Econ 305 Midterm
ECON 305 MIDTERM
A. Multiple choices
1. __________ Given that air pollution is generated as a byproduct of the production of some goods like chemicals A) GDP is adjusted downward to account for this B) GDP is adjusted upward to account for this. C) GDP tends to understate economic welfare. D) GDP tends to overstate economic welfare. E) None of the above.
2. __________ Suppose hamburgers cost $1.20 last year and $1.32 this year, and the overall price index (the GDP deflator) rose from 110 last year to 120 this year.
How much will 1000 hamburgers contribute to this year's real GDP? A) $1000. B) $1100. C) $1200. D) $1320. E) Impossible to calculate without additional information.
3. In the very long run we assume that A) prices are …show more content…
flexible, and, therefore, all markets are in equilibrium at all times B) the productive capacity of the economy is fixed C) at least some prices are fixed D) all of the above are true E) none of the above are true
4. In an open economy that has a government sector A) Sp – I = G + TR – TA B) Sp = (G + TR – TA – I) + NX C) Sp – I = (G + TR – TA) + NX D) I – Sp = (G + TR – TA) – NX E) none of the above are true
5. Assume that GDP = 480, consumption = 340, savings = 40, net exports = –12, and government purchases = 120. Which of the following is true? A) disposable income is 380 B) investment is 32 C) the budget deficit is 32 D) only A) and B) E) only A) and C)
6. In the long run the Aggregate Supply curve is vertical because A) full employment output depends on both the production function and the price level B) full employment output depends on the price level, but not on the production function C) full employment output depends on the production function, but not on the price level D) there is no unemployment in the Classical model E) both C) and D) are correct
7.
According to the quantity equation A) V =PM / T B) V = MT / P C) V = PT / M D) V = 1 / PTM E) none of the above
8. Which of the following is NOT a source of economic growth? A) growth in consumption expenditures B) growth in labor inputs C) growth in capital inputs D) improved technological efficiency E) growth in the stock of knowledge
9. Assume a production function with constant returns to scale, labor's share of income at 0.7, and capital's share at 0.3. If labor grows at 4% and capital grows at 3%, how many years would it take to double the current level of output if no technological advances are made? A) 7 B) 10 C) 19 D) 23 E) 33
10. In general A) a country that has a balance of payments deficit will have an increase in foreign reserves B) a country that has a balance of payments surplus will have a decrease in foreign reserves C) a country that has a balance of payments deficit will have a reduction in foreign reserves D) a country that has a balance of payments surplus will have an increase in foreign reserves E) both C) and D) are correct
11. The theory of purchasing power parity states
that A) in the short run, the nominal exchange rate moves primarily as a result of differences in price level behaviour between two countries B) in the long run, the nominal exchange rate moves primarily as a result of differences in the price level behaviour between two countries C) in the short run, the nominal interest rate moves primarily as a result of differences in the price level behaviour between two countries D) in the long run, the nominal interest rate moves primarily as a result of differences in the price level behaviour between two countries E) none of the above
12. The output gap equals A) potential output – full employment output B) actual output – potential output C) potential output – actual output D) full employment output – potential output E) none of the above
13. Which of the following is NOT reflected in a shift of the AD-curve? A) a change in real money balances due to a change in the price level B) a change in real money balances due to a change in nominal money supply C) a change in government transfer payments D) a change in the confidence of consumers and businesses E) all of the above will shift the AD-curve
14. In the case of the Classical Aggregate Supply curve, a monetary expansion would A) leave output and the price level unchanged B) increase the price level but leave output unchanged C) increase both the price level and output D) increase output, but decrease the price level E) increase output, but have no impact on the price level
15. The slope of the original Phillips Curve equals A) wage inflation B) price inflation C) the speed of nominal wage adjustment in the labour market D) the speed at which the actual unemployment rate adjusts to the natural rate of unemployment E) none of the above
16. According to the Phillips Curve, policymakers A) in the short run can reduce inflation at the expense of high unemployment B) in the short run can reduce unemployment at the expense of high inflation C) in the short run cannot reduce the unemployment rate D) in the short run cannot reduce the inflation rate E) can achieve both A) and B)
17. In terms of the long-run equilibrium, A) the Classical model, the adaptive expectations model, and the rational expectations model all differ B) the Classical model differs from the adaptive expectations model C) the Classical model, the adaptive expectations model, and the rational expectations model all yield the same result D) the Classical model differs from the rational expectations model E) the rational expectations model differs from the adaptive expectations model
18. Other things being equal A) increases in quits and layoffs increase unemployment B) increases in the flow of new entrants into the labour market increase unemployment C) increases in factory closures increase unemployment D) all of the above are true E) none of the above are true
19. Unemployment hysteresis refers to the phenomenon that, A) when unemployment is low, it tends to increase at a rapid rate B) when unemployment is high, it tends to remain high and only comes down slowly C) when unemployment is high, it tends to fall rapidly D) when unemployment is low, it tends to remain constant E) when unemployment is low, it tends decrease at a rapid rate
20. Perfectly anticipated inflation largely transfers wealth from A) debtors to creditors B) creditors to debtors C) poor to rich D) households to firms E) none of the above
B. True/False/Uncertain
1. There is a trade-off between inflation and unemployment.
2. Country A and Country B have identical characteristics except country A has a much higher capital-labor ratio than country B. According to Solow Growth model, country A must be growing faster than Country B.
3. If the rate of inflation in Canada increases, then the value of the Canadian dollar with respect to other currencies will decline.
C. Short answers
1. Suppose Canadian economy has the following Philips curve: πt=πt-1-0.5(ut-ut*) and the natural rate of unemployment is given by an average of the past two years’ unemployment: ut*=( ut-1+ ut-2)/2
For simplicity, assume that the unemployment rates in all the years before year 1 were u*.
a. Suppose Bank of Canada follows a policy to reduce permanently the inflation rate by 1% starting year1. What effect will this policy have on the unemployment rate over time?
b. What do these equations imply about the short-run and long-run trade-offs between inflation and unemployment?
2. Suppose that Canada can be described by the following Solow growth model: Kt+1=(1-d)Kt+sYt
Yt=AktθNt1−θ
The growth rate of total factor productivity (TFP) is zero. Suppose the depreciation rate d=10%, population growth rate n=2%, and capital share of income θ=0.3.
a. Suppose that the economy is currently at steady state, and saving rate s=10%. Find the current levels of per capita capital (k), per capita income (y), and per capita consumption (c).
b. As the economy is at steady state, what are the growth rates of per capita capital (k), per capita income (y ), total capital stock (K), and total output (Y)?
c. What saving rate maximizes the consumption per worker?
3. Using AD/AS model show the SR and LR effect of a contractionary fiscal policy on output and price level.
A. Multiple choices
1. __________ Given that air pollution is generated as a byproduct of the production of some goods like chemicals A) GDP is adjusted downward to account for this B) GDP is adjusted upward to account for this. C) GDP tends to understate economic welfare. D) GDP tends to overstate economic welfare. E) None of the above.
2. __________ Suppose hamburgers cost $1.20 last year and $1.32 this year, and the overall price index (the GDP deflator) rose from 110 last year to 120 this year.
How much will 1000 hamburgers contribute to this year's real GDP? A) $1000. B) $1100. C) $1200. D) $1320. E) Impossible to calculate without additional information.
3. In the very long run we assume that A) prices are …show more content…
flexible, and, therefore, all markets are in equilibrium at all times B) the productive capacity of the economy is fixed C) at least some prices are fixed D) all of the above are true E) none of the above are true
4. In an open economy that has a government sector A) Sp – I = G + TR – TA B) Sp = (G + TR – TA – I) + NX C) Sp – I = (G + TR – TA) + NX D) I – Sp = (G + TR – TA) – NX E) none of the above are true
5. Assume that GDP = 480, consumption = 340, savings = 40, net exports = –12, and government purchases = 120. Which of the following is true? A) disposable income is 380 B) investment is 32 C) the budget deficit is 32 D) only A) and B) E) only A) and C)
6. In the long run the Aggregate Supply curve is vertical because A) full employment output depends on both the production function and the price level B) full employment output depends on the price level, but not on the production function C) full employment output depends on the production function, but not on the price level D) there is no unemployment in the Classical model E) both C) and D) are correct
7.
According to the quantity equation A) V =PM / T B) V = MT / P C) V = PT / M D) V = 1 / PTM E) none of the above
8. Which of the following is NOT a source of economic growth? A) growth in consumption expenditures B) growth in labor inputs C) growth in capital inputs D) improved technological efficiency E) growth in the stock of knowledge
9. Assume a production function with constant returns to scale, labor's share of income at 0.7, and capital's share at 0.3. If labor grows at 4% and capital grows at 3%, how many years would it take to double the current level of output if no technological advances are made? A) 7 B) 10 C) 19 D) 23 E) 33
10. In general A) a country that has a balance of payments deficit will have an increase in foreign reserves B) a country that has a balance of payments surplus will have a decrease in foreign reserves C) a country that has a balance of payments deficit will have a reduction in foreign reserves D) a country that has a balance of payments surplus will have an increase in foreign reserves E) both C) and D) are correct
11. The theory of purchasing power parity states
that A) in the short run, the nominal exchange rate moves primarily as a result of differences in price level behaviour between two countries B) in the long run, the nominal exchange rate moves primarily as a result of differences in the price level behaviour between two countries C) in the short run, the nominal interest rate moves primarily as a result of differences in the price level behaviour between two countries D) in the long run, the nominal interest rate moves primarily as a result of differences in the price level behaviour between two countries E) none of the above
12. The output gap equals A) potential output – full employment output B) actual output – potential output C) potential output – actual output D) full employment output – potential output E) none of the above
13. Which of the following is NOT reflected in a shift of the AD-curve? A) a change in real money balances due to a change in the price level B) a change in real money balances due to a change in nominal money supply C) a change in government transfer payments D) a change in the confidence of consumers and businesses E) all of the above will shift the AD-curve
14. In the case of the Classical Aggregate Supply curve, a monetary expansion would A) leave output and the price level unchanged B) increase the price level but leave output unchanged C) increase both the price level and output D) increase output, but decrease the price level E) increase output, but have no impact on the price level
15. The slope of the original Phillips Curve equals A) wage inflation B) price inflation C) the speed of nominal wage adjustment in the labour market D) the speed at which the actual unemployment rate adjusts to the natural rate of unemployment E) none of the above
16. According to the Phillips Curve, policymakers A) in the short run can reduce inflation at the expense of high unemployment B) in the short run can reduce unemployment at the expense of high inflation C) in the short run cannot reduce the unemployment rate D) in the short run cannot reduce the inflation rate E) can achieve both A) and B)
17. In terms of the long-run equilibrium, A) the Classical model, the adaptive expectations model, and the rational expectations model all differ B) the Classical model differs from the adaptive expectations model C) the Classical model, the adaptive expectations model, and the rational expectations model all yield the same result D) the Classical model differs from the rational expectations model E) the rational expectations model differs from the adaptive expectations model
18. Other things being equal A) increases in quits and layoffs increase unemployment B) increases in the flow of new entrants into the labour market increase unemployment C) increases in factory closures increase unemployment D) all of the above are true E) none of the above are true
19. Unemployment hysteresis refers to the phenomenon that, A) when unemployment is low, it tends to increase at a rapid rate B) when unemployment is high, it tends to remain high and only comes down slowly C) when unemployment is high, it tends to fall rapidly D) when unemployment is low, it tends to remain constant E) when unemployment is low, it tends decrease at a rapid rate
20. Perfectly anticipated inflation largely transfers wealth from A) debtors to creditors B) creditors to debtors C) poor to rich D) households to firms E) none of the above
B. True/False/Uncertain
1. There is a trade-off between inflation and unemployment.
2. Country A and Country B have identical characteristics except country A has a much higher capital-labor ratio than country B. According to Solow Growth model, country A must be growing faster than Country B.
3. If the rate of inflation in Canada increases, then the value of the Canadian dollar with respect to other currencies will decline.
C. Short answers
1. Suppose Canadian economy has the following Philips curve: πt=πt-1-0.5(ut-ut*) and the natural rate of unemployment is given by an average of the past two years’ unemployment: ut*=( ut-1+ ut-2)/2
For simplicity, assume that the unemployment rates in all the years before year 1 were u*.
a. Suppose Bank of Canada follows a policy to reduce permanently the inflation rate by 1% starting year1. What effect will this policy have on the unemployment rate over time?
b. What do these equations imply about the short-run and long-run trade-offs between inflation and unemployment?
2. Suppose that Canada can be described by the following Solow growth model: Kt+1=(1-d)Kt+sYt
Yt=AktθNt1−θ
The growth rate of total factor productivity (TFP) is zero. Suppose the depreciation rate d=10%, population growth rate n=2%, and capital share of income θ=0.3.
a. Suppose that the economy is currently at steady state, and saving rate s=10%. Find the current levels of per capita capital (k), per capita income (y), and per capita consumption (c).
b. As the economy is at steady state, what are the growth rates of per capita capital (k), per capita income (y ), total capital stock (K), and total output (Y)?
c. What saving rate maximizes the consumption per worker?
3. Using AD/AS model show the SR and LR effect of a contractionary fiscal policy on output and price level.