Midterm Exam 1
Economics 503
Foundations of Economic Analysis
Session 5
Multiple Choice ( ½ point each)
1. Which of the following phrases means everything else held constant?
A) Caveat emptor
B) Post hoc, proctor hoc
C) Ceteris paribus
D) Carpe diem
________C__________
2. If a excess demand suddenly appears at the current market price, which of the
following could NOT be a possible cause?
A) Supply has decreased suddenly and the market has not yet reached a new
equilibrium.
B) Demand has increased suddenly and the market has not yet reached a new
equilibrium.
C) Supply has increased suddenly and the market has not yet reached a new
equilibrium.
D) All could be possible causes
________C__________
3. If a German firm produces cars in the United States, that production should count
towards
A) U.S. GDP.
B) German GDP.
C) U.S. GNP.
D) It will not affect either U.S. GNP or U.S. GDP.
________A__________
4. The largest component of spending in GDP is
A) investment spending.
B) net export spending.
C) government spending.
D) consumption spending.
________D__________
5. Stagflation occurs when
A) inflation falls and GDP falls.
B) inflation rises and GDP falls.
C) inflation falls and GDP rises.
D) inflation rises and GDP rises.
_______B___________
Calculation
6.
(1 point) The elasticity of demand is 1 and the elasticity of supply is 1. The
demand curve shifts out by 1%. What is the % change in prices?
1
1
a 
.01  .005 , .5%
bd
11
7.
(3 points) Your university is concerned about inflation in textbooks. Taking a
survey in 2009, you find the average student purchases 2 accounting texts and 3 finance
texts. The following table describes average prices for the two books.
2008
2009
Accounting Textbook
90
100
Finance Textbook
100
140
Market Basket
CPI
Inflation
a.
77.42
470
77.42
620
100.00
29.17%
Using 2009 as a base year, calculate the CPI of textbooks for 2008
through 2009.
100.00
b. Calculate the inflation rate for 2009.
29.17%
8. (2 points) Logs cut from forests in the Canadian province of British Columbia can
only be sold to lumber mills in British Columbia. There are three charts which
describe 1) the supply of tons of raw B.C. timber at different per ton price levels;
2) the demand for B.C. timber from lumber mills in B.C.; 3) the demand for B.C.
timber from lumber mills in Japan.
Price
25
20
15
10
5
Supply of B.C.
Lumber
800
700
600
500
400
Demand for B.C.
Timber in B.C.
200
400
600
800
1000
Demand for B.C.
Timber in Japan
100
300
500
700
900
a. Calculate the equilibrium price and quantity if logs can only be sold in B.C.
P = 15, Q = 600
b. Calculate the equilibrium price and quantity if logs can also be exported to Japan.
P = 20 Q = 700
9.
(3 points) The GDP per worker in the economy is fixed at 1000. There are two
million people in the economy half of whom would like to be employed. You believe that
when the labor markets in the economy are in good working order, the unemployment
rate will be 5%. Current labor market surveys show that there are 70,000 people who are
unemployed.
a. Calculate the GDP in the economy.
GDP = 930,000*1000 = 930 million
b. Calculate the potential output in the economy defined as the amount of output that we
would have if the labor markets were in good working order.
If unemployment rate were 5%, 950,000 people would work and GDP = 950,000,000
c. Calculate the output gap.
(930-950)/950 = -2/95 = -.021
10.
(3 points) The Japanese economy is hit by an earthquake which destroys
substantial amount of the energy infrastructure of Japan. This means that the energy
companies cannot provide as much electricity and will need to replace substantial
quantities of capital equipment. Using the AS-AD model, demonstrate the effect that this
would have in the short-run assuming the economy started at the level of potential output.
AS’
P
AS
2
1
AD
AD’
Y