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University of Toronto
Department of Economics
ECO105Y
Fourth Midterm: July 28, 2004
Time Allowed: 1 Hour
PRINT YOUR NAME AND STUDENT NUMBER CLEARLY ON THE FRONT
OF THIS EXAM AND ON ANY LOOSE PAGES.
NAME:
(FAMILY NAME)
STUDENT #:
.
(GIVEN NAME)
.
The Exam is divided into two parts
Part I: 5 graphical/analytical questions worth a potential total of 40 marks.
Part II: 5 multiple choice questions, each worth 2 marks if correct, for a potential 10
marks
Please use pen instead of pencil.
THERE ARE 6 PAGES TO THIS EXAM
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ECO105Y: Midterm #4, July 28, 2004
PART I: GRAPH/ANALYTIC QUESTIONS. ANSWER 4 QUESTIONS.
1.
Price Indices (10 marks)
1994
Coffee (cup)
Apples (unit)
Price/unit
$1.00
$0.60
2004
Quantity
30
25
Price/unit
$1.40
$0.40
Quantity
20
40
The above table gives data for the price/unit and quantity of coffee and apples
consumed per month by the average University of Toronto student in 1994 and 2004.
Assuming that 1994 is the base year, calculate the following values.
a) nominal student consumption in 2004 (1 mark)
1 mark = 1.40*20 + 0.4*1.60 = 44
b) the consumer price index for 2004 (3 marks)
1 mark: correct numerator 1.40*30 + 0.40*25 = 52
1 mark: correct denominator
1.00*30 + 0.60*25 = 45
1 mark: correct answer
100* 52/45 = 115.6 (or 115.5)
c) the amount of deflation or inflation between 1994 and 2004 relative to 1990 (1 mark)
1 mark: +15.6% [or any answer consistent with their b), e.g., increase of 10% if CPI is 110]
d) real consumption in 2004 relative to 1994 according to the consumer price index
(2 marks)
1 mark: the answer in a) divided by the answer in b) [times 100 but don’t worry about this]
1 mark: = 44/115.5 = $38.1 [or any answer consistent with their a) and b) answers
e) the GDP deflator for 2004 given 1994 as the base year (3 marks)
1 mark: correct numerator 1.40*20 + 0.40*40 = 44
1 mark: correct denominator
1.00*20 + 0.60*40 = 44
1 mark: correct answer
100* 44/45 = 100
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ECO105Y: Midterm #4, July 28, 2004
2.
National Accounts (8 marks)
The following data define Canada's ‘domestic’ accounts in 1999 ($ millions).
Corporate Profits before Taxes
Investment (Gross)
Net Investment Income of Non-Residents
Government Spending
Wages, Salaries, and Supplementary Labour Income
Savings
Government Transfer Payments
Capital Consumption Allowances (Depreciation)
Consumption
Net Income of Unincorporated Businesses (Farm and non-Farm) and Rent
Interest and Miscellaneous Investment Income
Imports
Corporate Taxes
Personal Taxes
Indirect Taxes less Subsidies
Exports
Retained Earnings (Undistributed Corporate Profits)
Calculate (Show your work)
a) Gross Domestic Product as Aggregate Expenditure (2 marks)
1 mark: correct except for one mistake
1 mark: correct = 40,000 + 10,000 + 13,000 + 15,500 - 15,000 = 63,500
b) Net Domestic Income calculated from factor cost (2 marks)
1 mark: correct except for one mistake
1 mark: correct: = 32,000 + 7,000 + 6,500 + 1,500 = 47,000
c) Gross Domestic Product calculated from Net Domestic Income (2 marks)
1 mark: correct except for one mistake
1 mark: = 47,000 + 8,500 + 8,000 = 63,500
d) Net Domestic Product (1 marks)
1 mark: = 63,500 – 8,500 = 55,000 [or from 47,000 + 8,000]
e) Disposable Income (1 mark)
1 mark: = 40,000 + 6,000 = 46,000
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7,000
10,000
1,000
13,000
32,000
6,000
15,000
8,500
40,000
6,500
1,500
15,000
3,000
11,000
8,000
15,500
2,000
ECO105Y: Midterm #4, July 28, 2004
3.
Consumption and Investment (10 marks)
Suppose that the an economy has no government or foreign sector so that consumption
and investment are the only expenditures. The equations for expenditure are:
C (Consumption) = 120 + 0.65Yd (Y = Yd)
a)
What is the equation for Aggregate Expenditure? (1 mark)
1 mark:
b)
I (Investment) = 40 + 0.15Y
AE = 160 + 0.8Y
What is the autonomous spending multiplier? (1 mark)
1 mark: = 1/(1 – 0.8) = 5 [must be correct not merely consistent with a)
c)
What is equilibrium income? (1 mark)
1 mark: Y = 800 (from 160/(1-0.8)) but also accept consistent with their AE
d)
What is Consumption and Investment at equilibrium? (2 marks)
1 mark: C = 120 + 0.65 (800) = 640
1 mark: I = 40 + 0.15(800) = 160
(Give marks for consistent with their answer for c) but only if both add up to their c)
e)
Draw a graph showing your Aggregate Expenditure function and equilibrium
Income. (3 marks)
real AE
AE
1 mark: axes AE (real) and Y (real)
1 mark: positively sloped AE with a Y intercept =
160 (or consistent)
1 mark: equil Y = 800 (or consistent) at
intersection of AE and 45 degree line
160
800
e)
What is aggregate expenditure if income/output is 900? (1 mark)
1 mark: AE = 880 from 160 + 0.8(900) or consistent with their a)
f)
What is the change in inventories if income is 900? (1 mark)
1 mark: change in inventories = +20 from 900 – 880 (or consistent with their e)
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real Y
ECO105Y: Midterm #4, July 28, 2004
4.
MacroModel: Aggregate Expenditure (6 marks)
An economy has the following set of macroeconomic equations.
Consumption:
C = 100 + 0.9Yd Net Taxes
T = 0.2Y
Investment:
I = 70
Exports
X = 90
Government Spending:
G = 80
Imports
IM = 10 + 0.13Y
a) What is the Consumption equation as a function of Y (not Yd)? (1 mark)
1 mark: C = 100 – 0.72Y (from 100 + 0.9(Y – 0.2Y)
b) What is the Aggregate Expenditure equation? (2 marks)
1 mark: setup : AE = 100 – 63Y + 70 + 80 + 90 – (10 + 0.13Y) [or something sensible]
1 mark: answer AE = 330 + 0.59Y (typo of .13 rather than .12)
c) Calculate the value of Autonomous Spending Multiplier. (1 mark)
1 mark: = 1/(1-0.59) = 2.44 or 2.5 (or consistent with their AE function)
d) Calculate the value of Equilibrium Income. (1 mark)
1 mark: = 825 (from 330/(1- 0.6) or consistent with AE) or 805 with 1 – 0.59
e)
Calculate the change in equilibrium income due to an increase in government
spending equal to +10. (1 mark)
1 mark: = +25 (from something like 10/(1-0.6))
5.
Income/Expenditure Equilibrium: (6 marks)
Suppose that the Canadian economy is presently in equilibrium but with inflation
because employment is greater than full employment.
a) Draw a diagram showing income/expenditure equilibrium (Yo) and a representative
potential GDP (Y*). Be sure to label your diagram carefully. (3 marks)
b) Suppose that government spending decreases just enough to eliminate the inflationary
gap. Show the change in government spending and equilibrium GDP on your diagram.
(3 marks)
real AE
AEo
1 mark: positively sloped AE with positive
AE
AE1
intercept
1 mark: Yo at intersection AEo and 45
degree line
1 mark: Y* < Yo
Ao
1 mark: shift down of AE
real Y
Y*
Yo
1 mark: Y1 from new AE and 45o line
Y1
1 mark: Y1 = Y*
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ECO105Y: Midterm #4, July 28, 2004
PART II: MULTIPLE CHOICE: 5 QUESTIONS, EACH WORTH 2 MARKS
NO MARKS DEDUCTED FOR WRONG ANSWERS
1. Suppose that Canada has an Adult population of 18 million, employed of 10 million,
unemployment of 1 million, part-time employment of 1 million, discouraged workers of
0.5 million, and a prison population of 0.5 million. Which of the following is true?
a) the participation rate is 72% and the unemployment rate is 12%
b) the participation rate is 69% and the unemployment rate is 8%
c) the participation rate is 66.6% and the unemployment rate is 8.33%
d) the participation rate is 66.6% and the unemployment rate is 9.09%
e) the participation rate is 61% and the unemployment rate is 10%
f) the participation rate is 61% and the unemployment rate is 9.09%
g) none of the above
2. Suppose that there was no change in the prices of investment, government and export
goods produced in Canada last year but that Canadian produced consumption goods
increased in price and that imported goods decreased in price. Which of the following
is most consistent with this information?
a) the Consumer Price Index (CPI) or GDP deflator did not change?
b) the CPI increased but the GDP deflator did not change
c) the CPI increased and the GDP deflator increased
d) the GDP deflator increased but the CPI may have increased or decreased
e) the GDP deflator and the CPI may have increased or decreased
f) none of the above
3. Which of the following is true for our measurement of GDP?
a) Investment includes all investment in the economy
b) Consumption includes all consumer expenditure
c) Investment includes only expenditures by firms
d) Government Spending includes every expenditure by governments
e) none of the above (i.e., all of the above are false)
4.
Which of the following would not have stimulated the U.S. economy in the last year?
a) the economic expansion in China which increased imports from the U.S.
b) the ongoing expenditures in Iraq due to the war
c) George Bush’s income tax cuts
d) autonomous expenditures on new technologies such as digital cameras
e) increased expenditures on cars and houses due to lower interest rates
f) none of the above (i.e., all of the above were stimulative)
5.
Which of the following is true for countries A and B producing commodities X and Y?
a) A has a comparative advantage in X if it produces X with less resources than B
b) A has an absolute advantage in X if it has a lower opportunity cost for X than B
c) Country A can always consume more if it specializes and trades the commodity for
which it has the absolute advantage
d) there is no comparative advantage if country A and country B have the same
opportunity costs
f) none of the above
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