Macroeconomics 1500, Humber College, Winter 2018
Professor: Adela Nistor
Name: ________________________
Midterm (30%)
All questions are 1 point unless otherwise stated.
Answer all the questions for a total of 74 Points.
50 multiple choice: total 50 points
Short answer: 3 questions each 8 points, total 24 points
1. In a simple circular-flow diagram, how are total income and total expenditure interrelated?
a. They are seldom equal because of fluctuations in the business cycle that occur in an economy.
b. They are equal only when all goods and services produced are sold.
c. They are always equal because every transaction has a buyer and a seller.
d. They are always equal because of accounting rules.
2. What does the simple circular-flow diagram illustrate?
a. that expenditure generates income so that income and the value of production are equal
b. that the economy’s income exceeds its expenditure
c. that factors of production “flow” from firms to households
d. that money “flows” from households to firms
3. Suppose an apartment complex converts to a condominium (i.e., the renters become owners of their
apartments). What is included in GDP?
a. The rent was included in GDP; the purchases of the condominiums are not included.
b. The rent was included in GDP, and so is the purchase of the condominiums.
c. The rent was not included in GDP; the purchases of the condominiums are included.
d. The rent was not included in GDP; the purchases are not included either.
4. A professional gambler moves from a province where gambling is legal to a province where gambling
is illegal. What impact does this move have on Canada’s GDP?
a. It raises GDP.
b. It decreases GDP.
c. It does not change GDP because gambling is never included in GDP.
d. It does not change GDP because in either case his income is included.
5. The local Nissan dealership has an increase in inventory of 25 cars in 2015. How will the sale of all 25
cars in 2016 affect the GDP?
a. The value of the cars will be counted as part of GDP in 2015 but not in 2016.
b. The value of the cars will not affect the 2015 GDP, but will be included in 2016 GDP.
c. The value of the cars will be included in both 2015 and 2016 GDP.
d. The value of the cars will not be included in GDP in 2015 or 2016.
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6. A company makes 500,000 smart phones in the second quarter. It sells 300,000 of them before the end
of the second quarter, and holds the others in its warehouse. How is the second quarter GDP affected?
a. The smart phones are included in second-quarter GDP.
b. The smart phones that are not purchased in the second quarter are not counted in the secondquarter GDP.
c. Since all the 500,000 smart phones will eventually be bought by consumers, they are included
as consumption in the third quarter.
d. The smart phones will be counted as a change in inventory in the second quarter, and when
sold in the third quarter will raise GDP.
7. Suppose an economy produces only wheat and rice. Last year, 20 bushels of wheat are sold at $4 per
bushel, and 10 bushels of rice are sold at $2 per bushel. If the price of wheat was $2 per bushel and the
price of rice was $1 per bushel in the base year, what can we conclude?
a. Nominal GDP is $100, real GDP is $50, and the GDP deflator is 50.
b. Nominal GDP is $100, real GDP is $50, and the GDP deflator is 200.
c. Nominal GDP is $50, real GDP is $100, and the GDP deflator is 200.
d. Nominal GDP is $50, real GDP is $100, and the GDP deflator is 50.
Table 5-4
Use the following table to answer the following questions.
Year Price of Burgers Quantity of Burgers Price of Magazines
2013 $4.00
100
$2.00
2014 $5.00
120
$2.50
2015 $6.00
150
$3.50
Quantity of Magazines
180
200
200
8. Refer to the Table 5-4. Using the GDP deflator to measure the average level of prices and using 2013
as the base year, what is the economy’s inflation rate?
a. 20 percent for 2014 and 12.5 percent for 2015
b. 20 percent for 2014 and 30 percent for 2015
c. 25 percent for 2014 and 28 percent for 2015
d. 44.7 percent for 2014 and 45.5 percent for 2015
9. How is a country’s wealth related to other measures of well-being such as life expectancy and literacy?
a. positively with both life expectancy and literacy
b. unrelated with life expectancy; positively with literacy
c. negatively with life expectancy; unrelated to literacy
d. negatively with both life expectancy and literacy
10. Which goods are supposed to be included in the CPI?
a. all goods and services produced in the economy
b. all goods and services that typical consumers buy
c. all goods and services in the consumption component of the GDP accounts
d. all the goods, but not the services, in the consumption component of the GDP accounts
Table 6-1
Year Peaches
2014 $14 per bushel
2015 $12 per bushel
Pecans
$9 per bushel
$14 per bushel
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11. Refer to the Table 6-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and
10 bushels of pecans and that the base year is 2014. What is the consumer price index for 2015?
a. 80
b. 100
c. 125
d. 200
12. Refer to the Table 6-1. What was the inflation rate in 2015?
a. 4 percent
b. 5 percent
c. 20 percent
d. 25 percent
Table 6-3
In the country of Shem, the CPI is calculated using a market basket consisting of 5 apples, 4 kg of
chicken, 3 shirts, and 2 litres of gasoline. The per-unit prices of these goods have been as follows:
Year Apples Chicken Shirts Gasoline
2012 $1.00
$2.00
$10.00 $1.00
2013 $2.00
$1.50
$8.00
$1.50
2014 $2.00
$2.00
$11.00 $2.00
2015 $3.00
$3.00
$14.00 $3.00
13. Refer to the Table 6-3. What was the inflation rate, as measured by the CPI, between 2013 and 2014?
Assume the base year is 2013.
a. 27.9 percent
b. 34.1 percent
c. 47.0 percent
d. 48.5 percent
14. What does “substitution bias” in the consumer price index refer to?
a. replacing old goods with new goods in consumer purchases
b. replacing low-quality goods with high-quality goods in consumer purchases
c. replacing expensive goods with cheaper goods in consumer purchases
d. replacing old technology goods with new technology goods in consumer purchases
15. Laura bought word processing software for $50. A year later, Laura’s twin brother Laurence bought
an upgraded version of the same software for $50. Which problem in the construction of the CPI does this
situation best represent?
a. substitution bias
b. unmeasured quality change
c. introduction of new goods
d. income bias
16. Suppose that Canadian mining companies purchase German-made ore trucks at a reduced price. By
itself, what will this do to the GDP deflator and the consumer price index?
a. The GDP deflator and the consumer price index will fall.
b. The GDP deflator and the consumer price index will be unaffected.
c. The GDP deflator will be unaffected, but the consumer price index will fall.
d. The GDP deflator will fall, but the consumer price index will be unaffected.
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17. Babe Ruth’s 1931 salary was $80,000. The price index for 1931 is 16 and the price index for the
current year is 210. What would Ruth’s 1931 salary be equivalent to in the current year?
a. $536,000
b. $635,000
c. $828,000
d. $1,050,000
18. Which statement best describes the relationship between inflation and interest rates?
a. There is no relationship between inflation and interest rates.
b. The interest rate is determined by the rate of inflation.
c. In order to fully understand inflation, we need to know how to correct for the effects of
interest rates.
d. In order to fully understand interest rates, we need to know how to correct for the effects of
inflation.
19. Which statement best explains economists’ understanding of the facts concerning the relationship
between natural resources and economic growth?
a. A country with few or no domestic natural resources is destined to remain undeveloped.
b. Differences in natural resources have virtually no role in explaining differences in standards of
living.
c. Some countries can be rich mostly because of their natural resources, and countries without
natural resources need not be poor, but can never have very high standards of living.
d. Abundant domestic natural resources may help make a country rich, but even countries with
few natural resources can have high standards of living.
20. What would increase productivity, everything else being the same?
a. an increase in immigration
b. an increase in the number of hours of work per week
c. an increase in prices
d. an increase in physical capital per worker
21. Other things equal, how do relatively poor countries tend to grow?
a. They grow slower than relatively rich countries; this is called the poverty trap.
b. They grow slower than relatively rich countries; this is called the Malthus effect.
c. They grow faster than relatively rich countries; this is called the catch-up effect.
d. They grow faster than relatively rich countries; this is called the constant-returns-to-scale
effect.
22. According to the traditional view of the production process, how does output per worker change when
capital per worker increases?
a. It increases. This increase is larger at larger values of capital per worker.
b. It increases. This increase is smaller at larger values of capital per worker.
c. It increases. This increase is the same at all values of capital per worker.
d. It decreases. This decrease is larger at larger values of capital per worker.
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23. Which statement illustrates an implication of investment from abroad?
a. Foreign investment makes poor countries poorer.
b. Foreign investment promotes economic growth.
c. Foreign investment makes rich countries poorer.
d. Foreign investment is only beneficial to investors.
24. The economic development minister of a country has a list of things she thinks may explain her
country’s low growth of real GDP per person relative to other countries. She asks you to pick the one you
think most likely explains her country’s low growth. What contributes to low growth?
a. strong private property rights
b. tariffs and quotas
c. encouraging foreign investment
d. low population growth
25. Which statement illustrates an important fact about population growth?
a. There are no substantial differences between rates of growth in population among countries.
b. In developed countries, population tends to grow slower than in developing countries.
c. Higher rate of growth in population implies higher productivity.
d. A country that increases its population growth rate will increase its economic growth rate.
26. Economists differ in their views of the role of the government in promoting economic growth.
According to the text, at the very least, what should the government do?
a. lend support to the invisible hand by maintaining property rights and political stability
b. limit foreign investment to industries that don’t already exist
c. impose trade restrictions to protect the interests of domestic producers and consumers
d. subsidize key industries
27. Suppose that in a closed economy GDP is equal to 15,000, taxes are equal to 2500, consumption is
equal to 7500, and government expenditures are equal to 3100. What is public saving?
a. –600
b. –500
c. 500
d. 600
28. Suppose that consumption is 7500, taxes are 1800, and government expenditures are 1500. If national
saving is 1500 and the economy is closed, what is the GDP?
a. 9500
b. 10,000
c. 10,500
d. 11,200
29. In a closed economy, what is private saving?
a. the amount of income that households have left after paying for their taxes and consumption
b. the amount of income that businesses have left after paying for the factors of production
c. the amount of tax revenue that the government has left after paying for its spending
d. the amount of tax revenue that the government has left after paying for transfers
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30. When is a budget surplus created?
a. when the government sells more bonds than it buys back
b. when the government spends more than it receives in tax revenue
c. when private savings are greater than zero
d. when the government spends less than the tax revenue
31. What would most likely happen in the market for loanable funds if the government were to decrease
the tax rate on interest income?
a. The supply of and demand for loanable funds would shift to the right.
b. The supply of and demand for loanable funds would shift to the left.
c. The supply of loanable funds would shift to the right, and the demand for loanable funds
would shift to the left.
d. The supply of loanable funds would shift to the right, and the demand for loanable funds will
remain unchanged.
32. Suppose that Parliament were to repeal (e.g., revoke) an investment tax credit. What would most
likely happen in the market for loanable funds?
a. The demand for and supply of loanable funds would shift right.
b. The demand for and supply of loanable funds would shift left.
c. The supply of loanable funds would shift right.
d. The demand for loanable funds would shift left.
33. When the government runs a budget deficit, what is most likely to happen?
a. Interest rates become lower than they would be otherwise.
b. National saving gets higher than it would be otherwise.
c. Investment gets lower than it would be otherwise.
d. Government debt decreases by the amount of the deficit.
34. Assuming that other things remain the same, what effect does a government budget deficit have on
saving?
a. It increases both private and national saving.
b. It increases public saving but reduces national saving.
c. It reduces both public and national saving.
d. It reduces private saving but increases national saving.
35. Who would NOT be included in the labour force?
a. Karen, who works most of the week in a steel factory
b. Beth, who is waiting for her new job at the bank to start
c. Dave, who does not have a job, but is looking for work
d. Jeremiah, who plans to travel for a few months before looking for work
36. A foreign governmental statistics agency recently reported that there were 47.6 million people over
age 25 who had at least a bachelor’s degree. Of this number, 38.0 million were in the labour force and
35.9 million were employed. What was the unemployment rate in this group?
a. about 2.3 percent
b. about 5.5 percent
c. about 22.8 percent
d. about 55.1 percent
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37. Rick loses his job and immediately begins looking for another. Other things equal, what happens to
the unemployment rate?
a. The unemployment rate decreases because he is not in the labour force anymore.
b. The unemployment rate increases because he is still in the labour force.
c. The unemployment rate decreases because he is still in the labour force.
d. The unemployment rate increases because he is not in the labour force anymore.
Table 9-1
This table shows the 2013 data for males and females aged 15 and over in the country of Bolivar.
Not in the Labour Force
Unemployed
Employed
Male
Female
Male
Female
Male
Female
45 million
35 million
5 million
5 million
85 million
65 million
38. Refer to the Table 9-1. What is the adult population in Bolivar?
a. 150 million
b. 160 million
c. 210 million
d. 240 million
39. According to your text, what is NOT a reason that actual labour markets experience unemployment?
a. unions
b. job search
c. flexible wages
d. minimum-wage legislation
40. Nancy is searching for a job that suits her tastes about where to live and the people she works with.
Laura is looking for a job that makes best use of her skills. Which statement best describes the nature of
Nancy and Laura’s unemployment?
a. Nancy and Laura are both frictionally unemployed.
b. Nancy and Laura are both structurally unemployed.
c. Nancy is frictionally unemployed, and Laura is structurally unemployed.
d. Nancy is structurally unemployed, and Laura is frictionally unemployed.
41. Tom is looking for work after school, but everywhere he fills out an application he is told that so have
lots of others. Simon has a law degree. Several firms have made him offers, but he thinks he might be
able to find a firm where his talents could be put to better use. Which category of unemployment do Tom
and Simon belong to?
a. Tom and Simon are both frictionally unemployed.
b. Tom and Simon are both structurally unemployed.
c. Tom is frictionally unemployed, and Simon is structurally unemployed.
d. Tom is structurally unemployed, and Simon is frictionally unemployed.
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42. Aaron is the owner of a firm that produces wind power in southern Alberta. There are many such
firms in the area. Aaron decides that if he pays his workers a wage higher than the going market wage, his
profits will increase. What is a likely explanation for his decision according to the efficiency wage
theory?
a. The higher the wage, the less often his workers will choose to leave his firm.
b. The higher the wage, the lower will be the cost of obtaining needed supplies.
c. The higher the wage, the more he can charge for his wind power.
d. The higher the wage, the less competition will be in the industry.
43. Suppose that the reserve ratio is 9 percent and that a bank has $2000 in deposits. What are its required
reserves?
a. $100
b. $120
c. $140
d. $180
44. Suppose a bank has a 6 percent reserve ratio, $4000 in deposits, and it loans out all it can, given the
reserve ratio. Which of the following describes the bank’s assets?
a. It has $800 in reserves and $16,000 in loans.
b. It has $240 in reserves and $3760 in loans.
c. It has $240in reserves and $4000 in loans.
d. It has $800 in reserves and $3200 in loans.
Table 10-2
Last Bank of Panorama Springs
Assets:
Liabilities:
Reserves $25,000
Deposits
Loans
$150,000
$175,000
45. Refer to the Table 10-2. If the reserve requirement is 30 percent, what is this bank’s reserve position?
a. It has $29,000 of excess reserves.
b. It needs $10,000 more in reserves to meet its reserve requirement.
c. It needs $27,500 more in reserves to meet its reserve requirement.
d. It just meets its reserve requirement.
46. Which list contains only actions that increase the money supply?
a. lowering the bank rate; raising the reserve requirement ratio
b. lowering the bank rate; lowing the reserve requirement ratio
c. raising the bank rate; raising the reserve requirement ratio
d. raising the bank rate; lowering the reserve requirement ratio
47. Which statement best describes the process of open-market sales conducted by the Bank of Canada?
a. The Bank of Canada sells Treasury bills, which increases the money supply.
b. The Bank of Canada sells Treasury bills, which decreases the money supply.
c. The Bank of Canada borrows from member banks, which increases the money supply.
d. The Bank of Canada lends money to member banks, which decreases the money supply.
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48. Which statement best describes the outcome of a decrease in the bank rate?
a. Banks will borrow less from Bank of Canada, so reserves increase.
b. Banks will borrow less from Bank of Canada, so reserves decrease.
c. Banks will borrow more from Bank of Canada, so reserves increase.
d. Banks will borrow more from Bank of Canada, so reserves decrease.
49. How can the Bank of Canada directly protect a bank during a bank run?
a. by increasing reserve requirements
b. by selling government bonds to the bank
c. by lending reserves to the bank
d. by increasing the overnight rate
50. Suppose the reserve ratio is 20 percent and banks do not hold excess reserves. Suppose the Bank of
Canada buys $10 million of government bonds. Which statement best describes the effects of this openmarket operation?
a. Bank reserves increase by $10 million, and the money supply eventually decreases by $50
million.
b. Bank reserves increase by $10 million, and the money supply eventually increases by $50
million.
c. Bank reserves decrease by $10 million, and the money supply eventually increases by $50
million.
d. Bank reserves decrease by $10 million, and the money supply eventually decreases by $50
million.
Bonus question (true/false)
True/false The CPI is computed by finding the price of a market basket of goods whose contents vary
each year.
a. True
b. False
Short answer: The following questions are short answer. Briefly explain your answer. Clarity will be
rewarded.
Question1 (7.5 points)
Describe three ways in which a government policymaker can try to raise the growth in living standards in
a society. Are there any drawbacks to these policies?
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Question2 (6 points)
“Some economists worry that the aging populations of industrial countries are going to start
running down their savings just when the investment appetite of emerging economies is
growing” (The Economist, May 6, 1995). Illustrate the effect of this phenomenon on the world
market for loanable funds. What is the effect on the interest rate and the quantity of loanable funds?
(explain with graph + words).
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Question 3 (5.5 points)
a. Suppose that the United States cracks down on illegal immigrants and returns millions of workers
to their home countries.
In the countries to which the immigrants return, explain how employment, the wage rate, and
potential GDP would change. (explain with graph + words)
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Question 3 (5 points)
b. In Korea, real GDP per hour of labor is $22, the wage rate is $15 per hour, and people
work an average of 46 hours per week. In U.S., real GDP per hour of labor is $60, the
wage rate is $40 per hour, and people work an average of 34 hours per week.
Draw a graph of the production functions in Korea and the United States using the
information from the data in the text above. Explain the difference in the two production
functions.
Answers multiple choice:
1c
2a
3a
4b
5a
6a
7b
8c
9a
10b
11c
12d
13a
14c
15b
16b
17d
18d
19d
20d
21c
22b
23b
24b
25b
26a
27a
28c
29a
30d
31d
32d
33c
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34c
35d
36b
37b
38d
39c
40a
41d
42a
43d
44b
45c
46b
47b
48c
49c
50b
Bonus question is false
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