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. 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 Kyoto b. a used Canadian-produced computer bought by a French citizen living in Ontario c. a new Japanese radio bought by a Canadian citizen in Alberta d. A Canadian pianist's concert sales in Britain e. stock in the Canadian firm Research in Motion bought by a Russian citizen 4. The chief economic cost of unemployment is a. the value of the leisure that is lost when people are unemployed b. the cost to employed citizens of paying unemployment benefits c. money spent on the job search process d. the chance that the unemployed might turn to crime to support themselves e. the value of output that could have been produced, but is not

5. Assume that a countrys 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 percent b. 3.7 percent c. 4.4 percent d. 7.0 percent e. 7.7 percent 6. Using the table below, calculate GDP for a particular year. Wages and salaries Government purchases of goods and services Exports Rental income Consumption spending Transfer payments Private investment spending Profit Imports Interest income Purchases of corporate stock Based on the above information, GDP in this year was a. $4,100 b. $4,300 c. $4,400 d. $4,600 e. $4,900 7. Prices of finished imported goods are a. not included in the CPI because the goods were produced outside the country b. not included in the CPI because different countries choose different base periods c. not included in the CPI because import prices are not denominated in Canadian dollars d. not included in the CPI because most imports are raw materials e. 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. $14.62 b. $15.00 c. $15.59 d. $16.00 e. His real wage for 2001 cannot be determined with the information given. $2,000 $500 $800 $300 $3,000 $300 $600 $1,200 $600 $800 $500

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 percent b. 4 percent c. -4 percent d. 1 percent e. 0 percent 11. According to Say's Law, in the aggregate a. demand creates its own supply b. the production of output will generate exactly enough income to purchase what has been produced c. the economy is incapable of producing output fast enough to ensure full employment d. full employment cannot be sustained without government action e. 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 Net Taxes Household Saving Investment Spending Government Purchases a. b. c. d. e. $0.3 trillion $2.2 trillion $2.5 trillion $3.0 trillion $5.2 trillion $3.5 trillion $2.7 trillion $2.5 trillion $2.2 trillion $3.0 trillion

13. According to the classical model, an increase in government purchases will a. lead to a change in the interest rate that encourages consumers to spend more b. lead to a change in the interest rate that encourages private businesses to invest more c. discourage private spending by increasing the price level d. be partially offset by a decline in consumption and investment spending e. 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 spending b. the supply of loanable funds includes only business investment spending c. the loanable funds market cannot be in equilibrium d. the supply of loanable funds includes only household saving e. 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 equipment b. an increase in educational attainment of the population c. a shift to earlier retirement d. an increase in population e. an increase in the number of two-family households 17. For the capital stock to grow, production of capital goods must a. exceed the inflation rate b. exceed 15 percent of GDP c. exceed the depreciation of existing capital d. increase from the previous year e. exceed the growth of the labor force

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 by a. $400 billion and leave the interest rate unchanged b. $100 billion and leave the interest rate unchanged c. $200 billion and leave the interest rate unchanged d. $100 billion and increase the interest rate by 2 percentage points e. $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 billion b. leave the interest rate and investment spending unchanged c. lower the interest rate to 6 percent and increase investment spending to $500 billion d. lower the interest rate to 6 percent and increase investment spending to $550 billion e. leave the interest rate unchanged at 8 percent but increase investment spending to $550 billion 20. If a new computer program was developed that dramatically improved productivity in most firms, what would happen in the labor market?

a. b. c. d. e.

The real wage would not change but employment would decrease. The real wage would increase and employment would decrease. The real wage would decrease and so would employment. The real wage would decrease and employment would increase. 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 income b. an increase in disposable income c. an increase in the interest rate d. more optimistic expectations about future income e. 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. 0.25 b. 1.0 c. 1.75 d. 0.75 e. 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 will a. decline as firms cut production to stop the buildup of inventories b. decline as firms increase their prices to stop the buildup of inventories c. increase as firms increase production to try to stop depletion of inventories d. increase as firms cut their prices to try to stop depletion of inventories e. 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. $0 b. $150 billion c. $200 billion d. $266.7 billion e. $800 billion 26. If the MPC is 0.75, what is the value of the tax multiplier?

a. b. c. d. e.

-1.33 3.0 4.0 -3.0 -4.0

27. Credit cards a. are considered money because they are a means of payment b. are not considered money and thus are not of importance to the monetary authority c. are not considered money but are important because they may affect how much people hold in M1 and M2 d. are counted in the money supply as part of M3 e. 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 countrys central bank lowered the required reserve ratio, a. excess reserves would decrease b. banks would reduce their loans c. the money supply would increase d. banks would borrow more from the Fed e. loans would earn more interest 30. Suppose you move some of your chequing account balance into your saving account a. M2 falls and M1 rises b. M1 falls and M2 rises c. M1 and M2 are unchanged d. M1 falls and M2 remains unchanged e. Not enough information provided to answer the question

Short Answers (45 marks) Note: Only answers written with a pen are eligible for regrading. 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 Targets 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 Canadas Real GDP to double?

________________________________________________________________________ DO NOT WRITE BELOW THIS LINE

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 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 Angelas bank decided to keep her deposit as excessive reserves by how much would deposits in the entire banking system increase? Explain in a sentence.

6.( 4 marks) Why do economists not believe that increasing an economys 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?

Multiple Choice Answers 1b

2e 3a 4e 5d 6b 7e 8b 9e 10 a 11 b 12 c 13 e 14 a 15 c 16 b 17 c 18 d 19 c 20 e 21 c 22 d 23 a 24 a 25 e 26 d 27 c 28 a 29 c 30 d