ECON 201 Saudi Electronic University Macro Economics Chapters 1 to 4 Questions Paper

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Economics

Econ 201

Saudi electronic university

ECON

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College of Administrative and Financial Sciences Assignment-1 Deadline: 24/02/2021 @ 23:59 Course Name: Macroeconomics Student’s Name: Course Code: ECON201 Student’s ID Number: Semester: II CRN: Academic Year: 1441/1442 H For Instructor’s Use only Instructor’s Name: Students’ Grade: / 5 Level of Marks: High/Middle/Low Instructions – PLEASE READ THEM CAREFULLY • The Assignment must be submitted on Blackboard (WORD format only) via allocated folder. • Assignments submitted through email will not be accepted. • Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page. • Students must mention question number clearly in their answer. • Late submission will NOT be accepted. • Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions. • All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism). • Submissions without this cover page will NOT be accepted. Assignment 1 Question-Chapters: 1, 2, 3 & 4: - [5 Marks] Q1: Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and “butter.” [2 Marks] A) Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape. B) Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. C) Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose. D) Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger “peace dividend,” measured by the increase in butter production? Explain. Q2: Suppose that there are 10 million workers in Canada and that each of these workers can produce Either 2 cars or 30 bushels of wheat in a year. [2 Marks] A) What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relationship between the opportunity costs of the two goods. B) Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier. C) Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal? Q3: Suppose the demand function for corn is Qd = 10 − 2p, and supply function is Qs = 3p − 5. The government is concerned that the market equilibrium price of corn is too low and would like to implement a price support policy to protect the farmers. By implementing the price support policy, the government sets a support price and purchases the extra supply at the support price. In this case, the government sets the support price ps = 4. [1 Mark] (a) Calculate the original market equilibrium price and quantity in absence of the price support policy. (b) At the support price ps = 4, find the quantity supplied by the farmers, the quantity demanded by the market, and the quantity purchased by the government. Answer:
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QUESTION 1

Production Possibilities Frontier
Quantity of guns produced

30

H

25

A
20

B

D

15
10
5
0
0

1

2

3

4

5

6

7

Quantity of butter produced

a) The figure above represents a production possibility frontier of guns against butter. When
this economy is producing a lot of guns, the labourers and the machinery that could be
used to make guns are used to make butter; thus, each unit of butter given up yields a
smaller increase in the production of firearms. That's why the graph of guns against butter
is bowed out the opportunity cost of guns depends on how much firearms and how much
butter are produced in the economy.

b) It is difficult for the economy to accomplish point A; it is beyond the frontier of
production possibilities. Point B is feasible yet inefficient because it is beyond the
frontier of production possibilities.

c) Point H could be chosen by the Hawks, with many guns and not much butter. The Doves,
with a lot of butter and a few firearms, could choose point D

d) Suppose both Hawks and Doves decreased their desired amount of guns by the same
amount. In that case, the Hawks will obtain a greater peace dividend because at point H
the boundary of production possibilities is much flatter than at point D. As a
consequence, the decrease in the number of guns made, beginning at point H, contributes
to a much greater increase in the amount of butter produced than at point D.

QUESTION 2.
a) Opportunity cost of producing a car is 15 bushels of wheat. It means if Canada wants to
produce a car, it needs to give up 15 bushels of wheat. Also opportunity cost of producing
a bushel of wheat is 1/15 of cars, which means if Canada wants to produce a bushel of
wheat it need to give up 1/15 of cars

production possibilities frontier
Cars( Per million years)

25
20

canada's ppf

15
10

A

5
0
0

50

100

150

200

wheat( per million years)

250

300

350

b) If each of the 10 million employees produces two cars, a total of 20 million cars are
made, which is the vertical intercept on the frontier of production possibilities. If all 10
million employees produce 30 bushels of wheat each, a total of 300 million bushels will
be made, which is the horizontal intercept on the frontier of production possibilities.
Since the tradeoff between cars and wheat is always the same, the production possibilities
frontier is a straight line.
c) If Canada approves the offer, 200 million bushels of whea...


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