Multiple Choice Questions

Transcription

1 Mock Midterm Instructions. Answer the following questions. Multiple Choice Questions 1. The table below pertains to an economy with only two goods; books and calculators. The xed basket consists of 5 books and 10 calculators Year Price of Books Price of Calculators 2005 $24 $ $30 $ $12 $25 Using 2005 as the base year, the consumer price index is (a) 100 in 2005, 135 in 2006, and 155 in 2007 (b) 100 in 2005, 270 in 2006, and 310 in 2007 (c) 200 in 2005, 270 in 2006, and 310 in 2007 (d) 200 in 2005, 540 in 2006, and 620 in If a country reported a nominal GDP of 85 billions in 2007 and 100 billions in 2006 and reported a GDP de ator of 100 in 2007 and 105 in 2006, then from 2006 to 2007 real output (a) and prices both rose (b) rose and prices fell (c) and prices both fell (d) fell and prices rose 3. Which one of the following items would be included in the GDP calculations? (a) The purchase of stocks on Toronto exchange (b) Payments made to unemployed workers during the year as a part of their unemployment compensation (c) The cost of the tools used by a thief to break into your car (d) The cost of the pollution caused during the processing of steel during the year 4. A real estate salesperson sells a house in 1999 that was built in How does this transaction get counted in the GDP statistics? (a) The price of the house and the real estate salesperson s commission are both included in 1999 s GDP. (b) Neither the price of the house nor the commission is included in 1999 s GDP (c) The real estate salesperson s commission but not the price of the house is included in 1999 s GDP (d) The price of the house would be included in both 1990 s GDP and the GDP for Capital consumption allowances correspond to each of the following except (a) depreciation (b) xed capital used up in the production process (c) di erence between GDP and NDP (d) di erence between GDP and GNP (e) both (c) and (d) 6. The simple circular ow model shows that 1

2 (a) rms hire the factors from households and produce the output consumed by households (b) households provide the factors to rms and buy the output produced by rms (c) the source of household income is the producing sector and the source of rms revenue is household spending (d) all of the above are correct 7. Which of the following would increase per unit production cost and therefore shift the aggregate supply curve up? (a) a reduction in business taxes (b) a production bottlenecsks occurring when producers are near full plant capacity (c) an increase in the price of imported resources (d) deregulation of industry 8. Suppose that nominal wages fall and productivity rise in a particular economy. Other things being equal, the aggregate (a) demand curve will shift leftward (b) supply curve will shift rightward (c) supply curve will shift leftward (d) expenditures curve will shift downward 9. Other things being equal, the higher the price level, the lower the level of domestic output purchased. This occurs because of: (a) wealth e ect (b) consumer spending on capital goods (c) the full-employment-unemployment rate (d) the sensitivity to demand-pull in ation 10. In a diagram illustrating the savings and investment functions for a closed economy with no government, an increase in saving at every level of income will: (a) shift the investment function up and increase equilibrium income (b) increase the slope of the savings function and lower equilibrium income (c) leave the level of investment and saving unchanged but lower the equilibrium income (d) change the slope of the investment function but leave equilibrium income unchanged 11. If the MPC is 0.8 and government levies a net tax rate of 0.3 then the MPC out of national income Y becomes (a) 0.56 (b) 0.24 (c) 0.5 (d) Other things equal, the multiplier e ect associated with a change in government spending is: (a) the same as that associated with a change in taxes. (b) equal to that associated with a change in investment or autonomous consumption. (c) less than that associated with a change in investment. (d) greater than that associated with a change in investment. 2

3 13. If a demand shock causes an economy to operate at a point above potential GDP, then (a) the AS curve will shift to return the economy to the original point of equilibrium. (b) the economy will correct itself through rising wages and prices. (c) this short-run equilibrium point will become the new long-run equilibrium GDP. (d) the economy will correct itself through falling wage rates and prices. (e) the shock is said to be a negative demand shock. provide information about the economic stimulus or restraint coming from monetary policy 14. In the following gure, if the AD conditions illustrated persist, the government can intervene to restore back equilibrium by (a) reducing interest rate (b) cutting taxes or government spending (c) increasing government spending (d) borrowing from other countries 15. Under what conditions will an increase in government expenditure have no e ect on real GDP? (a) when the long run AS curve slopes upward. (b) when workers are blind. (c) when the AD curve is vertical. (d) when the marginal propensity to consume is zero. (e) when MPC=1 Use the following information to answer questions 16, 17, and 18 below. Suppose the government raises its revenue by a net tax of 25 percent on income, t = 0:25, and the marginal propensity to consume out of disposable income is 0:8, and the government has an outstanding public debt of In addition, the autonomous expenditure by the household and business sectors is 200 and government expenditure is 500. Answer the following questions: 16. What is the initial debt to GDP ratio? (a) 62.86% (b) 50% (c) 60% (d) 52% 3

4 17. If the government increases its expenditures by 90 to provide additional funding for national defence. What is the size of the outstanding public debt after the increase in government expenditure, assuming the economy has reached its new equilibrium national income in one year? (a) (b) 1200 (c) 1100 (d) What is the debt ratio after the increase in government spending? (a) 57.41% (b) 50% (c) 60% (d) Non of the above 19. Who of the following would be counted as unemployed by Statistics Canada? (a) A person with a part-time job (b) A person with a full-time job (c) A person employed or unemployed but actively looking for a job (d) A person willing to work who had not looked for a job in two months 20. The built-in long-run adjustment process that eliminates a recessionary gap (Y < Y p ) om the economy requires that: (a) growth in wages and production costs slow down over time (b) the in ation rate declines over time (c) aggregate demand and output Y increase along the AD function over time. (d) all of the above 21. The actual budget balance of the federal government in 2005 was about $+5.7 billion. On the basis of this information it: (a) can be concluded that the economy was faced with serious in ation in 2005 (b) cannot be determined whether scal policy had an expansionary or a contractionary impact in 2005 (c) can be concluded that scal policy was contractionary in 2005 (d) can be concluded that scal policy was expansionary in "Built-in stability" means that: (a) an annually balanced budget will automatically o set the pro-cyclical tendencies created by state and local nance and thereby stabilizes the economy. (b) with given tax rates and expenditures policies a rise in national income will increase the budget balance while a decline will reduce the budget balance without any action on the part of the government (c) Parliament will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity (d) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year 4

5 23. which of the following best completes this statement: "Once we include a proportional income tax in the model of aggregate expenditure and equilibrium real GDP..." (a) individual incomes are higher than they would be without taxes (b) the marginal propensity to consume out of disposable income rises as a result of the tax (c) the multiplier is lower than it would be without the taxes (d) the government must also be spending on goods and services 24. Consider the following information regarding a hypothetical economy GDP (Y) Consumption (C) Investment (I) Referring to the previous table, the aggregate expenditure schedule in the above economy is (a) AE = :4Y (b) AE = :7Y (c) AE = 90 0:2Y 25. To obtain a measure of net domestic income from GDP, it is necessary to: (a) add any transfer payments made by the government to households (b) deduct the value of capital used up in the production of current output (c) deduct net indirect taxes and depreciation (d) add any increases in the nation s stock of capital Short Answer Questions 26. Double Counting Problem Suppose there is an economy that produces only four goods in one year: Paper: $8,000 Books: $15,000 Toner: $4,500 Envelopes: $4,000 The production of books requires the following amount of intermediate goods: Paper: $4,000 Toner: $3,500 The production of envelopes requires the following amount of intermediate goods: Paper: $2,500 (a) Find the total GDP for the economy ($21500) The value of the total GDP without taking into consideration the double counting is found as GDP Double Counting = = The value of paper as intermediate good equals $6500 ($4000+$2500) and the value of toner as intermediate good is $3500. Therefore, the value that we double counted is ($3500+$6500)=$10,000. Thus, the value of the GDP in the economy should be GDP = =

6 (b) Find the value of paper sold as a nal good. ($1500) (c) Find the value of toner sold as a nal good ($1000) 27. Suppose the labour force consists of 180 adults, of which 72 are employed. (a) Find the unemployment rate? (60%) (b) Now suppose 19 of the unemployed workers are so discouraged that they have given up looking for work. They decide to go back to school full-time. Find the new unemployment rate. (55.28%) (c) True or False: "low unemployment rates imply more people are working". False 28. The data in the table below shows the total output and prices of each product for the distant country of the United States (all gures in billions and the base year is 2003). Round your answer to two decimal places Q P (2003) N GDP Hot Dogs CDs Farm Tractors Parking Meters Totals Q P (2004) N GDP P (2003) Real GDP Hot Dogs 48 5 CDs Farm Tractors Parking Meters 5 90 Totals 2005 Q P (2005) N GDP P (2003) Real GDP Hot Dogs 48 6 CDs Farm Tractors Parking Meters Totals (a) Complete the table and answer the following questions Q P (2003) N GDP Q P (2004) N GDP P (2003) Real GDP Hot Dogs CDs Farm Tractors Parking Meters Totals Q P (2005) N GDP P (2003) Real GDP (b) What is the value of nominal GDP, real GDP, GDP de ator, and in ation rate (%) in 2004 and 2005? 6

7 Total Nominal GDP (in billions) Total Real GDP (in billions) GDP de ator In ation rate (c) Suppose that the population in the United States as follows: million 160 million 180 million What is the real GDP percapita in 2003, 2004 and 2005? , ,575 10, (d) What are the real GDP per capita growth rates (%) for 2004 and Growth rates (e) Suppose that the representative consumer in the United States buys 5 units of each consumer good. What is the cost of each bundle in 2003, 2004 and 2005? For year 2003, the cost of the bundle is 80 as (5 hot dogs 4) + (5 CDs 12) = 80 Similarly, for year 2004, the cost of the bundle is 100 and for year 2005, it costs Bundle cost (f) Converting the cost of each bundle into a consumer price index, what is the value of each bundle (using 2003 as the base year) in 2003, 2004, and 2005? We use the following formula to calculate the price index Therefore, and Index current year = V alue of bundles Current year V alue of bundles base year 100 Index 2004 = Index 2005 = = 125; 100 = 150 (g) What is the in ation rate (%) using this price index in 2003, 2004, and 2005? in ation rate 0 25% 20% Problems 29. Consider the following quote: The government should take some precautionary measures to face the expected recession in economic activities. Explain this statement. What measures this quote is talking about? what is the consequences of recession on the economic activities of an economy? Illustrate your answer with an AD AS diagram. 7

8 30. The AE function and the multiplier Consider the following information concerning a hypothetical economy: C = :8Y d I = 500 G = 150 t = 0:25 NX = 150 Y p = 3000 (a) Derive the aggregate expenditure function AE = :6Y (b) Find the short-run equilibrium output and the multiplier (c) Find the output gap Y = M ultiplier = 1 0:6 = 2:5 Gap = Y Y p Y p 100% = 16:7% (d) By how much would autonomous expenditures have to change to eliminate the output gap? by 200) (increase 31. AE and the Budget Balance Suppose the government raises its revenue by a net tax of 25 percent on income, t = 0:25, and the marginal propensity to consume out of disposable income is 0.8, and the government has an outstanding public debt of In addition the autonomous expenditure by the household and business sectors (C 0 + I 0 ) is 300 and government expenditure is 500. Answer the following questions: (a) What is the initial debt to GDP or debt to national income ratio? (b) Now, suppose the government increases its expenditures by 80 to provide additional funding for national defence. What is the size of the outstanding public debt after the increase in government expenditure, assuming the economy has reached its new equilibrium national income in one year? (c) What is the debt ratio after the increase in government expenditure and equilibrium income? Solution: (a) First, we need to nd the equilibrium level of GDP. To this end, we nd the AE function rst as follows At equilibrium Solving for Y yields Therefore, the debt to GDP ratio is AE = (C 0 + I 0 + G 0 ) + c(1 t)y AE = :8(0:75)Y AE = :6Y AE = Y :6Y = Y Y = 2000 Debt GDP = % = 55%

9 (b) We need to nd the e ect on the government s budget balance, BB, as a result of increasing G by 80. First notice that BB = T G; where T = ty Therefore, to see how much BB changes, we need to check the changes in its components, i.e., 4G and 4T: 4G = +80 (given) ((1)) To nd 4T, we compute, rst, the change in income, 4Y, as a result of the increase in G; this can be found from the multiplier formula 4Y = multiplier 4G; where Therefore, and From (1) and (2), multiplier = 1 1 slope of AE = 1 1 0:6 = 2:5 4Y = 2:5 80 = 200 4T = t 4 Y = 0:25(200) = +50 ((2)) 4BB = = 30 That is the government is su ering a de cit of 30 and hence, the outstanding public debt will increase by 30. The new outstdanding public debt is 1130 (c) The new debt ratio is then 32. Unemployment and Output Gaps New Debt New Y 100% = % = 51:36% 2200 Assume that the full-employment GDP(Y p ) is equal to 550 and it remains constant throughout the years below. Leave all decimals to two places Labor Employment Unemployment Pop. Real GDP Output Gap BB versus SBB Force (thousands) Rate (%) (millions) (in ationary) >,<,= Year (000) U E prices - (recessionary) ,600 11, , , (i) Fill in the columns for labour force, unemployed, employed and unemployment rates (4 marks). (ii) Using Okun s law, ll in the column for Real GDP. (iii) Given your answers in (b), ll in the column for output gap. (iv) Suppose that thre are no discrete scal policy chanes. Compare budget balance (BB) and structural budget balance (SBB). State in the table whether BB>SBB or BB<SBB or BB=SBB. (v) Explain intuitively how an economy will adjust from a short run recessionary gap back to the long run level of Y p without any scal or monetary policy intervention 9

10 Answer. Labor Employment Unemployment Pop. Real GDP Output Gap BB versus SBB Force (thousands) Rate (%) (millions) (in ationary) >,<,= Year (000) U E prices - (recessionary) , , , ,