Principles of Economics

January Exam - 2015-6

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Group

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NIU

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INSTRUCTIONS - The exam has 20 multiple choice questions. Each question has one and only one correct answer.
A correct answer gives 5 points, a wrong answer subtracts 1.6 points, and an answer left blank neither adds nor
subtracts. The answers have to be marked on the attached automatic correction sheet. We only evaluate the answers
in the automatic correction sheet. Please keep in mind that : 1. You have to write down your name, last name, study
programe, group number and NIU before starting the exercise in both the exam and the automatic correction sheet.
Do not forget to sign them both. 2. On the top left of this page you find a capital letter printed in bold. This letter
indicates the type of your exam which should also be marked in the automatic correction sheet.

Part I - Microeconomics
1 - Which of the following can be part of the opportunity cost of studying at the university?
a)
b)
c)
d)

Working at a firm for a wage.

Traveling around the world.
Working in the government for a wage.
All the options are correct.

2 - Suppose that in the year 2000 the world demand for Coca Cola was the following: P=3-2Q. If it is discovered in
the year 2015 that Coca Cola is bad for your health, ceteris paribus, which is a reasonable demand for Coca Cola in
2015?
a)
b)
c)
d)

All options are a plausible correct answer.

It is impossible to say.
P=5-2Q.
P=1-2Q.

3 - Suppose that in the year 2000 the world demand for Coca Cola was the following: P=3-2Q (Q in millions), and the
world consumption of Coca Cola was 1 million liters. In the year 2015, it is discovered that Coca Cola is bad for your
health, ceteris paribus. According to the model explained in the lectures, which one of the following is true?
a) The marginal cost of the 1 millionth liter of Coca Cola has increased as a consequence of the shift in the
demand.
b) The marginal cost of the 1 millionth liter of Coca Cola has decreased as a consequence of the shift in the
demand.
c) The total cost incurred by Coca Cola increases as a consequence of the shift in the demand.
d) The total cost incurred by Coca Cola decreases as a consequence of the shift in the demand.
4 - Suppose that in the year 2000 the world demand for Coca Cola was the following: P=3-2Q. Also suppose the supply
of Coca Cola was P=Q. Now, in the year 2015, Coca Cola supply changes to P=0.5 Q. Which of the following is true?
a)
b)
c)
d)

The supply is more elastic in 2015.

The traded quantity is higher in 2015.
The consumer surplus is greater in 2015.
All options are correct.

5 - In a perfectly competitive market, the government imposes a price ceiling P = 6 euros. Which of the following
statements is correct?
a) If the initial equilibrium price was P=5,35 euros, the price ceiling increases the Consumer Surplus.
b) If the initial equilibrium price was P=5,35 euros, the price ceiling increases the Producer Surplus.

c) If the initial equilibrium price was P=7,2 euros, the price ceiling decreases the Producer
Surplus.
d) If the initial equilibrium price was P=7,2 euros, the price ceiling decreases the Consumer Surplus.
6 - Which statement is incorrect?
a)
b)
c)
d)

The dead weight loss created by a monopoly will be higher the less elastic the demand is.
The total welfare in perfect competition is bigger than in monopoly.
If a monopoly becomes more efficient (reduces its marginal cost), the equilibrium price will decrease.
We say that a market is a natural monopoly when the total cost of producing a given quantity
is higher if the good is produced by only one firm.

7 - The graph below represents a market with an externality. Which one of the following statements is
correct?
a) This is a positive externality in production.
b) This is a positive externality in consumption.
c) This is a negative externality in consumption.
d) This is a negative externality in production.
8 - Suppose two countries, A and B, and two goods, X and Y. If both countries produce only one of the goods, Country
A produces double than Country B if it is good X, and triple if it is good Y.
a) Country A and Country B can benefit from trading good X and good Y at a interchange rate of one.
b) Country A and Country B can benefit from trading good X and good Y at a interchange rate of 2.5 units
of good X for one unit of good Y.
c) Country A has absolute advantage in the production of both goods and Country B has
comparative advantage in the production of good X.
d) We cannot say with this information which country has comparative advantage in which good.
9 - According to the terminology introduced in this course, bread and other basic goods are examples of
a)
b)
c)
d)

Goods with low elasticity of supply.

Complement goods.
Essential goods.
None of the others.

10 - We read in the Economist 22-08-2015: In the 1970s, [Yale University introduced the following lending scheme:]
around 3,300 undergraduates there agreed to pay 4 % of their annual income for every $1,000 of funding they received
until the entire group?s fees were paid. But students who expected future riches had no incentive to sign up in the
first place...
a)
b)
c)
d)

This is a clear example of market failure due to the market power of the bank of Yale University.
This text refers to the usual moral hazard problem typical of bank loans.
This is an example of adverse selection.
All the answers are correct.

Part II - Macroeconomics
11 - About the measurement of the GDP
a) The value added method is used as an alternative method to calculate GDP since is not
possible to know when a good is sold as a final good or as an intermediate good.
b) The GDP is the value of all goods and services sold in a given economy during a specific period of time.
c) In the Spanish national accounts, the trip to NewYork City of a Resident of Spain is included in exports.
d) None of other is correct.
12 - In a simple economy with two final goods (lattes and pizzas) the quantities produced of each good in 2014 are 2
lattes and 4 pizzas and 3 lattes and 6 pizzas in 2015. Their prices have been 1 euro per latte and 2 euros per pizza in
2014 and 1.5 euros per latte and 3 euros per pizza in 2015. The base year for the calculation of the deflator is 2014.
a)
b)
c)
d)

Real GDP has increased more than nominal GDP between 2014 and 2015.
The inflation rate between 2014 and 2015 measured by the deflator is 50 %.
The increase in the nominal GDP between 2014 and 2015 is 10 %
The increase in the real GDP between 2014 and 2015 is 25 %.

13 - A worker decides to become a retiree and to not participate any further in the labor market. If nothing else
changes then,
a)
b)
c)
d)

the unemployment and participation rates decrease

the unemployment and participation rates increase.
the unemployment rate increases and the participation rate decreases.
the unemployment rate decreases and participation rate increases.

14 - The government of Uglyland has good news for its citizens: the inflation rate, measured by the CPI has dropped
from 5 % in 2014 to 2 % in 2015. Therefore it must be the case that in 2015
a)
b)
c)
d)

some prices of the basket have dropped.

at least the price of one good of the basket has increased.
all prices of the basket have dropped.
all prices of the basket have increased.

15 - If a central bank
a) increases the discount rate, then the money supply will increase and the price level will increase in the long
run.
b) increases the discount rate, then the money supply will decrease and the price level will increase in the
long run
c) sells bonds in an open-market operation, then the money supply will increase and the price level will
increase in the long run.
d) buys bonds in an open-market operation, then the money supply will increase and the price
level will increase in the long run.
16 - Regarding the quantity theory of money,
a) If the velocity of money and the real GDP are constant and money supply increases, then the price level
decreases.
b) If the velocity of money is constant and the growth rate of the money supply is higher than the growth
rate of real GDP, then the price level should decrease.
c) If the velocity of money is constant and real GDP increases, then price level should increase more than
money supply.
d) If the velocity of money and real GDP are constant, the change in the price level will be
proportional to the change in the quantity of money.
17 - If the theory of purchasing-power parity holds
a) The real exchange rate will be always larger than the nominal exchange rate.

b) The real exchange rate will be always smaller than the nominal exchange rate.
c) A currency will depreciate if domestic inflation rate is smaller than inflation rate abroad
d) A currency will appreciate if inflation abroad is higher than domestic inflation.
18 - The Aggregate demand curve
a)
b)
c)
d)

shifts to the right when the money supply increases.

shifts to the left when prices increase since household feel less rich.
shifts to the right when taxes increase.
it is not affected by a change in government spending.

19 - In the Republic of Aycomosufro the marginal propensity to consume is smaller than one. If a new technological
improvement makes firms to increase investment by 100 monetary units and assuming that interest rates remain
constant, in the short run the aggregate demand will
a)
b)
c)
d)

increase by more than 100 monetary units

increase less than 100 monetary units.
increase by 100 monetary units
drop by 100 monetary units.

20 - One of the news that was published in the newspaper El Pas, on December 15, 2015, mentions that: ...the economic
recovery in Europe is based on the reduction of the oil prices and an expansionary monetary policy.
a) These topics are associated to the Market for Loanable Funds and explain the changes in investment in
the long run.
b) These topics are associated to Parity Purchasing Power Theory and explain the determination of the real
exchange rate.
c) These topics are associated to the Aggregate Demand and Aggregate Supply model and
explain the determination of GDP and price level in the short run.
d) These topics are associated to the determinants of productivity and explain the determination of GDP in
the long run.