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Economics 201: Introduction to Macroeconomics
Winter Quarter 2024
Mark Witte
Northwestern University
Do not turn this exam over or begin working until you are told to do so.
WRITE YOUR ANSWERS IN INK. The test is out of 120 points (19 short questions worth 4 points each and 4 longer questions worth 11 points each) and is worth 15% of your class grade. There is no guessing penalty so answer all the questions. Please be thorough but concise. Verbose answers will not help you. You can use a calculator. Handing the exam in on time (by 3:22) will gain you a bonus of 4 points. Handing the exam in after 3:26 will cost you five points with the penalty rising after that.
This exam covers readings, lectures, sections, and notes through Tuesday, January 30.
1. (4 points) In a market the quantity sold has fallen but the price charged per unit of the product has risen. Why?
A.An increased population of buyers.
B.A higher cost of one of the main inputs.
C.Increased demand for a complement in production.
D.Falling incomes and this is an inferior good.
E.A fall in the price of a substitute in consumption.
2.(4 points) There are more solar panels and wind turbines to generate electricity, but also more electric-powred cars. What would this be expected to do to the market for electricity?
A.Greater price and quantity.
B.Unclear effect on price but less quantity.
C.Higher prices but an unclear effect on quantity.
D.Higher quantity, but unclear effect on price.
E.Lower prices but an unclear effect on quantity.
3.(4 points) Suppose that inflation and unemployment are both rising. What would cause this?
A. Economic boom
B. Recession
C. Growth recession
D. Supply-side miracle
E. Stagflation
4. (4 points) 2023 Econ Nobel Prize winner Claudia Goldin said that the big driver of the gender gap in pay between similarly educated spouses…
A. …had essentially disappeared by the 2020s.
B. …is largely the effect of women trading off pay for flexibility in terms of working hours.
C. …is the result of women being less willing to accept jobs that have flexible work hours.
D. …comes from women tending toward professions where people in similar roles are not able to substitute for each other in terms of customer interactions.
E. …is caused primarily by workplace discrimination by management.
5. (4 points) The video with the muppets advances the case that:
A. Governments gather data from the many consumers and producers to make optimal policy choices for the good of society as a whole.
B. Firms can work to attract buyers by spending to make their products better or by spending money to lobby government to change the laws in order to reduce competition from other firms.
C. Government officials work to prevent anyone from engaging in rent-seeking.
D. Companies spend money to hire lobbyists to explain to officials in government what changes need to be made to regulations in order to make the economy more efficient and benefit society in general.
E. Rent-seeking exists, but it is not a big problem because everyone who is disadvantaged by it has a strong incentive to fight back against it.
6. (4 points) In Economics: A Very Short Introduction, Partha Dasgupta argues that
A. …one advantage to living in most low-income countries is that at least corruption among public officials is generally quite low.
B. … low-income countries have generally simple economies, which allow institutions like government to perform their functions relatively rapidly as compared to the time lags higher income countries..
C. ..markets reach Pareto-efficient equilibria that provide shares of output that need not be consistent with reasonable notions of distributive justice.
D. …monopolies lead to market failures that are uniformly harmful to social welfare.
E. …wealthier countries have a relatively large share of their economies in their agricultural sector, which supplies them with plenty of food.
7. (4 points) When it comes to equilibrium in the circle-flow diagram,
A. Malthus cited “Say’s Law” to support the idea that economies tended toward equilibrium.
B. Ricardo thought that Say and Malthus were wrong about the stability of equilibrium and that a lack of demand would often be a problem for free market economies.
C. Ricardo believed that Malthus failed to understand that it was good that total consumption and investment spending were less than production because unpurchased goods would lead firms to lower prices, which was good for workers/consumers.
D. Malthus thought that some income leaked out and resulted in spending being too low.
E. Ricardo refuted Malthus’s view by citing Say’s Law that “Demand creates its own supply!” That is, if people are willing to pay for something, then the market will find a way to produce it.
8. (4 points) Biden versus Trump again?! Why can’t we have an inspiring candidate like Harry Truman? After Truman left the presidency, he repeatedly complained that he was only getting by financially because he sold his family farm. As a result, Congress passed the “Former Presidents Act” that provides ex-presidents (including Truman) with a generous pension. But here’s an interesting thing: Although Truman was relatively poor when he became vice-president, by the time his term as president ended in 1953, he had a suspiciously high net worth of $650,000 (at least). The price level in 1953 was about 25 and now is around 300. In real purchasing power terms, how much would Truman’s net worth be in terms of today's prices? (Show your work.)
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Put your multiple-choice and short answers here:
The questions on this page all refer to various parts of the following table:
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P |
$5 |
$10 |
$15 |
$20 |
$25 |
$30 |
$35 |
$40 |
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QD |
1,000 |
450 |
300 |
250 |
200 |
180 |
150 |
100 |
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QS |
200 |
240 |
300 |
350 |
400 |
450 |
500 |
550 |
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(Put your answer in the space at the bottom of the page.)
10. (4 points) What is the equilibrium market price and quantity?
11. (4 points) There is a price ceiling of $10. How much would be sold in this market? What would be the surplus (+) or shortage (-)?
12. (4 points) How much would be the per unit “rent” in this market if there were a maximum quota of 200 supplied?
13. (4 points) Suppose that the government wanted to enforce a price floor of $40 per unit by purchasing enough to make $40 the market price. What quantity would the government have to buy?
14. (4 points) For sellers who were operating in this market when it was at the original equilibrium, what is the per unit rent they gain from this $40 price floor?
Put your short answers here:
The next two questions refer to various parts of the following table:
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P |
$5 |
$10 |
$15 |
$20 |
$25 |
$30 |
$35 |
$40 |
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QD |
1,000 |
450 |
300 |
250 |
200 |
180 |
150 |
100 |
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15. (4 points) A monopolist faces the above demand curve. The monopolist’s total cost of production is
TC = $20*Q. What is the maximum profit the monopolist could earn at one of the stated prices? (Be sure to show enough work below or in the table so that we can see how you reached your answer.)
16. (4 points) If the monopolist could get away with selling an extra 10 units at $5 below the monopoly price without it affecting anything else, how much would this change the firm’s profits?
17. (4 points) For the above table, using the Revenue Test, indicate the elasticity of the demand curve for each of the following price changes. NOTE: Put your answers here.
● For a price change from $5 to $10, the demand curve is _________________.
● For a price change from $10 to $15, the demand curve is _________________.
● For a price change from $15 to $20, the demand curve is _________________.
● For a price change from $20 to $25, the demand curve is _________________.
18. (4 points) Famous people are great for making commercials, and it’s also impactful when they say swears (but they can’t say them in commercials!). So, at a given point of time, they can either be doing a commercial or saying a swear, but can’t be doing both, hence there’s an opportunity cost to doing either. Consider the following resources and how they can be combined to form a Production Possibilities Frontier. ("OR" implies either choice or any linear combination of the two.) Fill out the PPF for these resources, and assume for now that resources can only do one thing or the other, and not divide their time between the two tasks.
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Outputs: Resources: |
Commercials |
OR |
Swears |
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Mahomes |
8 |
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8 |
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Travis |
10 |
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4 |
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Jason |
3 |
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1 |
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Ye |
8 |
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4 |
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Taylor |
15 |
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30 |
19. (4 points) If the resources can divide their time between the two tasks, would the point
(17 Commercials AND 41 Swears) be efficient, inefficient, or unattainable? Briefly explain why.
20. (11 points) Suppose that Northwestern would pay me $10,000 per extra class each year. That’s nice, but teaching is very annoying, causing me unhappiness worth about $6,000 (This isn’t true! I love teaching!). Suppose that if I teach one extra class, I would be in the 25% marginal tax bracket, if I teach a second extra class, I would be in the 35% marginal tax bracket. If I teach a third extra class, I would be in the 45% marginal tax bracket.
● How many extra classes would I choose to teach? Briefly, why?
● If the marginal tax rates were doubled (50%, 70%, 90%), how many extra classes would I teach? Briefly, why?
21. (11 points) If there is a negative externality, does the market produce too much or too little? What does too much or too little even mean in this context? If Adam Smith’s “Invisible Hand” is so great, why would it let us get the market quantity so wrong? (Accompany your explanation with the appropriate graph.)
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On-time bonus? (We will mark this one for you.) |
Yes: +4. No: + 0. Late: -5. |
Long problems: Write in the space provided
22. (11 points) From 1992 until 2021, we never saw the inflation rate go about 4%, then for two years it was well above 4%. Krugman claimed that it was various factors: messed up supply chains and because Covid made it harder for people to do their work, which made it more expensive to produce goods. Larry Summers said that the problem was the economic stimulus provided by increased government spending and cash transfers from government to augment people’s incomes. Draw two SRAS-AD diagrams to illustrate each view. (Label everything carefully.)
● In the left box below, draw Krugman’s view, and state what such an inflation would be called.
● In the right box below, illustrate Summers’ simulus view and what such an inflation would be called.
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Name for Krugman’s inflation: |
Name for Summers’ inflation: |
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23. (11 points) There is the Krugman view and the Summers view of what caused the high inflation, and then there are those who say that both effects were important. What variable could we look at to see which of the three views is closest to correct? What would that variable do to indicate which theory was best? (Draw graph is you like.)