Macroeconomics Answers

(a) Why are second hand motor cars are sold at a huge discount on Black Friday? (2)

(b) Why does the government usually increase taxes on cigarettes and alcohol in order to increase its revenue? (2)

How do the three basic economic questions relate to the firm? (3)

The following equations describe the economy.

• C = 100+ 0.8 Y

• I = 200- 1000 i

• L = Y – 10000 i

Initially, government expenditure is $550, and taxes are $500. The real money supply equals

$900.

a. Derive the formulas for the IS curve and LM curve. (4pts)

b. What are the initial levels of GDP, the interest rate, consumption, and investment?

Owing to a drop in investor confidence, the autonomous component of investment drops

by 90. (2pts)

c. By how much do income, the interest rate, and investment drop? (3pts)

d. By how much should the money supply be changed in order to return GDP to its original

level? What will the new interest rate be? (3pts)

e. Draw three graphs to illustrate the equilibria in b, c, and d. (6pts)

QUESTION 16

If buyers have a range of similar options available from other firms:

1. Then the monopolist must produce a larger quantity.
2. Then the monopolist cannot raise their price.
3. Then the monopolist cannot lower their price.
4. Then the monopolist will earn the highest profits.
5. Then the firm is not a monopoly.

QUESTION 17

No monopolist can require consumers to:

1. Pay a high price.
2. Pay a low price.
3. Purchase its product.
4. All of the above.
5. None of the above.  

QUESTION 18

The challenge for the monopolist is to strike a profit-maximizing balance between:

1. Beans and weaners.
2. Salty and sweet.
3. Profits and losses.
4. The price it charges and the quantity that it sells.
5. The price it charges and the happiness of consumers.

QUESTION 19

The demand curve perceived by a perfectly competitive firm is:

1. A tiny slice of the entire market demand curve.
2. Misleading to a firm.
3. Beneficial to the sellers.
4. All of the above.
5. None of the above.

QUESTION 13

A monopoly’s situation and decision process will differ from that of a perfectly competitive firm:

1. Only if there is stiff competition.
2. Whenever there is stiff competition.
3. Because a monopoly faces no competition.
4. Because a monopoly faces stiff competition.
5. All of the above.

QUESTION 14

A monopolist perceives the demand curve that it faces:

1. Only through normative analysis.
2. Without positive analysis.
3. To be left of the market demand curve.
4. To be the same as the market demand curve.
5. To be right of the market demand curve.

QUESTION 15

If the monopolist chooses a high level of output:

1. It will make the most profit possible.
2. It cannot be profitable.
3. It can charge only a relatively low price.
4. It might be illegal.
5. All of the above.

5

When economies of scale are large relative to the quantity demanded in the market, it is:

1. Bad for society.
2. Unnatural competition.
3. A natural monopoly.
4. Difficult to find a company willing to produce that product.
5. Impossible to find a company willing to produce that product.

6

Natural monopolies often arise in industries where:

1. The product is illegal.
2. The marginal cost of adding an additional customer is very low.
3. The marginal cost of adding an additional customer is very high.
4. The average cost of production is very low.
5. The average cost of production is very high.

7

One producer can serve the entire market more efficiently than a number of smaller producers:

1. In competitive markets.
2. In any monopoly.
3. Because of a fish’s scales.
4. Because of economies of scale.
5. Because of fish’s tales.

8

This occurs when the government erects barriers to entry by prohibiting or limiting competition.

1. Firms choose to exit the market.
2. Firms choose to enter the market.
3. Legal monopoly.
4. Illegal monopoly.
5. All of the above.

QUESTION 1

The Tea Act continued the tax on teas and made the East India Company:

1. The richest company the world has ever seen.
2. The sole legal supplier of tea to the American colonies.
3. The inheritor of what was formerly Spanish tea.
4. Adhere to certain laws intended to limit their profit.
5. Obsolete. 

QUESTION 2

Monopoly is a market:

1. That can only be represented on a game board.
2. With no competition at all.
3. Where firms have a great deal of market power.
4. Both answers A and B above.
5. Both answers B and C above.

QUESTION 3

A monopolist must be concerned about whether consumers will:

1. Purchase its products or spend their money elsewhere.
2. Recognize the value of its products.
3. Realized the legal implications of purchasing products from a monopoly.
4. All of the above.
5. None of the above. 

QUESTION 4

Monopolies tend to earn significant economic profits:

1. Only in springtime.
2. Because of the lack of competition.
3. In spite of the lack of competition.
4. Only in the short run.
5. Only in the long run.

If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?

Explain the relationship between the effectiveness of monetary policy and the interest

elasticity of money demand. Will monetary policy be more or less effective the higher the

interest elasticity of money demand? Explain. Now explain the relationship between fiscal

policy and the interest elasticity of money demand. Why do the two relationships differ?

{0.2 0.3 0.2

0.4 0.1 0.2

0.1 0.3 0.2}

 Give three industries having input coefficient matrix as above. Find the production of output of X1 X2 X3 IF THE final demand 10 5 6. Provide economic meaning of 0.1 and 0.4 if any