Download ECOAO3Y, November 12, 1998

Department of Economics
University of Toronto
ECO105Y1 Y
Midterm Test #2: July 25, 2005
Time Allowed: 1 Hour 20 Minutes
This test is divided into two parts:
Part I - problem format - is worth 40% of the total mark.
Part II - multiple choice- is worth 10% of the total mark
(There are 5 multiple choice questions each worth 2 marks)
Show your work where applicable.
Please use pen instead of pencil.
Print your name and student number clearly on the front of the exam and on any loose
pages.
Name:
(Family Name)
Student #:
.
(Given Name)
.
There are 7 pages to the exam.
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ECO105Y1 Y: Midterm Test #2, July 25, 2005
Part I
Place your answers (and work where necessary) in the space provided.
Clearly label all axes, curves, and points.
1.
Comparative Advantage (10 marks)
Suppose that one unit of resource produces either 1 units of gold or 4 units of peanuts
in Ghana and that a similar resource unit produces either 0.5 units of gold or 1 unit of
peanuts in Nigeria. Assume that these are the only countries and commodities in the
world and that there are no economies of scale and no transportation costs.
a) In the space below, determine the country with the comparative advantage in gold
production and the country with the comparative advantage in peanut production.
Show your calculations. (3 marks)
1 mark: Opportunity Cost of Ghana is 1 gold cost 4 peanuts (or 1 peanut cost ¼ gold)
1 mark: Opportunity Cost of Nigeria is 1 gold cost 2 peanuts (or 1 peanut cost ½ gold)
1 mark: Ghana has comparative advantage for peanuts and Nigeria has it for gold
b) Suppose that Ghana has 600 units of the resource and that Nigeria has 1600 units of
the resource. In the space below, draw each country's production possibility curve in
separate diagrams with gold on the vertical axis. (3 marks)
b) 1 mark: Ghana’s intercepts of
600 gold and 2400 peanuts
1 mark: Nigeria’s intercepts of
800 gold and 1600 peanuts
1 mark: linear PPC’s
c) 1 mark: Ghana’s linear CPC with
intercepts of 800 gold and 2400 peanuts
1 mark: Nigeria’s linear CPC with intercepts of 800 gold and 2400 peanuts
c) Suppose that these countries agree on an exchange rate of 1 unit of gold for 3 units of
peanuts.
i) In your diagram, draw each country's consumption possibility curve with trade.
(2 marks)
ii) If Ghana consumes 900 units of peanuts, what is the maximum units of gold that
Ghana can consume given trade? Show your work. (1 mark )
1 mark: Ghana consumes 900 peanuts => Ghana trades 2400 – 900 = 1500 peanuts
1 mark:
=> Ghan receivews 1500/3 = 500 gold
iii) If Ghana consumes 900 units of peanuts, how many units of peanuts and gold does
Nigeria consume given trade? Show your work. (1 mark)
Nigeria trades 500 gold for 1500 peanuts => Nigeria retains 800 – 500 = 300 gold
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ECO105Y1 Y: Midterm Test #2, July 25, 2005
2.
Prices Indices (10 marks)
1980
Books
Diskettes
Price/unit
$25
$10
2000
Quantity
12
20
Price/unit
$40
$6
Quantity
8
30
The above table gives data for the price/unit and quantity of books and diskettes
(computer) consumed by the average student in 1980 and 2000. Assuming that 1980 is
the base year, calculate the following values.
MUST HAVE SOME WORK FOR EACH QUESTION!
GIVE MARKS FOR CORRECT WORK BUT WRONG DUE TO PREVIOUS MISTAKE
a) nominal student consumption in 2000 (1 mark)
1 mark: = $40*8 + $6 *30 = $500
Be careful: nominal C1980 is also $500
b) the consumer price index for 2000 (2 marks)
1 mark: [= 100*(Pt*Qb)/( Pb*Qb)] or
1 mark:
= 100* ($40*12 + $6*20)/ $25*12 + $10 *20
= $100 * $600/$500 = 120
c) real consumption in 2000 relative to 1980 according to the consumer price index
(2 marks)
1 mark:
= 100 * nominal C2000/CPI2000 = ($40*8 + $6 *30)/120
1 mark:
= $500/120 = $417
d) the amount of inflation between 1980 and 2000 relative to 1980 (1 mark)
1 mark: = 20% [(120-100)/100] no need for work since some students may simply see it
Full marks if consistent with earlier incorrect CPI
e) real student income in 2000 using CPI if nominal student income was $2000 in 2000
(1 mark)
1 mark: = $2000/120 = $1667
Full marks if consistent with earlier incorrect CPI
f) real consumption in 2000 according to the GDP deflator measure (1 mark)
1 mark: = $25*8 + $10*30 = $500
Again, careful since $500 also nominal
g) the GDP deflator for 2000 given 1980 as the base year (2 marks)
1 mark: [= 100*(Pt*Qt)/( Pb*Qt)] or = 100*($40*8 + $6*30)/($25*8 + $10*30)
1 mark: = 100*$500/$500 = 100
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ECO105Y1 Y: Midterm Test #2, July 25, 2005
3.
National Accounts (10 marks)
The following data are from the 1999 National Accounts of Canada ($millions).
Corporate Profits (before Taxes)
Interest and Miscellaneous Investment Income
Gross Investment
Net Investment Income of Non-Residents
Government Spending
Wages and Salaries and Supplementary Labour Income
Government Transfer Payments
Depreciation (Capital Consumption Allowances)
Exports
Net Income of Unincorporated Businesses (Farm and non-Farm) including rent
Imports
Corporate Taxes
Consumption
Personal Taxes
Indirect Taxes Less Subsidies
Savings
Retained Earnings (Undistributed Corporate Profits)
100,000
45,000
170,000
30,000
200,000
495,000
90,000
120,000
410,000
65,000
380,000
40,000
550,000
115,000
125,000
60,000
30,000
a) Gross Domestic Product as Aggregate Expenditure (2 marks)
1 mark:
1 mark:
One mistake in setup (AE = 550,000 + 170,000 + 200,000 + 410,000 - 380,000)
correct answer = 950,000
b) Net Domestic Income from Aggregate Expenditure (2 marks)
1 mark:
1 mark:
one mistake in setup(NDY = 950,000 – 120,000 – 125,000 = 705,000)
no mistake (Give full marks if consistent with an incorrect mark in a)
c) Net Domestic Income from the sum of factor incomes (2 marks)
1 mark: one mistake in the setup (NDY = 495,000 + 100,000 + 65,000 + 45,000)
1 mark: correct answer: 705,000
d) Personal Income (1 mark)
1 mark: = 725,0000 (from S (60,000) + C (550,000) + Personal Taxes (115,000)
e) Gross National Product (1 mark)
1 mark: GDP – Net Investment Income of Non-Residents = 950,000 – 30,000 = 920,000
(Give full marks if consistent with an incorrect mark in a)
f) Disposable Income (1 mark)
1 mark: = Savings (60,000) + Consumption (550,000) = 610,000
or Personal Income – Personal Taxes = 725,000 – 110,000 = 615,000
g) Net Domestic Product (1 mark)
1 mark: = GDP – CCA = 950,000 – 120,000 = 830,000
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ECO105Y1 Y: Midterm Test #2, July 25, 2005
4.
An economy has the following set of macro equations.
Consumption:
C = 200 + .75Yd
Investment:
I = 300
Government Spending G = 400
Taxes: T = .2Y
Exports: X = 600
Imports: IM = 700
a) Calculate the value of the Aggregate Expenditure function. (3 marks)
1 mark: understanding that AE = C + I + G + X - IM
1 mark: correct autonomous part = 800 ( from 200 + 300 + 400 + 600 – 700)
1 mark: correct marginal propensity = 0.6 (from .8(1 – 0.75))
(i.e., three marks for AE = 800 + 0.6Y
b) Calculate the value of the Spending Multiplier. (1 mark)
1 mark
= 1/(1-.6) = 2.5
c) Calculate the value of equilibrium income. (1 mark)
1 mark:
= 800/(1-.6) = 2000
d) Graph the Aggregate Expenditure function to show equilibrium Income. Be sure to
label your axes and give specific numbers for any intercepts. (2 marks)
1 mark: diagram with positive sloped AE as a function of Y with AE intercept = 800
1 mark: intersection of AE and 45 degree line at Y = 2000
e) What is the change in inventories at Y = 1900? (2 marks)
1 mark: AE = 800 + 0.6(1900) = 1940
1 mark: change in inventories = 1900 - 1940 = -40 (must be negative)
f) What is the change in equilibrium income given an increase in G = + 12? (1 mark)
1 mark: = +30 (from +12/(1-0.6))
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ECO105Y1 Y: Midterm Test #2, July 25, 2005
Part II: Multiple Choice
Circle the best answer
Each question is worth 2 marks. No marks deducted for wrong answers.
.
1. The export of a car this year that was produced last year causes which of the following
changes in the National Accounts this year?
a) an increase in exports and GDP
b) a decrease in inventories and no change in GDP
c) a decrease in inventories and decrease in GDP
d) an increase in exports, decrease in inventories, and no change in GDP
e) an increase in exports, decrease in inventories, and increase in GDP
2. Argentina produces 10 pounds of beef and 4 pounds of bananas from one unit of
resource. Brazil produces 5 pounds of beef and 3 pounds of bananas from a similar
unit of resource. Therefore Argentina
a) has an absolute and comparative advantage in beef
b) has an absolute and comparative advantage in bananas
c) has an absolute advantage in beef and a comparative advantage in bananas
d) has an absolute advantage in bananas and a comparative advantage in bananas
e) has an absolute advantage in both commodities but a comparative advantage in
neither commodity
3. Dominion Textile purchased $50 million worth of cotton and $25 million worth of fuel
in 1990 from other companies to produce cotton cloth worth $200 million. If Dominion
Textile sold $175 million worth of cotton cloth in 1990, the companies value added for
1990 was
a) $75 million b) $100 million c) $125 million d) $175 million e) $200 million
4. Suppose that the adult (eligible) population is 30 million, employment is 15 million,
unemployment is 3 million, part-time unemployment is 2 million people and the number
of discouraged workers is 2 million people.
a) the unemployment rate = 33 2/3% and the participation rate = 66 2/3%
b) the unemployment rate = 33 2/3% and the participation rate = 60 2/3%
c) the unemployment rate = 16 2/3% and the participation rate = 66%
d) the unemployment rate = 16 2/3% and the participation rate = 60%
e) none of above
5.
Which of the following is false?
a) GDP is measurable by value added, income, and expenditure
b) nominal GDP is always greater than real GDP
c) the GDP deflator includes the price of imports
d) the Consumer price index overestimates inflation because it doesn’t include
substitution effects or improvements in quality
c) the GDP deflator uses the current basket of goods
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