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VANCOUVER ISLAND UNIVERSITY

ECON100: PRINCIPLES OF ECONOMICS

MIDTERM EXAM II

Total marks 65: Duration: 75 Minutes

Name (Last, First): __________________________________

ID #: __________________________________

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THIS EXAM HAS TOTAL 11 PAGES INCLUDING THE COVER PAGE

Use of any electronics device except calculator is strictly prohibited during the exam – your cell/mobile phone could be your biggest enemy!!

Instructions:

a) Please answer your MCQs in the table on additional answer sheet supplied and short

question answers in the space provided.

b) For short answer questions

o You must show your all work to get full marks. If you do not show work, you may

not get full marks even for a correct answer.

o Use the marks assigned to each question as a guide to allocating your time

across questions.

Good luck on your exam

ECON100; Midterm II Exam March 20, 2013

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PART A: MCQ

(In this section there are 30 MCQs, which is worth 30 marks)

1. The circular flow of income illustrates a) that there is no relationship between goods markets and factor markets b) the interaction of households and firms through the factors and goods markets c) that the flow of payments moves in the same direction as the flow of goods d) the flows of expenditures and income in a household e) that firms own the factors of production

2. In a co-ordinate graph, with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the variable Y is poitive in the ________ quadrant.

a) top, left b) top, right c) bottom, left d) bottom, right

3. Economists usually assume that households and firms, respectively, maximize a) Savings and profits b) Utility and profits c) Income and sales d) Wages and revenues e) Expenditures and profits

4. All goods and services produced by one firm but used as inputs into a further stage of production are called

a) value added

b) intermediate goods

c) consumption goods

d) national income goods

e) final goods

5. Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies, ________ depreciation.

a) minus; plus; plus

b) plus; minus; plus

c) plus; plus; plus

d) plus; plus; minus

e) plus; minus; minus

6. In macroeconomics, the "output gap" is the difference between a) real and nominal national income b) output and employment c) output in the current year and output in the base year d) real GNP and real GDP e) potential GDP and actual real GDP


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7. If a country's labour force is 20 million people, and 18 million of those are employed, the country's unemployment

rate is a) 9.0 percent b) 3.3 percent c) 2.5 percent d) 10.0 percent e) 4.5 percent

8. If a country's “output gap” is zero, the country’s unemployment rate is

a) zero

b) the natural rate of unemployment

c) equal to the cyclical unemployment rate

d) undetermined

9. When the nominal GDP and the real GDP are the same

a) imports have risen more rapidly than exports

b) the general price level remains unchanged

c) improvements in product quality have not been reflected in prices

d) exports have risen more rapidly than imports

10. Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure to achieve full employment, it can generally be concluded that the larger this output gap, the

a) greater is the unemployment rate

b) more upward pressure there is on prices

c) lower the deadweight loss of unemployment

d) greater is the employment rate

e) lower is frictional unemployment

11. If nominal national income increased by 10 percent over a certain period of time while real national income increased by 20 percent, then

a) the price level has declined by about 10 percent

b) inflation has occurred during this time period

c) the labour force increased by 10 percent

d) everybody in the economy became worse off

e) the price level has increased by approximately 10 percent

12. Workers with marketable skills sometimes quit a job and become unemployed, with the expectation of soon finding a better job. This type of unemployment is called

a) historical unemployment

b) frictional unemployment

c) overly-optimistic unemployment

d) cyclical unemployment

e) structural unemployment

13. Inflation is best defined as

a) a sustained increase in wages

b) a rise in the value of money

c) a persistent rise in average prices

d) all of the above


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14. The group that tends to be most hurt by unexpected inflation is

a) individuals with unindexed pensions

b) banks

c) fixed-income earners

d) both individuals with unindexed pensions and fixed-income earners

e) employers

15. Economic theory argues that there will be fewer real effects from inflation as long as the a) actual rate of inflation is less than 5 percent b) anticipated rate of inflation is more than the actual rate of inflation c) whole private sector is unaware that it is happening d) anticipated rate of inflation is less than the actual rate of inflation e) inflation is fully anticipated and no one changes their behaviour

16. Inflation benefits a) all producers b) borrowers c) lenders d) all consumers

17. When there is a demand-pull inflation, prices rise and unemployment a) is constant b) decreases c) falls or rises d) rises

18. Supply shocks cause a) increases in GDP b) cost-push inflation c) demand-pull inflation d) falling wages

19. The velocity of money is

a) the time it takes for monetary policy to have an effect on world financial markets

b) the number of times per year a dollar is spent on final goods and services

c) the time it takes to produce money

d) the time lag from when the money supply is increased until the effect takes place

20. An unemployment rate of zero cannot be expected since

a) the economy can never create enough job vacancies

b) some portion of the labour force will always be between jobs

c) there are some people who do not want to work

d) there will always be discouraged workers

21. Which of the following is true?

a) When an economy is experiencing inflation, the average price level is rising and the value of money is falling b) Mild and steady inflation is more serious problem than unemployment. c) Unpredictable inflation rates are good because people are unsure when to stop spending d) Deflation, a fall in the average level of prices, is good


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22. The hands-on and hands-off camps agree about the

a) coordination between input and output markets b) importance of rising living standards c) fundamental macroeconomic question d) origins of business cycle

23. Government failure can occur because a) economies of scale fail to produce outcomes of public interest b) economics of scale or externalities exist c) it is easy to make ‘honest mistake’ in choosing macroeconomic policies d) externalities cause outcomes contrary to the public interest

24. The “mantra” for calculating GDP is a) b) c) d)

25. I f real GDP per person this year is $41,000 and real GDP per person last year was $40,000, then the growth rate per person is

a) 2.50% b) 3.00% c) 3.00% d) 4.50%

26. The business cycle phase that occurs just after the peak is a) an inflation b) a contraction c) an expansion d) a trough

27. If real GDP is growing at 5 percent per year a) real GDP will be double in 7 years b) potential GDP will double in 7 years c) real GDP will double in 14 years d) nominal GDP will double in 14 years

28. A country with the highest real GDP per person a) has the highest quality of life b) has the smallest population c) has the highest real GDP also d) does not necessarily have the highest quality of life

29. The natural rate of unemployment does not include which of the following?

a) Cyclical unemployment b) Seasonal unemployment c) The natural rate of unemployment includes all of the above d) frictional unemployment

30. Business fluctuations a) influence inflation but not unemployment b) can influence inflation and unemployment c) influence unemployment but not inflation d) have no influence on inflation and unemployment


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PART B: SAQ

(This section contains short answer question and is worth 35 marks)

Question 01 (8 marks)

In your own words, define GDP, the unemployment rate, inflation and deflation.

Gross Domestic Product (GDP) is roughly the market value of all products/services produced in

country in one year. Two types of GDP: Nominal GDP and Real GDP

Unemployment rate is the percentage of people who are unemployed and actively looking for jobs.

Inflation rate is the percentage change or the growth rate in the price level. When the percentage

change in the price level is negative it is called the deflation rate.


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Question 02 (7 marks)

Consider the following data for a hypothetical economy that produces two goods, milk and honey.

Quantity Produced Prices

Milk (Litres) Honey (Kg) Milk ($/Litre) Honey ($/Kg)

Year 1 100 40 2 6

Year 2 120 25 3 6

a. (4 marks) Using Year 1 as the base year, compute real GDP for each year.

b. (3 marks) What is the growth rate?

Economic growth rate or growth rate is the percentage change in the real GDP compared to the last year.

The economic growth rate was negative, -11.36%


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Question 03 (10 marks) A typical family on Sandy Island consumes only milk and honey. The table below provides with information on prices and quantities consumed by the family:

Items Prices

Milk (Litres) Honey (Kg) Milk ($/Litre) Honey ($/Kg)

Year 1 10 4 2 6

Year 2 10 4 3 6

a. (2 marks) Identify the consumer basket

The consumer basket contains two goods only: 100 litres of Milk and 40kg of Honey

b. (5 marks) Calculate the Consumer Price Index (CPI) for both years assuming last year as the base year

c. (3 marks) Calculate the CPI inflation rate

CPI Inflation rate is the percentage change in the CPI


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Question 04 (5 marks) What is the underground economy? Why it is concern when we calculate the GDP?

The underground economy consists of activities that are hidden from government either because they are illegal, or are legal but avoid taxes. Unreported legal activities include cash payments for home renovation or repairs and unreported tips earned by servers, taxi drivers, and other service workers. When GDP is calculated underground activities are not included. Policies are design based on the

official GDP. If the size of the underground economy is large, the official GDP would be lower than

“actual” GDP, and policies may not be very effective.

Question 05 (5 marks) In the first quarter of 2009, real GDP (measured in 2002 dollars) was $1292 billion and potential GDP was $1331 billion. What kind of gap existed and what was its size

GPD gap is the difference between the actual GDP and the potential GDP at any time period. When the gap is positive, it’s called inflationary/expansionary gap. If the gap is negative it’s called recessionary/deflationary gap.

The output gap is negative, so in the first quarter of 2009 the economy was suffering by a recession

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