ECO 100Y L0201 INTRODUCTION TO ECONOMICS. Midterm Test # 4

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1 Department of Economics Prof. Gustavo Indart University of Toronto March 20, 2009 ECO 100Y L0201 INTRODUCTION TO ECONOMICS Midterm Test # 4 LAST NAME FIRST NAME STUDENT NUMBER Instructions: Multiple choice questions are to be answered using a black pencil or a black or blue ball-point pen on the separate SCANTRON sheet being supplied. Be sure to fill in your name and student number on the SCANTRON sheet! Each question is worth 2.5 marks. No deductions will be made for incorrect answers. Write your answers to the multiple choice questions ALSO in the table below. You may use this question booklet for rough work, and then transfer your answers to each multiple choice question onto the separate SCANTRON sheet. Your answers must be on the SCANTRON sheet. In case of a disagreement, the answer to be marked is the one on the SCANTRON sheet TOTAL /100 Page 1 of 8

2 1. The price index of a hypothetical economy was 125 in 2007 and 135 in If the nominal rate of interest was 12 percent in 2008, what was this economy s real rate of interest in 2008? A) 2 percent. B) 4 percent. C) 8 percent. D) 10 percent. 2. Suppose that the employment in a country is 15 million, unemployment is 2 million, and the population is 30 million. This country s unemployment rate is approximately A) 6.7 percent. B) 13.3 percent. C) 11.8 percent. D) 5.7 percent. E) none of the above. 3. Suppose that, in 2008, nominal gross domestic product equals $4,800 billion and the price index, which was 100 in 2005, equals 120. Real gross domestic product in 2008, measured in terms of 2005 prices, equals: A) $40 billion. B) $2,000 billion. C) $4,000 billion. D) $8,000 billion. 4. A farmer sells grapes to a vintner for $10. The vintner makes two identical bottles of wine out of the grapes, and sells them to a merchant for $10 each. The merchant sells one bottle to a regular customer for $15, and the other to a rich, wine-loving customer for $25. The combined contribution of the vintner and the merchant to GDP is: A) $60. B) $30. C) $70. D) $40. E) $ Which of the following is NOT considered an investment item when measuring GDP? A) The Bank of Montreal purchases government securities from the Bank of Canada. B) Increase in inventories of unsold goods at a warehouse owned by The Bay. C) Purchase of new bottling equipment by a Niagara winery. D) Purchase of 2000 shares of Sears Canada by a mutual fund company. E) Both A) and D) are not considered an investment when measuring GDP. 6. Acne Corporation receives $30 million from a new issue of shares and it uses $20 million to build a new factory and the other $10 million to pay off the debt with its bank. What is the contribution of these transactions to GDP? A) $60 million. B) $50 million C) $30 million. D) $20 million. Page 2 of 8

3 7. In a particular year an economy s gross domestic product (GDP) is $356 billion, net payments to foreigners are $28 billion, and indirect taxes less subsidies are $6 billion. What is the value of this economy s gross national product (GNP)? A) $384 billion. B) $322 billion. C) $390 billion. D) $328 billion. 8. Suppose that a country imports 10 tractors at a cost of $20,000 each and that 8 of these tractors are sold to farmers at $30,000 each and the remaining 2 tractors are kept in inventory at their imported price at the end of the year. As a result of these transactions, the country s gross domestic product increased by A) $40,000. B) $80,000. C) $200,000. D) $240, Which one of the following will cause an upward shift of the Canadian net export function? A) A decrease in foreign income. B) Lower inflation in Canada than elsewhere. C) A higher value of the Canadian dollar. D) An increase in Canadian income. 10. To raise the equilibrium level of national income by 200, government spending (G) must be: A) raised by 200 times the multiplier. B) lowered by 200 times the multiplier. C) lowered by 200 divided by the multiplier. D) raised by 200 divided by the multiplier. 11. An increase in the value of the expenditure multiplier could be caused by: A) an increase in income tax rates. B) a decrease in the marginal propensity to save. C) an increase in the marginal propensity to import. D) a decrease in the marginal propensity to consume. E) none of the above. 12. Assume a closed economy in which households spend 80 percent of any increase in their income. An increase in government spending of $100 million, accompanied by an increase in lump-sum taxes of $100 million, will cause the equilibrium level of national output to change by: A) $80 million. B) $100 million. C) $400 million. D) $500 million. E) $800 million. Page 3 of 8

4 13. When unplanned inventory reduction occurs, we can conclude that A) imports are greater than exports. B) desired investment is greater than actual investment. C) GDP is greater than its equilibrium level. D) GDP is above its equilibrium level. 14. If a household s income increases from $20,000 to $30,000 and its consumption expenditures increase from $16,000 to $22,000, which one of the following statements is true? A) The household is dissaving. B) The slope of the household s consumption function is 0.8. C) The average propensity to consume is negative over this range of income. D) The average propensity to consume is falling over this range of income. 15. Which of the following is true? A) If MPC YD increases, then MPS YD must increase too. B) MPC YD + APS YD = 1. C) MPC YD + MPS YD = APC YD + APS YD. D) MPC YD + MPS YD is greater than APC YD + APS YD. 16. If a representative family s disposable income rose from $40,000 to $42,000 and their desired consumption expenditures rose from $38,000 to $39,600, it can be concluded that the A) average propensity to consume is 0.8. B) average propensity to save is 0.8. C) marginal propensity to consume is $800. D) marginal propensity to consume is 0.8. E) marginal propensity to save is If there is an appreciation of the Canadian dollar in the foreign exchange market, then Canadian goods A) are more expensive to Canadian. B) are more expensive to foreign buyers. C) are less expensive to Canadian. D) are less expensive to foreign buyers. 18. The economy of Beverly Hills has a consumption function of C = Y, investment equal to 6, government purchases equal to 10, exports equal to 10, and an import function of M = 0.1Y. What is the level of consumption when the economy is in equilibrium? A) 298. B) 106. C) D) 114. Page 4 of 8

5 Table 1: Information on the Economy of Atlantida for Questions 19 and 21. (All values expressed in billions of Atlantida pesos) National income, Y 5,200 Public saving 150 Disposable income, YD 4,400 Net exports, NX 110 Consumption, C 4, In the economy described in Table 1, net taxes are A) $500. B) $600. C) $700. D) $ In the economy described in Table 1, the value of investment is A) $250. B) $260. C) $270. D) $ In the economy described in Table 1, the value of government purchases is A) $500. B) $650. C) $800. D) $ If desired expenditure exceeds actual expenditures, which one of the following is true? A) Inventories will build up, causing national income to rise. B) National income will fall, because desired expenditures are less than actual expenditures. C) Shortages of goods and reductions in inventories will cause producers to increase output and national income to rise. D) National income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save. 23. A hypothetical economy has a consumption function of C = Y, investment equal to 150, government purchases equal to 250, exports equal to 100, and an import function of Q = 0.1Y (where Q represents the volume of imports). What is the value of net exports when the economy is in equilibrium? A) 100. B) 150. C) 100. D) 200. Page 5 of 8

6 Table 2: Information on the Economy of Miramar for Questions 24 to 25. (All values expressed in billions of Miramar pesos) Consumption, C C = YD Investment, I I = 10 Government Purchases, G G = 70 Taxes, TA T = Y Disposable Income, YD YD = Y TA 24. Table 2 gives the equations describing key sectors of the small, closed economy of Miramar. Miramar is currently operating below capacity, with a fixed price level. Its current equilibrium level of income is: A) 280 billion. B) 476 billion. C) 295 billion. D) 350 billion. 25. Based on the information in Table 2, if consumers earned an additional 10 billion pesos of income (Y), savings (S) would increase by: A) 4 billion. B) 6 billion. C) 2 billion. D) 7.5 billion. 26. In a simple economy with no government and no trade, which one of the following statements is correct? A) Desired investment always equals saving at all levels of Y. B) At equilibrium, saving equals desired investment. C) If desired investment exceeded saving, then there would be unintended inventory accumulation. D) If saving exceeded desired investment, then there would be unintended reductions in inventories. 27. Consider a close economy without a government sector. If the saving function is given by S = Y, what is the value of the simple multiplier? A) 0.2. B) 1. C) 2.5. D) 5. E) Insufficient information to determine. 28. Suppose shoppers decided during the last end-of-year holiday period to spend considerably less than retail stores expected, leaving those stores with a higher than expected level of unsold merchandise. This is an example of A) planned investment. B) expected savings. C) an increase in equilibrium GDP. D) unplanned investment. E) a decrease in households disposable income. Page 6 of 8

7 29. Suppose that the consumption function is C = 2, Y. Investment is 500. There is no government and no international trade. The full employment level of GDP is 12,000. By which one of the following would autonomous investment have to increase in order to achieve full employment in this economy? A) 2,000. B) 4,000. C) 500. D) All else constant, which of the following would increase equilibrium GDP? A) An increase in the savings function. B) An increase in personal taxes. C) A decrease in the import function. D) A decrease in investment spending. E) A decrease in exports. In answering questions 31 to 33, assume for simplicity that a bank s balance sheet has only four items: reserves, securities (government bonds), loans (to customers), and (customers ) deposits. A (+) refers to an increase and a ( ) refers to a decrease. Consider only the initial changes. 31. If you deposited $1,000 in cash at your bank, your bank s balance sheet would change by A) +$1,000 in deposits only. B) +$1,000 in loans only, since you are lending the bank $1,000. C) +$1,000 in deposits and + $1,000 in loans. D) +$1,000 in deposits and + $1,000 in reserves. E) +$1,000 in reserves only. 32. If your bank lends you $1,000 and credits $1,000 to your chequing account, your bank s balance sheet would change by A) +$1,000 in deposits only. B) +$1,000 in loans, + $1,000 in deposits, and $1,000 in reserves. C) +$1,000 in deposits and + $1,000 in loans. D) +$1,000 in deposits and + $1,000 in reserves. E) +$1,000 in reserves only. 33. If the Bank of Canada sells $1,000 in securities to your bank, your bank s balance sheet would change by A) $1,000 in securities and $1,000 in deposits. B) $1,000 in securities and $1,000 in reserves. C) $1,000 in securities and + $1,000 in loans. D) +$1,000 in securities and $1,000 in reserves. E) +$1,000 in securities and + $1,000 in reserves. 34. Whenever desired reserves exceed actual reserves, the bank A) can lend out additional funds. B) will go out of business. C) needs to call in loans. D) will lend funds to other banks. E) will borrow funds from the Bank of Canada. Page 7 of 8

8 35. If you transfer $100 from your saving account to your chequing account, which one the following is correct? A) M2 decreases by $100 and M1 increases by $100. B) M2 decreases by $100 but M1 does not change. C) Both M1 and M2 decrease by $100. D) Neither M1 nor M2 changes. E) M1 increases by $100 but M2 does not change. 36. The Bank of Solymar is initially holding the desired level of reserves at the target reserve ratio of 5 percent. A few days later, the bank unexpectedly loses $10 million of its initial deposits of $100 million. Which of the following statements is true? A) The bank was initially holding $50 million in reserves. B) After the loss in deposits, target reserves are $5 million. C) After the loss in deposits, the bank has deficient reserves. D) After the loss in deposits, the bank has excess reserves. E) After the loss in deposits, the target reserves are more than $5 million. In answering questions 37 and 38, assume that total currency in the economy is $25, money supply is $100, and currency held by the banks is $10. Further assume that the reserve ratio of the banks is 20 percent. 37. What are the public s deposits at the commercial banks? A) $100. B) $90. C) $85. D) $ What are the banks deposits at the Bank of Canada? A) $20. B) $17. C) $75. D) $ Suppose that the target reserve ratio in the banking system is 20 percent, there is no cash drain, and all excess reserves are lent out. If Sam deposits a $50 bill in his bank account, then the money supply (M1) will A) decrease by $50. B) Increase by $50. C) remain unchanged. D) increase by $200. E) increase by $ If the Bank of Canada purchases government bonds in the bonds market, which one of the following is true? A) The money supply will decrease. B) The reserves of the chartered banks will increase. C) The bank rate will be forced up. D) The deposits of the public in the chartered banks will decrease. Page 8 of 8

SOLUTION ECO 209Y MACROECONOMIC THEORY. Midterm Test #1. University of Toronto October 21, 2005 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS:

Department of Economics Prof. Gustavo Indart University of Toronto October 21, 2005 SOLUTION ECO 209Y MACROECONOMIC THEORY Midterm Test #1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total