ECON2123-L5 Macroeconomics Mid-term 1 Part 1

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1 ECON2123-L5 Macroeconomics Mid-term 1 Part 1 1. For this question, assume that 1980 is the base year. Given macroeconomic conditions in the United States over the past three decades, we know that A) nominal GDP is always smaller than real GDP since B) real GDP and nominal GDP would be equal for the entire period. C) real GDP is larger than nominal GDP from 2002 to D) real GDP and nominal GDP were equal in Suppose nominal GDP increased in a given year. Based on this information, we know with certainty that A) real output has increased. B) the price level (GDP deflator) has increased. C) real output and the price level (GDP deflator) have both increased. D) either real output or the price level (GDP deflator) have increased. E) real output has increased and the price level has decreased. 3. In a given year, suppose a company spends $1 million on intermediate goods and $1million on wages, with no other expenses. Also assume that its total sales are $3 million. The value added by this company equals A) $3 million. B) $4 million. C) $2 million. D) $5 million. E) $1 million. 4. An individual is said to be a discouraged worker if he or she A) is working, but prefers not to work. B) is working part time, but would prefer a full time job. C) is working in jobs she/he is not suited for. D) wants to work, and is actively searching for a job. E) wants to work, but has given up searching for a job. 5. The prices for which of the following goods are included in both the GDP deflator and the consumer price index? A) goods bought by households B) goods bought by firms C) good bought by governments D) goods bought by foreign households (i.e., exports) E) all of the above 6. Let the consumption function be represented by the following equation: C = c0 + c1yd. For this equation, we assume that c1 is A) negative. B) larger than c0. C) different at different levels of income. D) equal to one.

2 7. Which of the following events will cause a reduction in equilibrium output? A) an increase in the marginal propensity to save B) an increase in taxes C) a reduction in the marginal propensity to consume D) all of the above 8. Which of the following generally occurs when a central bank pursues contractionary monetary policy? A) the central bank purchases bonds and the interest rate increases. B) the central bank purchases bonds and the interest rate decreases. C) the central bank sells bonds and the interest rate increases. D) the central bank sells bonds and the interest rate decreases. 9. Which of the following is NOT included as a component of the M1 definition of money? A) bonds B) checkable deposits C) coins and bills held by the nonbank public D) all of the above 10. Which of the following transactions would be included in the official calculation of United States GDP? A) A student buys a used textbook at the bookstore. B) Firestone sells $2 million worth of tires to General Motors. C) You wash and wax your father s car as a favor to him. D) You buy a new ipod. E) You illegally download music off the internet to put on your new ipod. 11. Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% interest rate. Given this information, we know that the bond s price must be. A) $950. B) $ C) $1150. D) $ An example of an intermediate good would be A) a new car B) a used car C) the rims on a new car D) new rims to replace old rims on a used car 13. Suppose the demand for money is VERY sensitive to the interest rate. Given this information, we know that A) the IS curve should be relatively flat. B) the IS curve should be relatively steep. C) the LM curve should be relatively flat. D) the LM curve should be relatively steep. E) neither the IS nor the LM curve will be affected.

3 14. For this question, assume that investment spending depends only on output and no longer depends on the interest rate. Given this information, an increase in the money supply A) will cause investment to decrease. B) will cause investment to increase. C) will cause a reduction in the interest rate. D) will have no effect on output or the interest rate. E) will cause an increase in output and have no effect on the interest rate. 15. Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that A) the goods market is in equilibrium and the money market is not in equilibrium. B) the money market and bond markets are in equilibrium and the goods market is not in equilibrium. C) the money market and goods market are in equilibrium and the bond market is not in equilibrium. D) the money, bond and goods markets are all in equilibrium. E) neither the money, bond, nor goods markets are in equilibrium. 16. Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy action. A) investment spending will decrease. B) investment spending will increase. C) there will be no change in investment spending. D) investment spending may increase, decrease, or not change. 17. Which of the following best defines the LM curve? A) the combinations of i and Y that maintain equilibrium in the goods market B) illustrates the effects of changes in i on investment C) illustrates the effects of changes in i on desired money holdings by individuals D) the combinations of i and Y that maintain equilibrium in financial markets Use the information provided below to answer the following questions. Suppose a country using the United States' system of calculating official unemployment statistics has 100 million people, of whom 50 million are working age. Of these 50 million, 20 million have jobs. Of the remainder: 10 million are actively searching for jobs; 10 million would like jobs but are not searching; and 10 million do not want jobs at all. 18. Refer to the information above. The labor force participation rate is A).2. B).3. C).4. D).6. E) Refer to the information above. The official unemployment rate is A).1. B).2. C).33. D).4. E).66.

4 20. Which of the following is a characteristic of bonds? A) pay zero nominal interest B) can be used for transactions C) are sold for a price that varies inversely with the interest rate D) all of the above 21. Which of the following would tend to make the multiplier smaller? A) an increase in the marginal propensity to consume B) an increase in the marginal propensity to save C) a reduction in taxes D) a reduction in government spending 22. In the circular flow diagram, aggregate expenditure includes: A) consumption expenditure, saving, investment and government expenditure B) saving, investment, and taxes C) consumption expenditure, investment, government expenditure, and exports D) consumption expenditure, investment, government expenditure and net exports 23. Which of the following would be an example of a consumption expenditure? A) More spending by the government on children's programs. B) An increase in welfare payments to single mothers. C) The purchase of a new car by the IPSCO steel company. D) The purchase of a new car by the David household. 24. The value of intermediate goods is not counted in GDP A) to keep from including goods that reduce society's welfare. B) because of the tremendous difficulty in keeping track of all the intermediate goods produced in an economy. C) because they are only sold in factor markets. D) to avoid counting their value twice and overstating the value of GDP. E) because they are not consumed in the current year. 25. Autonomous spending in a closed economy equals which of the following? A) c0 + I + G - c1t B) C + I + G C) Z D) c0 + I + G + c1t 26. Based on our understanding of the model presented in Chapter 3, we know that an increase in c1 (where C = c0 + c1yd) will cause A) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a smaller effect on output. B) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output. C) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller effect on output. D) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a larger effect on output. 27. Suppose the consumption equation is represented by the following: C = YD, then private savings is A) YD. B) YD. C) YD. D) YD.

5 28. Which of the following is a liability on a bank's balance sheet? A) checkable deposits B) reserves C) loans D) all of the above 29. The use of money is more efficient than barter because the introduction of money A) reduces the need for economic specialization. B) reduces the need to exchange goods. C) reduces the need for other stores of value. D) reduces transaction costs. 30. Why do people keep currency in their pockets when bank deposits pay interest? A) Because banks might steal your money. B) Because currency is more liquid. C) Because bank deposits lose value due to inflation. D) Because bank deposits lose value due to changes in interest rates.

6 Part 2 1.(12 points) Consider the following table for the economy of a nation whose residents produce four final goods. Assume a 2016 base year: a. What is nominal GDP for 2015 and 2016? (4 points) b. What is real GDP for 2015 and 2016? (4 points) c. What is the price index for 2015? (2 points) d. What is the inflation rate of year 2016? (2 points) 1

7 2.(12 points) Consider the equilibrium model in the Goods Market from Chapter 3. Assume that marginal propensity to consume is 0.8 when answer the following questions: a. If government expenditures rise by $1 billion, by how much will the aggregate expenditure curve shift upward? By how much will equilibrium real GDP per year change? Graphically show the effects of this change to the aggregate expenditure and equilibrium GDP. (6 points) b. If both taxes and government expenditures rise by $1 billion, by how much will the aggregate expenditure curve shift? What will happen to the equilibrium level of real GDP? (4 points) c. How does you response to the question in part (b) change if MPC = 0.75? (2 points) 2

8 3. (16 points) Assume the following IS-LM model: C = Y D T =0.25Y I = i G = 120 M s = 700 P =2 (M/P ) d = (1/3)Y i Answer the following questions: a. Derive the IS and LM relation mathematically and solve for the equilibrium level of income and the interest rate. Plot the IS-LM curves in the Y-i space. (Label the important values.) (8 points) b. Derive the equilibrium values of consumption and money demand. (2 points) c. Calculate the equilibrium value of investment. How much does investment change if the government increases its purchases by 160? Graphically illustrate and explain the effect of this change. (6 points) 3

Print last name: Solution Given name: Student number: Section number:

Print last name: Solution Given name: Student number: Section number: Department of Economics University of Toronto at Mississauga ECO202Y5Y Macroeconomic Theory and Policy Summer Session: June 2003 Test One Instructor: Xinhua Gu Date: Tuesday, June 10, 2003 Time allowed: