Economics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Final Examination December 14, 2007

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1 Economics 1012A: Introduction to Macroeconomics FALL 2007 Dr. R. E. Mueller Final Examination December 14, 2007 Answer all of the following questions by selecting the most appropriate answer on your bubble sheet. Be sure to read each question carefully. Each question is worth 1 point (100 points total) and will count as at least 40 per cent of your final course grade. 1. Economic forces A) are more powerful than social and political forces. B) are more powerful than social forces but less powerful than political forces. C) are less powerful than social and political forces. D) can be more or less powerful than political and social forces, depending on the circumstances. 2. Macroeconomics is a study of all of the following except A) inflation B) unemployment C) business cycles D) individual choice 3. An economic study concludes that an increase in the corporate tax rate would reduce business investment next year. This conclusion is an example of A) normative analysis. B) a value judgment. C) the science of economics. D) positive analysis. 4. The opportunity cost of spending $100 million on a new fighter plane might include all of the following except A) the health care benefits that could have been provided by the $100 million. B) the infrastructure that could have been built with the $100 million. C) the wages earned by the workers who built the plane. D) the technologies that might have been developed with the $100 million. Page 1

2 Use the following to answer question 5: Mary Paul Economics Math Economics Math Given Mary and Paul's production possibility tables for answering economics and math problems in a day, if they work together, what is the least number of days they would need to solve 45 economics problems and 15 math problems? A) 3. B) 4. C) 5. D) 6. Use the following to answer question 6: A C Sweaters D B Jeans 6. Refer to the graph above. Productive inefficiency occurs at what point? A) A B) B C) C D) D 7. If a country takes advantage of the comparative advantage of some resources over others its production possibility curve is likely to be A) flat. B) straight. C) bowed outward. D) bowed inward. Page 2

3 Use the following to answer question 8: Books B A Books D C CDs CDs 8. Refer to the graphs above. In the 1980s, desktop publishing reduced the costs of producing books. Assuming no change in the cost of producing CDs, which of the shifts reflects this change in technology? A) A. B) B. C) C. D) D. 9. To demonstrate graphically the principle of increasing marginal opportunity cost, the production possibility curve must be A) flat. B) straight. C) bowed out. D) bowed in. 10. A market economy A) requires government coordination. B) allocates according to need. C) expects people to be altruistic. D) expects people to be selfish. 11. The common currency for 12 European Union members is the A) the Eurodollar. B) the Euromark. C) the Euro. D) the Eurocredit. 12. Which group has ultimate control over the economy? A) Business. B) Households. C) Multinationals. D) Government. Page 3

4 13. International trade can be restricted by a limit on how much of a good can be shipped into a country. This restriction is generally called a A) quota. B) tariff. C) non-tariff barrier. D) sales tax. Use the following to answer question 14: Price of cassettes $5.00 $4.00 $3.00 $2.00 $1.00 S0 S1 $ Quantity of cassettes per week 14. Refer to the graph above. Suppose that at a price of $5.00, firm A is willing and able to supply 4 units and firm B is willing and able to supply 4 units. Which of the following statements is then true? A) Curve S0 shows the quantity supplied of firm A and firm B combined. B) Curve S1 shows the quantity supplied of firm A and firm B combined. C) The addition of firm B to the market causes a movement upward and to the right along S0. D) The addition of firm B to the market causes a movement upward and to the right along S Since the early 1970s, Canada A) has been a net exporter of services. B) has been a net importer of goods. C) consistently has had a surplus on its current account. D) has been a net exporter of goods. 16. Suppose the price of a banjo in Canada is $60 and the exchange rate between the dollar and the British pound is $1.5 per pound. In the absence of transportation costs and taxes, a British resident who wished to buy a Canadian banjo would have to pay A) 20 pounds. B) 40 pounds. C) 90 pounds. D) 120 pounds. Page 4

5 17. If the price in a market is above its equilibrium level A) there will be a surplus and downward pressure on price. B) there will be a surplus and upward pressure on price. C) there will be a shortage and downward pressure on price. D) there will be a shortage and upward pressure on price. 18. Suppose that initially, demand is given by the equation Qd = 48-4P. If, as a result of an increase in income, the quantity demanded increases by 12 at every price, the new demand equation would be A) Qd = 60-4P. B) Qd = 36-4P. C) Qd = 48-16P. D) Qd = 48-8P. 19. According to the law of demand, an increase in the price of baseball trading cards causes A) an increase in the quantity of trading cards demanded. B) a decrease in the quantity of trading cards demanded. C) an increase in the scarcity of baseball trading cards. D) a greater abundance of baseball trading cards. Use the following to answer question 20: Price S0 Price S0 D0 D1 D1 D0 (a) Quantity (b) Quantity Price S1 S0 Price S0 S1 D0 D0 (c) Quantity (d) Quantity Page 5

6 20. Refer to the graphs above. The relevant market is corn. The impact of a poor corn harvest on the market for corn would most likely be demonstrated by which graph above? A) A. B) B. C) C. D) D. 21. When output is at its potential A) unemployment and capacity utilization rates are below the target levels. B) unemployment and capacity utilization rates are above the target levels. C) unemployment and capacity utilization rates are equal to the target levels. D) the unemployment rate is equal to its target level, but the capacity utilization rate is below its target level. 22. Which of the following people would be considered unemployed? A) A 55-year-old steelworker who was laid off 18 months ago and has given up trying to find a job. B) A woman who has quit college to move to Montreal, where she is looking for a modeling job. C) A young man who has recently received his Ph.D. but who is driving a taxi because of an inability to find a teaching job. D) A student who plans to look for a job after graduation. 23. All of the following are long-run growth policies except A) increasing government spending to spur consumer spending. B) reducing tax rates to increase incentives to work. C) providing funding for research. D) following policies to reduce interest rates and increase business investment. 24. With respect to the unemployment problem, Classical economists generally take the position that A) government should guarantee each person a job. B) government should eliminate structural and cyclical unemployment. C) each person should have a job commensurate with their training or past job experience. D) individuals should be responsible for finding their own jobs. 25. If real output is $7.7 trillion and the GDP deflator is 10 percent higher than in the base year, then nominal output is roughly A) $7.0 trillion. B) $7.6 trillion. C) $7.8 trillion. D) $8.5 trillion. Page 6

7 26. A cost of inflation is that A) it makes everyone poorer. B) it makes the poor poorer and the rich richer. C) there are no costs of inflation because inflation does not make the society as a whole poorer. D) it reduces the informational content of prices. 27. To calculate GDP A) add the quantity of all final goods and services produced in an economy in a year. B) add the quantity of all goods and services sold in an economy in a year. C) weight the output of each final good and service produced in an economy in a year by its price in that year and then add the result. D) weight the output of each good and service produced in an economy in a year by its price in that year and then add the results. 28. GDP is the A) market value of an economy's production of final goods and services in a one-year period. B) sum of coins, bills, and demand deposits circulating in an economy during a oneyear period C) total expenditures of the federal government over the period of one year. D) market value of an economy's production of all goods and services in a one-year period. 29. Personal consumption expenditures consist of A) household and individual purchases of services and durable and nondurable goods. B) foreign investments in Canada. C) foreign plus domestic investments. D) domestic investments. 30. The size of underground economies differs across countries. In Greece it has been estimated to be as big as 30% of GDP, in Spain 25%, in Italy 20% and, in Canada about 7%. Given this information, official GDP measures understate true economic activity the most in: A) Greece. B) Canada. C) Italy. D) Spain. 31. To cool down an overheating economy, the U.S. government decides to decrease income by 2,000. If the mps is 0.2, the government should decrease its spending by A) 400. B) 500. C) 1,000. D) 1,600. Page 7

8 32. The aggregate expenditure model makes it possible to estimate how a change in autonomous expenditures affects A) the price level. B) the aggregate supply curve. C) investment. D) equilibrium output. Use the following to answer question 33: 33. Refer to the graph above. If autonomous expenditures were to change to $100, equilibrium real income would be A) greater than $600. B) $600. C) less than $600. D) indeterminate. 34. According to Classical economists in the 1930s, a recession will end when A) government creates enough jobs for all of the unemployed. B) wages rise enough to eliminate unemployment. C) wages fall enough to eliminate unemployment. D) taxes are cut enough to stimulate private spending. 35. If people form their expectations rationally, they will most likely A) disregard the true processes determining economic variables. B) not take into account changes in aggregate supply in forming their expectation of the future. C) observe the reactions of other individuals who know the true process by which economic variables are determined. D) will behave in ways inconsistent with economic theory. Page 8

9 36. Suppose the economy is initially in an equilibrium but then exports rise relative to imports. Assuming no other changes occur, A) a surplus will develop. B) a shortage will develop. C) equilibrium will still exist. D) withdrawals from the spending stream will exceed injections. Use the following to answer question 37: Income Expenditures $ 0 $ 500 1,000 1,167 1,500 1,500 2,000 1,833 2,500 2, In the table above, if income rises from $2,000 to $2,500, induced expenditures A) remain equal to $500. B) remain equal to $1,833. C) rise by $334. D) rise to $2,167. Use the following to answer question 38: 38. Refer to the graph above. A movement from D to C is most likely to be caused by A) an increase in input prices. B) a decrease in input prices. C) an increase in aggregate demand. D) a decrease in aggregate demand. 39. An increase in real money balances resulting from a lower price level will A) reduce both interest rates and investment. B) reduce interest rates and increase investment. C) increase interest rates and reduce investment. D) increase both interest rates and investment. Page 9

10 Use the following to answer question 40: 40. Refer to the graph above. In the graph, an inflationary gap exists if A) the price level is P 0 and the aggregate demand curve is AD 0. B) the price level is P 0 and the aggregate demand curve is AD 1. C) the price level is P 1 and the aggregate demand curve is AD 0. D) the price level is P 1 and the aggregate demand curve is AD A doubling of prices A) doubles potential output. B) more than doubles potential output. C) increases potential output but by less than double. D) does not affect potential output. 42. In the late 1990s, U.S. fiscal policy was largely contractionary, while U.S. monetary policy was largely expansionary. In the long run, this combination will A) increase output above its potential. B) reduce output beneath its potential. C) have an indeterminate effect on output. D) not cause output to deviate from its potential. Use the following to answer question 43: Page 10

11 43. Refer to the graph above. A movement from A to C is most likely to be caused by A) an increase in input prices. B) a decrease in input prices. C) an increase in exports. D) an increase in imports. 44. An increase in aggregate demand A) raises potential output. B) reduces potential output. C) does not change potential output. D) has an unpredictable effect on potential output. 45. During the Second World War, the economic boom that raised equilibrium income above potential income A) caused significant inflation. B) would have caused significant inflation, if wage and price controls had not been used. C) created no significant inflationary pressures. D) created a substantial budget surplus. 46. According to the aggregate expenditure model, government has a role in getting an economy out of recession because A) individuals collectively don't have the spending power to make a difference. B) government spending will increase income and induce individuals to spend more. C) the economy could never be expected to return to potential output on its own. D) only the government knows when the economy is in a recession. 47. The budget surplus of the late 1990s and early 2000s resulted from all of the following except A) unexpected increases in income. B) unexpected increases in tax revenues. C) unexpectedly low inflation. D) unexpected declines in expenditures on income-support programs. Page 11

12 Use the following to answer question 48: AP Real expenditures E0 E1 AE1 AE Real income 48. Refer to the graph above. A shift in the aggregate expenditure curve from AE0 to AE1 could not be caused by A) an increase in income taxes. B) an increase in defence spending. C) an increase in welfare payments. D) a decrease in the capital gains tax. 49. Fine tuning the economy with fiscal policy is A) relatively simple because the government has access to the best information available. B) difficult because the government lacks important information about the economy. C) relatively simple because the political process usually works smoothly and without significant lags. D) difficult because economists haven't developed theoretical models of the macroeconomy. 50. Suppose government spending increases by 50. If equilibrium real output rises by 500 and prices rise as well, then A) it can be inferred that the mpc is.9. B) it can be inferred that the mpc is less than.9. C) it can be inferred that the mpc is greater than.9. D) no inference can be made about the value of the mpc. 51. If a $10 trillion economy is growing at a real rate of 2.5% a year, it must run to maintain a constant debt-to-gdp ratio. A) increasingly larger surpluses B) a balanced budget C) increasingly smaller deficits D) increasingly larger deficits Page 12

13 52. As the interest rate rises, A) debt service decreases. B) debt increases but debt service does not. C) debt service increases. D) debt service and debt do not change. 53. As a percentage of GDP, Canadian budget deficits in the post-1960 period were A) smallest in the 1980s. B) largest in the 1960s. C) largest in D) largest in the early 1990s. 54. External government debt is A) government debt owed to its own citizens. B) government debt owed to individuals in foreign countries. C) government debt owed by one branch of the government to another. D) debt that individuals in foreign countries owe to the Canadian government. 55. Bond holders A) lose when actual inflation is less than was expected. B) gain when actual inflation is more than was expected. C) do not lose when the expected inflation built into the nominal interest rate is correct. D) do not lose when the expected inflation built into the nominal interest rate is lower than actual inflation. 56. If the price level is rising, the real deficit A) must be equal to the nominal deficit. B) must be greater than the nominal deficit. C) must be lower than the nominal deficit. D) may be greater than or less than the nominal deficit. 57. The advent of Keynesian economics A) increased the pressure to eliminate budget deficits. B) increased the pressure to run budget surpluses. C) reduced the pressure to eliminate budget surpluses. D) reduced the pressure to eliminate budget deficits. 58. Suppose the real interest rate in Brazil is 40 percent, actual inflation is 20 percent, and expected inflation is 20 percent. The nominal interest must then be A) 20 percent. B) 40 percent. C) 60 percent. D) 80 percent. Page 13

14 59. Deficits and surpluses are best viewed as A) comprehensive measures of an economy's health. B) a measure of government involvement in the economy. C) a summary measure of a government's budget. D) a summary measure of a nation's monetary policy. 60. A decrease in interest rates A) increases investment. B) decreases money demand. C) decreases consumption spending. D) decreases Canadian exports. 61. When a bond's price rises, its yield A) declines. B) increases. C) first rises and then falls. D) first falls and then rises. 62. When money is used to set the value of goods such as cars, VCRs, and TVs, money is serving as a A) medium of exchange. B) unit of account. C) store of wealth. D) unit of wealth. 63. If the money supply is 500 and the velocity is 6, then nominal GDP A) is B) is 500. C) is 3,000. D) cannot be determined. 64. The Bank of Canada does not issue too much money because doing so would destroy money's usefulness as a A) unit of account. B) store of wealth. C) medium of exchange. D) unit of account, store of wealth, and medium of exchange. 65. The income velocity of money can be calculated as the ratio of A) nominal GDP to real GNP. B) nominal GDP to the money supply. C) real GDP to the price level. D) the money supply to the price level. Page 14

15 66. In order to function as a medium of exchange, money must A) be backed by gold. B) maintain a constant value over an extended period of time. C) be backed by some precious commodity. D) be generally accepted in exchange for goods and services. 67. If the Bank of Canada issued too little money, money's relative price would A) fall, and the money price of goods would rise. B) rise, and the money price of goods would fall. C) fall, and the money price of goods would fall. D) rise, and the money price of goods would rise. 68. Illiquid assets are least able to perform which of the following functions? A) Medium of exchange. B) Unit of account. C) Store of value. D) Store of wealth. 69. Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000. If banks desire a reserve ratio of 20 percent and individuals hold no cash, the maximum amount the banking system can now add to deposits is: A) $ 15,000. B) $ 75,000. C) $175,000. D) $500, When the Bank of Canada issues an IOU, it creates A) a financial liability for the holder of the IOU. B) a financial asset for itself. C) a real asset. D) money. 71. Suppose a bank wants a reserve ratio of.15 and individuals hold no cash. Total bank deposits are $100 million and the bank holds $20 million in reserves. How many more deposits can the bank create if it becomes fully loaned out? A) $33 million. B) $66 million. C) $100 million. D) $667 million. 72. A chartered bank is an example of A) a depository institution. B) a contractual intermediary. C) an investment intermediary. D) an investment dealer. Page 15

16 73. Which of the following assets is the most liquid? A) A Rembrandt painting. B) Deposits in a chequing account. C) Real estate. D) 100 shares of stock in IBM. 74. When an individual has purchased a stock, the stock is closest to a for the firm issuing the stock. A) financial liability B) financial asset C) real liability D) real asset 75. If the reserve ratio is 0.20 and individuals hold no cash, what is the maximum amount of deposits that can be created from an initial $5 million deposit in the banking system? A) $5 million. B) $20 million. C) $25 million. D) $50 million. 76. Expansionary monetary policy always raises A) nominal income but not real income. B) real income but not nominal income. C) nominal income. D) real income. 77. Monetary policy affects A) social spending. B) tax rates. C) the availability of credit. D) competition policy. 78. When the Bank of Canada sells bonds, the money supply is A) expanded. B) contracted. C) not affected. D) sometimes raised and sometimes lowered. 79. The interest rate on government bonds A) equals the bond's price expressed as a percentage of its annual payment. B) equals the bond's annual payment expressed as a percentage of its price. C) is affected only indirectly by changes in bond prices or annual payments. D) is not related to bond prices or annual payments. Page 16

17 80. If a contractionary monetary policy reduces nominal income by more than it reduces real income, it must be true that prices A) are perfectly flexible. B) are at least partially flexible. C) are completely inflexible. D) have fully adjusted to the change in aggregate demand. 81. The consequences of inflation include A) increasing the purchasing power of a nation's money supply. B) increasing the value of a nation's exchange rate. C) helping those in fixed incomes. D) encouraging individuals and firms to undertake transaction costs to keep their wealth in investments that earn a rate of interest at, or above, the rate of inflation. 82. If the economy is in the Classical range, a contractionary monetary policy A) decreases both nominal and real income. B) decreases real income but not nominal income. C) decreases nominal income but not real income. D) doesn't decrease real or nominal income. 83. The consequences of inflation include all of the following EXCEPT: A) reducing the purchasing power of a nation's money supply. B) reducing the value of a nation's exchange rate. C) helping those in fixed incomes. D) encouraging individuals and firms to undertake transaction costs to keep their wealth in investments that earn a rate of interest at, or above, the rate of inflation. 84. Which of the following is the path through which contractionary monetary policy works? A) Money supply down implies interest rates up, implies investment down implies income down. B) Money supply down implies interest down, implies investment down implies income down. C) Money supply down implies interest rates up, implies investment up implies income down. D) Money supply down implies interest down, implies investment up implies income down. 85. The consequences of inflation include A) reducing the purchasing power of a nation's money supply. B) increasing the value of a nation's exchange rate. C) helping those in fixed incomes. D) encouraging individuals and firms to undertake transaction costs to keep their wealth in investments that earn a rate of interest at, or above, the rate of inflation. Page 17

18 86. All of the following are problems associated with the effective use of monetary policy EXCEPT A) the Bank of Canada must know the relationship between changes in the monetary base and the resulting changes in the money supply. B) political pressure on the Bank of Canada. C) the Bank of Canada can increase bank reserves, but this does not always guarantee an increase in lending activity. D) monetary policy works too quickly. Use the following to answer question 87: 87. Refer to the graph above. Monetary policy that shifts the AD curve from AD0 to AD1 is A) expansionary. B) contractionary. C) neither expansionary nor contractionary since it does not affect output. D) neither expansionary nor contractionary since it does not affect inflation. 88. Suppose the approximate money multiplier is 2.5. If the Bank of Canada wants to reduce the money supply by 1,500, it should A) raise the overnight financing rate by 2%. B) raise the bank rate by 2 percentage points. C) buy government securities worth 600. D) sell government securities worth Suppose a given basket of goods and services costs 9 dollars in Australia and 5,400 baht in Thailand. If the exchange rate is 600 baht per Australian dollar, purchasing power parity implies that A) the exchange rate has attained its long run equilibrium value. B) the Australian dollar must appreciate to restore purchasing power parity. C) the Australian dollar must depreciate to restore purchasing power parity. D) the baht must depreciate to restore purchasing power parity. Page 18

19 90. An increase in Japanese prices relative to international prices might be expected to A) increase the demand for yen and reduce the supply. B) increase both the demand for yen and the supply. C) reduce the demand for yen and increase the supply. D) reduce both the demand for yen and the supply. 91. Strategic trade policies A) are less successful than other trade policies. B) impose trade restrictions in order to obtain concessions from other countries. C) threaten to impose trade restrictions in order to obtain concessions from other countries. D) are never successful in promoting freer trade. 92. A country that fixes a price for its currency that is above the market price will A) accumulate official reserves. B) increase its money supply. C) lose official reserves. D) eventually increase the value of its currency. 93. In the balance of payments accounts, net investment income shows up A) in the current account. B) in the capital account. C) in the official transactions account. D) nowhere; net investment income is not in the balance of payments. 94. Which of the following is a fundamental determinant of the exchange rate? A) A country's tax structure. B) A country's price level. C) A country's labour supply. D) A country's unemployment rate. 95. Which of the following trade policies is the most common? A) Tariffs. B) Quotas. C) Embargoes. D) Regulatory restrictions. 96. The lazy firm hypothesis states that Canadian productivity growth has lagged behind American productivity growth in the 1990s because of A) the appreciation of the Canadian dollar. B) the depreciation of the Canadian dollar. C) low interest rates in Canada. D) high interest rates in Canada. Page 19

20 97. A balance of payments deficit would put A) upward pressure on the value of a country's currency. B) downward pressure on the value of a country's currency. C) no pressure on the value of a country's currency. D) no pressure on the value of a country's currency, unless it were also running a current account deficit. 98. Purchasing power parity is used to estimate A) changes in both short-run and long-run exchange rates. B) only changes in short-run exchange rates. C) only changes in long-run exchange rates. D) changes in price levels, not exchange rates. 99. Strategic currency stabilization A) involves frequent exchange rate intervention. B) involves carefully timed exchange rate intervention. C) is successful only if the government does not attempt to affect market expectations. D) can be successful only if governments possess large amounts of official reserves Economists are in general opposed to trade restrictions for all of the following reasons except A) trade restrictions reduce competition. B) trade restrictions are difficult to limit to the special cases where they are beneficial. C) trade restrictions are never beneficial to an economy. D) trade restrictions reduce global output. Have a great holiday! Page 20

21 Fall 2007 Economics 1012 Final Examination Answer Key 1. D 2. D 3. D 4. C 5. A 6. D 7. C 8. D 9. C 10. D 11. C 12. B 13. A 14. B 15. D 16. B 17. A 18. A 19. B 20. C 21. C 22. B 23. A 24. D 25. D 26. D 27. C 28. A 29. A 30. A 31. A 32. D 33. C 34. C 35. C 36. B 37. C 38. B 39. B 40. B 41. D 42. D 43. C Page 21

22 44. C 45. B 46. B 47. C 48. A 49. B 50. C 51. D 52. C 53. D 54. B 55. C 56. C 57. D 58. C 59. C 60. A 61. A 62. B 63. C 64. D 65. B 66. D 67. B 68. A 69. B 70. D 71. A 72. A 73. B 74. A 75. C 76. C 77. C 78. B 79. B 80. B 81. D 82. C 83. C 84. A 85. A or D 86. D 87. B 88. D 89. A Page 22

23 90. C 91. C 92. C 93. A 94. B 95. A 96. B 97. B 98. C 99. B 100. C Page 23