e105practice midterm

19
Economics 105 Practice Midterm Examination Name: ____________________________________ Student Number: _____________ Tutorial Group: __________________ TA: ___________________________________ The exam will be graded out of a total of 90 marks. Multiple Choice (45 marks – 1.5 marks per question) Select the best answer and record it on the answer sheet provided. 1. An economist claims that “the evidence suggests that high rates of inflation are associated with slow long term economic growth.” This is an example of a . Normative economics. b . Positive economics c . Negative economics d . A simplifying assumption e . Microeconomic analysis 2. What is the difference between an intermediate good and a final good? a . Final goods are adjusted for depreciation, intermediate goods are not. b . Final goods are adjusted for changes in the value of the dollar, intermediate goods are not. c . In GDP calculations, final goods are counted as consumption spending, intermediate goods are counted as private investment spending. d There is no meaningful difference between them.

Upload: michael-nguyen-huu-pham

Post on 24-Oct-2014

589 views

Category:

Documents


1 download

TRANSCRIPT

Page 1: E105Practice Midterm

Economics 105 Practice Midterm Examination

Name: ____________________________________ Student Number: _____________

Tutorial Group: __________________ TA: ___________________________________

The exam will be graded out of a total of 90 marks.

Multiple Choice (45 marks – 1.5 marks per question) Select the best answer and record it on the answer sheet provided.

1. An economist claims that “the evidence suggests that high rates of inflation are associated with slow long term economic growth.” This is an example ofa. Normative economics.b. Positive economicsc. Negative economicsd. A simplifying assumptione. Microeconomic analysis

2. What is the difference between an intermediate good and a final good?a. Final goods are adjusted for depreciation, intermediate goods are not.b. Final goods are adjusted for changes in the value of the dollar, intermediate goods

are not.c. In GDP calculations, final goods are counted as consumption spending,

intermediate goods are counted as private investment spending.d. There is no meaningful difference between them.e. Final goods are finished and ready for sale; intermediate goods require further

processing.

3. Which of the following would be counted in Canadian GDP?a. a new Canadian-produced radio bought by a Japanese citizen living in Kyotob. a used Canadian-produced computer bought by a French citizen living in Ontarioc. a new Japanese radio bought by a Canadian citizen in Albertad. A Canadian pianist's concert sales in Britaine. stock in the Canadian firm Research in Motion bought by a Russian citizen

4. The chief economic cost of unemployment isa. the value of the leisure that is lost when people are unemployedb. the cost to employed citizens of paying unemployment benefitsc. money spent on the job search processd. the chance that the unemployed might turn to crime to support themselvese. the value of output that could have been produced, but is not

Page 2: E105Practice Midterm

5. Assume that a country’s working age population is 160 million. Of those 60 million are classified as out of the labour force, and 7 million are unemployed, what is the unemployment rate?a. 2.7 percentb. 3.7 percentc. 4.4 percentd. 7.0 percente. 7.7 percent

6. Using the table below, calculate GDP for a particular year.

Wages and salaries $2,000Government purchases of goods and services $500Exports $800Rental income $300Consumption spending $3,000Transfer payments $300Private investment spending $600Profit $1,200Imports $600Interest income $800Purchases of corporate stock $500

Based on the above information, GDP in this year wasa. $4,100b. $4,300c. $4,400d. $4,600e. $4,900

7. Prices of finished imported goods area. not included in the CPI because the goods were produced outside the countryb. not included in the CPI because different countries choose different base periodsc. not included in the CPI because import prices are not denominated in Canadian

dollarsd. not included in the CPI because most imports are raw materialse. included in the CPI

8. Assume that Ernesto earned a nominal wage rate of $15 per hour in 2001, the base year for the CPI. If the CPI in 2002 was 102.6 and his nominal wage rate was $16 per hour, what was his real wage rate in 2001?a. $14.62b. $15.00c. $15.59d. $16.00e. His real wage for 2001 cannot be determined with the information given.

Page 3: E105Practice Midterm

9. Suppose the Consumer Price Index (CPI) increased by 5 percent over each of the last 5 years while the GDP price index increased by 12 percent annually. Which of the following reasons could explain this difference?a. Police unions across the country agreed to substantial salary cuts.b. Import good prices increased relative to domestic good prices.c. The price of used automobiles increased substantially relative to the prices of other

goods.d. The price of fighter planes dropped due to increased competition in the aerospace

industry.e. The price of investment goods purchased by businesses increased substantially

relative to the prices of all other goods.

10. If a lender charged a 9 percent nominal interest rate and the expected inflation rate is 4 percent, what is the difference between the real rate the lender received and the real rate the lender expected when actual inflation ended up being 2 percent?a. 2 percentb. 4 percentc. -4 percentd. 1 percente. 0 percent

11. According to Say's Law, in the aggregatea. demand creates its own supplyb. the production of output will generate exactly enough income to purchase what has

been producedc. the economy is incapable of producing output fast enough to ensure full

employmentd. full employment cannot be sustained without government actione. consumer saving prevents the economy from reaching full employment

12. Assuming the economy was in equilibrium, use the following information to determine the total amount of funds demanded in the loanable funds market.

Consumption Spending $3.5 trillionNet Taxes $2.7 trillionHousehold Saving $2.5 trillionInvestment Spending $2.2 trillionGovernment Purchases $3.0 trillion

a. $0.3 trillionb. $2.2 trillionc. $2.5 trilliond. $3.0 trillione. $5.2 trillion

Page 4: E105Practice Midterm

13. According to the classical model, an increase in government purchases willa. lead to a change in the interest rate that encourages consumers to spend moreb. lead to a change in the interest rate that encourages private businesses to invest

morec. discourage private spending by increasing the price leveld. be partially offset by a decline in consumption and investment spendinge. leave total spending and output unchanged

14. When the government is running a budget surplus,a. the demand for loanable funds includes only business investment spendingb. the supply of loanable funds includes only business investment spendingc. the loanable funds market cannot be in equilibriumd. the supply of loanable funds includes only household savinge. there will be an excess supply of loanable funds

15. If labor supply decreases, what will happen to the real wage rate, employment, and real output, assuming no change in labor demand?a. The real wage will increase, employment will decrease, and real output will

increase.b. The real wage will decrease, employment will decrease, and real output will

increase.c. The real wage will increase, employment will decrease, and real output will

decrease.d. The real wage will increase, employment will increase, and real output will

increase.e. The real wage will decrease, employment will increase, and real output will

increase.

16. Which of the following is a reason why the labor demand curve would shift rightward?a. a decrease in the amount of capital equipmentb. an increase in educational attainment of the populationc. a shift to earlier retirementd. an increase in populatione. an increase in the number of two-family households

17. For the capital stock to grow, production of capital goods musta. exceed the inflation rateb. exceed 15 percent of GDPc. exceed the depreciation of existing capitald. increase from the previous yeare. exceed the growth of the labor force

Page 5: E105Practice Midterm

18. Refer to Figure 8-3. An investment tax credit that increases the demand for loanable funds from D1 to D2 will increase investment spending bya. $400 billion and leave the interest rate unchangedb. $100 billion and leave the interest rate unchangedc. $200 billion and leave the interest rate unchangedd. $100 billion and increase the interest rate by 2 percentage pointse. $200 billion and increase the interest rate by 2 percentage points

19. Refer to Figure 8-5. An increase in the supply of loanable funds from S1 to S2 will, everything else equal,a. lower the interest rate to 6 percent and investment spending to $350 billionb. leave the interest rate and investment spending unchangedc. lower the interest rate to 6 percent and increase investment spending to $500

billiond. lower the interest rate to 6 percent and increase investment spending to $550

billione. leave the interest rate unchanged at 8 percent but increase investment spending to

$550 billion

Page 6: E105Practice Midterm

20. If a new computer program was developed that dramatically improved productivity in most firms, what would happen in the labor market?a. The real wage would not change but employment would decrease.b. The real wage would increase and employment would decrease.c. The real wage would decrease and so would employment.d. The real wage would decrease and employment would increase.e. The real wage would increase and so would employment.

21. What would lead to a decrease in autonomous consumption spending?a. a decrease in disposable incomeb. an increase in disposable incomec. an increase in the interest rated. more optimistic expectations about future incomee. an increase in wealth

22. If real disposable income increased by $10,000 and real consumption spending increased by $7,500, what is the marginal propensity to consume (MPC)?a. 0.25b. 1.0c. 1.75d. 0.75e. 1.25

23. What is the difference between actual investment (as defined in GDP) and planned investment?a. Planned investment does not include unplanned inventory changes; actual

investment does.b. There is no difference; they are the same.c. Planned investment does not include depreciation; actual investment does.d. Planned investment includes inventories; actual investment does not.e. Planned investment includes depreciation; actual investment does not.

24. In the short-run macro model, if aggregate expenditure is less than GDP, output willa. decline as firms cut production to stop the buildup of inventoriesb. decline as firms increase their prices to stop the buildup of inventoriesc. increase as firms increase production to try to stop depletion of inventoriesd. increase as firms cut their prices to try to stop depletion of inventoriese. remain unchanged indefinitely unless government takes action

25. If the marginal propensity to consume is 0.75 and investment spending increases by $200 billion, by how much will equilibrium output increase?a. $0b. $150 billionc. $200 billiond. $266.7 billione. $800 billion

Page 7: E105Practice Midterm

26. If the MPC is 0.75, what is the value of the tax multiplier?a. -1.33b. 3.0c. 4.0d. -3.0e. -4.0

27. Credit cardsa. are considered money because they are a means of paymentb. are not considered money and thus are not of importance to the monetary authorityc. are not considered money but are important because they may affect how much

people hold in M1 and M2d. are counted in the money supply as part of M3e. are considered money when held by the public

28. If the Bank of Canada purchases a $2,000 bond from a bond dealer who deposits the check in a bank, what changes will occur on that bank's balance sheet?a. Reserves, demand deposits, total assets, and total liabilities will all increase by

$2,000.b. Reserves and assets will increase by $2,000; demand deposits and total liabilities

will decrease by $2,000.c. Reserves and total assets will decrease by $2,000; demand deposits and total

liabilities will increase by $2,000.d. Reserves and total liabilities will decrease by $2,000; demand deposits and total

assets will increase by $2,000.e. Reserves and assets will increase by $2,000; demand deposits and total assets will

decrease by $2,000.

29. If a country’s central bank lowered the required reserve ratio,a. excess reserves would decreaseb. banks would reduce their loansc. the money supply would increased. banks would borrow more from the Fede. loans would earn more interest

30. Suppose you move some of your chequing account balance into your saving accounta. M2 falls and M1 risesb. M1 falls and M2 risesc. M1 and M2 are unchangedd. M1 falls and M2 remains unchangede. Not enough information provided to answer the question

Page 8: E105Practice Midterm

Short Answers (45 marks) Note: Only answers written with a pen are eligible for re-grading. WRITE ONLY IN THE SPACE PROVIDED.

1. (9 marks) (3 marks each)

(a) Last year the giant U.S retailer Target stores had sales of $600 million. This $600 million represents Target’s contribution to U.S. GDP last year? Agree or disagree?

(b) How is cyclical unemployment measured?

(c) According to the Rule of 70, if the Canadian real GDP is growing at an annual rate of 4%, how many years will it take for Canada’s Real GDP to double?

________________________________________________________________________ DO NOT WRITE BELOW THIS LINE

Page 9: E105Practice Midterm

2. (5 marks) By putting out fires firefighters provide a useful service for society, but since they are provided by the government “free” there is no market price associated with their services. In the expenditure approach to measuring GDP how is the value of firefighting services accounted for?

3. (5 marks) Suppose there are only two consumption goods in the Canadian the economy: apples and oranges. And further suppose that over time the prices of apples and oranges are both increasing, but the price of apples is increasing at a more rapid rate. In these circumstances explain why Statistics Canada will adjust the consumption bundle in the next revision of the Consumer Price Index (CPI).

________________________________________________________________________ DO NOT WRITE BELOW THIS LINE

Page 10: E105Practice Midterm

4. (8 marks) In the market for loanable funds suppose that the demand for funds comes solely from the demand for funds by the government to finance its deficit. That is firms demand no funds for investment at any interest rate.If the government reduces its spending, and reduces but does not eliminate the government deficit, what impact will this have on the equilibrium interest rate and the level of consumption spending? Briefly explain using a diagram to illustrate your answer.

5. (6 marks) (a) Suppose that Angela deposits $1,000 of currency (“cash”) into her account at her local bank. If the required (or “desired” in Canada) reserve ratio (RRR) is 0.05 for the banking system, what is the maximum amount by which deposits in the entire banking system could increase? Show how you calculated your answer.

(b) If Angela’s bank decided to keep her deposit as excessive reserves by how much would deposits in the entire banking system increase? Explain in a sentence.

Page 11: E105Practice Midterm

6.( 4 marks) Why do economists’ not believe that increasing an economy’s Employment Population Ratio (EPR) is a way to create sustained economic growth?

7. (8 marks) In the classical model, what would have to happen to the labour supply curve to cause a recession in the economy? (b) Give two reasons why do economists not regard that as a plausible explanation of a recession?

Page 12: E105Practice Midterm

Multiple Choice Answers

1 b2 e3 a4 e5 d6 b7 e8 b9 e10 a11 b12 c13 e14 a15 c16 b17 c18 d19 c20 e21 c22 d23 a24 a25 e26 d27 c28 a29 c30 d