Please note that this is a sample/practice midterm exam. Actual number of questions and
structure of the Term exam would be as discussed in class
Vancouver Island University
ECON100: Principles of Economics
Sample Midterm II
Name: _________________________________
ID: ____________________________________
1. Economics can best be described as
a) the study of the use of scarce resources to satisfy unlimited human wants
b) the study of how to reduce inflation and unemployment
c) a normative science
d) the study of how a society ought to allocate its resources
e) the application of sophisticated mathematical models to address social problems
2. A modern economy like Canada's is largely organized by
a) individuals forming cooperative enterprises and labour unions
b) individuals following their own self interest, doing what seems best for themselves.
c) benevolent individuals pursuing the public interest.
d) governments at all levels coordinating the activities of firms and citizens
e) the directions of international economic consortiums
3. The circular flow of income illustrates
a) the interaction of households and firms through the factors and goods markets
b) that there is no relationship between goods markets and factor markets
c) that the flow of payments moves in the same direction as the flow of goods
d) the flows of expenditures and income in a household
e) that firms own the factors of production
4. Choose the answer that best explains why economists build models that abstract from the complexities of
reality.
a) Because economists don't understand the real world
b) Because economics deals only in the abstract
c) Because they believe they gain a greater understanding of reality
d) Because the complexities of reality are unimportant
e) Because economists are not interested in reality
5. In a co-ordinate graph, with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the
variable Y is negative in the ________ quadrant.
a) top, right
b) top, left
c) bottom, left
d) bottom, right
6. A change in demand is said to take place when there is a
a) price change
b) movement along the demand curve
c) shift of the supply curve
d) shift of the demand curve
e) quantity change
7. Economists usually assume that households and firms, respectively, maximize
a) Savings and profits
b) Income and sales
c) Wages and revenues
d) Utility and profits
e) Expenditures and profits
8. All goods and services produced by one firm but used as inputs into a further stage of production are called
a)
b)
c)
d)
e)
value added
final goods
intermediate goods
consumption goods
national income goods
9. When calculating GDP using the expenditure approach, the investment component includes
a) fixed investment minus depreciation
b) net investment plus depreciation
c) gross investment plus depreciation
d) net investment only
e) net investment minus depreciation
10. Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies,
________ depreciation.
a) minus; plus; plus
b) plus; plus; plus
c) plus; plus; minus
d) plus; minus; minus
e) plus; minus; plus
11. Historically, nominal GDP has increased faster than real GDP because
a) the general price level has fallen
b) imports have risen more rapidly than exports
c) improvements in product quality have not been reflected in prices
d) the general price level has increased
e) exports have risen more rapidly than imports
12. In a simple macro model with the price level assumed to be constant, a change in firms' level of desired
investment is predicted to influence equilibrium national income by
a) shifting the saving function
b) shifting the aggregate expenditure function
c) shifting the 45-degree line
d) shifting the consumption function
e) causing movement along the investment function
13. In macroeconomics, if the value of the national product increases, there is
a) a decrease in the value of income claims on that output, due to importing
b) a decrease in value of income claims on that output, due to taxation
c) an equal increase in the value of income claims on that output
d) a decrease in the value of income claims on that output, due to household saving
e) an even larger increase in the value of income claims on that output, due to value added
14. An equivalent term for "real national income" is
a) current-dollar national income
b) actual national income
c) constant-dollar national income
d) none of the responses is correct
e) nominal national income
15. In macroeconomics, the "output gap" is the difference between
a) real and nominal national income
b) output and employment
c) output in the current year and output in the base year
d) potential real national income and actual real national income
e) real GNP and real GDP
16. The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constantdollar terms.
Year
Actual Output
(billions of $)
Potential Output
(billions of $)
Unemployment
Rate
2002
402
404
7.1
2003
408
411
7.2
2004
415
415
6.3
2005
420
418
5.9
2006
422
420
6.0
2007
420
423
7.0
2008
425
425
6.3
Refer to the table. In which years was this economy experiencing an inflationary gap?
a)
b)
c)
d)
2005, 2006
2002, 2003
2006, 2007
2004, 2008
17. Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure
to achieve full employment, it can generally be concluded that the larger this output gap, the
a) greater is the unemployment rate
b) more upward pressure there is on prices
c) lower the deadweight loss of unemployment
d) greater is the employment rate
e) lower is frictional unemployment
18. If a country's labour force is 15 million people, and 1 million of those are unemployed, the country's
unemployment rate is
a) 9.0 percent
b) 6.7 percent
c) 3.3 percent
d) 2.5 percent
e) 4.5 percent
19. If a country's labour force is 15 million people, and 1.35 million of those are unemployed, the country's
unemployment rate is
a) 6.7 percent
b) 3.3 percent
c) 9.0 percent
d) 2.5 percent
e) 4.5 percent
20. Workers with marketable skills sometimes quit a job and become unemployed, with the expectation of soon
finding a better job. This type of unemployment is called
a) historical unemployment
b) frictional unemployment
c) overly-optimistic unemployment
d) cyclical unemployment
e) structural unemployment
21. The group that tends to be most hurt by unexpected inflation is
a) individuals with unindexed pensions
b)
c)
d)
e)
banks
fixed-income earners
employers
both individuals with unindexed pensions and fixed-income earners
22. If nominal national income increased by 10 percent over a certain period of time while real national income
increased by 20 percent, then
a) the price level has increased by approximately 10 percent
b) the price level has declined by about 10 percent
c) inflation has occurred during this time period
d) the labour force increased by 10 percent
e) everybody in the economy became worse off
23. Economic theory argues that there will be fewer real effects from inflation as long as the
a) actual rate of inflation is less than 5 percent
b) anticipated rate of inflation is more than the actual rate of inflation
c) inflation is fully anticipated and no one changes their behaviour
d) whole private sector is unaware that it is happening
e) anticipated rate of inflation is less than the actual rate of inflation
24. When there is cost-push inflation, prices rise and employment
a) is constant
b) falls
c) falls or rises
d) rises
25. Inflation benefits
a) all producers
b) borrowers
c) lenders
d) all consumers
26. The velocity of money is
a) the time it takes for monetary policy to have an effect on world financial markets
b) the time lag from when the money supply is increased until the effect takes place
c) the number of times per year a dollar is spent on final goods and services
d) the time it takes to produce money
27. Supply shocks cause
a) cost-push inflation
b) increases in GDP
c) demand-pull inflation
d) falling wages
28. Inflation is best defined as
a) a sustained increase in wages
b) a persistent rise in average prices
c) a rise in the value of money
d) all of the above
29. An unemployment rate of zero cannot be expected since
a) the economy can never create enough job vacancies
b) some portion of the labour force will always be between jobs
c) there are some people who do not want to work
d) there will always be discouraged workers
30. The natural rate of unemployment does not include which of the following?
a) frictional unemployment
b) Cyclical unemployment
c) Seasonal unemployment
d) The natural rate of unemployment includes all of the above
PART B
Question 01
Business Cycle is used to study the short-run fluctuations of an economy. Draw a business cycle clearly
labeling axes and various phases. When do we declare that an economy is in recession?
If an economy experiences negative economic growth rate for two and more successive quarters, its called
recession. When the recession prolongs, it’s called great recession or depression.
Question 02
Consider the following data for a hypothetical economy that produces two goods, milk and honey.
Year 1
Year 2
Quantity Produced
Milk (Litres)
Honey (Kg)
100
40
120
25
Prices
Milk ($/Litre)
2
3
Honey ($/Kg)
6
6
a. Compute nominal GDP for each year in this economy
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃𝑡 = ∑ 𝑃𝑟𝑖𝑐𝑒𝑡 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑡
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃1 = ∑ 𝑃𝑟𝑖𝑐𝑒1 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦1
= 100 × 2 + 40 × 6 = 440
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃2 = ∑ 𝑃𝑟𝑖𝑐𝑒2 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦2
= 120 × 3 + 25 × 6 = 510
b. Using Year 1 as the base year, compute real GDP for each year. What is the growth rate?
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑡 = ∑ 𝑃𝑟𝑖𝑐𝑒0 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦𝑡
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃1 = ∑ 𝑃𝑟𝑖𝑐𝑒0 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦0
= 100 × 2 + 40 × 6 = 440
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃2 = ∑ 𝑃𝑟𝑖𝑐𝑒0 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦2
= 120 × 2 + 25 × 6 = 390
c. Now compute the GDP deflator for each year, using Year 1 as the base year.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃𝑡
440
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟𝑡 =
× 100 =
× 100 = 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑡
440
440
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟1 =
× 100 = 100
440
510
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟2 =
× 100 = 130.77
390
Question 03
If you observe any difference between GDP deflator and CPI, explain why?
GDP deflator is a type of price index, which is calculated based on all good/services produced by an economy
domestically. Consumer price index (CPI) is calculated based on a consumer basket which may contain
imported goods/services and not all goods produced domestically
Question 05
In June 2009, Statistics Canada released data on GDP and personal disposable income for the last two
quarters of 2008 and the first quarter of 2009. Use the table below to answer the following questions:
Change in real GDP (%)
Compared to previous quarter
Consumption
Government Spending
Investment spending
Exports
Imports
Personal Disposable income
(m$, current income)
Third Quarter
2008
0.1%
Fourth Quarter
2008
-0.9%
First Quarter
2009
-1.9%
$813,446
$264,462
$318,616
$488,152
$584,824
$955,512
$807,018
$266,084
$305,999
$464,964
$547,196
$963,852
$803,863
$266,884
$288,780
$424,655
$485,937
$955,260
a. Calculate the GDP for the fourth quarter of 2008
𝐺𝐷𝑃 (𝑈𝑠𝑖𝑛𝑔 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 𝑚𝑒𝑡ℎ𝑜𝑑) = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)
= 807018 + 266084 + 305999 + 464964 − 547196
= 1,296,869
b. Calculate saving for each of the quarters
𝑆𝑎𝑣𝑖𝑛𝑔 = 𝐷𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑐𝑜𝑛𝑠𝑢𝑚𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒
𝑆𝑎𝑣𝑖𝑛𝑔2008𝑄3 = 955512 − 813446 = 142066
c. When did the Canadian economy enter a recession? Why?
calculate GDPs for all three quarters and check since when the economic growth rate was negative
for 2 quarters
d. What spending component of GDP decreased the most since the third quarter of 2008
Import
e. Did real disposable income increase over this period? (Hint: prices decreased over this period)
No
Question 06
If real GDP per person was $50 000 last year and increases to $52 000 this year, what is the
annual economic growth rate?
A: The growth rate
= (real GDP per person this year — real GDP per person last year) ÷ real GDP per person last
year × 100%
= ($52 000 — $50 000) ÷ $50 000 × 100%
= 4%