November 9, 1994

1. Define or identify:
a. Built in Stabilizers
c. Wagner Act
e. real GDP vs. nominal GDP
b. collusion
d. Quantity theory of money

2. After the recent mid-term elections yesterday, several of the newly elected representatives need some policy advice based on economic theory. Please answer the questions fully, using graphs and examples. (30 points)

a. Why does cutting taxes by $100 have a smaller effect on GDP than increasing expenditures by $100?

b. How would you reduce unemployment from 5.8 percent to 4.8 percent? Income is $4T and needs to increase to $4.5T for the lower unemployment level. The mpc is .8. Explain your recommendations.

c. Would the budget be balanced if they followed your advice? Explain

3. If the government regulated the price of amonopoly, at what price (approximately) would the government choose if it intervened and regulated the monopoly? Mark this point on a graph. Explain the rationale used by the government. (20 points)

4. List and define four types of unemployment. What would economists recommend for eliminating each type? (10 points)

5. Given the experience of the Great Depression what might economists learn about the relation between theory and practice. Give three specific examples. (15 points)

6. On October 25th, the federal price-fixing trial of General Electric opened. G.E. is accused of trying to "increase profits in its industrial diamonds business by bidding up prices in concert with its chief competitor." Together these two firms control 90 percent of the billion dollar synthetic diamond market. Why is the government prosecuting General Electric? Explain the economic rationale. (10 points)