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1 Econ 112X - Midterm Test - Feb 16, 2011 Version-v2 Print your name, student number, course, section, and version number (top right hand corner of this page) on the multiple choice answer card provided. Choose the best answer and enter it on the card IN PENCIL. If you make changes, be sure to erase completely. Please remain seated until the test is complete. 1) Suppose that, in a two-good world, the price of the first good has increased from $3.00 to $4.00 and the price of the second good has increased from $150 to $200. The relative price of the first good A) has fallen. B) has risen. C) remained constant. D) cannot be determined from the above data. E) is completely unrelated to the price of the second good. The table below includes data required to calculate GDP from the income side. Investment expenditure $ Wages and salaries $ Consumption expenditure $ Interest and investment income $99.40 Business profits $70.40 Depreciation $ Indirect taxes less subsidies $ Net exports $94.00 TABLE ) Refer to Table What is the value of GDP? A) $ B) $ C) $ D) $ E) $ ) Suppose the Bank of Montreal wants a four percent real rate of return on all its loans, and anticipates an annual inflation rate of six percent. It should therefore lend its money at a nominal interest rate of A) ten percent. B) nine percent. C) five percent. D) four percent. E) one percent. 1

2 FIGURE 3-5 4) Consider Figure 3-5. If supply and demand were to increase simultaneously, this would lead to A) an increase in P and in Q. B) a decrease in P and in Q. C) an increase in Q and an indeterminate change in P. D) an increase in P and an indeterminate change in Q. E) no change in P or Q. 5) Consider the following news headline: ʺMinister of Defence announces $2 billion purchase of fighter aircraft.ʺ Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) the AE function will shift down parallel to itself and equilibrium national income will fall. B) the AE function will rotate upward (become steeper) and equilibrium national income will rise. C) the AE function will rotate downward (become flatter) and national income will fall. D) the AE function will shift up parallel to itself and equilibrium national income will rise. E) there will be no change in the AE function or in equilibrium national income. 6) Suppose that in 2000, Canada Cars Corporation produced $20 million worth of cars and trucks but was able to sell only $16 million worth. Is the remaining $4 million increase in inventories part of GDP for 2000? 1. Yes, since changes in inventories are part of consumption expenditures. 2. Yes, since they are part of the economyʹs output in Yes, since changes in inventories are part of actual investment. A) 1 only B) 2 only C) 3 only D) both 1 and 2 E) both 2 and 3 2

3 The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms. Year Actual Output Potential Output Unemployment Rate (billions of $) (billions of $) (% of labour force) TABLE ) Refer to Table What is the unemployment rate when this economy is at full employment? A) 5.9% B) 6.0% C) 6.3% D) 7.0% E) 7.1% 8) Consider two countries that can produce wheat and coffee. The gains from trade when the two countries have different opportunity costs are realized when A) production possibility boundaries shift inward. B) the two countries continue to produce the same quantities of wheat and coffee. C) each country has an absolute advantage in one of the two commodities. D) resources are reallocated within the two countries such that each specializes in the production of the good in which it has an absolute advantage. E) resources are reallocated within the two countries such that each specializes in the production of the good in which it has a comparative advantage. 9) Suppose there is an increase in the marginal propensity to spend out of national income. The result will be A) an increase in the slope of the AE curve. B) an upward parallel shift in the AE curve. C) a movement up the AE curve. D) a movement down the AE curve. E) a downward parallel shift in the AE curve. 10) Suppose that a particular theory predicts that on Monday, Wednesday, and Friday the stock market will rise and that on Tuesday and Thursday the stock market will fall. If an economist tests this theory and finds that over a six-month period the theory predicts accurately, the economist would likely say that the theory A) has been proven correct. B) is reliable. C) is not rejected by the evidence. D) shouldnʹt be taken seriously. E) is not useful because stock markets involve irrational human behaviour. 11) In Lumberville, the lumberjack cuts trees and sells them to the local mill for $500. The local mill processes these trees into wood planks and sells them to the carpenter for $800. Finally, the carpenter uses these wood planks to make tables which he sells for $1400 to Lumbervilleʹs residents. If we allowed double counting, the total value of Lumbervilleʹs output would be calculated as. But if we correctly compute the total value added, the value of the total output in Lumberville would be. A) $1400; $1400 B) $2200; $2700 C) $2200; $4200 D) $2700; $1400 E) $4200; $2700 3

4 12) Jodieʹs Bakery generates a yearly revenue of $6000. Throughout the year Jodie spends $1500 on flour, $1000 on fruit, $500 on sugar & spices, $1500 on butter, and employs an assistant whom she pays $1000. Calculate the value of the annual output produced by Jodieʹs Bakery using the value added method. A) $1000 B) $1500 C) $4500 D) $5000 E) $ ) If nominal national income increased by 10 percent over a certain period of time while real national income increased by 20 percent, then A) everybody in the economy became worse off. B) inflation has occurred during this time period. C) the labour force increased by 10 percent. D) the price level has declined by about 10 percent. E) the price level has increased by approximately 10 percent. Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted line. The outputs of wool and steel are given in physical units. FIGURE ) Refer to Figure The comparative advantage is held by A) neither country in either good. B) Japan in both goods. C) Ireland in both goods. D) Ireland in wool, Japan in steel. E) Ireland in steel, Japan in wool. 4

5 15) Suppose aggregate output is demand-determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will and the marginal propensity to spend must equal. A) decrease by $40 billion; 0.75 B) decrease by $10 billion; 0.25 C) increase by $40 billion; 0.25 D) increase by $40 billion; 0.75 E) none of the above The table below shows total output for an economy over 2 years. TABLE Price Quantity Good A $ units Good B $ units Good C $ units 2008 Price Quantity Good A $ units Good B $ units Good C $ units 16) Refer to Table The implicit GDP deflator in 2008, when 2007 is used as the base year, was approximately A) 105. B) 160. C) 180. D) 193. E) ) Consider a simple macro model with demand-determined output and the following specific parameter values: a) Marginal propensity to consume out of disposable income = 0.6 b) Marginal propensity to consume out of national income = 0.48 c) Marginal propensity to import = 0.23 The simple multiplier without government and foreign trade in this economy is and the simple multiplier with government and foreign trade in this economy is. A) 1.67; 1.33 B) 1.67; 4 C) 2.5; 1.33 D) 2.5; 2.5 E) 2.5; 4 18) A straight-line production possibilities boundary differs from a concave boundary in which of the following ways? A) The straight-line boundary illustrates constant opportunity costs, whereas the concave boundary illustrates increasing opportunity costs. B) The concave boundary illustrates constant opportunity costs, whereas the straight -line boundary illustrates decreasing opportunity costs. C) The straight-line boundary does not show scarcity, whereas the concave boundary does. D) The straight-line boundary shows opportunity cost, whereas the concave boundary does not. E) A straight-line boundary is associated with a command economy, whereas a concave boundary is associated with a free-market economy. 5

6 FIGURE ) Refer to Figure 3-4. If the price of 1-bedroom apartments in Collegetown were $700, there would be a of apartments. A) surplus; 150 B) shortage; 300 C) shortage; 150 D) surplus; 300 E) surplus; ) There will be no gains from specialization and trade between two countries if A) neither country has an absolute advantage in the production of any good. B) neither country has a comparative advantage in the production of any good. C) opportunity costs are the same in the two countries. D) there are no economies of scale. E) both B and C are correct. 21) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = (0.4)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) insufficient information to know. 22) Suppose the unemployment rate is 8.5 percent and we know that frictional and structural unemployment together account for 5.5 percent. The cyclical unemployment rate is then A) 14 percent. B) 8.5 percent. C) 5.5 percent. D) 3.0 percent. E) -3.0 percent. 6

7 23) Consider a simple macro model with demand-determined output. If the level of exports decreases unexpectedly by 60, then if the government wants to restore the initial equilibrium level of output it should by. A) increase its purchases; 60 B) increase its purchases; more than 60 C) increase its net tax revenues; 60 D) increase its net tax revenues; less than 60 E) none of the above 24) Consider a small economy with 3 individuals. Individual A produces 100 chickens that sell for $8 each. Individual B produces 50 bags of corn that sell for $10 each. Individual C produces 40 bushels of apples that sell for $20 each. National product in this economy is A) 100 chickens plus 50 bags of corn plus 40 bushels of apples. B) 190 units of goods produced. C) $2100. D) $2470 E) not determinable from the information provided. FIGURE ) Refer to Figure A shift in the aggregate expenditure function from AE0 to AE1 could be caused by A) a rise in the multiplier. B) a fall in the marginal propensity to consume. C) a rise in the marginal propensity to consume. D) an increase in desired investment expenditures. E) a decrease in desired investment expenditures. 7

8 Answer Key Testname: W11 112X V2 1) C 2) D 3) A 4) C 5) D 6) E 7) C 8) E 9) A 10) C 11) D 12) B 13) D 14) D 15) D 16) C 17) C 18) A 19) D 20) E 21) C 22) D 23) A 24) C 25) D 8