Problems 1. Given this graph of real GDP for the U.S. in the years 1960 - 2015: U.S. Real GDP 18000 15000 12000 GDP (Billions of Constant 2010 USD 9000 6000 3000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: www.bea.gov Identify approximately what years the economy went into a recession. 2. Use the graph below to answer the following questions: B GDP y . Year a. Label the phases of the "stylized" business cycle graph. A: B: C: D: Chapter 9 - Aggregate Demand and Economic Fluctuations b. What does Y* refer to? 3. Use the table below (for a simple economy with no foreign sector or government) to answer the questions that follow. (1) (2) (3) (4) Income Consumption Intended Aggregate Expenditure Investment (r) (9) AE = C+ 1 = column (2) + column (3) 0 30 (a 50 300 300 20 (b) 400 (c) 20 410 500 480 20 500 600 20 (e) Fill in the missing numbers in the spaces marked (a)-(c). Determine the consumption function, and use the result to fill in the remaining missing numbers (d )-(e). (f) Determine the equilibrium output level.Refer to the Figure below for the next two questions. Contraction Expansion GDP Peak Peak Trough Year 3. When is inflation and unemployment most likely to be a problem? a. Inflation and unemployment will be a problem in the grey area representing the range of full employment output. b. Inflation will be a problem during the peak of an expansion, and unemployment will be a problem during the trough of the contraction. c. Inflation will be a problem during the trough of the contraction, and unemployment will be a problem during the peak of the expansion. d. Inflation will be a problem during both the peak and the trough of the business cycle. e. Unemployment will be a problem during both the peak and trough of the business cycle. 4. What is the goal of stabilization policy? a. To keep the economy as close to the peak as possible, where unemployment remains very low. b. To keep the economy as close to the trough as possible, where inflation remains low. c. To keep the economy in the grey area, to avoid the threats of both excessive unemployment and inflation. d To enable the economy to move freely from peak to trough. e. None of the above. Chapter 9 - Aggregate Demand and Economic Fluctuations 5. Which of the following best describes the meaning of aggregate expenditure in the traditional macro model (with no government and a closed economy)? a. The amount firms and households intend to spend on consumption and investment. b. The actual level of spending done in the economy by firms and households on consumption and investment. c. The summing up of all the spending on goods and services in the economy by firms and households. d The average level of demand for all goods and services in the economy by firms and households. e. The average level of spending on all goods and services in the economy by firms and households. 6. According to the simplified macro model (with no government and no foreign sector), which of the following characterizes an economy in equilibrium? a. When leakages = injections b. When saving (S) = intended investment (II) c. When Y = AE d. When actual consumption and investment spending equals the intended consumption and investment spending. e. All of the aboveProf. Marek Weretka Final Exam (B) You have 2h to complete the exam and the final consists of 6 questions (15+10+25+15+20+15=100). Problem 1. (Consumer Choice) Jeremy's favorite flowers are tulips z , and daffodils z2. Suppose p1 = 5. p2 = 10 and m = 100. ) Write down Jeremy's budget constraint (a formula) and plot all Jeremy's affordable bundles in the graph (his budget set). Find the slope of a budget line (number). Give an economic interpretation for the slope of the budget line (one sentence). b) Jeremy's utility function is given by U(m,2) = \\(3mm +3lzz)'+8 Propose a simpler utility function that represents the same preferences (give a formula). Explain why your utility represents the same preferences (one sentence). ej' Plot Jeremy's indifference curve map (graph), find MRS analytically (give a formula) and find its value at bundle (2, 4) (one number). Give economic interpretation of this number (one sentence). Mark its value in the graph. d) Write down two secrets of happiness (two equalities) that allow determining the optimal bundle. Pro- vide their geometric interpretation (one sentence for each). Find the optimal bundle (21,z2) (two numbers) Is your solution interior? (a yes -no answer ) e) Hard: Find the optimal bundle given p, =5, p, = 10 and m = 100 assuming I (21. 22) = 2r, + 3r2 (two numbers). Is your solution interior? (a yes -no answer Problem 2. (Producers) Consider production function given by F(K. L) = 5K+1+. a) Using the A argument demonstrate that production function exhibits decreasing returns to scale. bj Derive the cost function given wx = ut = 25. c) Derive a supply function of a competitive firm, assuming the cost function from b) and fixed cost F = 2 (give a formula for y(p)). Plot the supply function in a graph, marking the threshold price below which a firm chooses inaction. Problem 3. (Competitive Equilibrium) Consider an economy with apples and oranges. Dustin's endowment of two commodities is given by " = (20. 10) and Kate's endowment is wh = (10, 20). The utility functions of Dustin and Kate are the same and given by where i = D. K. a) Plot the Edgeworth box and mark the point corresponding to the initial endowments. b) Give a general definition of Pareto efficient allocation z (one sentence) and state its equivalent con- dition in terms of MRS (one sentence, you do not need to prove the equivalence) ) Using the "MRS" condition verify that the initial endowments are not Pareto efficient. d) Find a competitive equilibrium (six numbers). Provide an example of a competitive equilibrium with some other prices (six numbers). e) Using MRS condition verify that the competitive allocation is Pareto efficient. f) Hard: Find prices pi, pa in a competitive equilibrium for identical preferences of two agents ( (21. 22) = 221 +3x2 (two numbers, no calculations). Explain why any two prices that give rise to a relative price higher than pi/pa cannot be equilibrium prices (which condition of equilibrium fails?) "If you do not know the answer to b). to get partial credit in points cl-e) your can assume ( (21.2,) =Problems 1. Given this graph of real GDP for the U.S. in the years 1960- 2015: U.S. Real GDP 18000 15000 12000 GDP (Billions of Constant 2010 USD) 9000 6000 3000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: www.bea.gov Identify approximately what years the economy went into a recession. 2. Use the graph below to answer the following questions: B GDP Year a. Label the phases of the "stylized" business cycle graph. A: B: C: D: Chapter 9 - Aggregate Demand and Economic Fluctuations 5 b. What does Y* refer to? 3. Use the table below (for a simple economy with no foreign sector or government) to answer the questions that follow. (1) (3) (4) (2) Income Consumption Intended Aggregate Expenditure Investment (n) (C) AE = C+h = column (2) + column (3) 0 30 (a) 50 300 300 20 (b) 400 (e) 20 410 500 480 20 500 600 (d) 20 (e) Fill in the missing numbers in the spaces marked (a)-(c). Determine the consumption function, and use the result to fill in the remaining missing numbers (d)-(e). (f) Determine the equilibrium output level.3. The oil (petroleum) industry plays an important role in our economy. Using the supply and demand model from Chapter 4, determine how each of the following events would affect the price of oil on the world market. Identify if the event would cause a shift in supply or a shift in demand (ceteris paribus), in which direction, and whether the equilibrium price of oil would increase or decrease. a OPEC engages in an oil embargo in 1973 b. Consumers in the U.S. and Europe start driving more fuel efficient cars in the late 1970s and early 1980s c. Saudi Arabia departs from the OPEC agreement and increases its supply of oil in the early 1980s d. Consumers in the U.S. start driving more fuel inefficient SUVs and light trucks with low gas mileage in the 1990s e. The economies of China and India grow more rapidly in the early 2000s and consumers buy and drive more cars f. Oil production in Iraq, one of the three countries with the largest reserves of oil, is disrupted after the U.S.-led war, invasion and occupation Chapter 7 - The Structure of the United States Economy 6 Self Test 1. How large is the U.S. economy? a The largest in the world. The second largest in the world, after China. The third largest in the world, after China and India. The fourth largest in the world, after China, India and Japan. e. The fifth largest in the world, after China, India, Japan, and Germany. 2. Which of the following would be a primary sector activity? a. Utilities b. Construction c. The selling of houses d. A household growing food in their garden e. A household whose members clean their house 3. Which of the following would not be an activity in the primary sector? a Agriculture b. Commercial fishing Mining The timber industry e. The food processing industry 4. Maria is a farmworker. Jose is a medical doctor. Robin is a construction worker. Which of them works in the secondary sector? a Maria b. Jose Robin d. All of them do. e. None of them do. 5. Which of the following would not be an activity of the secondary sector? a Automobile manufacturing b. Utilities c. Construction d. Food processing e. Transportation of goods to market