Introduction to Economics

(Prof. Martin Gramont Manzo)

International University of Monaco
Final Exam – Jan 2021

. This is your final examination for IntroEcon (4 points each question).

. Questions are structured to be answered using certain analyses which could be approached and
explained differently depending on the student, then cheating will be evident.

. Additionally, all your answers will be analyzed by the Moodle recognition algorithm, and also by Google.

. If two (or more) students -even with correct answers- present a very high degree of coincidence in their
analyses, these exams will be considered plagiarism.

. If any answer presents a high degree of coincidence with any content on internet or the book, also will
be considered plagiarism.

 Reply the questions ON THIS DOCUMENT (do not convert to pdf nor any other document)

 You have three (3) hours to upload your exam on Moodle (do not send it by email!). After that
window of time your exam will not be accepted (the exam is thought to completed in less than
two hours)

 Cheating/plagiarism policy is inflexible for every student with no exceptions:

Have in mind that:

. If two -or more- exams have “impossible coincidences”, both exams will be heavily penalized

. You cannot copy (totally or partially) a third person’s analysis (from internet, a book, etc.,) as if
they were “yours”. Even though you can consult internet and books, you must write your own
analyses with your own words (E.g. if you copy literal from the book, that answer will be
consider plagiarism).

.This is a final examination. You are required to work individually. No team-work or consultations
among students are allowed (by email, whatsapp, etc.). You are required to do an individual
analysis based on what you have learnt in this course. If you work in team with others, have in
mind that your exams could present many similarities in your analyses and, therefore,
considered cheating.

. If you work with others, or help other people’s exam, it will be at

your own risk of having zero in your final exam

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 Final Questions

1. Answer whether the following statement is true or false, and explain why:

“As Economics is a social science, then it is not possible to conduct closed-experiments

(so we use models as a simplification of reality)”

This statement is true because economists apply the logic of science and simplify reality
to better understand the decisions of individuals and their interactions in the market

This statement is true because the economist simplify the economy

2. Answer whether the following statement is true or false, and explain why:

“Opportunity cost is always the value of time for not choosing certain alternative”

This statement is false because the opportunity cost could also be the value of money or
other resource.

3. Answer whether the following statement is true or false, and explain why:

“A market is when you have lots of firms supplying and lots of consumers demanding”

This statement is false because a market is simply a location where buyers and sellers
meet to exchange goods and services at a given price.

4. Answer whether the following statement is true or false, and explain why:

“Comparative advantage is the ability of an individual, firm or country to produce

cheaper than competitors”

This statement is true because indeed comparative advantage is producing something at

a lower cost than anyone else

5. Explain correctly the Law of Demand:

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 The Law of Demand is that if the price of a good increases the quantity demanded
decrease and vice versa

6. Explain (in proper, technical terms) what happens when the price of a given good is
below its equilibrium price. How is it the adjustment dynamics afterwards (if the market
has no interferences)?

When a price of a given good is below its equilibrium price the quantity supplied will be
over than quantity demanded, creating a surplus.

7. Explain (in proper, technical terms) what happens when the government imposes a
minimum wage (above equilibrium level). How is it the adjustment dynamics afterwards
(if the government does not remove the minimum wage)?

When the government imposes a minimum wage above the equilibrium level more labor
will be provided by workers than will be demanded by employers creating a surplus that
leads to unemployment

8. The following statement, is it true or false? Explain why?:

“When the government imposes a minimum wage above equilibrium the country suffers
frictional unemployment, but not structural”

The following statement is false because the frictional unemployment is not directly
related to factors that lead to an underperforming economy and structural
unemployment is caused by shifts in the economy.

9. Problem of Elasticities: You are a producer of hand-made pens. Last year you
produced and sold 10,000 pens at 10 euro/each.
You plan to raise the price of your pens by 30%
If your demand for pens is UNIT ELASTIC, you should go ahead with the 30% increase in
price or not? Justify why.

No because the demand is unit elastic and its sensible to price variation

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 10. Explain whether, and why, the following statement is true or false:

“When there is a change in price of good X, there is ALWAYS a change in quantity

demanded, but NOT ALWAYS in quantity supplied, as the latter (quantity supplied) will
depend on the elasticity (change in QDx after a change in Px)”

This statement is true because a change in the price of a good causes a movement
along a particular demand curve and typically ends up in some change within
the quantity demanded but it doesn't shift the demand curve

11. Explain what does it mean constant prices, and why we use them to calculate real
GDP.

Constant prices are a way of measuring the real change in output and we use constant
prices to calculate real GDP because using constant prices cancels out any changes in
the price level between years.

12. Explain whether the following statement is true or false and detailed why:

“Fiscal Policy is designed and executed by the ministry of finance, and it is related to
government expenditures, money supply and taxes”

This statement is true

13. Explain whether the following statement is true or false and detailed why:

“Monetary Policy is designed and executed by the monetary authority, and it is related to
quantity of money and exchange rate”

This statement is true because the monetary policy is the policy adopted by the
monetary authority of a nation, to influence the amount of money and credit in the
economy

14. Explain all the ways in which the government can execute a contractionary fiscal
policy

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 The government can execute a contractionary fiscal policy by decreasing its own
spending, raise taxes, or both.

15. Explain why the following statement is true or false:

“A labor market with many rigidities (like strong unions and minimum salary) typically
suffers both frictional and structural unemployment”

This statement is true because a labor market with many rigidities as a lot of movements
in the employments and so different type of unemployment

16. Explain what is the role of the financial system in an economy is (only what we
discussed together in class):

The role of the financial system in an economy is to help the growth of capital market

17. Explain why the following statement is true or false:

“The difference of nature between financial markets and financial intermediaries is the
following: Financial markets are independent from the financial system, but
intermediaries are dependent of the financial system”

This statement is false

18. Explain why the following statement is true or false:

“In macroeconomic analysis, investment (I) mostly depends on the interest rate”

This statement is true because interest rates play a key role in the determination of the
desired stock of capital and thus of investment. Because investment could be a process
through which capital is increased in one period to be used in future period

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 19. Explain why the following statement is true or false:

“Inflation is a high level of prices with increases in the value of money”

This statement is false because inflation rise in general price level and therefore the
value of money decrease

20. Explain why the following statement is true of false:

“An increase in taxes will necessarily increase national savings”

This statement is false because it will not necessarily increase national savings it
depends if the government is having a deficit or a surplus.

21. Explain the relationship between fiscal deficits and the market of loanable funds

The realationship between fiscal decifits and the markt of loanable funs is that the
fiscal deficits decrease the supply of loanable funds

22. Explain the relationship between capital inflows/outflows, interest rates and
exchange rates in open economies with free capital movements:

23. Explain what happens -and why- with the interest rate in the domestic market of
loanable funds when the government runs fiscal deficits (financed by domestic debt)

24. Explain what happens -and why- with the current account of balance of payments
when the government runs fiscal deficits (financed by domestic debt)

25. Explain what is the limit to expansionary fiscal policy (in other words, why the
government cannot expand fiscal policy with no limits

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