MIDTERM EXAMINATION
Answer all questions on a separate piece of paper with your name on every
page.
1. One of the scarce resources that constrain our behavior is time. Each of us has only
24 hours in a day. How do you go about allocating your time in a given day among
competing alternatives? Once you choose a most important use of time, why do you
not spend all your time on it? Use the notion of opportunity cost in your answer.
2. Describe a command economy and a laissez-faire economy. Do any economic
systems in the world reflect the purest forms of command or laissez-faire economies?
Explain.
3. Before economic reforms were implemented in the countries of Eastern Europe,
regulation held the price on bread substantially below equilibrium. When reforms
were implemented, prices were deregulated and the price of bread rose dramatically.
As a result, the quantity of bread demanded fell and the quantity of bread supplied
rose sharply. Is this what is happening in the United States with gasoline? If so, what
would be the results if the North American oil companies did not receive various
federal subsidies to the supply and demand curves?
4. When excess demand exists for tickets to a major sporting event or a concert, profit
opportunities exist for scalpers. Explain using supply and demand curves to illustrate
this economic principle. Do you agree or disagree that these scalpers are efficient
and work to the advantage of everyone?
5. In your words define monetary policy, inflation, unemployment, stagflation, Gross
National Product, Gross Domestic Product, recession and depression.
6. Explain why imports are subtracted in the expenditure approach to calculating Gross
Domestic Product?
7. When an inefficient company or a company producing a product that people no
longer want goes out of business, people are unemployed, but that is part of the
normal process of economic growth and development. The unemployment is part of
the natural rate and need not concern policy makers. Explain that statement and its
relevance to the economy today.
8. You read that expenditures and income should always be equal. You also read that
Aggregate Expenditures and Aggregate Output (income) can be different. Explain is
there an inconsistency here?
1
9. Explain the following statement: For an economy to be in equilibrium, planned
investment spending plus government purchases must equal saving plus net taxes.
10. What are the three tools the central bank can use to change the money supply?
Describe how the central bank can use each of these tools to either increase or
decrease the money supply.