2002
Great Plains Economics Challenge
Round I Microeconomics
1.
D,
the main reason for high living standards or material well being for
various countries around the world is the growth in productivity. For example
labor productivity is defined as output per worker hour. High productivity means
that for each hour worked, workers produce more real goods and services than low
productivity workers.
2.
C,
driver’s training is not a public good.
Public goods present a unique economic problem because firms have little
incentive to produce them. Few buyers are willingly to pay for nonexcludeable
goods because they can get them for free. Once the good is produce it is
difficult to exclude individuals for using it.
Individuals can receive benefits from using the good without having to
pay, because it is difficult to exclude them.
3.
D,
in economics capital is physical capital.
Capital goods that are used to produce other goods and services.
Machinery, equipment, tools, buildings, computers and wrenches are examples of
physical capital.
4.
C,
the law of demand says that there is an inverse or negative relationship
between price of a good and quantity demanded. When the price of a good falls,
holding other things constant, such as income, tastes and preference, and price
of related goods, the quantity purchased rises.
5.
A,
offering rebates in the form of cash back or low interest financing are used by
car manufacturers to lower car prices. They understand that by lower prices more
cars will be sold because there is an inverse relationship between price and
quantity demanded. Lower prices will help reduce a surplus on a market.
6.
B,
the opportunity cost of something is the value of what someone must
sacrifice or give up for it. The opportunity cost of ten monitors is other
goods, which could be produced with the resource that produced the ten monitors.
7.
A,
the definition of economic growth is a rise in real GDP per person. If
there are more real goods and services available per person, then the average
citizen, roughly speaking, gets a larger quantity of real goods and services.
8.
B,
a price control in the form of a price ceiling is the highest price at
which the government allows people to buy or sell the good.
In the American Revolution case the price was set below equilibrium. A
price ceiling below equilibrium results is quantity demanded being greater than
quantity supplied. Shortages develop in the market. Since it is not as
profitable to produce the price controlled goods, firms produce another good
that do not have a government mandated price.
9.
C, if the
price of cookies fall, given a downward sloping demand curve, a larger quantity
of cookies will be demanded. This is the law of demand. There is an inverse or
negative relationship between price of a good and quantity demanded.
10.
C, when
the government banned cigarette advertising on radio and television, cigarette
manufactures increased other forms of advertising, such as billboards and
magazines. An increase in magazine advertising by cigarette manufactures
increased the demand for limited advertising space in magazines. An increase in
demand with limited increase in supply would increase the price for all magazine
ads.
11.
C, one of
the assumptions of a purely competitive firm is that it provides such a small
part of total output that doubling output or withholding output from the market
has not affect on market price.
12.
C,
price discrimination means charging different prices to different buyers
for the same good. Two goods are not the same if their costs of production are
different, so selling them at different prices would not constitute price
discrimination.
13.
D,
the absence of major barriers to entry allows new firms to enter an
industry and reduce economic profits to zero over time.
Remember that zero economic profits do not mean that firms are not
earning a profit, they are earning a normal profit for their product.
14.
C,
the definition of long run is all inputs or resources are variable for a
firm. In the short run, at least one input is fixed.
A plant is a fixed input. Selling a plant is a long run adjustment.
15.
C,
if the government legally imposes a tax on either the buyer or seller the
incidence of the tax will be shared. Incidence is who really pays the tax.
Given a downward sloping demand curve and upward sloping supply curve, a
government imposed $2 tax will be shared by the buyer and seller. If the seller
absorbs $1 and the buyer has to pay $1 more for the good, then the new
equilibrium price will be $11.
Great
Plains Economic Challenge
Round II Macroeconomics
1.
B,
supply side economics stress factors that affects the capacity of the
economy to produce real goods and services. Reducing tax rates to encourage
people to work harder, providing incentives for increased saving and investment
and encouraging risk taking by starting new businesses are supply side concepts.
2.
D,
a reduction in personal income taxes would increase
available income that could be spent
or saved. If people expect that
inflation will be higher next year, then they increase their purchases now.
A decrease in interest rates lowers the total price of buying big-ticket
items like houses and cars; as a result they would increase spending.
A reduction in the unemployment rate means more people are working and
earning income so they will be spending more.
A decrease in stock prices reduces individual wealth and in some cases
income, which likely results in reduced consumer spending.
3.
D, GDP
measures the value of all-final goods and services produced in the economy in
one year. It is a measure of productive activity. A museum purchasing a painting is a transfer of ownership. No
new Rembrandt were produced.
4.
D, the
Federal Government finances deficit spending by issuing treasury bills, notes,
and bonds.
5.
A, the
index number in a base year is 100. If the index number in the current year is
300 it means that price have increase on average 200%. To keep up with inflation
salaries must increase by an equal amount.
CPI in current year minus CPI base year
Inflation rate =
-------------------------------------------------
X 100
CPI base year
6.
C, buying
of stocks and bonds in only a transfer of ownership and does not add to, or
decrease the nation’s capital stock.
7.
A,
aggregate demand = consumption + investment + government spending +
(exports – imports).
8.
C,
deficit spending and a federal government budget surplus are methods to
moderate variations in real output, employment and income and are a part of
fiscal policy. Deficit spending is
desirable when the economy is not at full employment.
Demand-pull inflation occurs when there is excessive aggregate demand and
the federal government should reduce it’s spending by decreasing the size of
the deficit or increasing it’s budget surplus.
9.
C, an
increase in personal income taxes will decrease aggregate demand. When the
federal government increases personal income taxes it reduces income people have
to spend on real goods and services. In other words aggregate demand decreases.
10.
D,
if people believe that the economy is strong, then they are more
confident that they will keep their jobs and as a result are more willing to
spend their current income on goods and services. Also, they are more willing to
buy goods and services now and pay for them in the future by using credit
(future income).
11.
D, higher
levels of saving and investment, which are used to develop new processes and
products, will increase the capacity of the economy to produce goods and
services. Greater potential for economic growth. Increased government regulation
decreases the potential for economic growth.
Resources must be used to meet the new regulations.
12.
C, the
Federal Reserve will sell bonds in the open market, which reduces the amount of
excess reserves in the banking system. Decreased reserves in the banking system
increase the price of money (interest rate). The Discount Rate is the interest
rate the Federal Reserve charges banks for short-term loans.
A higher Discount Rate will be passed on to bank customers.
13.
E,
factual question.
14.
A, if the
interest rate is 8% and inflation is 10%, then your real interest rate is –2%.
In this case the borrower in effect is being paid by the lender to
borrow. This can occur when there
is unanticipated inflation.
15.
C,
inflation is a situation where on average prices are rising. The question is
“why are prices increasing”? Too
much money chasing too few goods. The central bank has increased the money
supply too rapidly. 2002 Great Plains Economic Challenge
1.
B,
factual question.
2.
B,
a strong dollar means that it takes fewer dollars to buy a unit of a
foreign currency. It takes fewer dollars to buy foreign goods. A stronger U.S.
dollar makes goods produced in foreign countries relatively cheaper for American
to buy. Americans will buy more
goods produced in foreign countries and fewer goods produced in the U.S..
Sales of exporters decline. A lower aggregate demand for U.S. made goods results and increased
imports and decreased exports leads to a worsening trade deficit.
3.
B, if a
Euro costs 50 cents and a car costs 40,000 Euro, then .50 X 40,000 = $20,000.
4.
C,
increased tariffs on foreign steel benefits U.S. firms and workers involved in
steel production hurts users of U.S. steel because they must pay higher prices
for input, steel.
5.
A, the
theory of comparative advantage evaluates relative opportunity costs. We must
examine relative costs of producing widgets and cogs in countries X and Y. In
country X with a given amount of resources it can produce either 5 cogs or 10
widgets. The opportunity cost of producing 5 cogs is 10 widgets (1 cog = 2
widgets) and 1 widget = ½ cog. In country Y the opportunity cost of producing 2
cogs is 8 widgets (1 cog = 4 widgets) and 1 widget = ¼ cog. The cost of
producing 1 cog is 2 widgets in country X and 4 in country Y.
Country X should specialize in the production of cogs and sell them to Y.
In terms of widgets relative cost is lower in country Y. Gains from
specialization and trade are maximized if Country Y imports cogs and exports
widgets.
6.
B, given
the initial condition of 10% interest rates in each country and then a decline
in interest rates in the U.S. to 5% and no change in inflation in either
country. The U.S. dollar will depreciate against the Won.
U.S. investors will experience a higher return on investment if they
purchase more South Korean securities. U.S. investors must sell U.S. dollars in
order to buy South Korean Won. Increased dollars supplied in currency markets
and increased demand for won leads to a decreased value for the dollar
(depreciation).
7.
B, the
Japanese have few natural resources.
8.
B, for
voluntary trade to occur there must be gains for both countries. Increased trade
generally leads to lower product prices, increased labor productivity in both
countries, greater availability of products in both countries and a net gain in
new jobs in both countries.
9.
D,
factual question.
10.
B, given
a $20,000 per capita income in the U.S., a 1% growth results in a $200 increase.
Pakistan would need a 20% increase in per capita income to achieve the same
dollar amount of change.
11.
E,
increased Mexican exports increased the demand for pesos. Decreased travel by
Mexicans in the U.S. decreases the supply of pesos. Increased flow of capital to
Mexico for investment purposes increases the demand for pesos. Increased demand
for pesos and decreased supply increases the value of the peso (appreciation).
12.
D,
special interest groups are net gainers from barriers to trade.
13.
E,
factual question.
14.
C,
aggregate demand = consumption + investment + government spending + net exports (exports – imports). An increase in U.S. exports
results in an increase in net exports, which will increase aggregate demand.
Increased aggregate demand increases employment, increases U.S. GDP, increases
the demand for U.S. dollars, puts upward
pressure on prices and if there is no change in imports leaves unchanged
U.S. demand for foreign currencies.
15. C, eliminating tariffs and other trade restrictions increase economic well being in the world. Increased specialization and trade leads to greater economic efficiency on a global scale. Greater output of real goods and services on a global scale increases economic well being.