ECON 1000 D. Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work.

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1 It is most beneficial to you to write this mock midterm UNDER EXAM CONDITIONS. This means: Complete the midterm in 2.5 hours. Work on your own. Keep your notes and textbook closed. Attempt every question. After the time limit, go back over your work with a different colour or on a separate piece of paper and try to do the questions you are unsure of. Record your ideas in the margins to remind yourself of what you were thinking when you take it up at PASS. The purpose of this mock exam is to give you practice answering questions in a timed setting and to help you to gauge which aspects of the course content you know well and which are in need of further development and review. Use this mock exam as a learning tool in preparing for the actual exam. Please note: Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work. Often, there is not enough time to review the entire exam in the PASS workshop. Decide which questions you most want to review the Facilitator may ask students to vote on which questions they want to discuss in detail. Facilitators do not bring copies of the mock exam to the session. Please print out and complete the exam before you attend. Facilitators do not produce or distribute an answer key for mock exams. Facilitators help students to work together to compare and assess the answers they have. If you are not able to attend the PASS workshop, you can work alone or with others in the class. Good Luck writing the Mock Exam!! Dates and locations of mock exam take-up: Thursday, April pm ME 3380 Saturday, April pm in ME3380 Office Hour take up: Thursday April 12, 6-7pm 4 th Floor Library

2 PART A 1. Suppose that 25 years ago a country had nominal GDP of 1000, a GDP deflator of 100, and a population of 100. Today, that country has a nominal GDP of 3000, a GDP deflator of 200, and a population of 150. What happened to the real GDP per person? a. It more than doubled. b. It rose, but less than doubled. c. It fell. d. It did not change. 2. If the production function for an economy had constant returns to scale, the labour force doubled, and all other inputs stayed the same, what would happen to real GDP? a. It would stay the same. b. It would increase by 50 percent. c. It would increase, but by something less than double. d. It would double. 3. In computing GDP, what is investment? a. Spending on stocks, bonds, and other financial assets b. spending on real estate and financial assets c. spending on new capital equipment, inventories, and structures, including new housing d. spending on capital equipment, inventories, and structures, excluding household purchases of new housing 4. How does the supply of loanable funds curve slope? a. upward because an increase in the interest rate induces people to save more b. downward because an increase in the interest rate induces people to save less c. downward because an increase in the interest rate induces people to invest less d. upward because an increase in the interest rate induces people to invest more

3 5. What is the effect of anything that makes the efficiency wage rise relative to the market-clearing wage? a. It increases both the quantity demanded and the quantity supplied of labour. b. It decreases both the quantity demanded and the quantity supplied of labour. c. It increases the quantity demanded and decreases the quantity supplied of labour. d. It decreases the quantity demanded and increases 6. How can the Bank of Canada directly protect a bank during a bank run? a. by increasing reserve requirements b. by selling government bonds to the bank c. by lending reserves to the bank d. by penalizing the bank in trouble 7. When the money market is depicted in a graph with the value of money on the vertical axis, as the price level increases, how does the quantity of money demanded or supplied change? a. The quantity of money demanded increases. b. The quantity of money demanded decreases. c. The quantity of money supplied increases. d. The quantity of money supplied decreases. 8. Which of the following best characterizes the effects of monetary policy? a. Monetary policy is neutral in both the short run and the long run; therefore, it does not affect real variables. b. Monetary policy is neutral in the long run, but it has big effects on real variables in the short run. c. Monetary policy has big effects on real variables in both the short run and the long run. d. Monetary policy has big effects on real variables in the long run, but is neutral in the short run. 9. According to the theory of purchasing-power parity, what must the nominal exchange rate between two countries reflect? a. the different price levels in those countries b. the different resource endowments in those countries c. the different income levels in those countries d. the different standards of living between those countries

4 10. When a country s central bank decreases the money supply, which of the following best predicts the consequences? a. Its price level rises, and its currency appreciates relative to other currencies in b. Its price level falls, and its currency appreciates relative to other currencies in c. Its price level rises, and its currency depreciates relative to other currencies in d. Its price level falls, and its currency depreciates relative to other currencies in 11. In an open economy, which of the following does the market for loanable funds take as given? a. saving b. investment c. exchange rate d. real interest rate 12. What is net capital outflow equal to? a. national saving minus the trade balance b. domestic investment plus national saving c. national saving minus domestic investment d. domestic investment minus national saving 13. When taxes increase, consumption decreases. How is this situation represented in the aggregate demand and aggregate supply model? a. by a movement to the left along a given aggregate-demand curve b. by shifting aggregate demand to the left c. by shifting aggregate supply to the left d. by a movement to the right along a given aggregate-supply curve 14. Which of the following would cause prices to fall and output to rise in the short run? a. Short-run aggregate supply shifts right. b. Short-run aggregate supply shifts left. c. Aggregate demand shifts right. d. Aggregate demand shifts left.

5 15. When the interest rate increases, how do the opportunity cost of holding money and the quantity of money demanded change? a. The opportunity cost of holding money increases, so the quantity of money demanded increases. b. The opportunity cost of holding money increases, so the quantity of money demanded decreases. c. The opportunity cost of holding money decreases, so the quantity of money demanded increases. d. The opportunity cost of holding money decreases, so the quantity of money demanded decreases. 16. Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase? a. the crowding-out effect b. the multiplier effect c. the wealth effect d. the interest-rate effect 17. In which of the following situations would the long-run aggregate-supply curve shift right? a. if the government were to increase the minimum-wage b. if the government were to make unemployment benefits more generous c. if the government were to raise taxes on investment spending d. if the government were to increase immigration 18. If policymakers expand aggregate demand, what happens to inflation and unemployment? a. Inflation falls, but unemployment rises. b. Inflation and unemployment fall. c. Inflation and unemployment rise. d. Inflation rises, but unemployment falls. 19. How is a college student who is not working or looking for a job counted? a. as neither employed nor part of the labour force b. as unemployed and in the labour force c. as unemployed, but not in the labour force d. as employed and in the labour force

6 20. Suppose the economy goes into recession. Which of the following is a list of things policymakers could do to try to end the recession? a. increase the money supply, increase taxes, and increase government spending b. increase the money supply, increase taxes, and decrease government spending c. increase the money supply, decrease taxes, and increase government spending d. decrease the money supply, increase taxes, and decrease government spending 21. An Italian company opens a pasta company in Ottawa. Where are the profits from this pasta company included? a. in both Canadian and Italian GNP b. in both Canadian and Italian GDP c. in Canadian GNP and Italian GDP d. in Canadian GDP and Italian GNP 22. In a closed economy, what does (T G) represent? a. national saving b. investment c. private saving d. public saving 23. Based on the quantity equation, if M = 125, V = 4, and Y = 200, what is P? a. 0.5 b. 1 c. 1.5 d If a central bank wanted to increase the money supply, which of the following would it most likely do? a. It would make open-market purchases and lower the overnight rate. b. It would make open-market sales and lower the overnight rate. c. It would make open-market purchases and raise the overnight rate. d. It would make open-market sales and raise the overnight rate.

7 25. When a country s central bank decreases the money supply, which of the following best predicts the consequences? a. Its price level rises, and its currency appreciates relative to other currencies in b. Its price level falls, and its currency appreciates relative to other currencies in c. Its price level rises, and its currency depreciates relative to other currencies in d. Its price level falls, and its currency depreciates relative to other currencies in 26. According to Liquidity Preference Theory, what are the effects of a decrease in the price level? a. People hold less money, so they sell bonds, and the interest rate rises. b. People hold less money, so they buy bonds, and the interest rate falls c. People hold more money, so they buy bonds, and the interest rate rises. d. People hold more money, so they sell bonds, and the interest rate falls. 27. Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase? a. the crowding-out effect b. the multiplier effect c. the wealth effect d. the interest-rate effect 28. When aggregate demand is high, how are unemployment, wages, and prices affected? a. Unemployment is low, so there is upward pressure on wages and prices. b. Unemployment is low, so there is downward pressure on wages and prices. c. Unemployment is high, so there is upward pressure on wages and prices. d. Unemployment is high, so there is downward pressure on wages and prices. 29. Refer to the table below. What is the reserve ratio? a. 0 percent 20 b. percent c. 25 percent d. 80 percent Bank of ECON 1000 Assets: $ Liabilities: $ Reserves 20 Deposits 100 Loans 80

8 30. What is the formula for investment in an open economy? a. I = Y C b. I = S c. I = S NCO d. I = S + NX PART B (Try to answer all) 1. Fruitland is a closed economy that always produces and consumes 50 apples and 50 bananas. Initially both apples and bananas cost $1 each. Then demand shifts, so the price of apples doubles to $2 and the price of bananas halves to 50 cents, but production and consumption of apples and bananas stays the same. Calculate the effect on: nominal GDP, real GDP, the GDP deflator, and the Consumer Price Index. 2. Explain the differences between: a) Gross Domestic Product and Gross National Product b) the Consumer Price Index and the GDP Deflator c) Net Investment and Gross Investment 3. Explain how and why a permanent increase in the level of saving will affect the long run growth rate of real GDP. Will the effect on the growth rate get bigger or smaller over time? Explain. 4. Explain why firms might want to pay an Efficiency Wage. Explain why this might cause unemployment. 5. If banks are required by law to keep 100% reserves, explain how the supply of money would be affected if the Bank of Canada purchased $1 million worth of bonds. Now if explain how your answer would be different if the law was changed so banks keep less than 100% (fractional) reserves. 6. A) Explain what each of the four terms in MV=PY means. B) If V is constant and real income grows at 3% per year, what would the Bank of Canada need to do to hit its target of 2% inflation? C) According to the Fisher equation, what would happen to real and nominal interest rates in the long run if the Bank of Canada raised its inflation target from 2% to 4%?

9 7. Explain what is meant by Purchasing Power Parity. Explain why PPP might work and what might prevent it from working. According to this theory, explain what would happen to the Canada/US exchange rate, if Canada has 2% inflation while the US has 0% inflation. 8. Draw the Long Run Aggregate Supply Curve and Short Run Aggregate Supply Curve. Describe two theories that explain why those curves are different. 9. Draw a diagram with a Long Run Phillips Curve and Short Run Phillips Curve. Explain what is assumed about expected inflation for each of those two curves. Explain what happens to unemployment and expected inflation in the short run and in the long run if the actual rate of inflation increases from 2% to 4%. 10. Suppose the Canadian government puts restrictions on imports. Explain, with the aid of diagrams, how this policy would affect Net Exports and the real exchange rate PART C (Try to answer all) 1. Suppose Canada is initially on the Long Run Aggregate Supply curve, but the national debt is increasing over time because the government is running a budget deficit. The government decides to cut spending to eliminate the deficit to stop the debt rising. Critics say that this policy will cause a recession. Explain, with the aid of diagrams, whether the critics are right or wrong, assuming a flexible exchange rate. Explain whether your answer would be different if the Bank of Canada had a fixed exchange rate policy. 2. With the aid of a diagram, explain the trade-off between unemployment and inflation, both for the Long Run and for the Short Run. The Bank of Canada currently targets 2% inflation. Explain the advantages and disadvantages of lowering the inflation target to 0% 3. Canada is a small open economy. There is a large increase in savings in the rest of Explain with the aid of diagrams how this affects the world interest rate, and how this affects the Canadian interest rate, Canadian savings and investment, Canada s net capital outflow, net exports, and the exchange rate.