Economics 1022B - 002/004 Mid-term 2March 13,2010

Use the figure below to answer the following question.

Figure 1

J 1) Refer to Figure 1, which shows the circular flow of expenditure and income for Venus. During2008, A was $100, B was $50, C was $30 and D was $10. How much is net exports?

A) $25.B) $30.

}J,$50.(E2J$1O.

E) None of the above.

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Use the table below to answer thefollowing question.

Table 1

Government expenditures on goods and servicesWages, salaries, and supplementary labour incomeDepreciationInvestmentConsumption expenditureNet exportsIndirect taxesStatistical discrepancy

1.5.QQ2,000

400:1-00

2,200__:.50150

o

/ 2) Refer to Table 1. Gross domestic product equals <:.... ~ C, .•...-r T X -,. V'-I\.

@)s3,050. '1.. '2.-"Ov .}. S'oC) ~ ~O 0 ~ S"\:JB) $3,400.C) $5,600. )0 $l)D) $3,150.E) $5,050.

V 3) Why is the Human Development Index thought to be a better measure of economic well-being thanreal GDP per person?

A) It ignores health, which is hard to measure.B) It includes a measure ofresource depletion.C) It includes leisure time and household production.D) It includes only health and education measures, ignoring real GDP per person.

®t includes health and education measures, as well as real GDP per person.

vi 4) In a country with a working-age population of22 million, 16 million are employed, 2 million areunemployed, and 1million of the employed are working part-time, half of whom wish to workfull-time. The involuntary part-time rate is .--A) 5 percent.cm 2.8 percent.

C) 6.3 percent.D) 12.5 percent.E) none of the above.

o.~--\~

5) Counting discouraged workers as unemployed wouldA) raise the full employment rate.~lower the measured unemployment rate.

0J)raise the measured unemployment rate.D) raise the natural unemployment rate.E) not change the measured unemployment rate.

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J 6) The reference base period is 2002. A consumer price index of @in 2009 means that \A) prices of consumer goods have gone up by a factor of 12.2. ~B) the market basket of consumer goods that cost $122 in 2002 can be purchased for $100 in

2009.C) if the price ofa good was $100 in 2002, its price in 2009 is $122.D) prices of consumer goods have more than doubled.

@the average of the prices paid by urban consumers for a fixed market basket of consumergoods and services was 22 percent higher in 2009 than it was on average during 2002.

Use the table below to answer thefollowing question.

Table 2Data From Southton

Price Price Quantity(dollars) (dollars) (number)

Item Base Current BaseRubberDucks 1.00 1.25 100Beach Towels 9.00 6.00 12

Ii 7) Refer to Table 2. From the data in Table 2, what is Southton's consumer price index for the currentyear?

A) 100.5/'m94.7L2) 105.6

D) 100E) 112

/ 8) Suppose a country is producing $20 million of real GDP. If the economy grows at 10 percent peryear, approximately how many years will to take for real GDP to grow to $80 million?@14

B) 3.5 yearsC)4D) 30E) 7

cA...o \A'o~ 4..0 \n

cLo~~ o.-.~c;.. \) Wl

C 9) Which of the following statements about Canada's long-term growth trends isfalse?AEconomic growth rates have generally been faster in Japan than in Canada. ./B)African countries have fallen further behind Canada in recent years.

/ C) Economic growth rates have been steady, except for the business cycle.~Ec.onomic growth rates show periods of slow and high growth.

~ E) Economic growth rates were faster in the 1990s than in the 1980s.

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J 10) Ceteris paribus, an increase in population results in a \ o';':'oQ-r!A) higher level of labour employed and higher potential GDP per hour of labour.

folower level oflabour employed and lower potential GDP per hour of labou~~onstant level of labour employed and constant potential GDP per hour of labour.@ higher level of labour employed and lower potential GDP per hour of lab~ur.

7f1ower level of labour employed and higher potential GDP per hour of labour.~

J 11) An increase in population results in (90PMan upward shift in the production function.®movement along the production function.4a leftward shift of the labour supply curve.fla rightward shift of the labour demand curve. L ~ D '--'

E) both Band Dare correct.

V 12) A decrease in the real interest rate leads to a the demand for loanable funds curve, and adecrease in ex ected rofit leads to a the demand for loanable funds curve.

• ) rightward shift of; leftward shift ofB)rightward shift of; movement up alongC) movement down along; rightward shift of

?,~10vement down along; movement ~p along<mJnovement down along; leftward Shift of ~,..f.r"Q..,.)./'Q.. ~-~~

13) A govemment budget deficit the demand for loanable funds, the real interestrate, and investment..Adecreases; increases; crowds out

,/ ..B)increases; decreases; increasesfC))ncreases; increases; crowds out15) increases; decreases; crowds out,%'decreases; increases; increases

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Refer to the table below to answer the following question.

Table 3

Realinterest rate

(percent per year)

Loanable fundsdemanded

(trillions of 2002dollars)

Loanable fundssupplied

(trillions of 2002dollars)

'/14) Refer to Table 3,The table shows an economy's demand for loanable funds and supply ofloanablefunds schedules when the government's budget is balanced. The quantity of loanable fundsdemanded increases by $1 trillion at each real interest rate and the quantity of loanable fundssupplied increases by $2 trillion at each real interest rate. If the government wants investment to be$9 trillion, it must its budget balance by trillion.

A) decrease; $1B) decrease; $1.5J2)increase; $1.5J21'increase; $2@ncrease; $1

45678910

8.5 q:5"8.0 0.,7.5 fb·S

7.0 'a6.5 .,:'56.0 ,

5.5 b.S

./15) Which one of the following is a component of M2 but not of Ml ?

~Personal non-chequable deposits.B) Personal chequable deposits.C) Currency in a bank vault.D) Canada Savings Bonds.E) Currency outside banks.

5.5 T'S6.0 'i6.5 e .57.0 '\7.5 t\. S8.0\08.5 lo."$"

/16) Suppose that a country has $50 billion in bank reserves, $100 billion in currency held by the

public, and $500 billion in bank deposits. The currency drain ratio isA) 50%.B) 10%.

@O%.D) 30%.E) 18%.

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/17) Quantecon is a country in which the quantity theory of money operates. The country has a constantpopulation, capital stock, and technology. In year 1, real GDP was $400 million, the price levelwas 200, and the velocity of circulation was 20.In year 2 the quantity of money was 20 perc~nt higher than in year 1. Y fThe quantity of money in year 1 was ~ -:.. ~The quantity of money in year 2 was '1 ~ 2,0The price level in year 2 is :')

A) $40 million; $48 million; 220 i..toD\ '? _ \. '-'{:/i)~1..-J1$80 million; $88 million; 200 ~ __ ::::-----4$20 million; 24 million; 240 10 ::: '-'a j;O t..I\~ $20 million; $24 million; 220 ~( 'f.')@J)$40 million; $48 million; 240 tI\ -::.(,,:,.o~

~""'"1.0

/ 18) Suppose that the Canadian dollar exchanges for 0.90 US. dollars and also for 0.65 Euros. A US.dollar exchanges for

A) 0.25 Euros.B) 1.55 Euros.C) 1.39 Euros.

@V>.72 Euros.E) 1.00 Euro.

j 19) Choose th~tatement.;,4The absence of a gap between the real CERI and the nominal CERI between 1997 and 2008results from the fact that the inflation rates in Canada and the other countries were similar.

~ In the CERI, each currency gets a weight that represents the importance of the currency inCanada's international trade.

AThe average ~f the exchange rates of the Canadian dollar agains~the U.S. dollar, the .European Umon euro, the Japanese yen, the UK. pound, the Chmese yuan, and the Mexican

>.--feso is the Canadian-dollar effective exchange rate index.D)).rhe nominal CERI and the real CERI appreciated constantly between 1997 and 2008.E) The CERI shows that the dollar depreciated on average from 1997-2002 and then appreciated

through 2007.

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/ 20) Which of the following factors influence the demand for Canadian dollars?/A) The exchange rate and the ~rld dem~d for Canad~<:~exp..?E:§.

B) Interest rates in Canada and other countries, and the expected future exchange rate.,J4:i'he world demand for Canadian exports and Canadian demand for imports.·(Qj)Both A and B.

~othBandC.

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/ 21) Suppose that people expect that the Canadian exch;mge rate will decrease in the near future. Howwill):his situation affect the Canadian exchange rate?/'f\) Neither the supply of Canadian dollars nor the demand for Canadian dollars changes.4The supply of Canadian dollars decreases, the demand for Canadian dollars decreases and the

_~xchange rate falls.;t:) The supply of Canadian dollars decreases, the demand for Canadian dollars increases and the

exchange rate rises.D) The supply of Canadian dollars increases, the demand for Canadian dollars decreases and the

~xchange rate rises.~~_he supply of Canadian dollars mcreases, the demand for Canadian dollars decreases and the

exchange rate falls.

J 22) Suppose the exchange rate between the Canadian dollar and the British pound is\QO.5poundS perdollar. If a radio sells for 38 pounds in Britain and purchasing power parity holds, what is thedollar price of the radio?

A) $19B) $26C) $38D) $57

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Use the information below to answer the following question.

Fact 1

You are given the following information about the country of Ecoland, whose currency is the turkey, and whoseofficial settlements balance is zero.

Variable Billions of turkiesReal GDPConsumption expenditureGovernment expenditure on goods and servicesInvestmentExportsGovernment budget deficit

50301211102

j23) Refer to Fact 1. What is the net exports?

A) 1 billion turkiesB) 3 billion turkiesC) -2 billion turkiesD) -1 billion turkies

@3 billion turkies

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Use the table below to answer thefollowing question.

Table 4

YearBorrowed from Rest of W orld

(billions of dollars)Loaned to Rest of World

(billions of dollars)20406080

123

cD

60606060

J 24) Refer to Table 4. IfMengia's official settlement balance was zero every year, for which year oryears can you say for sure there was a current account surplus?

,A')years 1 and 2 . .c~'ir,B)year 2 only o-"

@year40nlY~ years 2 and 3

E) years 3 and 4

25) Which of the following does not change short-run aggregate supply?AAn increase in the quantity of capital.~ change in the full-employment quantity of labour ..qA change in expected future profits.

~echnological change.~ change in the money wage rate.

/ 26) An increase in oil prices to a country that is Gt importe~of oil shiftsA) both the short-run aggregate supply and long-run aggregate supply curves leftward.B) both the short-run aggregate supply and long-run aggregate supply curves rightward.C) the short-run aggregate supply curve leftward, but shifts the long-run aggregate supply curve

rightward.D) the long-run aggregate supply curve rightward, but leaves the short-run aggregate supply

~lfve unchanged.~~e short-run aggregate supply curve leftward, but leaves the Iong-run aggregate supply curve

unchanged.

-- o---(-)

o--

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J 27) Which of the following situations illustrates how fiscal policy can influence aggregate demand?A) The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a

result, the aggregate demand curve shifts leftward.B) The exchange rate value of the Canadian dollar rises. As a result, people living near the

US-Canada border increase their imports of goods and net exports decrease.C) Investors, anticipating an erosion of financial wealth due to inflation, decide to save more.

As a result, aggregate demand decreases.@The government reduces the goods and services tax. As a result, consumption expenditure

increases and aggregate demand increases.E) Both A and C are examples of fiscal policy.

/ 28) Everything else remaining the same, an increase in the expected inflation rate

~

creates a movement up along the aggregate demand curve.B) ifts the aggregate demand curve rightward.

) shifts the short-run aggregate supply curve leftward.D) shifts the aggregate demand curve leftward.E) shifts the long-run aggregate supply curve rightward.

Use thefigure below to answer thefollowing question.

Price level (GDP defk:ior, 2002 ••1(lOlLAS

nolOO

90

80

70

60

~'fo-L-~L- __ L-~~~ __ ~_

o 320 360 JOO MO 480 520Reel GDr lbillions of 2002 001101"$)

Figure 2

v 29) Refer to Figure 2. If Econoworld automatically adjusts to a long-run equilibrium, then in thelong-run macroeconomic equilibriumVA) the price level is 70.v B) real GDP is $440 billion.Apotential GDP is greater than in the short run.

~actuallU1employment exceeds the natural unemployment rate.~othAandB.

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J 30) If real GDP is greater than potential GDP, the economy isA) in a below full-employment equilibrium.

rBDn an above full-employment equilibrium.Y) not in short-nm equilibrium.

D) in a recessionary equilibrium.E) in long-run equilibrium.

Use the table below to answer the following question.

Table 5

Short-RunAggregate Supply

(billions of 2002 dollars)

PriceLevel

(2002=100)

AggregateDemand

(billions of 2002 dollars)

Long-RunAggregate Supply

(billions of 2002 dollars)800700600') t; ';0500400

300400500 ')600700

600600600600600

100110120130140

V 31) Refer to Table 5. Consider the economy represented in the table. There isA) an inflationary gap equal to $100 billion.

@a recessionary gap equal to $50 billion.C) an inflationary gap equal to $50 billion. . 5SC>D) neither an inflationary nor a recessionary gap because the economy is at full employment. ~oE) a recessionary gap equal to $100 billion.

/ 32) Which of the following statements about the Keynesian view of the macroeconomy is incorrect?AExpectations are the most significant influence on aggregate demand.

~echnological change is the most significant influence on both aggregate demand andaggregate supply.

AExpectations are based on "animal spirits."rTO achieve and maintain full employment, active help from fiscal policy and monetary policyis required.

E) The money wage rate is extremely sticky in the downward direction so there is no automaticmechanism for eliminating a recessionary gap.

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S<®e>o---- ::::>

(. <U \ 00 V 10 ( 00;>

33) If a household's disposable income increases from $12,000 to $22,000 and at the same time itsconsumption expenditure increases from $4,000 to $9,000, then

~slope of the consumption function is 0.5. J,oO...;:) ~

B) the slope of the consumption function is 0.6.C) the household is dissaving.D) the marginal propensity to consume over this range is negative.E) the marginal propensity to save over this range is negative.

vl;-;)IWhen the consumption function lies below the 45° line, householdsV A) save all of any increase in disposable income. \

!Qare dissavinz. ,(9are saving s~me portion of their disposable income.D) consume more than their disposable income.E) spend all of any increase in disposable income.

Use the figure below to answer thefollowing question.

Aggregate pkmnsd expeooill1re(billions of 2002 ddl<ml

Ye Yb Yc

Reol GDP Ibillions of 2002 dollors]

Figure 3

There are no exports or imports in this economy.

C 35) Refer to Figure 3. When real GDP is equal to Ya, thenA) planned expenditure is equal to actual expenditure.B) the economy is in equilibrium.C) actual expenditure is less than planned expenditure.

(D) actual expenditure is greater than planned expenditure.E) real GDP decreases.

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f>'- 36) If AE = 50 + 0.6Y and y J~OO, then unplanned inventories...k'fincrease by 30.B) increase by 75.

%decrease by 30.(.!JJ. decrease by 75.';t) do not change and equilibrium exists.

y -z: 50 -\0 .\.:,y

o 1" 't ? ~O

'I -- \1...<;Use the table below to answer the following questions.

Table 6

The following table shows the relationship between aggregate plannedexpenditure and GDP in the hypothetical economy of Econoworld.

Real GDP(billions of 2002

dollars)

Aggregate plannedexpenditure

(billions of 2002 dollars)o

L 200400600800

100260 ) '2,l,v

420580740,

/ 37) Refer to Table 6. The equilibrium level of real GDP isA) $525 billion.

@$500 billionC) $450 billionD) $550 billion.E) none of the above.

y

v38) Refer to Table 6. The multiplierA) is 1.8.

, B) is 2.5.C9is5.D) is 4.E) cannot be determined without more information.

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I 39) ~i~in the price level .~ecreases aggregate expenditure and produces a movement along the aggregate demand

curve.)lJincreases aggregate expenditure, but has no effect on the aggregate demand curve.,9Ydecreases aggregate expenditure and produces a leftward shift of the aggregate demand

curve.D) has no effect on aggregate expenditure.E) decreases aggregate expenditure and produces a rightward shift of the aggregate demand

curve.

/40) Suppose that investment decreases by $15 billion. The multiplier is 2, and the short-run aggregatesupply curve is positively sloped. In the short TUn,equilibrium real GDP

~~ decreases by more than $30 billion.@)ldecreases by less than $30 billion.C»)Ioes 110tchange.D) decreases by $30 billion.E) increases by less than $30 billion.

Use the information below to answer thefollowing question.

Fact 2

The economy of Beverly Hills has a consumption function of C = 10+ 0.8Y, investment equal to 6, governmentexpenditure equal to 10, exports equal to 10, and an import. function of M = 0.1 Y .

.J41) Refer to Fact 2. What is equilibrium real GDP in this economy?

A) 36 _ ,./ ' / + ..L lr;,e:-@ 120 Y - )Xl.\ 0 .9 >' \- ~ FC) 130D) 360E) none of the above

o\y

y ~ --;(0 +"0 '\Yo . ?:. y -- "S \..:. y -~

42) At full employment an increase in the quantity ofmone (ceteris paribus) can create a/ A) demand-pull inflation, as canan increas~ 111 government expenditure.

~)demand-pull and a cost-push inflation, as can an increase in government expenditure.Acost-push inflation, as can an increase in government expenditure.

D) demand-pull inflation, but an increase in government expenditure cannot.~ost-push inflation, but an increase in government expenditure cannot.

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Use thefigure below to answer thefollowing question.

PriCil 1~·e.1(GD? cleflolor, 2002 = l 001

L~S

~'~~ __~~ __-L__k-~ __o 350400 450 SOO 550 600

Real GDf' (billions of 2002 ooll<1[s)

Figure 4

.~ 43) Refer to Figure 4. The economy is in long-run equilibrium. If the short-run aggregate supply curves~eftward from SASO to SASl, ceteris paribus, then people expec@)

,L. AUhe real wage rate to fall, by 10 percent./ffV 15 percent inflation. .

(.C) a real GDP decrease of $50 billion.)p{ 10 percent inflation.c.:vhe price level to rise to 110.

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Use thefigure below to answer the following question.

Price leve.l (GDP deflolor, 2002 = lOC>1!.AS SAS]

150

130t20

100

~.~--------~~--~~---O R"QIGDP(trillions,of 2002 doliat.$)

Figure 5

J 44) Refer to Figure 5. The figure illustrates an economy initially in equilibrium at point A. If thequantity of money is expected to increase by 50 percent, what is the rational expectation of theprice level?

A) 120B) 130C) 100D 150E) We cannot tell without more information on wage negotiations.

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Use the figure below to answer the following question.

Price leY<t1(GD? de!bjor. 2002 = WO~

!AS

120

80

~'~'--~----~--~--~----o 8 10 12104~lO'ClI GDf' (,ril!ion!, of 2002 ooilaf£l

Figure 6

J 45) Refer to Figure 6. Starting at point A, the initial effect of a demand-pull inflation is a move to point____ . As a demand-pull inflation spiral proceeds, it follows the path _

A) C; B, H, G, IB) E; 1C)B; E, G, I

(If))) C; E, H, 1Y) none of the above

;/ 46) If the natural unemployment rate risesA) the long-run Phillips curve shifts rightward and the short-run Phillips curve does not change.~the short-run and long-run Phillips curves both shift leftward.

(S)Ahe short-run and long-run Phillips curves both shift rightward.D) the short-run Phillips curve shifts rightward and the long-nm Phillips curve does not change.E) the long-run Phillips curve shifts leftward and the short-run Phillips curve does not change.

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Use the table below to answer the following question.

Table 7

Inflation Unemployment(percent peryear) (percent)

12 411 510_ 69 78 87 9

fA 47) Refer to Table 7. The table gives points on the short-run Phillips curve for the country ofRuritania. If the expected inflation rate is 10percent, and the inflation rate unexpectedly rises to 12percent and stays there for some period of time, the expected inflation rate becomes _percent and the natural unemployment rate is percent.

XI 12' 6-: B) 10;4410;6~12'5(§j12~4 ~

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Use thefigure below to answer thefollowing question.

LRPCa7

65

.3 w ._~v •• v __ ~ ._.~ .~-.----- _.- -

2 -·······:·····~··-·-I··········-L-..-....-..-

o 234567891011UI"IBmploymeflt role

!~r~nl'Q9'e of labour force)

Figure 7

J 48) Refer to Figure 7. The figure illustrates an economy's Phillips curves. If the current inflation rate is4 percent, what is the natural unemployment rate?

A) 3 percentB) 4 percent<9) percentD) 6 percentE) cannot be determined without more information

V 49) According to the real business cycle theory, what effects follow from a change in productivity?I. Investment demand changes.H. The demand for labour changes.HI. Goverrnnent expenditure changes.

A) I, Hand IHB) IT and lIT

,'q)I andIIb) I and IIIE)I

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J 50) Suppose that the business cycle in Canada is best described by RBC theory.An advance in technology increases productivity.The when-to-work decision depends on the real interest rate. The the real interest rate,other things remaining the same, the is the supply of labour today.RBC theorists believe the when-to-work effect is ----

A~higher; larger; smalldD/higher; larger; largeC) lower; larger; large .y:/

D) lower; smaller; smallE) higher; smaller; small

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