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ECONOMICS 1022B-002/004 Department of Economics

Western University

Jeannie Gillmore MIDTERM 1 February 9, 2013 INSTRUCTIONS: 1. The examination begins at 4:00 p.m. and ends at 6:00 p.m. 2. Check that your examination paper contains 16 pages. 3. Use a BLACK PENCIL to complete your Scantron Form.

Print your NAME and complete your SIGNATURE.

Enter your STUDENT NUMBER.

Enter your SECTION NUMBER, which is either 002 or 004. 4. Please hand in Scantron Form only.

5. You may use a calculator but your cell phone may not be used as a calculator.

6. Your cell phone must be switched off and left in your bag at the front of the exam room.

7. You must remain in the examination room until you have finished the exam. No breaks

outside of the examination room will be allowed.

NOTE: QUESTIONS ARE PRINTED ON BOTH SIDES OF EACH PAGE

Economics 1022B-002/004Mid-term 1

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers thequestion.

1) A bakery uses flour to produce bread.When calculating GDP, we include ________, because when we add the value of the flour to thevalue of the loaf of bread to calculate GDP, the result is ________.

A) both the value of the bread sold in a store and the value of the flour used to produce thebread; double counting

B) only the value of the flour used to produce the bread; double countingC) both the value of the bread sold in a store and the value of the flour used to produce the

bread; the true value of the economy's outputD) only the value of the bread sold in a store; double countingE) none of the above

2) Which of the following are equal to one another?I. aggregate productionII. aggregate expenditureIII. aggregate income

A) I equals II, but I does not equal III.B) I equals II equals III.C) I equals III, but I does not equal II.D) II equals III, but II does not equal I.E) III equals II, but III does not equal I

B-1

Use the table below to answer the following questions.

Table 1Data From Eastland

Wages, salaries, and supplementary labour income 800Other factor incomes 260Government expenditures on goods and services 240Depreciation 240Investment 400Personal income taxes net of transfer payments 140Indirect taxes 120Net exports 80Consumption expenditure 640

3) Refer to Table 1. From the information given in the table, the value of gross domestic product isA) $1,290.B) $1,360.C) $1,120.D) $1,280.E) $1,100.

4) Refer to Table 1. From the information given in the table, the value of net domestic income atfactor cost is

A) $1,360.B) $1,060.C) $1,100.D) $1,290.E) $1,280.

5) Refer to Table 1. From the data in the table, what additional data are needed to compute netdomestic income at market prices?

A) transfer paymentsB) depreciationC) statistical discrepancyD) subsidiesE) net taxes

B-2

Use the table below to answer the following questions.

Table 2Data From Southton

Price (dollars) Quantity (number of items)Item Base Year Current Year Base Year Current YearRubber Ducks 1.00 1.25 100 100Beach Towels 9.00 6.00 12 14

6) Refer to Table 2. From the data in the table, compute Southton's nominal GDP in the current year.A) $197B) $226C) $208D) $209E) It cannot be calculated given the data.

7) Refer to Table 2. From the data in the table, compute Southton's real GDP in the base year.A) $226B) $197C) $208D) $209E) It cannot be calculated given the data.

8) Choose the correct statement.A) Nominal GDP and real GDP both increase when the average level of prices increase.B) When nominal GDP increases, real GDP decreases.C) Nominal GDP is just a more precise name for GDP.D) Nominal GDP is just a more precise name for real GDP.E) We measure the change in production by comparing nominal GDP in one year with real GDP

in the previous year.

9) Suppose Angela falls in love with and subsequently marries her regularly employed housekeeper,Tony. What effect would this action have on GDP?

A) It would fall.B) It would fall but then increase after the honeymoon was over.C) It depends on whether he starts to work in the house free of charge or whether she still pays

him.D) It would rise.E) It would stay the same.

B-3

Use the table below to answer the following question.

Table 3

In 2010Item Quantity Price

Digital cameras 7 $2 eachChocolate bars 2 $1 eachWatches 3 $3 each

In 2011Item Quantity Price

Digital cameras 1 $9 eachChocolate bars 6 $8 eachWatches 9 $10 each

10) Refer to Table 3. An economy produces only digital cameras, chocolate bars, and watches.The table gives the quantities produced and prices in 2010 and 2011.The base year is 2010.The chained-dollar real GDP in 2011 is

A) $147.B) $34.C) $25.D) $36.E) $109.

11) In a country with a working-age population of 20 million, 13 million are employed, 1.5 million areunemployed, and 1 million of the employed are working part-time, half of whom wish to workfull-time. The labour force participation rate is

A) 57.5 percent.B) 72.5 percent.C) 65 percent.D) 75.5 percent.E) none of the above.

12) In a country with a working-age population of 22 million, 16 million are employed, 2 million areunemployed, and 1 million of the employed are working part-time, half of whom wish to workfull-time. The unemployment rate is

A) 10.3 percent.B) 10 percent.C) 11.1 percent.D) 15.4 percent.E) none of the above.

B-4

13) In a country with a working-age population of 22 million, 16 million are employed, 2 million areunemployed, and 1 million of the employed are working part-time, half of whom wish to workfull-time. The employment-to-population ratio is

A) 65 percent.B) 57.5 percent.C) 75.5 percent.D) 72.7 percent.E) none of the above.

14) In a country with a working-age population of 22 million, 16 million are employed, 2 million areunemployed, and 1 million of the employed are working part-time, half of whom wish to workfull-time. The involuntary part-time rate is

A) 5 percent.B) 2.8 percent.C) 12.5 percent.D) 6.3 percent.E) none of the above.

15) In a recession, typicallyA) unemployment rises.B) the employment-to-population ratio decreases.C) the labour force participation rate rises.D) the employment-to-population rate rises.E) both A and B are correct.

16) A zero percent unemployment rateA) is the only efficient unemployment rate.B) was last achieved during World War II when everyone was willing to work at the going wage

rate to end the war.C) would alleviate scarcity.D) is not consistent with the notion of full employment.E) is one of the economic goals of the Canadian government.

17) Rochelle lost her job as a salesperson when sales fell off during the recession. Now she is lookingfor a new job. Rochelle is

A) cyclically unemployed.B) structurally unemployed.C) frictionally unemployed.D) not unemployed.E) none of the above.

B-5

18) Suppose that the unemployment rate equals 4.5 percent and that the natural unemployment rate is5.5 percent. We can conclude that

A) we have mismeasured the natural unemployment rate.B) potential GDP is greater than real GDP.C) real GDP is greater than nominal GDP.D) potential GDP equals real GDP.E) potential GDP is less than real GDP.

Use the table below to answer the following questions.

Table 4Suppose a simple economy produces three goods only.

The price and output data for some selected years are shown below.

Price(dollars)

Price(dollars)

Quantity(number)

Quantity(number)

2002 2012 2002 2012PopCrackersCucumbers

0.751.252.00

1.102.103.00

100300200

120280190

19) Refer to Table 4. The reference base period is 2002. The CPI in 2012 isA) 100.B) 63.C) 96.D) 158.E) 1,340.

20) Refer to Table 4. The reference base period is 2002. Which one of the following statements is true?A) From 2002 to 2012, the cost of the market basket rose by 58 percent.B) It costs 158 times more in 2012 than it does in 2002 to buy the same market basket.C) The inflation rate in 2002 is greater than the inflation rate in 2012.D) All prices have risen by the same amount.E) The inflation rate in 2012 is greater than the inflation rate in 2002.

21) Using the Rule of 70, if the country of Flowerdom's current growth rate of real GDP per person is10 percent a year, how long will it take the country's real GDP per person to double?

A) 10 yearsB) 7 yearsC) 1 yearD) 0.7 yearsE) 49 years

B-6

22) Real GDP per person in the country of Flip is $10,000, and the growth rate is 10 percent a year.Real GDP per person in the country of Flap is $20,000 and the growth rate is 5 percent a year.When will real GDP per person be greater in Flip than in Flap?

A) in 2 yearsB) in 7 yearsC) neverD) in 10 yearsE) in 15 years

23) Canada's economic growth rate was highest in which of the following decades?A) the 1960sB) the 1930sC) the 1970sD) the 1980sE) the 1990s

24) Convergence between real GDP per person in Canada and Japan was relatively ________ duringthe 1960s; convergence has recently been ________.

A) slow; increasingB) rapid; increasing at an even faster rateC) rapidly; continuing at the 1960s paceD) slow; decreasingE) rapid; decreasing

B-7

Use the figure below to answer the following question.

Figure 1

25) Refer to Figure 1. The country of Kemper is on its aggregate production function at point W in theabove figure. If the population increases with no change in capital or technology, the economy will

A) remain at point W.B) move to point such as X.C) move to point such as Y.D) move to point such as Z.E) either remain at point W or move to point X.

26) Ceteris paribus, an increase in labour productivity results in aA) lower real wage rate and higher potential GDP per hour of labour.B) higher real wage rate and higher potential GDP per hour of labour.C) higher real wage rate and lower potential GDP per hour of labour.D) constant real wage rate in the long run.E) lower real wage rate and lower potential GDP per hour of labour.

27) Which of the following statements regarding human capital is incorrect?A) The accumulation of human capital is the source of both increased labour productivity and

technological advance.B) Writing and mathematics, the most basic of human skills, are crucial elements in economic

progress.C) Human capital is the accumulated skill and knowledge of human beings.D) Education is the only vehicle for the creation of human capital because training simply

reinforces what has already been learned.E) All of the above statements are correct.

B-8

28) In developing nations, microloans ________.A) have enabled small businesses with limited access to credit to purchase capital and expand,

allowing greater economic growthB) have increased the indebtedness of impoverished people, slowing economic growthC) are primarily used to finance consumption expenditure, leading to economic growthD) discourage saving and investmentE) are far too small to have any discernible effect

29) Which theory of economic growth argues that growth does not automatically slow down?A) classical growth theoryB) neoclassical growth theoryC) new growth theoryD) all of the theoriesE) none of the theories

30) The key difference between the neoclassical growth theory and the classical growth theory is thatA) in classical growth theory, the pace of technological change influences the economic growth

rate but economic growth does not influence the pace of technological change.B) increases in population drive workers' incomes back down to the subsistence level in classical

growth theory.C) growth in the neoclassical growth theory ends with a population explosion.D) capital is not subject to diminishing returns under classical growth theory.E) capital is subject to diminishing returns under classical growth theory.

31) At the beginning of the year, your wealth is $10,000. During the year, you have an income of$80,000 and you spend $90,000 on consumption goods and services. You pay no taxes. Yourwealth at the end of the year is

A) $10,000.B) $20,000.C) $100,000.D) $0.E) $90,000.

32) Suppose a bond promises to pay its holder $100 a year forever. The interest rate on the bond risesfrom 4 percent to 5 percent. The price of the bond ________.

A) falls from $25,000 to $20,000B) falls from $2,500 to $2,000C) rises from $20,000 to $25,000D) rises from $2,000 to $2,500E) does not change. Bond prices are constant.

B-9

Refer to the table below to answer the following question.

Table 5

ItemMillions of

dollarsConsumption expenditureGovernment expenditure ongoods and servicesNet taxesInvestmentImportsExports

80

3035201020

33) Refer to Table 5. Private saving isA) $20 million.B) -$15 million.C) $80 million.D) $40 million.E) $25 million.

34) A decrease in the real interest rate leads to a ________ the demand for loanable funds curve, and adecrease in expected profit leads to a ________ the demand for loanable funds curve.

A) movement down along; movement up alongB) rightward shift of; movement up alongC) movement down along; leftward shift ofD) movement down along; rightward shift ofE) rightward shift of; leftward shift of

B-10

Refer to the figure below to answer the following question.

Figure 2

35) Refer to Figure 2. In Figure 2, the supply of loanable funds curve is SLF0 and the demand forloanable funds curve is DLF0. An expansion that increases disposable income and expected profit

A) shifts the demand for loanable funds curve rightward to curve DLF1 and does not shift thesupply of loanable funds curve.

B) shifts the supply of loanable funds curve rightward to curve SLF1, and shifts the demand forloanable funds curve rightward to curve DLF1.

C) has no effect on either the demand for loanable funds curve or the supply of loanable fundscurve.

D) shifts the supply of loanable funds curve rightward to curve SLF1 and does not shift thedemand for loanable funds curve.

E) none of the above.

36) A government budget deficit ________ the demand for loanable funds and ________ investment.A) increases; decreasesB) increases; rises or falls depending on the change in the supply of loanable fundsC) decreases; decreasesD) decreases; increasesE) increases; increases

B-11

37) If the Ricardo-Barro effect occurs, ________ in private saving finances the government budgetdeficit and the real interest rate ________.

A) an increase; fallsB) a decrease; remains the sameC) a decrease; increasesD) an increase; remains the sameE) an increase; rises

Use the table below to answer the following question.

Table 6Data from Northland

Realinterest rate

(percent per year)

Demand forLoanable Funds

(billions of dollars)

Supply ofLoanable Funds

(billions of dollars)345678

1601401201008060

406080100120140

38) Refer to Table 6. Table 6 shows the market for loanable funds in Northland. The governmentbudget is balanced. If the government moves from a balanced budget to a surplus of $20 billion,the new equilibrium has a real interest rate of ________ percent and quantity of loanable fundstraded equal to ________.

A) 6; $120 billionB) 5.5; $110 billionC) 6.5; $110 billionD) 5.5; $90 billionE) 6.5; $90 billion

39) In an individual economy that is integrated into the global market, the demand for loanable fundsis determined by the ________ demand and the supply of loanable funds is determined by the________ supply.

A) country's; world'sB) world's; World Bank'sC) country's; country'sD) world's; world'sE) world's; country's

B-12

40) An increase in the government budget deficit ________. If the country is an internationalborrower, the government budget deficit ________. If the country is an international lender, thegovernment budget deficit ________.

A) decreases the country's demand for loanable funds; decreases foreign lending; increasesforeign borrowing

B) increases the country's demand for loanable funds; decreases foreign borrowing; increasesforeign lending

C) increases the country's demand for loanable funds; increases foreign borrowing; decreasesforeign lending

D) increases the country's supply of loanable funds; decreases foreign lending; increases foreignborrowing

E) decreases the country's supply of loanable funds; increases foreign borrowing; decreasesforeign lending

41) If Wolfgang transfers $1,000 out of his chequable deposit account and places it in hisnon-chequable deposit account,

A) M1 falls and M3 rises.B) M1 rises and M2 remains the same.C) M1 falls and M2 rises.D) M1 falls and M2 remains the same.E) M1 and M2 fall.

42) Which one of the following is considered to be money?A) a debit cardB) a credit cardC) a blank chequeD) a chequable depositE) a Canada Savings Bond

43) The Monetary Base consists of the sum ofA) Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada,

and coins held by banks and the public.B) Bank of Canada notes held outside the Bank of Canada, bank deposits at the Bank of Canada,

and notes and coins held by banks.C) Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada,

and coins held by banks.D) Bank of Canada notes held within the Bank of Canada, bank deposits at the Bank of Canada,

and coins held by banks and the public.E) Bank of Canada notes held outside the Bank of Canada, the desired reserves of chartered

banks, and coins held by banks.

B-13

44) When the Bank of Canada sells government securities to a bank, how are the Bank of Canada'sassets affected?

A) The bank's reserves held at the Bank of Canada decrease.B) The bank's reserves held at the Bank of Canada increase.C) Bank of Canada notes increase.D) The amount of the Bank of Canada's government securities decreases.E) The amount of the Bank of Canada's government securities increases.

Use the information below to answer the following questions.

Fact 1

The Bank of Speedy Creek has chosen the following initial balance sheet:

Assets Liabilities Reserves $40 Deposits $500

Loans $460 $500

45) Refer to Fact 1. Based on the Bank of Speedy Creek's initial balance sheet, what is its desiredreserve ratio?

A) 25 percentB) 8 percentC) 4 percentD) 40 percentE) 12.5 percent

46) Refer to Fact 1. Huck Finn comes along and deposits $10. After Huck's deposit, but before anyother actions occur, the total amount of money in the economy

A) has stayed the same, with currency decreasing and deposits increasing.B) has risen, with currency unchanged and deposits increasing.C) has fallen, with currency decreasing and deposits staying the same.D) has stayed the same, with its components unchanged.E) has fallen, with currency decreasing and deposits unchanged.

B-14

47) If the interest rate is above the equilibrium rate, how is equilibrium achieved in the money market?A) People buy bonds to get rid of their excess money, raising the price of bonds and lowering

the interest rate.B) People sell bonds to get rid of their excess money, raising the price of bonds and lowering the

interest rate.C) People sell bonds to get rid of their excess money, lowering the price of bonds and lowering

the interest rate.D) People sell goods to get rid of their excess money, lowering the price of goods and lowering

the interest rate.E) People buy goods to get rid of their excess money, lowering the price of goods and lowering

the interest rate.

Use the figure below to answer the following question.

Figure 3

48) Refer to Figure 3. Which one of the following best describes the response to a decrease in themarket price of bonds?

A) A movement from A to FB) A movement from A to CC) A movement from E to AD) A movement from A to BE) A movement from A to E

B-15

49) GDP is $2,000 billion, the price level is 100, and the velocity of circulation is 5. The quantity ofmoney is

A) $400 billion.B) $10,000 billion.C) $500 billion.D) $2,000 billion.E) $20 billion.

50) Real GDP is $2,000 billion, the price level is 120, and the velocity of circulation is 5. NominalGDP is

A) $166.67 billion.B) $2,000 billion.C) $2,400 billion.D) $24 billion.E) $600 billion.

B-16

Answer KeyTestname: MT1FEB13

1) D2) B3) B4) B5) D6) D7) C8) C9) C10) B11) B12) C13) D14) B15) E16) D17) A18) E19) D20) A21) B22) E23) A24) E25) B26) B27) D28) A29) C30) B31) D32) B33) E34) C35) B36) A37) D38) B39) A40) C41) D42) D

B-17

Answer KeyTestname: MT1FEB13

43) A44) D45) B46) A47) A48) D49) A50) C

B-18