that real GDP in 2005 is $121 if we use 2006 as a base year. What is the value of Y? 

a) $1

b) $2

c) $3

d) $4

15) In 2010, Mark's Electronics spent $1 million on intermediate goods that were used to produce final goods, paid out $2 million in wages, paid rent of $3 million dollars, and paid interest payments worth $4 million. However, 2010 was a bad year for the business, as Mark's Electronics had a net loss of $2 million (i.e. profits were negative $2 million). What was this company's contribution to GDP in 2010?

a) $10 million

b) $9 million

c) $8 million

d) $7 million

16) Holding everything else constant, an increase in the minimum wage is likely to have what effect on unemployment?

a) It will increase structural unemployment.

b) It will increase frictional unemployment.

c) It will increase cyclical unemployment.

d) It will decrease frictional unemployment.

Refer to the following information for the following question.

             Table 1

Category of Expenditure                              Trillions of  $

Personal Consumption Expenditure                    7.5

Gross Private Domestic Investment                   2.2

Government Purchases                                     2.5

Net Exports of Goods and Services                    -1.0

Depreciation of capital                                      0.5

17) Based on the data in Table 1, Gross Domestic Product is:

a) $11.7 trillion

b) $10.7 trillion

c) $11.2 trillion

d) none of the above

Refer to the following information for the following two questions.

In Madison's labor market, we have that labor demand is 3L= 200-W and the labor supply is L = 0.5W, where L is number of hours worked per week, and W is the real wage rate per hour of labor. Assume that the price index this year is 2, and the price index for next year is expected to increase by 150%.

18) If there is no change to the labor market for next year, what will be the equilibrium nominal wage rate per hour of labor next year? Hint: you will need to calculate the real wage and the price index in order to then calculate the nominal wage rate.

a) $120

b) $160

c) $240

d) $400

19) Suppose there is an unexpected technology shock at the beginning of the second year and this alters the demand for labor curve to 3L= 100-W.  The labor supply curve does not change. In addition the expected inflation rate is 100% rather than 150%. Which of the following statements is true?

a) There will be more hours worked in the second year than in the first year.

b) There will be fewer hours worked in the second year than in the first year.

c) The nominal wage rate will increase in the second year relative to the nominal wage in the first year.

d) The nominal wage rate will decrease in the second year relative to the nominal wage in the first year.

20) For a country currently producing at full employment, which of the following statements is true?

a) The frictional unemployment rate is 0%.

b) The cyclical unemployment rate is 0%.

c) The structural unemployment rate is 0%.

d) Answers (a), (b) and (c) are all true statements.

21) If the annual growth rate on a certificate of deposit is 3.5%, how long will it take for the amount of money invested in the certificate of deposit to quadruple?

a)  20 years

b)  30 years

c)  40 years

d)  50 years

22) The marginal product of labor is

a) the change in output divided by the change in labor.

b) capital divided by labor (K/L).

c) labor divided by capital (L/K).

d) the level of technology.

Refer to the following information for the following question.

Suppose the loanable funds market in a closed economy can be described by the following two equations:

Supply of Loanable Funds Curve: S = 1000 + 100i

Demand for Loanable Funds Curve: I = 2500 - 400i

Here i is the interest rate measured as a percent, I is private investment demand measured as millions of dollars, and S is household saving measured as millions of dollars. Initially assume that the government is running a balanced budget where tax revenues are equal to government spending. Now suppose that the government runs a deficit and this deficit results in the demand for loanable funds curve shifting to the right. The new equation for the demand for loanable funds is I' = 3000 - 400i where I' includes both private investment and the deficit. Assume there is no change to the supply curve. 

23) Given that tax revenue collected is $400 million, what is the government expenditure when the government runs this deficit?

a) $300 million

b) $500 million

c) $800 million

d) $900 million

Refer to the following information for the following two questions.

Consider an aggregate production function that is parabolic (hill-shaped).

172_Figure.png

24) Suppose that the labor market in this economy finds the equilibrium quantity of labor is L1. Then this economy is

a) Hiring more labor than is optimal.

b) Hiring less labor than is optimal.

c) Exhibiting increasing returns to labor.

d) Exhibiting constant returns to labor

25) Going from (L1, GDP1) to (L2, GDP2)

a) The marginal productivity of labor decreases.

b) The marginal productivity of labor remains constant.

c) The marginal productivity of labor increases.

d) There is not enough information to determine the marginal productivity of labor.

Refer to the following information for the following three questions.

Consider an aggregate production function: Y=30(K)1/2 (L)1/2, where Y is real GDP, K is the capital stock level, and L is the total number of workers in the economy. The number of workers is constant and equal to 100.

26) In Economics 101 you studied returns to scale which considers what happens to output when all inputs (in this case, labor and capital) are increased proportionately. Recall that constant returns to scale occurs when output increases by the same proportion as the increase in inputs (e.g., if inputs double, then output doubles); increasing returns to scale occurs when output increases by more than the proportionate increase in inputs (e.g., if inputs double, output more than doubles); and decreasing returns to scale occurs when output increases by less than the proportionate increase in inputs (e.g., if inputs double, output less than doubles). This aggregate production function exhibits

a) decreasing returns to scale.

b) constant  returns to scale.

c) increasing returns to scale.

d) There is not enough information to determine returns to scale for this production function.

27) In the short-run suppose capital is fixed at 100 units. What is the value of capital productivity given this information?

a) 30,000 units of output per unit of capital

b) 3,000 units of output per unit of capital

c) 300 units of output per unit of capital

d) 30 units of output per unit of capital

28) Suppose that in the long-run the economy continues to employ 100 workers but the level of capital stock increases to 144 units. Compared with the short-run situation where there were 100 workers and 100 units of capital, we know that labor productivity

a) has decreased.

b) has increased.

c) has remained constant.

d) cannot be computed for these two scenarios without more information.

Refer to the following information for the following two questions:

384_Figure1.png

29) Based on this aggregate production function for an economy, which of the following statements is true?

a) The productivity of labor at L2 is smaller than the productivity of labor at L1.

b) The real GDP per capita at L2 is smaller than the real GDP per capita at L1.

c) The marginal productivity of labor at L2 is greater than the marginal productivity of labor at L1.

d) The real GDP at L2 is greater than the real GDP at L1.

30) Suppose in this economy there is an increase in education subsidies, so that, more people are able to attend college and improve their human capital. At the same time earthquakes destroy several hundred manufacturing facilities in the country. Given these events, how will the aggregate production function for this economy shift?

a) It will shift up.

b) It will shift down.

c) It will remain the same.

d) We do not know for sure how the aggregate production function for this economy will shift.

Reference no: EM131022746

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