1A Sample Questions

PETER B. LUND

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SAMPLE QUESTIONS FOR ECON 1A EXAMS:

Second Exam
Third Exam

FIRST EXAM

1. "If a given society had no economic problem, then no commodity in that society would have a cost."

Assume that the statement is correct. Explain it, making clear your understanding of what the basic economic problem is and what the economic concept of cost is.

2. Consider two firms in downtown San Francisco, one which owns the building in which it is located and the other which rents. There is a significant increase in downtown rents, and the manager of the firm which owns its building notes: "Faced with higher costs, our renter neighbor had to move, but, because we own our building, our costs are not rising and we don’t have to move."

Comment on the manager’s economic logic concerning the use of the input his building represents.

3. Draw a production possibilities curve diagram for an economy.

a) Under what circumstances would a society be at a point inside of the curve?

b) Could it ever get to points outside of the curve? Explain.

c.)Explain how the slope you have given the curve illustrates an important cost concept. (Your answer should show your understanding of the concept.)

4. Assume that the quantity demanded of a commodity, say, Z, were zero until its price was as low as $20 per unit. From a price of $20 to $5, the quantity demanded increases one unit for every $1 decrease in price. At a price of $5, the quantity demand does not change with further decreases in price. Draw a graph of the demand function just described.

5. What will happen to the demand for movie admissions if:

    a) the price of an admission increases?

    b) the rental price of movie videos increases?

    c) the supply of movies increases?

    d) the supply of rental movie videos decreases?

6. Headline in USA Today: "Rent Controls Cause Scarcity of Apartment Units in New York City."

Does this statement use correct economic terminology? Explain. With an appropriate diagram, show what is happening in the market for apartments in New York.

7. Consider this statement: "In inflation-adjusted terms, the price of VCR's has fallen each year for the past several decades, yet the quantity supplied of such machines has gone up each year. It is clear, then, that the famous "Law of Supply" doesn't really work."

Comment on the economic logic or illogic behind the statement, making clear your understanding of the law of supply and the supply function

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SECOND EXAM

1. "GDP is what a nation produces, and when GDP increases, the economic well-being of a nation's people increases in proportion." Think about the statement and comment on and explain your agreement or disagreement with it.

2. A major problem with inflation is its redistributive effects. What are these effects and why are they a problem?

3. Is the official measure of unemployment an accurate measure of the employment problems our nation may have? Explain.

4. Some economists argue that attempts to increase output and employment in the long run by shifting the aggregate demand curve will not be successful. Draw an AS/AD diagram which would support this argument and explain the analysis underlying it.

5. In 1997, the cyclical component of the federal budget balance was plus $34 bil, but the budget balance as a whole was a negative $22 bil. Why was the budget as whole in deficit when a major component was strongly in surplus?

6. If there were a balanced budget requirement at the Federal Government level, what would be the effect on the macro economy if goods and services expenditures were to be increased by, say, $100 bil, and the MPS was 0.1?

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Third Exam

1. Are Japanese Yen money in the U.S. today? Explain.

2. Create a T-account for a typical commercial bank with the elements of such an account that are involved in the money creation process. If the bank had excess reserves of $1,000, what is the maximum loan it could make? How do we know what the eventual maximum expansion of the money supply in the banking system can be if the maximum loan is made?

3. Describe what might happen to M if $1 billion in counterfeit currency printed by some foreign country were to be brought to the U.S. spent here, and went undetected as counterfeit.

4. If the economy were headed into a recession, what actions would you advise the Fed take? Explain in anayltic detail why you advise the actions.

5. The Gini Coefficient for the U.S. increased from 0.358 in 1967 to 0.426 in 1994. What does this imply about the distribution of income? Does it matter if the Gini Coefficient is increasing?

6. What is economic growth? Is growth good for a society of people? Explain.

7. Consider the gainers and the losers in the case of a tariff and in the case of a quota. Who are they in each case? In light of the gainers and losers, is either of the trade restriction devices better public policy than the other? Explain. Who gains from the imposition of either a tariff or a quota? Who loses?

8. You are a U.S. tourist in Europe and learn that the Euro has appreciated against the dollar. Is this good news or bad news? Explain.

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