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Midterm Exam
Economics 503
Foundations of Economic Analysis
Session 5
Multiple Choice ( ½ point each)
1.
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 __________
2.
A)
B)
C)
D)
The current account is
the sum of national savings and investment.
net capital outflows.
the difference between net exports and net factor income. .
acquisition of domestic assets by foreign residents and
________B__________
3.
Consider the local market for newspapers. If i) the cost of newsprint (i.e. paper for
printing newspapers) increased and ii) there was an election in town that a lot of people
wanted to read about.
A) we can say equilibrium prices definitely rise
B) we can say equilibrium prices definitely fall.
C) we can say equilibrium quantities definitely rise.
D) we can say equilibrium quantities definitely fall.
_______A___________
4.
Zambia is less well developed than Japan. It is likely that
A) the exchange rate is undervalued relative to PPP and exchange rate converted GDP is
larger than PPP converted GDP.
B) the exchange rate is undervalued relative to PPP and exchange rate converted GDP is
smaller than PPP converted GDP.
C) the exchange rate is overvalued relative to PPP and exchange rate converted GDP is
larger than PPP converted GDP.
D) the exchange rate is overvalued relative to PPP and exchange rate converted GDP is
smaller than PPP converted GDP.
__________B________
Calculation
1.
(2 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
50
90
Finance Textbook
100
100
a. Using 2009 as a base year, calculate the CPI of textbooks for 2008 and the
inflation rate for 2009.
400
5
x100  x100  84.44
480
6
  20%
b. The interest rate in 2008 was 25% (i.e. i2008 = .25). Suppose inflation was
perfectly foreseen. Show the real interest rate in 2008.
5%
2.
(1 point) The own price elasticity of demand for good A is exactly 1. The own
price elasticity of supply for good A is .5. Income elasticity for this necessity good is .3.
The income of customers goes up by 1%. Estimate the increase in the price level in %
terms.
q = a - b *p +m*log(income)
q = c + d* p
solve
1
bd
1
=
bd
p =
* m*log(income)
Δp
(1/(b+d)) * m* Δlog(income)
where b and d are price elasticities and m is income elasticity.
So if Δlog(income) = 1% then
.3
 .2%
1.5
% p

1
 m  1%
bd
3.
(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
Supply of B.C.
Demand for B.C. Demand for B.C.
Lumber
Timber in B.C.
Timber in Japan
25
800
200
100
20
700
400
300
15
600
600
500
10
500
800
700
5
400
1000
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
4.
(1 point) Show in a diagram the effect on the demand curve, the supply curve, the
equilibrium price and quantity in the market for canned SPAM, an inferior good, of each
of the following events.
Case 1: The income of consumers goes up.
S
P
1
2
D´
D
Q
Case 2: Government regulations on canning make the production of the good less
efficient.
S´
P
S
2
1
D
Q
5.
(1 point) The government drops tariffs on foreign imports making them more
attractive to domestic customers.
Case 1: Demonstrate the effect of this if the government allows the exchange rate to float.
Supply
S
2
1
Demand'
Demand
Forex
Case 2: Demonstrate the effect of this event on the Balance of Payments if the
government wants to keep a fixed exchange rate.
Supply
S
1
Balance of
Payments <0
2
Demand'
Demand
Forex
6. (1 point) The government of an individual country which is a small part of the global
loanable funds market decides to run a budget surplus. Demonstrate the effect on
international lending or borrowing of this event assuming a constant world real interest
rate.
SLFP
r
S'LF
rW
1
International
Lenging > 0
2
DLF
Loanable
Funds