Imperfect Competition
What is the type of market that holds a few large firms and has interdependence between them?
Oligopoly
A country’s firms face a sudden increase in workers' wages. How will this affect the country's long-run output?
No change, wage changes do not shift the LRAS curve.
The Federal Reserve observes that banks are holding ample reserves significantly above the required ratio. What kind of government policy will the Fed implement to reduce reserves?
The Federal Reserve will use contractionary monetary policy (Raise the reserve requirement, sell bonds, increase the interest on reserves).
A factory worker is laid off due to a loss in profits for the product. What type of unemployment is this?
Cyclical unemployment.
Suppose the widget industry is a constant-cost and perfectly competitive industry in long-run equilibrium. An increase in demand for widgets has raised the price above the average total cost. In the long run, will firms enter or exit the industry?
Firms will enter the industry in the long run.
On a monopoly graph, where is the socially optimal quantity found?
The socially optimal quantity is found where the marginal cost (MC) equals demand/price.
A nation’s economy is currently facing a negative demand shock. However, the government chooses not to respond to this issue. How will nominal wages change?
Nominal wages do not change due to sticky wages.
How does an increase in the interest on reserves from the central bank affect consumer spending in the economy?
A decrease in consumer spending.
If a country’s central bank lowers its interest rates, what is the short-run effect on actual unemployment?
Short-run actual unemployment decreases.
A country produces and imports steel with an imposed tariff. What will happen to its consumer surplus if the government of the country reduces its tariff on imported steel and the country continues to import steel from abroad?
Consumer surplus increases.
A monopoly faces an increase in input prices that causes its average total cost (ATC) curve to shift. How will this change affect the monopoly’s profits?
The monopoly’s profits decrease.
A nation’s economy displays an increase in exports to foreign countries. However, the price of raw materials used for production in the nation has suddenly increased. What will be the effect on the price level and Real GDP?
The price level increases, and the Real GDP is indeterminate.
Currently, the money supply is $15 billion, nominal GDP is $45 billion, and real GDP is $9 billion. What is the velocity of money and the price level?
The velocity of money is 3 and the price level is 5.
The natural rate of unemployment is 6%, with an inflation rate of 4%. Due to slow economic activity, unemployment has risen from 6% to 8%. If a 2% increase in unemployment above the natural rate causes inflation to fall by 3%, what is the new inflation rate?
The new inflation rate is 1%.
A firm in a perfectly competitive market produces a good where its marginal cost (MC) curve lies below the market price at the current output level. How will this affect the number of firms in the short run?
The number of firms remain unchanged in the short run.
A firm that produces radios operates in a monopolistically competitive market and is currently in long-run equilibrium. The firm produces 500 radios per month. At this output level, the firm's total cost is $4,000, and its marginal cost is $6. Is the firm producing at an efficient scale?
No, the firm is not producing at an efficient scale because the ATC is $8, which is less than $6.
A government decides to increase transfer payments by $250. The marginal propensity to consume (MPC) is 0.8. What will the total effect be on spending?
Total spending will increase by $1000.
The Fed wants to increase its money supply by $450 million. Assuming that banks don’t hold any excess reserves, what quantity of bonds will the Fed buy or sell when the reserve requirement is 20%?
The Fed will buy $90 million in bonds.
There is a total adult population of 1000. 600 are employed, 150 are unemployed, and 50 are discouraged from working. What is the rate of unemployment?
Unemployment rate: 20%.
A competitive and profit-maximizing bakery sells each loaf of bread for $15. The total daily cost is $450, including a fixed cost of $120. The bakery bakes 30 loaves per day. Will the bakery choose to shut down in the short run?
The bakery will not shut down in the short run.
A fast food chain in a small town serves children, adults, and senior citizens. There are 300 children, 500 adults, and 200 senior citizens in the town. Children are willing to pay $4, adults are willing to pay $8, and senior citizens are willing to pay $6. The marginal cost for each meal is $3. What is the total profit if the fast food chain can perfectly price-discriminate?
Total profit: $3400.
A country's economy is currently experiencing a recessionary gap. The government decides to take action using tax policies. The recessionary gap is $100 billion, and the MPC is 0.8. How much will the government need to increase/decrease taxes to close this gap?
The government will cut taxes by $25 billion.
The banking system has $80 million in total reserves. The required reserve ratio is 20 percent and banks do not hold excess reserves. If the Fed lowers the required reserve ratio to 10 percent, what is the change in the money supply?
The money supply increases by $400 million.
The Fed aims to maintain stable inflation, but it believes that the natural rate of unemployment is 7% when it is actually 4%. After implementing policies, what will be the short-run effect on the actual unemployment rate?
Unemployment will be higher than the natural rate in the short run.
A profit-maximizing firm is perfectly competitive for both the output and the factor markets and is in long-run equilibrium. The output is 100 units, the total revenue is $500, and the fixed cost of production is $100. If the marginal cost is $5, what is the average variable cost?
The average variable cost is $4.