Economics Education and Research Consortium

MA Program in Economics

National University “Kyiv–Mohyla Academy”

Admission Examination in Economics

Version A

Name: ______

(please print legibly using capital block letters)

Instructions:

1. Do not turn this page until told to do so.

2. You have two hours to answer all the questions in the space provided. If the provided space is insufficient, you may continue on the back of the sheet.

3. Answers in any language other than English will receive zero credit.

4. No dictionaries are allowed.

5. No calculators or other similar devices are permitted. Mobile phones must be switched off for the duration of the exam.

6. Positively no cheating. If caught cheating, you will be asked to leave the room immediately, and your grade for this exam will be zero.

July 1, 2007

Kyiv

Part I – Macroeconomics (50 points, 5 points each question)

1. Give at least three reasons why real Gross Domestic Product (GDP) is an imperfect measure of current level of production in an economy.

2. Complete the sentences:

Aggregate supply curve shows the relationship between an economy’s ______level and the ______of goods supplied by its producers. In the short run, this curve is ______-sloping because higher product prices will improve profit margins when the costs of important resources, like labor, are ______in the short run. In the long run, however, the aggregate supply curve is ______.

3. A Ukrainian firm decides to cut its level of domestic investment by 40 000 hryvnas. What is the maximum potential change in Ukrainian GDP if the marginal propensity to consume in the economy is 0.6?

4. Suppose that the money supply and the nominal GDP for a hypothetical economy are $38 billion and $266 billion respectively. Compute the velocity of money in this economy.

5. Suppose that a saver puts $1 000 on a bank account at the annual interest rate 20%. What is the real value (purchasing power) of that deposit in one year if inflation turns out to be 25%?

6. The so-called Laffer curve depicts the relationship between tax rates and tax revenues. Explain the shape of this curve.

7. Complete the following sentence using the words in brackets:

Expansionary monetary policy is associated with open market ______(sale, purchase) of securities by the central bank, ______(higher, lower) reserve requirements, ______(higher, lower) discount rate.

8. Explain why a progressive income tax system is an automatic stabilizer of the economy.

9. Write down the condition of Purchasing Power Parity. Explain your notation.

10. What is the maximum amount of money that can be created by the banking system out of a new deposit of 1000 dollars, if the required reserve rate is 25%.

Part II – Microeconomics (50 points, 5 points each question)

1. Suppose that the total revenue of a firm rises by 15% after the market price of product A that this firm sells increases by 10%. Show that product A is an inferior good.

2. Suppose that a consumer chooses an optimal bundle of goods X and Y. Price of a unit of good X is $3, price of a unit of good Y is $4, and the consumer’s budget is $24. How many units of good X and good Y will the optimal bundle include if for all levels of consumption the marginal utility from consuming good X is 3, and the marginal utility from consuming good Y is 2.

3. Complete the following sentences using the words in brackets:

The price elasticity of demand is computed as the percentage change in the ______(price; quantity demanded) of a product purchased divided by the percentage change in the ______(price; quantity demanded) of this product. When there are many close substitutes available, the demand of the product is likely to be ______(elastic; inelastic). When the product is a sizable component of the consumer’s budget, its demand is likely to be ______(elastic; inelastic). Typically, the price elasticity of a product will ______(increase; decrease) in absolute value as consumers have had more time to adjust to a change in its price.

4. A firm on a competitive market faces price of $10 for its product and produces 100 units of it. The marginal cost of production is $10; average total cost is $12, and fixed cost is $150. Is this equilibrium for this firm (explain why)? Calculate the firm’s profit (loss).

5. Explain the notion of normal profit.

6. Explain the difference between monopolistic competition and oligopoly.

7. Explain (from the point of view of economics) why environmental pollution should be (and in majority of countries is) regulated by the government.

8. Suppose that a large oil-exporting country suddenly discovers that its oil reserves are nearly exhausted. As a consequence, the aggregate income of its residents will fall sharply in the next few years. The country is a large world importer of olive oil. Assuming that olive oil is a luxury good, what is likely to happen to the equilibrium world price and quantity of olive oil, other things equal?

9. Explain why the minimum-wage legislation is likely to increase unemployment among low-skilled workers? Who is likely to benefit from this legislation?

10. Suppose that in industry N due to some production process peculiarities only three plant sizes are technologically feasible: a small plant, a medium plant and a large plant. The short-run average total cost curves for these three plant sizes are depicted on the graph below. Using this graph show the shape of the long-run average total cost curve for this industry.