Explanations should be written in pencil or black. Legibility is a virtue; practice good penmanship. Explanations should be succinct and to the point; you may use bullet points and commonly used mnemonics. Do NOT open this test until instructed to do so. Good Luck! Spring 2010 (Exam Icon BIBB loft A. Multiple Choice Questions (30 points). Circle the letter corresponding to the best answer. (3 points each. ) 1. Your boss wants to know if the company should lay off any workers. You answer that they should lay off workers only if the: a. B. C. D. Marginal product of labor is less than the real wage rate.

Marginal product of labor is greater than the real wage rate. Marginal product of labor is less than the nominal wage rate. Marginal revenue product of labor is greater than the nominal wage rate. 2. Originally an unskilled worker, Judy attends the University of California, Berkeley where she acquires new skills that give her access to a Job with a higher hourly wage. Assuming that her preferences about leisure are not affected by the change in Jobs, how would this affect her supply of labor? A. B. C. D. Judy will supply more labor due to both income and substitution effects.

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Judy will supply less labor because her Economics Bibb Wood Midterm 1 By Dividable decision is based only on the income effect. The effect on Judy labor supply is ambiguous because the income and substitution effects work in opposite directions. 3. Skunk’s law states that the gap between actual output and full-employment output increases by 2 percentage points for each 1 percentage point increase in the unemployment rate. Why does an increase in unemployment lead to twice as large an effect on output? A. B. C. D. According to Skunk’s law, every worker produces two units of output.

If firms are employing fewer workers, they must also be choosing to reducer less output. With fewer workers, the marginal product of labor declines and so output falls by even more. When unemployment rises, the labor force and work hours tend to decline, further reducing output. 4. An invention that increases the future marginal product of capital would cause an increase in desired investment, which would cause the investment curve to shift to the and would cause the real interest rate to . A. B. C. D. Left; increase. Left; decrease. Right; increase. Right; decrease. 5.

Your friend claims that the United States is a net international debtor. The best way f testing this claim is to see whether: a. B. C. D. U. S. Foreign liabilities exceed U. S. Foreign income. U. S. Official reserve assets were positive or negative. The U. S. Ran a balance of a payments surplus or deficit in the last year. Foreign payments to U. S. Owners of foreign assets exceed U. S. Payments to foreign owners of U. S. Assets. Icon BIBB 2 of 11 6. In goods market equilibrium in an open economy: The desired amount of exports must equal the desired amount of imports.

The desired amount of exports must equal the desired amount of imports minus the current account balance. C. The sired amount of national saving must equal the desired amount of domestic investment. D. The desired amount of national saving must equal the desired amount of domestic investment plus the current account balance. A. B. 7. If business taxes rise in a large open economy it will cause the current account to decrease. Decrease; increase. 8. Robert Vogel, a Nobel Laureate in economics, has argued that better health and a higher level of nutrition of workers is important in generating higher standards of living.

In the Slow growth model, we could represents such a change as: a. B. C. D. An increase in technology. An increase in labor force growth. Higher depreciation rates because there are now more people working. A one-time increase in the labor force because this effectively leads to more workers. 9. The “IT Revolution” has led to an increase in productivity but also to an increase in the depreciation rate because computers and telecommunications equipment have to be replaced more often. Overall, then: a. B. C. D. The standard of living will unambiguously increase.

The standard of living will unambiguously decrease. There is an indeterminate effect on the standard of living. Economic growth will be faster in he new steady state. 10. Labor force growth rates tend to fall as a country becomes richer. Compared with the standard Slow growth model, this would lead to: a. B. C. D. Higher saving rates in rich countries than in poor countries. Greater income differences between rich and poor countries. Smaller income differences between rich and poor countries. Lower depreciation rates in rich countries than in poor countries. Iffy B. Answer BOTH of the following questions based on the standard models of analysis developed in class. Open Economy Desired Saving – Desired Investment Model (35 points). Suppose that the world economy is composed of only two large, open-economy countries?China and the European Union?and that the European Union is running a substantial current account deficit. A. Based only on this information, use 2-country Open Economy Desired Saving – Desired Investment diagrams to clearly and accurately show the initial equilibrium situation in each country.

These diagrams should be drawn in BLACK. China OSDL Sad RL Did Did Standards Did Did Idylls Sad CACAO>O CACAOIn the European Union graph above, at the initial equilibrium world real interest rate, row, the European Union has a current account deficit given by CACAO with desired saving of Sod and desired investment of ‘do. In the current account surplus given by CACAO with desired saving of Sod and desired investment of ‘do. 5 of 11 Now suppose that because of the global economic crisis, both China and the European Union increase government spending. However, the increase in government spending in China is for infrastructure projects, a form of investment, while the increase in government spending in the European Union is for general government services.

In both countries, the increased government spending is financed by borrowing, not by higher taxes, and there is no Arcadian equivalence. Based only on this information, clearly and accurately show what, if anything, happens to desired investment in both China and the European Union (in RED), desired savings in both China and the European Union (in BLUE), and to the world interest rate and the current account balances in both countries (in GREEN). Provide a brief economic explanation for the results you have shown in your diagrams above and explain why these changes take place.

Be sure to include in your discussion what happens to the levels of desired investment and desired saving and the current account balance in each country. In China, the increase in government spending is for infrastructure projects so this is also an increase in desired investment at every real interest rate level. This can be represented by a rightward shift of the desired investment function from Did to Idle in the China diagram above. In China, the increase in government spending financed by borrowing with no Arcadian equivalence reduces national saving at every real interest rate level.

This can be represented by a leftward shift of the saving function from Sod to OSDL in the China diagram above. In the European Union, the increase in government spending enhanced by borrowing with no Arcadian equivalence reduces national saving at every real interest rate level. This can be represented by a leftward shift of the saving function from Sod to OSDL in the European Union diagram above. The increase in desired investment in China increases the worldwide demand for alienable funds at every real interest rate.

The declines in national saving in both China and the European Union reduce the worldwide supply of alienable funds at every real interest rate. Because the worldwide demand for alienable funds now exceeds the worldwide apply of alienable funds, the world real interest rate must rise until a new equilibrium world real interest rate is reached at RL where the current account deficit in the European Union is equal in magnitude to the current account surplus in China. As the world real interest rate rises from row to RL several things will happen in each country.