Download February 7, 2004

ECMA06S
First Term Test - February 7, 2004
Profs. Michael Krashinsky and Gordon Cleveland
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ECMA06H FIRST TERM TEST
February 7, 2004
This term test consists of 25 questions. Answer each question by choosing the best alternative and
indicating your choice with a capital letter in the appropriate place on the first page of this exam
(which you should detach, as it is the only thing you will turn in at the end of the exam - you are free
to take the rest of the exam away with you; use the fronts and back of these pages for your rough
work; if you wish to keep a record of your answers, make a note of them on the exam; the answer
sheet will be returned to you in tutorial; if you do not attend tutorial, your answer sheet will not be
returned to you, but your overall mark on the exam will be posted). Each correct answers is worth 4
marks (there is no deduction for wrong answers).
1. Canada’s GDP in 2002 (measured in current dollars) was approximately:
A) $600,000,000
B) $900,000,000
C) $1,200,000,000
D) $1,500,000,000
E) $6,000,000,000
F) $9,000,000,000
G) $12,000,000,000
H) $15,000,000,000
I) $60,000,000,000
J) $90,000,000,000
K) $120,000,000,000
L) $150,000,000,000
M) $600,000,000,000 N) $900,000,000,000
O) $1,200,000,000,000
P) $1,500,000,000,000
Q) $6,000,000,000,000 R) $9,000,000,000,000 S) $12,000,000,000,000 T) $15,000,000,000,000
U) $60,000,000,000,000
V) $90,000,000,000,000
W) $120,000,000,000,000
X) $150,000,000,000,000
Y) none of the above
2. Over the past year, the rate of inflation in Canada has been approximately:
A) -6%
-4%
-2%
D) +2%
H) +10%
I) +12%
J) +20%
E) +4%
+6%
+8%
F)
G)
K) none of the above
3. The adult population of Atlantis is constant at 10,000. In the initial period, 4400 people have fulltime jobs, 3000 people have part-time jobs, 600 people have no jobs and are actively looking for
work, and 2000 people are at home and are not looking for work. In a later period, economic activity
in Atlantis has declined and jobs have become difficult to find. As a result, we find that 3600 people
have full-time jobs, 3150 people have part-time jobs, 750 people have no jobs and are actively
looking for work, and 2500 people are at home and are not looking for work. Between the initial
period and the later period, we can state that the unemployment rate:
A) has risen by 1.5 percentage points, which understates the decline in activity.
B) has risen by 1.5 percentage points, which overstates the decline in activity.
C) has risen by 1.875 percentage points, which understates the decline in activity.
D) has risen by 1.875 percentage points, which overstates the decline in activity.
E) has risen by 2.5 percentage points, which understates the decline in activity.
F) has risen by 2.5 percentage points, which overstates the decline in activity.
G) has risen by 5 percentage points, which understates the decline in activity.
H) has risen by 5 percentage points, which overstates the decline in activity.
I) has risen by 6.5 percentage points, which understates the decline in activity.
J) has risen by 6.5 percentage points, which overstates the decline in activity.
K) none of the above
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4. In period 1, an individual’s income is $25,000 and the consumer price index is 160; in period 2,
the same individual’s income is $60,000 and the consumer price index is 300. A good estimate of the
increase in purchasing power of this individual between periods 1 and 2 would be:
A) 0%
B) 10%
C) 15%
D) 20%
E) 25%
F) 28%
G) 30%
H) 33%
I) 36%
J) 40%
K) 48%
L) 50%
M) 56.25% N) 60%
O) 75%
P) 83.33%
Q) 100%
R) 140%
S) 200%
T) none of the above
5-6. An economy has only two consumption goods, and has the following prices and quantities
consumed (and produced) in 1993 and 2003 (questions 5 and 6 deal with this problem):
1993
Food
Clothing
Price
$3.00
$2.50
2003
Quantity
400
600
Price
$4.50
$3.00
Quantity
400
800
5. If the consumer price index is 100 in 1993, then the consumer price index for 2003 (to the nearest
unit) is:
A) 1
B) 100
C) 131
D) 133
E) 180
F) 183
G) 200
H) 240
I) 315
J) 373
K) 400
L) 467
M) 500
N) 533
O) 600
P) 880
Q) none of the above
6. The true increase in prices from 1993 to 2003 is:
A) 16.67%
B) 18.52%
C) 31.25%
D) 33.33%
E) 36.67%
F) 40%
H) between 16.67% and 18.52%
I) between 16.67% and 31.25%
J) between 16.67% and 33.33%
K) between 16.67% and 36.67%
L) between 16.67% and 55.56%
M) between 18.52% and 31.25%
N) between 18.52% and 33.33%
O) between 18.52% and 36.67%
P) between 18.52% and 55.56%
Q) between 31.25% and 33.33%
R) between 31.25% and 36.67%
S) between 31.25% and 40%
T) between 31.25% and 55.56%
U) between 33.33% and 36.67%
V) between 33.33% and 40%
W) between 36.67% and 40%
X) between 36.67% and 55.56%
Y) between 40% and 55.56%
Z) none of the above
G) 55.56%
7. In October 1973, the Consumer Price Index was 28.8; in October 2003, the Consumer Price Index
was 122.4 (these are true figures, setting the index equal to 100.0 in June 1992). The average annual
rate of inflation in the 30 years between 1973 and 2003 (to the nearest one-hundredth of a percent)
was [hint - remember that the inflation rate compounds each year] :
A) 1.22%
B) 1.28%
C) 1.54%
D) 2.18%
E) 2.88%
F) 3.02%
G) 3.25%
H) 3.36%
I) 3.43%
J) 3.75%
K) 3.96%
L) 4.06%
M) 4.13%
N) 4.25%
O) 4.33%
P) 4.51%
Q) 4.74%
R) 4.94%
S) 5.02%
T) 5.25%
U) 325%
V) none of the above
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8. An economy consists of only two firms, A and B. There is no government and no foreign sector.
Firm A produces $3000 worth of output, while firm B produces $4000 worth of output. Firm A sells
$1500 worth of output to consumers, $900 worth of output to firm B for immediate use in production,
and another $600 worth of output to firm B to be used as investment goods. Firm B sells $2000
worth of output to consumers, $700 worth of output to firm A for immediate use in production, and
another $1200 worth of output to firm B to be used as investment goods. Firm B has $100 worth of
output which it cannot sell, and which is added to its inventories. GDP in this economy is:
A) $3500
B) $3600
C) $4500
D) $4600
E) $5100
F) $5200
G) $5300
H) $5400
I) $5800
J) $5900
K) $6100
L) $6200
M) $6300
N) $6400
O) $6500
P) $6600
Q) $6700
R) $6800
S) $6900
T) $7000
U) none of the above
9. You are given the following list of items from a country’s national accounts:
i) wages and salaries
ii) consumption goods and services sold to consumers
iii) all investment goods acquired by firms, plus residential construction
iv) government spending on goods and services, including government production
v) government transfer payments to households and firms
vi) capital consumption allowance
vii) exports net of imports
Which of these items would not be included if you were adding up entries to obtain a measure of
GDE (Gross Domestic Product, measured using the final products approach):
A) i
B) ii
C) iii
D) iv
E) v
F) vi
G) vii
H) i & ii
J) ii & iii
K) iii & iv
L) iv & v
M) v & vi
N) vi & vii
O) i & iii
P) ii & iv
Q) iii & v
R) iv & vi
S) i, iii & v T) i, iv & v U) i, v & vi
V) iii, v & vi W) iv, v & vi X) iv, vi & vii Y) v, vi & vii Z) none of the above
10
taxes or transfers) and no foreign sector. Prices are fixed. As in our models discussed in class, either
DI or Yd is disposable income, C is consumption, and I is investment. The economy has the
following consumption and investment relationships:
C = 30 + (8/11)DI = 30 + (8/11)Yd
I = 90
Questions 10 through 13 concern this economy.
10. Equilibrium output in this model is:
A) 0
B)30
C) 90
H) 165
I) 180
J) 200
O) 360
P) 375
Q) 400
V) 720
W) none of the above
D) 100
K) 240
R) 440
E) 110
L) 255
S) 480
F) 120
M) 275
T) 520
G) 150
N) 330
U) 660
11. The multiplier on an increase in investment in this model is:
A) 0
B) 1
C) 30
D) 1/30
E) 90
H) 1/120
I) 44/3
J) 44/9
K) 8/11
L) 11/8
O) 11/19
P) 19/11
Q) none of the above
F) 1/90
M) 3/11
G) 120
N) 11/3
5
12. Suppose that the economy initially is producing output equal to 390. The adjustment mechanism
that will move this economy into equilibrium is:
A) excess demand will cause inventories to rise; orders will increase and GDP will rise
B) excess demand will cause inventories to fall; orders will increase and GDP will rise
C) excess demand will cause inventories to rise; orders will fall and GDP will fall
D) excess demand will cause inventories to fall; orders will fall and GDP will fall
E) excess supply will cause inventories to rise; orders will increase and GDP will rise
F) excess supply will cause inventories to fall; orders will increase and GDP will rise
G) excess supply will cause inventories to rise; orders will fall and GDP will fall
H) excess supply will cause inventories to fall; orders will fall and GDP will fall
13. Suppose that consumers in this economy attempt to save more by reducing their consumption
function to C =20 + (8/11)DI = 20 + (8/11)Yd. When equilibrium is restored, the result of this
change will be:
A) output will rise, consumption will rise, and savings will rise
B) output, consumption and savings will all stay the same
C) output, consumption and savings will all fall
D) output will fall, consumption will rise, and savings will remain the same
E) output will fall, consumption will fall, and savings will remain the same
F) output will fall, consumption will stay the same, and savings will remain the same
G) output will fall, consumption will rise, and savings will rise
H) output will fall, consumption will stay the same, and savings will rise
I) output will fall, consumption will fall, and savings will rise
J) none of the above
14
or output, DI or Yd is disposable income, C is consumption, I is investment, G is government
spending, X is exports, IM is imports, TA is taxes, TR is transfers). Assume that prices are fixed in
this model.
C = 7 + (24/25)DI = 7 + (24/25)Yd
TA = (1/3)Y
- (1/12)Y
I = 60
G = 632
X = 405
IM = (1/5)Y
You will find it useful to know that combining the C, TA, and TR functions allows us to write the
consumption function as:
C = 247 + (14/25)Y
Questions 14 through 23 concern this problem. Note that in all cases, when the correct answer has
decimals, you should round to three decimal points.
14. Equilibrium output in this model is:
A) 0
B)1000
C) 1104
I) 2115.625 J) 2116
K) 2250
P) 3600
Q) 3733.333 R) 4200
W) none of the above
D) 1344
L) 2400
S) 4800
E) 1434
M) 2700
T) 5600
F) 1800
N) 2850
U) 6600
G) 2100
O) 3000
V) 7200
6
15. The government budget position is the surplus or the deficit (if it is a surplus, it is written as a
positive number; if it is a deficit, it is written as a negative number). In this case, at equilibrium, the
government budget position is:
-15
B) C) D) E) F) G) M) 0
S) +6
Y) +15
H) I) N) +1
O) +2
T) +7
U) +8
Z) none of the above
J) P) +3
V) +9
K) Q) +4
W) +10
L) R) +5
X) +12
16. The government is considering increasing government expenditures by 48. This would increase
equilibrium Y by:
A) 16
B) 17.28
C) 24
D) 48
E) 56
F) 60
G) 64
H) 66
I) 72
J) 75
K) 78
L) 80
M) 90
N) 96
O) 100
P) 120
Q) 133.333 R) 136
S) 160
T) 180
U) 240
V) 360
W) 480
X) 1200
Y) 2400
Z) none of the above
17. After the new equilibrium is achieved, the overall effect on the government’s budgetary position
caused by the increase in government expenditures of 48 will be to reduce the surplus or increase the
deficit by:
A) 48
B) 36
C) 32
D) 30
E) 24
F) 20
G) 18
H) 17
I) 16.75
J) 16
K) 15
L) 14
M) 12
N) 11
O) 10
P) 9
Q) 8
R) 6
S) 4
T) 2
U) 0
Z) none of the above
18. Now, instead of increasing government expenditures by 48, the government instead is
considering cutting taxes by 100. This would increase equilibrium Y by:
A) 32
B) 34.56
C) 48
D) 96
E) 100
F) 120
G) 144
H) 150
I) 156.25
J) 160
K) 180
L) 192
M) 196
N) 200
O) 209.375 P) 240
Q) 266.667 R) 272
S) 320
T) 360
U) 480
V) 720
W) 960
X) 2400
Y) 4800
Z) none of the above
19. After the new equilibrium is achieved, the overall effect on the government’s budgetary position
(compared with the answer in question 15) caused by the cut in taxes of 100 will be to reduce the
surplus or increase the deficit by:
A) 100
B) 96
C) 75
D) 62.5
E) 60
F) 52
G) 48
H) 42
I) 37.5
J) 36
K) 32.5
L) 30
M) 27.5
N) 25
O) 22.5
P) 20
Q) 15
R) 12.5
S) 10
T) 7.5
U) 0
Z) none of the above
20. Instead of cutting taxes or increasing government spending, the government proposes to increase
transfers by 50. The effect on equilibrium of this policy would be:
A) the same as the effect of an increase in government spending of 50
B) the same as the effect of a cut in taxes of 50
C) less than the effect of an increase in government spending of 50 but more than a cut in taxes of 50
D) more than the effect of an increase in government spending of 50 but less than a cut in taxes of 50
E) less than the effect of either policy
F) none of the above
7
21. Now return to the original equilibrium before there was any change in government policy.
Suppose that exports fall by 16. This would reduce increase equilibrium Y by:
A) 0
B) 4
C) 8
D) 16
E) 18
F) 20
G) 24
H) 25
I) 27
J) 30
K) 32
L) 33.333
M) 35
N) 36
O) 36.667
P) 39
Q) 40
R) 42
S) 42.5
T) 44.444
U) 48
V) 60
W) 72
X) 80
Y) 96
Z) none of the above
22. After the new equilibrium is achieved, the overall effect on the government’s budgetary position
(compared with the answer in question 15) caused by the fall in exports of 16 will be to reduce the
surplus or increase the deficit by:
A) 48
B) 36
C) 32
D) 24
E) 18
F) 16.75
G) 16
H) 15
I) 14.333
J) 12
K) 11.417
L) 11.333
M) 10.417
N) 10
O) 9.6
P) 9
Q) 8.417
R) 8.333
S) 8
T) 6.667
U) 5.583
V) 5
W) 4.667
X) 4.417
Y) 0
Z) none of the above
23. The answers to questions 21 and 22 could illustrate which of the following statement(s) [Note,
the issue is not just whether or not the statements are correct, but whether they are also illustrated by
questions 21 and 22!]?
I. The deficit is determined in part by forces beyond the control of the government.
II. The deficit rises when the government increases spending or cuts taxes.
III. Government policy is always responsible for an increase in the deficit.
IV. Deficits rise by themselves when GDP falls.
A) only I
B) only II
C) only III
D) only IV
E) I & II
F) I & III
G) I & IV
H) II & III
J) II & IV
K) III & IV L) I, II & III M) I, II & IV
N) I, III & IV
O) II, III & IV P) I, II, III & IV
Q) none of the statements
24following way:
C = A + bDI = A + bYd
TA = tY
TR = D I = I0
G = G0
X = X0
IM = mY
Questions 24 and 25 concern this more general model.
24. In general, the marginal propensity to spend out of GDP (that is, dAE/dY, sometimes written as
cY) can be expressed as:
A) b
B) bt
C) b(t+e)
D) b(1E) b(1-e)
-e)
G) b(1+t+e)
H) (1I) (1-e)
J) (1-e) K) (1L) b(1-e) - m
M) b(1-e) + m N) none of the above
8
25. Suppose that we examine the impact of changes in the various parameters in the model on the
basic multiplier (the basic multiplier is the multiplier on an increase in autonomous expenditure; that
is, the multiplier on any of the constants in the AE function, for example, the multiplier on G or I or
X). Which of the following statements is true ?
I. An increase in b will increase the multiplier.
II. An increase in t will increase the multiplier.
III. An increase in e will increase the multiplier.
IV. An increase in m will increase the multiplier.
A) only I
B) only II
C) only III
D) only IV
E) I & II
F) I & III
G) I & IV
H) II & III
J) II & IV
K) III & IV L) I, II & III M) I, II & IV
N) I, III & IV
O) II, III & IV P) I, II, III & IV
Q) none of the statements