Midterm Examination Economics 105 Spring 2002 Mr. Easton Answer each of the test questions on the answer sheet provided. Be sure to use a pencil. There are 50 questions. Each question is worth one point. In addition to your name and ID number, please put the Version Number in the box that is indicated on the Overhead. THIS EXAM IS VERSION 1. Good luck. 1. If the unemployment rate is 8.5 percent and the natural rate of unemployment is 3.0 percent, then the cyclical unemployment rate is a. 8.5 percent. b. -3.0 percent. c. 3.0 percent. d. 14 percent. e. 5.5 percent. 2. Inflation a. benefits creditors if it is unanticipated. b. has no real effects if it is unanticipated. c. reduces the real value of nominal debt. d. reduces the real value of fixed money incomes. e. increases the purchasing power of money. 3. If the Consumer Price Index changes from 120 in year one to 150 in year two, the rate of inflation in the intervening year is a. 20 percent. b. 12.5 percent. c. 10 percent. d. 30 percent. e. 25 percent. 4. If 5 French francs can be exchanged for one Canadian dollar, the dollar price of a franc is a. $0.20 b. $1.00 c. $2.00 d. $5.00 e. $0.50 1
5. One major reason that GDP is an inaccurate measure of quality of life is that a. people frequently buy things they do not want. b. it is statistically very inaccurate. c. it does not include non-market activities. d. it cannot be adjusted for changes in prices. e. all of the above. 6. Real GDP is equivalent to a. the nominal value of GNP multiplied by the GDP deflator. b. the market value of all goods and services produced in an economy per year. c. personal disposable income plus depreciation. d. the money value of all goods and services produced in an economy per year plus imports. e. the value of all goods and services produced in an economy per year deflated for price changes. The table below shows total output for an economy over 2 years. ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ 1998 Price Quantity ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ Good A $1.50 200 units Good B $3.00 400 units Good C $7.50 200 units 1999 Price Quantity ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ Good A $3.00 240 units Good B $4.50 400 units Good C $15.00 200 units ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ TABLE 20-2 7. Refer to Table 20-2. The real GDP in 1999, expressed in 1998 dollars, was a. $3060. b. $3360. c. $5400. d. $5520. e. $3000. 8. Refer to Table 20-2. The implicit GDP deflator in 1999 was approximately a. 160 b. 204. c. 195. d. 175. e. 180. 2
9. Refer to the graph below, Figure 20-1. Nominal GDP increased by approximately percent between 1985 and 1990. a. 40 b. 60 c. 20 d. 100 e. 80 10. Decreases in real GDP may be caused by a (an) a. increase in factor productivity. b. increase in factor utilisation rates. c. increase in interest rates. d. decrease in unemployment rates. e. all of the above. 3
11. The payment to a factor of production that is the most important in determining production costs and the price level in the economy as a whole is a. wages paid to workers. b. rents paid for the use of land. c. interest rate (the cost of using capital). d. the money invested into fixed buildings and capital equipment. e. profits paid to the entrepreneurs who undertook the risks of production. 12. Undesired inventory accumulation occurs when a. autonomous expenditure exceeds induced expenditure. b. consumption exceeds investment. c. actual expenditure exceeds desired expenditure. d. desired expenditure exceeds actual expenditure. e. investment exceeds consumption. 13. "The marginal propensity to consume" refers to the additional a. consumption that occurs out of an additional dollar of investment. b. saving that occurs out of an additional dollar of disposable income. c. consumption that occurs over time. d. consumption that occurs out of an additional dollar of disposable income. e. consumption caused by a change in tastes. 14. Which of the following are the basic assumptions about the consumption function? a. The MPC and APC are always less than unity. b. Below the break-even level, APC > 1 and MPC < 0. c. The APC is greater than zero and less than one and the MPC falls as income rises. d. The MPC is greater than zero and less than one and the APC falls as income rises. e. As income rises, the MPC falls and the APC rises. 15. A decrease in wealth a. causes an upward shift in the consumption function. b. only affects saving, not consumption. c. causes no change in consumption because the increase is always expected. d. causes no change in consumption because consumption is a function of disposable income only. e. causes a downward shift in the consumption function. 4
16. In a simple model of the economy, with no government and no foreign trade, the equilibrium level of national income is at an income a. to the left of the point where the AE curve intersects the 45-degree line. b. where aggregate desired expenditure equals the value of total output. c. where savings plus consumption equal actual national income. d. where saving equals income. e. to the right of the point where the AE curve intersects the 45-degree line. 17. The requirement for equilibrium in the simple macro model (closed economy, no government) with a given price level is that desired a. investment equals zero. b. investment equals consumption. c. investment equals actual saving. d. saving equals zero. e. saving equals desired investment. 18. Suppose S = -200 + 0.1Y, and I = 400. Equilibrium income is a. 4000. b. 6000. c. 2000. d. 200. e. 400. 19. The simple multiplier, which applies to short-run situations in which prices are given, describes changes in a. the equilibrium level of national income caused by changes in autonomous expenditure. b. employment induced by changes in equilibrium income. c. investment induced by changes in equilibrium income. d. the rate of interest caused by increased demand for credit. e. saving caused by changes in investment. 20. If the business community decreases its investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend is a. 1/3. b. 4/5. c. 1/2. d. 2/5. e. 2/3. 5
21. If the saving function is S = -100 + (0.4)Y, the simple multiplier in a closed economy with no government is a. 5. b. 2.5. c. insufficient information to know. d. 1. e. 0.2. 22. The AE function for an open economy with government can be written as AE = a. C + I - G - (X+IM). b. C + I - G + (X-IM). c. C + I + G - (X-IM). d. C + I + G + (X-IM). e. C + I + S + (X+IM). 23. Given a marginal propensity to consume out of disposable income of 0.9 and a tax rate of 10 percent of national income, the marginal response of consumption to changes in national income is. a. 0.72 b. 0.09 c. 0.81 d. 1.00 e. 0.90. 24. An economy with positive net exports is, and so is trading off. a. transferring assets to foreigners; present claims on services to gain more services in the future b. transferring assets to foreigners; future claims on services to gain more services in the present c. accumulating foreign assets; present claims on services to gain more services in the future d. accumulating foreign assets; future claims on services to gain more services in the present e. maintaining a constant level of foreign assets; nothing 25. A decrease in the value of the multiplier can be caused by a. a decrease in the marginal propensity to import. b. an increase in the marginal propensity to consume. c. a decrease in income tax rates. d. an increase in the marginal propensity to spend. e. an increase in the marginal propensity to save. 6
26. If the marginal propensity to spend is 0.4, a $0.6 billion decrease in government purchases will cause equilibrium national income to by. a. decrease; 1 billion b. increase; $1.5 billion c. increase; $1 billion d. decrease; $1.5 billion 27. A rise in the domestic price level a. makes domestic goods more attractive to foreigners. b. causes a decrease in saving. c. lowers the real value of all assets denominated in money units. d. makes foreign goods less attractive to domestic residents. e. raises the real burden of repaying a fixed money value debt. 28. Assume that aggregate expenditure is composed of consumption and investment (C+I). As the price level falls, the aggregate expenditure curve shifts a. down and the economy will downward along the AD curve. b. upward and the economy moves downward along the AD curve. c. upward and the economy moves upward along the AD curve. d. to the right as does the AD curve. e. down and the economy will move upward along the AD curve. 29. A fall in the amount of desired consumption, investment, government, or net export expenditure associated with each level of national income a. causes a movement along the AE curve. b. shifts the AD curve to the right. c. shifts the AD curve to the left. d. causes a movement along the AD curve. e. causes a shift of the AE curve but no movement of the AD curve. 30. The simple multiplier is indicated by the a. downward movement along the AD curve in response to a change in autonomous expenditure. b. rightward shift of the AD curve in response to a change in autonomous expenditure. c. upward movement along the AD curve. d. upward shift of the AD curve in response to a change in autonomous expenditure. e. horizontal distance between initial equilibrium and the new intersection of AD and AS in response to a change in autonomous expenditure. 7
31. If the economy is at a price level/real GDP combination that is to the left of the aggregate demand curve, a. the economy is in a short-run equilibrium. b. inventories are likely to decumulate. c. consumption will tend to fall. d. income will tend to fall. e. actual output is greater than aggregate desired expenditure. 32. The short-run aggregate supply (SRAS) curve shows the relationship between the price level and the total a. investment that firms wish to make, as input prices vary. b. investment that firms wish to make, with input prices given. c. output that firms wish to produce and sell, with input prices given. d. output that firms wish to produce and sell, as input prices vary. e. wealth accumulated by households, with national income given. 33. The SRAS has a positive slope because, as the price level rises, business firms will a. be compensated for the extra costs incurred to produce more output. b. experience rising factor prices. c. produce the same output, but at higher prices. d. produce less in response to falling profits. e. accumulate inventories. 34. Suppose that a government report indicates that a rising percentage of high-school graduates are illiterate, resulting in a decrease in labour productivity. This will a. shift the SRAS curve to the left. b. not shift any curve in the short run. c. shift the AD curve to the right. d. shift the SRAS curve to the right. e. shift the AD curve to the left. 8
35. If major labour unions succeed in increasing wages, this will cause the SRAS curve to shift a. upward (to the left), increasing the price level. b. downward (to the right), reducing the price level. c. downward (to the right) and then return immediately to its original position. d. in the opposite direction to the shift in the AD curve caused by the rise in wages. e. upward (to the left) and then return immediately to its original position. 36. Over the horizontal range of the SRAS, a leftward shift of the AD curve will result in a. an increase in both real GDP and prices. b. an increase in prices and no change in real GDP. c. a decrease in real GDP but no change in prices. d. an increase in real GDP and no change in prices. e. a decrease in both real GDP and prices. 37. The multiplier effect of a shift in AD when SRAS is positively sloped is a. less than the simple multiplier. b. more than the simple multiplier. c. the same as the simple multiplier. d. zero. e. could be any of the above depending upon the value of the slope of the SRAS curve. 38. When a shift in aggregate demand occurs, the effect will be divided between a change in output and a change in price level. How the effect is divided depends on the a. amount of inflation in the economy. b. slope of the SRAS curve. c. size of the multiplier. d. position of the AE curve. e. slope of the AD curve. 39. A rise in an input price like the price of oil would be expected to result in a new macroeconomic equilibrium in which the price level a. and real GDP are higher than in initial equilibrium. b. and real GDP are lower than in initial equilibrium. c. is lower and real GDP higher than in the initial equilibrium. d. is higher and real GDP lower than in the initial equilibrium. e. none of the above. 9
40. Suppose there is a rise in aggregate demand and, simultaneously, a fall in SRAS. The result will be a a. an indeterminate change in real GDP and a fall in the price level. b. rise in real GDP but price level changes will be indeterminate. c. rise in real GDP and a rise in the price level. d. an indeterminate change in real GDP and a rise in the price level. e. rise in real GDP and a fall in the price level. 41. Which of the following is an example of an aggregate demand shock? a. an improvement in the computer literacy skill of workers increases labour productivity and reduces real wage cost. b. OPEC (the Organization of Petroleum Exporting Nations) announces a substantial increase in oil prices. c. because of free trade, Canadian businesses decide to increase their investment expenditures. d. a severe drought lasts for six months, destroying agricultural and forestry production. e. a government report indicates a substantial increase in the health of the average Canadian worker resulting in less sick days taken. 42. Which of the following would serve as an automatic adjustment mechanism of the economy with an inflationary gap? a. increasing government spending b. increasing wages. c. increasing investment d. reduction in taxes e. falling prices 43. The process of automatic adjustment of an economy, from an inflationary output gap, is best described by saying that wages a. fall, unit costs rise and the SRAS curve shifts leftward b. rise, unit costs rise and the SRAS curve shifts leftward c. do not adjust, but the AD curve shifts to the right d. fall, unit costs fall and the AD curve shifts rightward e. fall, unit costs fall, and the SRAS curve shifts rightward 44. A rightward shift of LRAS curve could be caused by a. a decrease in investment. b. an increase in current consumption. c. an increase in interest rates. d. a fall in the price level. e. an improvement in the productivity of labour. 10
45. If the economy in Figure 25-1 is currently producing Y0 level of output, then to attain full-employment level of production Y*, the a. SRAS curve will shift to the right and intersect the AD curve at A. b. economy is in equilibrium and will not adjust further. c. AD curve will shift to the right and intersect the SRAS curve at point B. d. LRAS curve will shift to the left until it intersects the SRAS curve and AD curve at Y0 output level. e. economy will stay at Y0 level of production. 11
46. If the economy in Figure 25-1 is currently producing Y0 level of output and wages are sticky downward, then the a. level of output will decrease below Y0. b. economy will quickly move to point A. c. AD curve will eventually shift to the right and return the economy to full employment level of output. d. economy will eventually move to point B. e. economy will only move gradually toward point A as wages slowly adjust. 47. Fiscal policy refers to the a. influence on GDP of the spending and saving decisions of households. b. government's use of policy tools to influence the net export function, thereby influencing GDP. c. influence on GDP of investment by firms. d. government's use of spending and taxing policies to influence aggregate demand and aggregate supply. e. government's attempt's to maintain a balanced budget. 12
48. When economists argue that fiscal policy may NOT be effective in stabilizing the economy, the reasons they adduce are that a. households will tend to save the extra income brought by a tax cut rather than spend it. b. private investment will be crowded out by government's borrowing in the money market. c. there are considerable time lags in implementing fiscal policy. d. all of the above. e. none of the above. 49. Progressive income taxes in Canada can be considered to be automatic stabilizers because a. tax revenues decrease when income increases, thereby intensifying the increase in aggregate demand. b. tax revenues increase when income increases, thereby offsetting some of the increase in aggregate demand. c. taxes are changed to create surpluses in recessions. d. the Minister of Finance can increase or decrease tax rates whenever such policy is deemed appropriate. e. taxes are changed to keep the budget balanced. 50. An important policy conclusion of the Phillips curve is that a. the real GDP can be maintained above the potential output without causing inflation. b. the unemployment rate can be maintained at less than the natural rate in the long run. c. an attempt to maintain real GDP higher than the potential output will result in accelerating inflation. d. fiscal policy is most effective in controlling inflation. e. none of the above. 13
Answer Key: Version 1 [Accepted answers] 1. e 2. c,d 3. e 4. a 5. c 6. e 7. a 8. e 9. a 10. c 11. a 12. c 13. d 14. d 15. e 16. b,c 17. e 18. b 19. a 20. e 21. b 22. d 23. c 24. c 25. e 26. a 27. c 28. b 29. c 30. b 31. b 32. c 33. a 34. a 35. a 36. c 37. a 38. b 39. d 40. d 41. c 42. b 43. b 44. e 45. a 46. e 47. d 48. d 49. b 50. c 14
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