University of Alberta Version 11 Department of Economics

ECON 102 A1 Midterm exam Fall 2017

Instructor: Mesbah Sharaf

Please copy your Name, Id, Version, and answer in the multiple choice scantron sheet provided
Allowed time: 50 minutes
The exam is 7 pages
The exam is 30 multiple choice
You are allowed to use a nonprogrammable calculator

Some useful Formulas

• 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒 = 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
• 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 = 𝑋100
𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
• 𝐸𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 = 𝑋100
𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
• 𝑃𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑋100
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑛𝑜𝑡 𝑝𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑛𝑔 𝑖𝑛 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒
• 𝑁𝑜𝑛 𝑃𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 𝑋100
𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑎𝑔𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛
𝑃2 −𝑃1
• 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = ( ) 𝑋100
𝑃1
• 𝑅𝑒𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 − 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
• 𝐶𝑃𝐼 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
• 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = X100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
• 𝑀𝑃𝐶 =
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑣𝑖𝑛𝑔
• 𝑀𝑃𝑆 = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒
• 𝑀𝑃𝐶 + 𝑀𝑃𝑆 = 1
𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
• 𝐴𝑃𝐶 = 𝐷𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒
𝑆𝑎𝑣𝑖𝑛𝑔
• 𝐴𝑃𝑆 = 𝐷𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒
• 𝐴𝑃𝐶 + 𝐴𝑃𝑆 = 1
• 𝐴𝐸 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀
• 𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀
• 𝐺𝐷𝑃 = 𝑤𝑎𝑔𝑒𝑠 + 𝑟𝑒𝑛𝑡 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 + 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑡𝑎𝑥𝑒𝑠 − 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 +
𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
• 𝑉𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 = 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 − 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡𝑠
• 𝐺𝑟𝑜𝑠𝑠 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝑛𝑒𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
• 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑠𝑎𝑣𝑖𝑛𝑔 = (𝑌 − 𝑇 − 𝐶) + (𝑇 − 𝐺)
70
• 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑡𝑜 𝑑𝑜𝑢𝑏𝑙𝑒 𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐺𝐷𝑃 1
• 𝑆𝑝𝑒𝑛𝑑𝑖𝑛𝑔 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑠𝑝𝑒𝑛𝑑𝑖𝑛𝑔 = 1−𝑀𝑃𝐶
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐺𝐷𝑃 −𝑀𝑃𝐶
• 𝑇𝑎𝑥 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑎𝑥𝑒𝑠 = 1−𝑀𝑃𝐶

1
Consider the following information about a particular economy in a given year.
Use the information in Table 1 to answer questions 1 to 4

Table 1
Working age population=100 million Population=150 million
Nonparticipation rate=10% GDP deflator = 120
Employment rate=75% Exports = 30
Government purchases of goods and services =40 Subsidies= ???
Wages paid to labor =90 Consumption expenditure = 100
Personal Savings =30 Interest income = 30
Indirect taxes = 15 Imports = 20
Profits = 40 Depreciation = 10
Rent = 40 Investment expenditure = 50

1. Based on the information in Table 1, what is the value of GDP (in million dollars)?

a. 100
b. 200
c. 250
d. 300
e. None of the above

2. What is the value of the subsidies (in million dollars) in this economy?
a. 35
b. 45
c. 25
d. 10
e. None of the above

3. What is the number of unemployed people (in millions) in this economy?

a. 22.5
b. 25
c. 20
d. 15
e. None of the above

4. What is the value of the real GDP (in million dollars) in this economy?

a. 200
b. 166.66
c. 266.66
d. 100
e. None of the above

2
5. Including discouraged workers in the unemployment rate would
a. Lower the labour force.
b. Lower the measured unemployment rate.
c. Raise the labour force.
d. Raise the measured unemployment rate.
e. Both C and D are correct.

6. Suppose a bakery sells its monthly output for $10,000, and it pays $2,000 in wages to its workers,
$1,000 in rent for the building and $2,000 in materials such as flour, sugar, and oil to its suppliers. Its
profit is equal to $5,000. The value added of this bakery is
a. $2,000.
b. $5,000.
c. $8,000.
d. $10,000.
e. None of the above.

7. Suppose 100,000 people are in the labour force and the unemployment rate is 25%. As the economy
moves out of a recession and jobs increase, 20,000 discouraged workers become "encouraged" to
search for jobs and join the labour force. As a result, the unemployment rate becomes
a. 20%.
b. 25.75%.
c. 35%.
d. 45%.
e. 37.5%

8. If Canada’s GDP is higher than its GNP, then

a. Canadian workers working outside of Canada earn more income than foreigners working in Canada.
b. Canadian workers working outside of Canada earn less income than foreigners working in Canada.
c. Canadian workers working outside of Canada earn the same amount of income as foreigners
working in Canada.
d. Canada’s net exports must be positive.
e. Canada’s net exports must be negative.

9. What annual growth rate will result in a country roughly doubling its GDP in 14 years?
a. 2.5 percent
b. 5 percent
c. 7.5 percent
d. 12 percent
e. 3.5 percent

10. If John voluntarily leaves his job as a mechanic and spends a period of time to take care of his six-
month-old child. What kind of unemployment is he facing?
a. Structural unemployment
b. Seasonal unemployment
c. Frictional unemployment
d. Cyclical unemployment
e. None of the above

3
11. Which of the following is included in our current GDP?

a. A $5 billion loan from the world bank

b. The revenue from the sale of a two-year-old car
c. The revenues from a sale of land
d. The value of selling a $100 stock in the stock market
e. None of the above

12. How is the Canadian nominal Gross National Product is defined?

a. The base-year market value of all final goods and services produced in Canada during a given
period
b. The current-year market value of all final goods and services produced in Canada during a given
period
c. The base-year market value of all final goods and services produced by Canadians during a
given period
d. The base-year market value of all goods and services produced in Canada during a given period
e. The current-year market value of all final goods and services produced by Canadians during a
given period

13. Suppose in the year 2016 inflation rate is 10%, and the Consumer Price Index (CPI) in the year 2015
is 105. What is the CPI for the year 2016?
a. 105
b. 107.5
c. 115
d. 115.5
e. None of the above.

14. Reece earned $250 000 in 2014 as a celebrity endorser and spokesperson. She spent 85 percent of her
earnings. In 2015, with a new contract, she earned $750 000 per year. Her consumption increased by
$250 000. Which of the following statements about her propensity to consume is NOT accurate?
a. Her 2015 marginal propensity to consume is 0.50.
b. Her 2014 average propensity to consume is 0.85.
c. Her average propensity to consume fell between 2014 and 2015.
d. Her marginal propensity to save falls to 0.15 in 2015.
e. None of the above

15. Which of the following describes marginal propensity to consume (MPC) and average propensity to
consume (APC)?
a. MPC is less than 1, but APC can be either greater or less than 1.
b. Both MPC and APC are always less than 1.
c. MPC is less than 1, but APC is always equal to 1.
d. MPC and APC are always greater than or equal to 1.
e. None of the above.

4
16. Which of the following changes in disposable income would lead to the greatest increase in
consumption?
a. a $40 000 increase in disposable income, if MPC equals 0.5
b. a $30 000 increase in disposable income, if MPC equals 0.6
c. a $24 000 increase in disposable income, if MPC equals 0.75
d. a $60 000 increase in disposable income, if MPC equals 0.25
e. None of the above

17. What would be the impact on the investment demand curve as a result of a combination of higher
business taxes, reduced expected future profitability of businesses, and a reduction in the level of new
profitable technological investment opportunities?
a. It would increase the investment demand curve.
b. It would leave the investment demand curve unchanged.
c. It could either increase or decrease the investment demand curve.
d. It would decrease the investment demand curve.
e. None of the above

18. What would be the impact on aggregate demand (AD) if both imports and exports fell?
a. AD would fall if exports fell more than imports.
b. AD would decrease.
c. AD would increase.
d. AD would rise if exports fell more than imports.
e. AD would not change

19. What would be the effect on aggregate demand (AD) as a result of an increase in business tax rates,
combined with a decrease in consumer confidence?
a. AD would increase.
b. AD could either increase or decrease, depending on which change was of a greater magnitude.
c. AD would decrease.
d. AD would stay the same.
e. None of the above

20. If Alice's taxes fell by $10 000, other things being equal, which of the following statements about her
consumption is accurate?
a. It would rise by $6000 if her APC was equal to 0.6
b. It would fall by $6000 if her APC was equal to 0.6
c. It would rise by $6000 if her MPC was equal to 0.6
d. It would fall by $6000 if her MPC was equal to 0.6
e. It would rise by $4000 if her MPC was equal to 0.6

5
21. Why did Malthus’s predictions NOT was not realized for most of the developed world?
a. Death due to natural disasters slowed the population growth.
b. The law of diminishing returns applies only in theory, not in practice.
c. He implicitly neglected the potential effect of technological advancement.
d. His predictions were only intended to apply to African nations.
e. None of the above

22. Which of the following groups of people would be included in the official unemployment rate?
a. discouraged workers
b. workers working in the underground economy
c. underemployed workers
d. part-time workers
e. a full-time university student

23. Under what circumstances might the unemployment rate overestimate the true extent of
unemployment?
a. when many part-time employees would like to work full-time, but are unable to get the
additional work
b. when people become discouraged and stop looking for work
c. when people falsely claim that they are actively seeking work in an attempt to receive
unemployment benefits
d. when employees increase the number of hours that they work overtime
e. None of the above

24. Lindsay has finished her diploma in marketing and has just started looking for work. What kind of
unemployment is she facing?
a. cyclical
b. seasonal
c. structural
d. Frictional
e. underemployed

25. Marco lives in a country that is experiencing high inflation. He works at an online retailer, and he is
constantly updating the website to reflect the current prices. The additional work is considered to be
what kind of cost?
a. a shoe-leather cost
b. a menu cost
c. a real cost
d. a cost of business
e. none of the above

6
26. If the inflation rate is 5 percent, what is the real interest rate paid on a loan bearing 7 percent
nominal interest per year?
a. 2 percent
b. 5 percent
c. 7 percent
d. 12 percent
e. 9 percent

27. Based on the information presented below, what is the equation representing the consumption for
this economy?
GDP (Y) Consumption (C) Saving (S) Investment (I)
$0 $60 $-60 $100
100 120 -20 100
200 180 20 100
300 240 60 100
400 300 100 100
500 360 140 100
a. C = 60 + 0.6Y
b. C = 60 + 0.4Y
c. C = 40 + 0.75Y
d. C = -60 + 0.8Y
e. None of the answers is correct.

28. What impact would a combination of a lower inventory and an increase in the government budget
deficit have on real interest rate?
a. It would increase the real interest rate
b. It would leave the real interest rate unchanged.
c. It could either increase or decrease the real interest rate.
d. It would decrease the real interest rate.
e. None of the above.

29. Which of the following is NOT included in the investment category under the expenditure approach to
GDP accounting?
a. newly constructed houses
b. additions to inventory
c. stocks issued by Canadian corporations
d. machines and tools
e. none of the above

30. Under what conditions will nominal GDP always equal real GDP?
a. if prices are declining
b. if the economy's total production does NOT change
c. if prices are increasing
d. in the base year
e. none of the above
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