THE UNIVERSITY OF WESTERN ONTARIOLONDON CANADA E. Rivers ECONOMICS 1022A-001 November 14, 2010 MIDTERM #2 INSTRUCTIONS: 1. The examination begins at 1:00 p.m. and ends at 3:00 p.m. 2. Check that your examination contains 16 pages. 3. Use a BLACK PENCIL to complete your Scantron Form. i. Print your NAME and complete your SIGNATURE ii. Enter your STUDENT NUMBER iii. Enter your SECTION NUMBER – 001 In order to get credit for a question, you must record the correct answer on your Scantron Form. No credit will be given for answers recorded in your question packet. 4. You may have pencils, erasers, your student card, and a non-programmable calculator at your desk. All other items must be left in your bag at the front of the examination room. 5. Please ensure that all electronic devices (cell phones, laptops, etc.) are turned off before storing them in your bag at the front of the examination room. 6. There are no washroom breaks allowed during the test. 7. WHEN YOU HAVE FINISHED, PLEASE HAND IN YOUR SCANTRON FORM, YOUR QUESTION PACKET, AND ANY SCRAP PAPER YOU HAVE BEEN PROVIDED. Question packets will be made available after the examinations have been graded. If you want to ensure that you get your own question packet back, print your name at the top of this page. V111 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Without money to act as a medium of exchange, A) independence in production would lead to a proliferation of new products. B) the standard of living in the economy would increase. C) barter exchange would allow for a much simpler yet increased standard of living. D) the increased transaction costs associated with trading would prohibit some trades from taking place. E) all exchanges that take place under a monetary system would still take place. 2) The higher and more unpredictable the changes in a monetary unit, the A) more likely it will be used as a standard of deferred payment. B) less likely it will be used as a store of value. C) more confidence people will have in holding it for the future. D) less likely contracts will be written to counterbalance the uncertainty of its value in the future. E) more likely it will be used as a store of value. 3) If the prices of goods and services are stated in terms of kilograms of salt, then salt is A) a medium of exchange. B) a store of value. C) quasi-money. D) a standard of deferred payment. E) a unit of account. Use the information below to answer the following question. Fact 1 The information describes a hypothetical banking system. Assume that all banks are holding their desired reserves. Actual reserves in banking system $1,000 Total chequable deposits $5,500 Securities held by chartered banks $1,000 Currency outside banks $500 4) Refer to Fact 1. The quantity of money as measured by M1 is equal to A) $6,500. B) $6,000. C) $1,500. D) $2,500. E) $7,000. A-1 V111 5) Which of the following does not affect the size of the monetary base? A) The amount of chartered bank deposits at the Bank of Canada. B) The amount of notes issued by the Bank of Canada. C) The amount of loans issued by chartered banks. D) The amount of coins issued by the Canadian Mint. E) None of the above. Use the figure below to answer the following question. Figure 1 6) Refer to Figure 1. Everything else remaining the same, which graph best shows a decrease in real GDP? A) (a) B) (b) C) (c) D) (d) E) (a) and (c) 7) A bank can create money by A) converting reserves into securities. B) lending its excess reserves. C) increasing its reserves. D) printing more cheques. E) selling some of its securities. A-2 V111 8) The opportunity cost of holding currency is A) consumption given up. B) the real interest rate. C) the inflation rate. D) the nominal interest rate. E) the price level. 9) If the interest rate is below the equilibrium, how is equilibrium achieved in the money market? A) People sell bonds to get rid of their excess money, lowering the price of bonds and raising the interest rate. B) People sell bonds to try and raise more money, lowering the price of bonds and raising the interest rate. C) People sell goods to get rid of their excess money, lowering the price of goods and raising the interest rate. D) People buy goods to get rid of their excess money, lowering the price of goods and raising the interest rate. E) People buy bonds to get rid of their excess money, raising the price of bonds and raising the interest rate. 10) Real GDP is $2,560 billion, the price level is 125, and the velocity of circulation is 5. The quantity of money is A) $625 billion. B) $640 billion. C) $2,048 billion. D) $20.48 billion. E) $400 billion. 11) According to the quantity theory of money, in the long run A) Y/M is constant. B) Y/P is constant. C) M/V is constant. D) M/P is constant. E) V/M is constant. A-3 V111 Use the information below to answer the following question. Fact 2 The Bank of Speedy Creek has chosen the following initial balance sheet: Assets Liabilities Reserves $40 Deposits $500 Loans $460 $500 12) Refer to Fact 2. Suppose all the banks in the banking system have the same desired reserve ratio as the Bank of Speedy Creek. If the currency drain ratio is 32 percent, what is the size of the money multiplier? A) 3.3 B) 4.0 C) 5.0 D) 1.25 E) 2.7 13) The money multiplier will decrease if the currency drain ratio A) decreases or the desired reserve ratio decreases. B) decreases and the monetary base increases. C) increases or the desired reserve ratio decreases. D) decreases or the desired reserve ratio increases. E) increases or the desired reserve ratio increases. 14) Foreign currency is A) the market for foreign exchange. B) foreign notes, coins and bank deposits. C) the purchasing power of foreign money. D) the price at which one currency exchanges for another currency. E) foreign notes and coins only. 15) Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys $0.88 U.S, and 1 Canadian dollar buys 5.77 South African rand. How many U.S. dollars will one rand buy? A) $0.15 B) $6.56 C) 5.77 D) $0.88 E) $0.17 16) The lower the exchange rate, the A) smaller is the quantity of Canadian dollars demanded in the foreign exchange market. B) larger is the quantity of Canadian dollars demanded in the foreign exchange market. C) smaller is the quantity of Canadian dollars supplied in the foreign exchange market. D) larger is the quantity of Canadian dollars supplied in the foreign exchange market. E) B and C. A-4 V111 17) Which one of the following shifts the demand curve for Canadian dollars rightward? A) A decrease in the demand for Canadian goods by foreigners. B) The Canadian dollar is expected to appreciate. C) U.S. interest rates rise. D) The Canadian dollar is expected to depreciate. E) An increase in the demand for foreign goods by Canadians. 18) If the price of a burger is $4.50 Canadian in Toronto and $3 U.S. in New York, and if purchasing power parity holds, then the exchange rate is A) 67 cents U.S. per Canadian dollar. B) $1 U.S. per Canadian dollar. C) $3 U.S. per Canadian dollar. D) $1.5 U.S. per Canadian dollar. E) none of the above. 19) Suppose the interest rate in Canada falls and the interest rate in J apan remains the same. Interest rate parity implies that given equal risk A) J apanese financial investments are more profitable. B) the yen is expected to appreciate against the dollar. C) the inflation rate is higher in J apan. D) Canadian financial investments are less profitable. E) the yen is expected to depreciate against the dollar. 20) Suppose that Canada's demand for imports decreases. All other things equal, A) the demand for Canadian dollars decreases and the supply of Canadian dollars increases. B) the supply of Canadian dollars decreases and demand for Canadian dollars increases. C) both the supply of and demand for Canadian dollars decreases. D) the supply of Canadian dollars decreases. E) the demand for Canadian dollars increases. 21) If the current account is in surplus and the capital account is also in surplus, then the official settlements account balance is A) positive. B) probably close to zero, but could be either negative or positive. C) zero. D) negative. E) equal to the sum of the current account and the capital account. 22) NX = A) (G - T) + (I - S). B) (S + I) - (NT + G). C) (S - I) + (G - T). D) C + I + G. E) (T - G) + (S - I). A-5 V111 Use the information below to answer the following question. Fact 3 You are given the following information about the country of Ecoland, whose currency is the turkey, and whose official settlements balance is zero. Variable Billions of turkies Real GDP 50 Consumption expenditure 30 Government expenditure on goods and services 12 Investment 11 Exports 10 Government budget deficit 2 23) Refer to Fact 3. What is the value of the private sector deficit or surplus? A) -3 billion turkies B) zero C) -1 billion turkies D) +1 billion turkies E) -2 billion turkies Use the table below to answer the following questions. Table 1 Year Borrowed from Rest of World (billions of dollars) Loaned to Rest of World (billions of dollars) 1 60 20 2 60 40 3 60 60 4 60 80 24) Refer to Table 1. If Mengia's official settlement balance was in deficit every year, for which year or years can you say for sure there was a current account surplus? A) year 1 only B) years 2 and 3 C) year 2 only D) years 3 and 4 E) years 1 and 2 A-6 V111 25) Refer to Table 1. The country Mengia came into existence at the beginning of year 1. Given the information, in year 4 Mengia is a A) net borrower and a debtor nation. B) net lender and neither a creditor nor a debtor nation. C) net lender and a creditor nation. D) net borrower and a creditor nation. E) net lender and a debtor nation. 26) Which of the following exchange rate policies uses a target exchange rate, but allows the target to change? A) fixed exchange rate B) moving target C) flexible exchange rate D) crawling peg E) none of the above 27) Suppose the Bank of Canada follows a fixed exchange rate of $1 U.S. per Canadian dollar. If the demand for Canadian dollars temporarily increases, to maintain the target exchange rate, the Bank can A) sell Canadian dollars. B) enforce interest rate parity. C) violate purchasing power parity. D) buy Canadian dollars. E) violate interest rate parity. A-7 V111 Use the figure below to answer the following question. Figure 2 28) Refer to Figure 2. Which graph illustrates what happens when factor prices rise? A) (a) B) (b) C) (c) D) (d) E) (a) and (b) 29) Which one of the following newspaper quotations describes a movement along an LAS curve? A) "The decrease in consumer spending may lead to a recession." B) "The increase in consumer spending is expected to lead to inflation, without any increase in real GDP." C) "Growth has been unusually high the last few years due to more women entering the labour force." D) "The recent tornadoes destroyed many factories in Calgary and Edmonton." E) "Recent higher wage settlements are expected to cause higher inflation this year." A-8 V111 30) The short-run aggregate supply curve indicates A) the relationship between the price level and the natural unemployment rate. B) the relationship between the purchasing power of wages and the quantity of labour supplied by households. C) the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant. D) the various quantities of real GDP producers supply at different income levels. E) the relationship between the price level and real GDP demanded by consumers, investors, governments, and net exporters. 31) Which one of the following variables is not held constant along a given aggregate demand curve? A) fiscal policy B) the price level C) expectations about inflation D) real income E) tax rates 32) Your total wealth is $1,000, which you are holding in your savings account. If the price level rises by 10 percent, your wealth A) increases to $1,100. B) is unchanged. C) is worth 10 percent less than before the price level change. D) increases by an unknown amount. E) decreases to $990. 33) If the price level rises, then the wealth effect leads to A) a decrease in real wealth, an increase in current consumption expenditure, and a decrease in saving. B) an increase in real wealth, an increase in current consumption expenditure, and an increase in saving. C) a decrease in real wealth, a decrease in current consumption expenditure, and an increase in saving. D) an increase in real wealth, an increase in current consumption expenditure, and a decrease in saving. E) a decrease in real wealth, an increase in current consumption expenditure, and an increase in saving. A-9 V111 Use the figure below to answer the following question. Figure 3 34) Refer to Figure 3. Which graph illustrates what happens when the quantity of money decreases? A) (a) B) (b) C) (c) D) (d) E) None of the above 35) When an economy is operating on its long-run aggregate supply curve, A) unemployment will fall to an unusually low rate that is not likely to last into the future. B) the actual inflation rate is greater than the anticipated inflation rate. C) inflation must be positive. D) the actual unemployment rate equals the natural unemployment rate. E) real GDP demanded exceeds real GDP supplied. A-10 V111 Use the figure below to answer the following question. Figure 4 36) Refer to Figure 4. As Econoworld automatically adjusts to long-run equilibrium, the A) AD curve shifts leftward. B) SAS curve shifts rightward. C) LAS curve shifts leftward. D) AD curve shifts rightward. E) SAS curve shifts leftward. 37) Beginning at a long-run equilibrium, an increase in aggregate demand A) decreases the price level and in the long run decreases real GDP. B) increases the price level and in the long run decreases real GDP. C) increases the price level, but in the long run there is no change in real GDP. D) increases the price level and in the long run increases real GDP. E) decreases the price level and in the long run increases real GDP. 38) Consider an economy starting from a position of full employment. Which one of the following occurs as a result of an advance in technology? A) An inflationary gap arises. B) The long-run aggregate supply curve shifts leftward to create the new long-run equilibrium. C) Real GDP decreases in the short run. D) The price level falls. E) Factor prices rise in the long run, shifting the short-run aggregate supply curve leftward. A-11 V111 Use the figure below to answer the following question. Figure 5 39) Refer to Figure 5. The changes represented A) lead to an inflationary gap. B) cause a proportionate increase in long run aggregate supply. C) increase real GDP. D) cannot occur because aggregate demand and short-run aggregate supply cannot change at the same time. E) lead to a recessionary gap. 40) If real GDP is greater than potential GDP, we would expect A) the money wage rate to fall. B) the money wage rate to rise. C) potential GDP to decrease. D) potential GDP to increase. E) A and C. 41) The marginal propensity to consume is the A) fraction of the last dollar of disposable income received that is saved. B) total amount of consumption divided by the total amount of disposable income. C) fraction of the first dollar of disposable income received that is consumed. D) fraction of a change in disposable income that is spent on consumption. E) fraction of the first dollar of disposable income received that is saved. A-12 V111 Use the figure below to answer the following question. Figure 6 This figure describes the relationship between consumption expenditure and disposable income for a model economy. 42) Refer to Figure 6. When disposable income is $200 billion, A) households are consuming less than $200 billion. B) saving is equal to line segment AD. C) businesses are spending more than households because the consumption function lies above the 45° line. D) households are dissaving an amount equal to line segment AB. E) households are saving an amount equal to line segment AB. 43) Everything else remaining the same, a decrease in expected future income ________ current consumption expenditure and ________ saving. A) increases; decreases B) increases; increases C) does not change; does not change D) decreases; decreases E) decreases; increases A-13 V111 44) If aggregate planned expenditure is less than real GDP, then inventories A) increase and real GDP increases. B) decrease and real GDP increases. C) increase and real GDP falls. D) remain constant and real GDP remains constant. E) decrease and real GDP decreases. 45) Which one of the following will lead to an increase in the slope of the AE function? A) an increase in the marginal propensity to import B) a decrease in the marginal propensity to save C) an increase in the marginal tax rate D) an increase in the marginal propensity to save E) a decrease in the marginal propensity to consume Use the figure below to answer the following question. Figure 7 There are no taxes in this economy. 46) In Figure 7, at the equilibrium level of real GDP, induced expenditure is A) $225 billion. B) $347 billion. C) $375 billion. D) $28 billion. E) $150 billion. A-14 V111 Use the figure below to answer the following question. Figure 8 The economy shown in the graph does not engage in international trade and has no government. Planned aggregate expenditure equals the sum of consumption expenditure (C) and investment (I). 47) Refer to Figure 8. If investment increases by $25 billion, then real GDP increases by A) $75 billion. B) $25 billion. C) $50 billion. D) $100 billion. E) $125 billion. 48) If investment increases by $200, and as a result income increases by $800, then the A) slope of the AE curve is 0.75. B) multiplier is 1/4. C) slope of the AE curve is 1/4. D) multiplier is 3. E) none of the above. A-15 V111 Use the information below to answer the following question. Fact 4 The economy of Beverly Hills has a consumption function of C =10 +0.8Y, investment equal to 6, government expenditure equal to 10, exports equal to 10, and an import function of M =0.1Y. 49) Refer to Fact 4. What is consumption expenditure in equilibrium in this economy? A) 114 B) 298 C) 106 D) 38.8 E) none of the above 50) Suppose that investment increases by $10 billion. Which one of the following would reduce the effect of this increase in autonomous expenditure on equilibrium real GDP in the short run? A) A steeper short-run aggregate supply curve. B) A flatter short-run aggregate supply curve. C) A decrease in the marginal propensity to import. D) An increase in the marginal propensity to consume. E) A decrease in the marginal tax rate. A-16 V111