V111
DEPARTMENT OF ECONOMICS
WESTERN UNIVERSITY
E. Rivers
ECONOMICS 1022B-001
February 6, 2016
MIDTERM 1
INSTRUCTIONS:
1. You will have 2 hours to complete the exam.
2. Check that your examination contains 50 questions.
3. Use a BLACK PENCIL to complete your Scantron Form.
i. Print your NAME and complete your SIGNATURE
ii. Enter your STUDENT NUMBER
iii. Enter your SECTION NUMBER – 001
iv. Ensure that the VERSION CODE on your question packet matches
the version code on your Scantron Form.
In order to get credit for a question, you must record the correct answer on your
Scantron Form. No credit will be given for answers recorded in your question
packet.
4. You may have pencils, erasers, your student card, and a non-graphing, nonprogrammable calculator out of its case at your desk. All other items including
watches and cell phones must be left in your bag at the front of the examination
room.
5. Please ensure that all electronic devices (cell phones, laptops, etc.) are turned off
before storing them in your bag at the front of the examination room.
6. There are no washroom breaks allowed during the test.
7. Do not ask questions during the test. If you have a concern about a question, note
it on a piece of paper along with your name and student number and give it to a
proctor when you hand in your exam.
8. When you have finished, please hand in your Scantron Form.
V111
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
Use the figure below to answer the following question.
Figure 1
1) Refer to Figure 1, which shows the circular flow of expenditure and income for Venus. During
2012, A was $100, B was $50, C was $30 and D was $10. How much is net exports?
A) $25
B) $50
C) $10
D) $30
E) None of the above
2) Which of the following is not correct?
A) Net investment equals gross investment minus depreciation.
B) Investment is the purchase of new plant, equipment, and buildings and the additions to
inventories.
C) Gross investment is the amount by which the value of capital increases.
D) Gross investment is the total amount spent buying new capital and replacing depreciated
capital.
E) Depreciation decreases the value of a firm's capital.
A-1
V111
Use the information below to answer the following question.
Fact 1
At the beginning of 2012, Peter's Perfectly Prickly Piercing Parlour had $5,000 worth of bellybutton and eyebrow
rings on hand, 2 computers (each worth $1,000), 1 cash register worth $100, electrical equipment worth $500,
and one piercing needle worth $500. At the end of 2012, they had $5,000 worth of bellybutton and eyebrow
rings, a new high speed computer worth $3,000 (they had to throw out the old ones), the same cash register,
which was now worthless, electrical equipment worth $600, and they had upgraded the needle at a cost of $700.
The total value of the needle after the upgrade was $1,000.
3) Refer to Fact 1. Peter's depreciation in 2012 is
A) $2,300.
B) zero.
C) $1,000.
D) $3,000.
E) $800.
4) An art collector recently sold a piece of pottery for $300. He had purchased it for $200 two years
earlier. How will the most recent sale affect GDP?
A) GDP will not change.
B) GDP 2 years ago must be adjusted downwards by $200, and current GDP will rise by $300.
C) GDP will increase by $200.
D) GDP will increase by $100.
E) GDP will increase by $300.
5) From the following list, choose the item that would be included in a current measure of GDP.
A) the purchase of 10 litres of gasoline for your car
B) a $2,000 cheque from your Aunt Grace
C) income from the sale of your Canadian Snowfun stocks
D) the purchase of a previously owned house that was built last year
E) a social insurance cheque for $500
6) From the following list, choose the item that would be included in a current measure of GDP.
A) A professional gardener who regularly cuts your lawn.
B) The value of safety on the streets of your community.
C) Your labour in fixing a leaky pipe under your sink.
D) The illegal sale of a bag of marijuana.
E) All of the above would be included.
A-2
V111
7) A bakery uses flour to produce bread.
When calculating GDP, we include ________, because when we add the value of the flour to the
value 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 the
bread; double counting
B) only the value of the bread sold in a store; double counting
C) only the value of the flour used to produce the bread; double counting
D) 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 output
E) none of the above
8) Net domestic income at market prices can be derived by which one of the following? GDP minus
A) consumption expenditure.
B) corporate profits.
C) subsidies.
D) indirect taxes minus subsidies.
E) depreciation.
Use the table below to answer the following question.
Table 1
Other factor incomes
Indirect taxes minus subsidies
Depreciation
Wages, salaries and supplementary labour income
Consumption expenditure
Government expenditure on goods and services
Government transfer payments
Net exports
Statistical Discrepancy
9) Refer to Table 1. Gross domestic product is equal to
A) $1,940.
B) $2,350.
C) $1,920.
$570
230
250
1,350
1,400
500
50
40
0
D) $2,400.
E) $2,150.
10) Real GDP equals
A) the value of final goods and services produced in a given year when valued at the prices of a
reference base year.
B) nominal GDP minus the value of intermediate goods.
C) nominal GDP minus the value of goods exported to foreign countries.
D) nominal GDP minus the rate of inflation.
E) nominal GDP adjusted for the depreciation of capital.
A-3
V111
11) If you want to investigate the claim that more goods and services were produced in the economy
during 2011 than 2012, what should you look at?
A) nominal GDP
B) real GDP
C) GDP calculated using the expenditure approach
D) intermediate GDP
E) either B or D
12) Julieta did not work in 2013 and cleaned her own house during that time. Julieta worked outside of
the house in 2014 and hired a cleaning company to clean her house. As a result, the use of GDP as
the country's official production measure would have
A) overstated true 2014 production and overstated growth in production from 2013 to 2014.
B) understated true 2013 production and overstated growth in production from 2013 to 2014.
C) understated true 2013 production and understated growth in production from 2013 to 2014.
D) overstated true 2014 production and understated growth in production from 2013 to 2014.
E) accurately measured 2013 and 2014 production.
13) Business cycles are
A) predictable in length with an expansion following a trough.
B) irregular, with some having two recessions and no expansion.
C) unpredictable in length, and don't always have two phases and two turning points.
D) unpredictable in length, but always have two phases and two turning points.
E) predictable in length, with a recession following a trough.
14) When we use purchasing power parity (PPP), we can make valid international comparisons of real
GDP because we
A) account for the exchange rate between the two countries.
B) account for the exchange rate and price differences in the two countries.
C) account for the interest rate difference between the two countries.
D) use official government data.
E) use data provided by the International Monetary Fund.
A-4
V111
Use the table below to answer the following questions.
Table 2
Item
Bacon
Eggs
2014 Price
2015 Price
$4
$2
$4.80
$3.60
2014
Quantity
20
40
2015
Quantity
32
48
15) Refer to Table 2. From the data in the table, compute nominal GDP in 2015.
A) $160
B) $326.40
C) $224
D) $240
E) $192
16) Refer to Table 2. From the data in the table, compute real GDP in 2015 with 2014 as the base year.
A) $224
B) $160
C) $240
D) $192
E) $326.40
17) Refer to Table 2. According to the chained-dollar real GDP method, what is the percentage
increase in production between 2014 and 2015?
A) 38%
B) 36%
C) 40%
D) 44%
E) 104%
18) Suppose that a country has a working-age population of 30 million, a labour force participation
rate of 70 percent, and an employment-to-population ratio of 60 percent. What is the size of the
labour force in this country?
A) 42.9 million
B) 18 million
C) 21 million
D) 3 million
E) 12.6 million
19) In a country with a working-age population of 22 million, 16 million are employed, 2 million are
unemployed. Of those employed, 1 million are working part-time, half of whom wish to work
full-time. Of those unemployed, 500,000 are cyclically unemployed. What is the natural
unemployment rate?
A) 5.6 percent
B) 8.3 percent
C) 9.4 percent
D) 11.1 percent
E) none of the above
A-5
V111
20) Which one of the following people is frictionally unemployed? A steel worker who
A) decides to leave the labour force and become a full-time ballet student.
B) becomes discouraged and stops looking for a job.
C) is laid off but expects to be called back soon.
D) gives up her job because she retires.
E) loses her job because of technological change.
Use the table below to answer the following question.
Table 3
This table shows the answers given by interviewees to the Labour Force Survey
Person A Now that kids are in school full-time, this person is looking
for work and has been interviewed for three jobs over the
past 2 weeks.
Person B This person has been laid off but expects to be called back
in a few weeks, just as soon as the economy improves.
Person C This person has just graduated from university and will start
a new job in 8 weeks. In the meantime, this person is
surveying local drinking establishments.
Person D This person was laid off last year when new equipment at
the plant reduced the number of jobs. Since his layoff, this
person has been constantly job searching.
Person E This economics graduate is working two nights a week at
the 7-11, but wants full-time work as an economist.
21) In Table 3, which person is structurally unemployed?
A) A
B) B
C) C
D) D
E) none of them
A-6
V111
22) If the number of discouraged searchers decreases because many of them start to look for work
again, everything else remaining the same, then the
A) the involuntary part-time rate will decrease.
B) employment-to-population ratio will decrease.
C) labour force participation rate will increase.
D) labour force participation rate will decrease.
E) both A and C.
23) When the unemployment rate is less than the natural unemployment rate, real GDP is ________
than potential GDP and the output gap is ________.
A) greater; equal to zero
B) greater; negative
C) smaller; negative
D) greater; positive
E) smaller; positive
24) If the CPI was 228 at the end of 2011 and 236 at the end of 2012, what was the inflation rate in
2012?
A) 3.5 percent
B) 4 percent
C) 236 percent
D) 8 percent
E) 3.4 percent
Use the table below to answer the following question.
Table 4
Data From Beachland
Item
Sunscreen
Towels
Price
(dollars)
Base
1.00
9.00
Price
(dollars)
Current
1.25
6.00
Quantity
(number)
Base
100
12
Quantity
(number)
Current
100
14
25) From the data in Table 4, what is Beachland's consumer price index for the current year?
A) 100.5
B) 112
C) 94.7
D) 105.6
E) 100
A-7
V111
26) If prices at Harvey's rise, more consumers buy their hamburgers at McDonald's and fewer
consumers buy their hamburgers at Harvey's. This is an example of
A) commodity substitution.
B) outlet substitution.
C) quality change.
D) both A and B.
E) both B and C.
27) Which bias or biases can result from the fact that the method for calculating CPI assumes
consumers do not react to price changes?
A) Commodity substitution bias.
B) Quality change bias.
C) New goods bias.
D) Both (B) and (C).
E) All of the above.
28) In China, suppose that the price level was 100 in 2007, 110 in 2008, 120 in 2009, and 130 in 2011.
Over this time period,
A) deflation occurred.
B) the inflation rate increased.
C) the inflation rate was positive.
D) the inflation rate decreased.
E) Both C and D are correct.
29) Comparing the core inflation rate to the Consumer Price Index, the core inflation rate
A) controls for the biases of the CPI.
B) includes volatile elements not in the CPI.
C) measures all goods produced, not just consumer goods.
D) excludes the volatile elements of the CPI.
E) uses current period quantities, not base period quantities.
30) According to the law of diminishing returns, along the aggregate production function an additional
unit of
A) labour decreases output.
B) labour produces more output than the previous unit.
C) capital produces more output than an additional unit of labour.
D) labour produces less output than the previous unit.
E) labour increases the real wage rate.
A-8
V111
Use the figure below to answer the following question.
Figure 2
31) Refer to Figure 2. A country is on its aggregate production function at point W. If there is a
technological advance, the economy will
A) either remain at point W or move to point X.
B) move to point such as Z.
C) move to point such as X.
D) move to point such as Y.
E) remain at point W.
A-9
V111
Use the table below to answer the following questions.
Table 5
Quantity of
Quantity of
Real wage rate
labour demanded labour supplied
(2002 dollars per
(billions of hours (billions of hours
hour)
per year)
per year)
15
70
30
20
60
40
25
50
50
30
40
60
35
30
70
Real GDP
Quantity of
(trillions of 2002 labour (billions of
dollars per year) hours per year)
3
20
9
30
14
40
18
50
21
60
32) Refer to Table 5, which shows the labour market and the aggregate production function schedule
for the country of Wambold. Potential GDP is ________.
A) $50 trillion
B) $9 trillion
C) $6 trillion
D) $18 trillion
E) $14 trillion
33) Continue to refer to Table 5, which shows the labour market and the aggregate production function
schedule for the country of Wambold. Now suppose that a war in a neighbouring country causes
rapid immigration into Wambold. The quantity of labour supplied increases by 20 billion hours per
year at each wage rate. The new equilibrium wage is ________ and the new equilibrium quantity
of labour is ________.
A) $20; 40 billion hours
B) $30; 60 billion hours
C) $25; 50 billion hours
D) $25; 70 billion hours
E) $20; 60 billion hours
A-10
V111
34) If real GDP is $12,150 billion and aggregate labour hours are 270 billion, labour productivity
equals
A) $48 an hour.
B) $6.50 an hour.
C) $32.81 an hour.
D) $45 an hour.
E) $650 an hour.
35) When labour productivity increases, the demand for labour curve ________ and the supply of
labour curve ________.
A) shifts rightward; does not shift
B) shifts rightward; shifts rightward
C) shifts rightward; shifts leftward
D) shifts leftward; does not shift
E) shifts leftward; shifts rightward
36) All else equal, an increase in population results in a
A) lower level of labour employed and lower potential GDP per hour of labour.
B) higher level of labour employed and lower potential GDP per hour of labour.
C) higher level of labour employed and higher potential GDP per hour of labour.
D) constant level of labour employed and constant potential GDP per hour of labour.
E) lower level of labour employed and higher potential GDP per hour of labour.
37) Factors that influence labour productivity include ________.
A) the labour demand curve
B) the inflation rate, the real wage rate, and the exchange rate
C) physical capital, the real wage rate, and technology
D) physical capital, human capital, and technology
E) the demand for labour, the real wage rate, and technology
38) Net investment equals
A) the total quantity of plant, equipment, and buildings.
B) wealth minus saving.
C) gross investment minus depreciation.
D) gross investment/depreciation.
E) capital minus depreciation.
39) If national saving equals $100,000, net taxes equal $100,000 and government expenditure equals
$25,000, what is private saving?
A) zero
B) $25,000
C) $225,000
D) $175,000
E) -$25,000
A-11
V111
Refer to the figure below to answer the following question.
Figure 3
40) In Figure 3, the economy is at point A on the initial demand for loanable funds curve DLF0. What
happens if the real interest rate rises?
A) There is a movement to a point such as B on the demand for loanable funds curve DLF0.
B) The demand for loanable funds curve shifts rightward to curve DLF2.
C) The demand for loanable funds curve shifts leftward to curve DLF1.
D) Either A or B can occur.
E) Either A or C can occur.
41) If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest
rate is approximately
A) 18 percent.
B) 20 percent.
C) -2 percent.
D) 2 percent.
E) 4 percent.
42) An increase in ________ will shift the supply of loanable funds curve ________.
A) expected future income; rightward
B) the real interest rate; rightward
C) disposable income; leftward
D) default risk; rightward
E) wealth; leftward
A-12
V111
43) If disposable income increases, people ________ saving, the supply of loanable funds will
________ and the equilibrium real interest rate will ________.
A) decrease; decrease; rise
B) increase; increase; rise or fall depending on the shift of the demand curve for loanable funds
C) increase; increase; fall
D) increase; decrease; rise
E) decrease; increase; fall
44) Suppose the market for loanable funds is in equilibrium. If expected profit falls, the equilibrium
real interest rate ________ and the quantity of loanable funds ________.
A) falls; increases
B) rises; increases
C) falls; decreases
D) rises; decreases
E) falls; increases or decreases but we don't know for sure
45) In Canada's economy, investment is financed by
A) S + T + M.
B) C + S + T.
C) S + (T - G) + (M - X).
D) C + I + G + X - M.
E) S + (T - G) + (X - M).
46) In class, we discussed Premium Bonds, which are a type of government bond issued in the United
Kingdom. How are bondholders compensated for the use of their funds under this type of bond?
A) Bond numbers are drawn monthly to receive cash prizes, much like a lottery ticket.
B) Bondholders earn monthly interest payments and a lump sum payment at bond maturity.
C) Bondholders receive only a lump sum payment at bond maturity.
D) Bondholders earn a monthly interest payment only.
E) Bondholders are entitled to a share of the government's future surpluses.
47) A government budget deficit ________ the demand for loanable funds, ________ the real interest
rate, and ________ investment.
A) increases; increases; increases
B) increases; decreases; increases
C) increases; decreases; crowds out
D) increases; increases; crowds out
E) decreases; increases; crowds out
A-13
V111
Refer to the table below to answer the following questions.
Table 6
Real
interest rate
(percent per year)
4
5
6
7
8
9
10
Loanable funds
demanded
(trillions of 2002
dollars)
7.5
7.0
6.5
6.0
5.5
5.0
4.5
Loanable funds
supplied
(trillions of 2002
dollars)
4.5
5.0
5.5
6.0
6.5
7.0
7.5
48) Refer to Table 6. The table shows the private demand for loanable funds schedule and the private
supply of loanable funds schedule when the government's budget is balanced. The real interest rate
is ________ percent a year and the quantity of investment is ________ trillion.
A) 5.0; $7.0
B) 7.0; $6.0
C) 5.0; $5.0
D) 9.0; $7.0
E) 3.0; $7.5
49) Refer to Table 6. The table shows the private demand for loanable funds schedule and the private
supply of loanable funds schedule when the government's budget is balanced. Now suppose the
government has a $2 trillion budget deficit and the Ricardo-Barro effect occurs. The real interest
rate is ________ percent a year and the quantity of investment is ________ trillion.
A) 7.0; $6.0
B) 3.0; $7.5
C) 9.0; $7.0
D) 5.0; $7.0
E) 5.0; $5.0
50) Refer to Table 6. The table shows the private demand for loanable funds schedule and the private
supply of loanable funds schedule when the government's budget is balanced. Now suppose the
government has a $2 trillion budget surplus. The real interest rate is ________ percent a year and
the quantity of investment is ________ trillion.
A) 9.0; $7.0
B) 7.0; $6.0
C) 5.0; $5.0
D) 5.0; $7.0
E) 3.0; $7.5
A-14
V111
Answer Key
Testname: 1022BMT1
1) C
43) C
2) C
44) C
3) A
45) C
4) A
46) A
5) A
47) D
6) A
48) B
7) B
49) A
8) E
50) D
9) D
10) A
11) B
12) B
13) D
14) B
15) B
16) A
17) A
18) C
19) B
20) C
21) D
22) E
23) D
24) A
25) C
26) B
27) A
28) E
29) D
30) D
31) B
32) D
33) E
34) D
35) A
36) B
37) D
38) C
39) B
40) A
41) D
42) E
A-15