Question

Scenario: Country X and Country Y production amount of physical capital stock available to each country is also equal. However, the labor supply for Country X is Ho while the labor supply for Country Y is Hy identical aggregate production functions as shown in the figure below. The Output 0 H, H, Efficiency units of Labor 8) Refer to the scenario above. A one-unit increase in the efficiency units of labor will lead to in output in Country X than in Country Y A) a larger increase C) a smaller increase B) a larger decrease D) a smaller decrease will lead to an increase in the GDP of a country, all other variables 9) Which of the following remaining unchanged? A) A fall in the expenditure incurred by the government B) An increase in consumption expenditure C) An increase in imports D) A fall in the expenditure on investment goods 10) 10) Which of the following creates an incentive to increase the amount of an activity? A) an increase in the marginal cost of the activity and a decrease in the marginal benefit of the activity B) a decrease in the marginal cost of the activity and an increase in the marginal benefit of the activity C) constant marginal cost and constant marginal benefit of the activity D) None of the above create an incentive to increase the amount of an activity during a recession A) labor supply curve shifts to the left C) labor demand curve shifts to the left B) labor demand curve shifts to the right D) labor supply curve remains unaffected 11) An economy's 2 B) output falls D) inflation rises 12) Assuming all else equal, when the labor demand curve shifts to the left, A) equilibrium wage rises C) unemployment falls D-2

Answer 1

8. Due to large supply of labour, diminishing returns operate in country Y. So every addition of labour contributes less than proportion increase in output. But in country X every addition of labour contribute more than proportionate increase in output.

Answer: A. a larger increase.

9. The level of GDP is determined by the aggregate demand. The components of aggregate demand are consumption, investment, government purchase and net export(C+I+G+Nx). The aggregate demand increase when anyone of these components increases and the GDP also increase accordingly.

Answer: B. An increase in consumption expenditure. (fall in government expenditure, increase in import and fall in expenditure on investment goods actually decrease the GDP)

10. While doing an activity the economic unit compares the marginal cost and marginal benefit of the activity. It is profitable to undertake an economic activity if the marginal benefit is greater than the marginal cost. Thus the incentive to an economic activity increases when the marginal cost decreases and marginal benefit increase.

Answer: B. a decrease in the marginal cost of the activity and an increase in the marginal benefit of the activity.

11. During recession the price level decreases which result in decreased profit for the firms. The firms lay off the workers. Thus there will be less demand for workers. This cause the labour demand curve to shift to the left.

Answer: C. labour demand curve shift to the left.

12. Less workers are demanded when the firms reduce the volume of output. Thus with fall in demand for labour, the output also falls.

Answer: B. output falls.