LaGuardia Community College
Social Sciences Department
Introduction to Economics
Dr. Kone
Test No. 2
Answer completely any four (4) questions:
1.
Country
India
Japan
Labor hours needed to make 1 unit of
Sunglasses
Cloth
2
4
4
16
Sunglasses
8
4
Output per Worker in 8 hours
Cloth
4
1
a) Refer to the table above. Which country has a comparative advantage in producing sunglasses, in producing
cloth? Explain.
b) Explain and illustrate the concept of a production possibility curve for India and Japan.
c) Illustrate the gains from trade between India and Japan.
2. Suppose that real GDP is below potential GDP, and the Council of Economic Advisers is trying to evaluate
various proposals for fiscal stimulus. They are uncertain about whether the spending multiplier is 1.7 or 2.5.
a) What is the slope of the aggregate expenditure line in each case?
b) Suppose the economic advisers decide the multiplier is 1.7, and they decide an increase G of $50 billion
would bring real GDP to potential GDP. Draw the aggregate expenditure/real GDP diagram for this situation.
If they are correct about the value of the multiplier, by how much does real GDP rise?
3. Globalization has stimulated much controversy in recent years. Some studies have shown that globalization
increases economic growth, narrows the income gap between rich and poor nations and reduces poverty. But
some critics argue that globalization may encourage governments to participate in a “race to the bottom”, i.e.,
countries compete for international investment by offering low or no environmental regulations or labor
standards. Your instructor has requested that you assess the major arguments on both sides.
4. In recommending central banking reforms for Eastern European economies, the Economic Report of the
President, 1990 asserted, “It is widely agreed that the central bank should have a high degree of independence
from the central government so that it can resist political pressures to finance government spending with
money creation and can pursue price stability”. Explain the reasoning behind this assertion. What are some
counter agreements?
5. Suppose that US market demand and supply for cloth are given, respectively, by the following algebraic
equations: P = 8 – ½Q and P = 2 + ¼Q (P is given in dollars and Q in tons).
a) Plot the demand and supply schedule for clothe and determine the equilibrium price and quantity for cloth
in the US in the absence of [international] trade.
b) If the US now allows free trade and P=$2.00 on the world market and we assume no transportation costs,
how much cloth will the US consume, produce and import with free trade?
c) Now assume the US imposes a tariff of 50% on the world price, how much cloth will the US consume,
produce and import with tariff?
d) How much tax revenues will the US government collect with trade restrictions?
e) How much is the consumer loss as a result of the tariff?
f) How much are the producer’s gains and the society loss (deadweight loss) as a result of the tariff?
6. Suppose that US market demand and supply for cloth are given, respectively, by the following algebraic
equations: P = 7 – 0.10Q and P = 1 + 0.10Q (P is given in dollars and Q in tons).
a) Plot the demand and supply schedule for clothe and determine the equilibrium price and quantity for cloth
in the US in the absence of [international] trade.
b) If the US now allows free trade and P=$1.00 on the world market and we assume no transportation costs,
how much cloth will the US consume, produce and import with free trade?
c) Now assume the US imposes a tariff of 100% on the world price, how much cloth will the US consume,
produce and import with tariff?
d) How much tax revenues will the US government collect with trade restrictions?
e) Suppose domestic growers of cotton convince the government to impose a quota of 20 tons. Illustrate and
explain the effect of quota on the domestic market.
7. Explain and illustrate the effects of Tariffs and Quotas on:
a. The domestic government
b. Domestic consumers
c. Domestic producers
d. Foreign producers
8. The benefits of trade liberalization are assumed to be great. Yet, Nations restrict International Trade. Why do
they do that? Discuss and evaluate.
9. The convergence hypothesis, first proposed by a Soviet economist, suggests that over time the capitalist
economies will become increasingly socialistic and the socialist economies will become increasingly
capitalistic. Do you believe the convergence hypothesis has merit? Discuss