Principles of Macroeconomics

Sample Mid-Term Examination

(Based on material in Chapters 5-11)

This examination consists of two parts and carries a total of 50 marks. Follow the
instructions carefully.

Part A: Multiple-Choice Questions (20 Marks)

Answer all questions. Select the best responses to the following 20 multiple-choice
questions. Each question carries one mark.

1. Which of the following would be included in the calculation of GDP for 2001?
A. the price of a home built in 1991 and sold in 2001
B. the price of a new punch press built and purchased in 2001 to replace a worn out
machine
C. the price of a classic 1960 Thunderbird purchased in 2001
D. the price of 100 shares of Imperial Oil stock purchased in 2001
E. the price of a used bicycle purchased at a garage sale in 2001

2. The growth of average labour productivity is important to the economy because

A. without it, real GDP per person must decrease.
B. without it, real GDP per person cannot increase.
C. it is a key to improving living standards in the long run.
D. the fraction of the total population that is employed is constant over time and,
thus, real GDP per person is solely dependent upon average labour productivity.
E. it implies more resources are being employed to produce less output.

3. In the monthly Labour Force Survey conducted by Statistics Canada, a person who was
not working during the previous week and was not actively seeking work during the last
four weeks is classified as
A. employed.
B. unemployable.
C. underemployed.
D. part-time employed.
E. not in the labour force.

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4. Real GDP is nominal GDP adjusted for
A. changes in the quality of goods and services.
B. value added during a previous year.
C. the percentage rate of change in the price level.
D. imports.
E. changes in the cost of intermediate goods and services.

5. International data on the relationship between the amount of capital per worker and
average labor productivity indicate that there is
A. a negative positive relationship between the two variables.
B. a positive relationship between the two variables.
C. no relationship between the two variables.
D. a positive relationship between the two variables for some countries, but a
negative relationship between the two variables for other countries.
E. a positive relationship between the two variables for some countries, but no
relationship between the two variables for other countries.

6. The Consumer Price Index is a measure of the change in prices of 
A. a standard basket of all goods and services measured in GDP. 
B. a standard basket of goods and services determined by the family expenditures surveys,
relative to the cost in a base year. 
C. a standard basket of agricultural goods determined by the agricultural expenditure survey.
D. a standard basket of selected items in wholesale markets.
E. a standard basket of machinery, tools, and new plant.

7. The slowdown in real-wage growth that characterizes the past 30 years of the
twentieth century is best explained as a(n)
A. nearly total lack of productivity growth.
B. increase in labor supply.
C. combination of higher prices for consumer goods and decreased labor supply.
D. combination of less rapid productivity growth and increased labor supply.
E. increased government regulation of the labor market.

8. Microland has a population of 70 people and 50 of them worked last year with a total
output of $100,000. The average labor productivity of Microland equaled
A. $100,000.
B. $100.
C. $4,000.
D. $2,000.
E. $20,000.

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9. John can purchase a delivery truck for $20,000 and he estimates it will generate a net
income (i.e., after taxes and maintenance and operating costs) of $1,000 per year. He
should
A. not purchase the truck if the real interest rate is less than 2%.
B. not purchase the truck if the real interest rate is greater than 2%.
C. purchase the truck if the real interest rate is less than 5%.
D. purchase the truck if the real interest rate is greater than 5%.
E. None of the above.

10. The unemployment rate is the

A. number of unemployed people.
B. number of people who would like to be employed but can find work.
C. fraction of people who are not working.
D. number of people who are not working.
E. The number of unemployed workers divided by the labour force.

11. Government policies that affect the performance of the economy as a whole are called
A. positive analysis.
B. normative analysis.
C. macroeconomic policy.
D. microeconomic policy.
E. aggregation.

12. A decrease in the corporate income tax on income generated from investment in new
capital will
A. shift the demand for investment curve to the right.
B. shift the demand for investment curve to the left.
C. shift the supply of saving curve to the right.
D. shift the supply of saving curve to the left.
E. decrease real interest rates.

13. When the Bank of Canada sells government bonds, the commercial banks’ 
A. reserves will decrease and lending will contract, causing a decrease in the money
supply.
B. reserves will increase and lending will expand, causing an increase in the money
supply.
C. reserve requirements will increase and lending will contract, causing a decrease in
the money supply.
D. reserves­deposit ratio will increase and lending will expand, causing an increase in
the money supply.

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 E. reserves­deposit ratio will decrease and lending will contract, causing an increase in
the money supply.

14. Which of the following events would not cause the demand curve for labor to shift?
A. A decrease in the productivity of labor.
B. An increase in demand for the output produced by the labor.
C. An increase in the wage rate paid to workers.
D. Introduction of new, inexpensive capital equipment designed to replace workers.
E. A decrease in demand for the output produced by the labor.

15. Generally speaking, _____________ unemployment is thought to be the least costly

because _____________________.
A. structural; as economies grow, some sectors gain and others lose
B. cyclical; it is just part of the business cycle
C. cyclical; most of the layoffs are short term
D. frictional; it tends to last the longest
E. frictional; it results in a better match of worker with job

16. Double coincidence of wants is avoided if money is used as a
A. measure of value.
B. store of value.
C. standard of deferred payment.
D. medium of exchange.
E. tool of monetary policy.

17. If the Consumer Price Index is 130 at the end of 2001 and, at the end of 2002, it is 
140, then during 2002 the economy experienced
A. inflation
B. deflation
C. hyperinflation
D. indexing
E. deflating

18. A   financial   system   is   an   effective   mechanism   for   channeling   funds   from   savers   to
borrowers with productive investment opportunities because it
A. reduces the risk faced by each saver.
B. shift the risk of investing from borrowers to savers.
C. diversifies the risk of investing by savers and financial investors.
D. pools the costs of gathering information about prospective borrowers.
E. facilitates the direct lending of funds by savers to borrowers.

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19. Suppose the National Accounts records the nominal GDP for Canada in 2002 as $850
billion. In the same year, the real GDP (1997 base year) is $810 billion. The implicit
price index [GDP deflator] is (rounding up your answer):
A. 105
B. 100
C.   40
D. 120
E.   95

20. When an individual deposits currency into a chequing account
A. bank reserves decrease, which reduces the amount banks can lend thereby reducing
the money supply.
B. bank reserves increase, which allows banks to lend more and, ultimately, increases
the money supply.
C. bank reserves are unchanged. 
D. bank   reserves   decrease,   which   increases   the   amount   banks   can   lend,   thereby
increasing the money supply.
E. bank reserves increase, which reduces the amount banks can lend, thereby reducing
the money supply.

Part B: Short-Answer Questions (30 Marks)

Answer THREE of the following four questions.  Each question carries an equal 
weight of 10 marks. 

1.  Suppose we have data on the inflation rate, measured by the GDP deflator index, and 

nominal interest rates, measured by the interest rate on long­term bonds, as shown in the 
following table.

Inflation Interest
Year rate rate
1979 8.9 9.5
1983 3.5 10.2
1987 5.0  9.5
1991 3.3 8.0

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 1995 2.5 6.9

A. What was the real interest rate on long­term bonds in 1991? _________ %

B. In what year was the real interest rate on long­term bonds the highest? ________

C. In   what   year   was   the   real   interest   rate   on   long­term   bonds   the   lowest,   but   still
positive? ________

D. Assuming that the nominal interest rate remains unchanged, a  lower  inflation rate

would (increase/decrease) _________ the real interest rate.

E. Assuming that the nominal interest rate remains unchanged, the holders of long­term
bonds would (gain/lose) _________ from higher inflation.

2. From the following table, answer the questions below. (Assume there is no statistical 
discrepancy)

Expenditure Components Year 2000 ($ Bil.)

Business fixed investment 170.1

Durable Goods 150.2
Exports 450.7
Government current purchases 300.0
Imports 415.2
Inventory investment 5.7
Semi- and Nondurable goods 134.6
Residential investment 60.3
Services 310.0
Government investment purchases 25.3

A. Total consumption spending in the Canadian economy during the year 2000 equaled
$___________ billion.

B. Investment spending of the private sector in the Canadian economy during the year 2000
equaled $___________ billion.

C. Net export spending in the Canadian economy during the year 2000 equaled
$___________ billion.

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D. Total government purchases in the Canadian economy during the year 2000 equaled
$___________ billion.

E. The expenditure method of calculating indicates that gross domestic product for the
Canadian economy during the year 2000 equaled $ ___________ billion.

3. Answer the questions below based on the following the supply and demand curves for
saving in Macroland, a hypothetical economy.

Real Interest
Rate (%)

7
S
6

1
D

0 500 1,000 1,500 2,000

($ million)

A. The equilibrium real interest rate is _________ % and the equilibrium quantity of
saving/ investment is $_________ million.

B. A government budget surplus is the excess of _____________________ over

government spending. The latter consists of government current purchases of goods and
services, government _____________ (e.g., government fixed capital formation), and
government ___________ (e.g., government interest payments on the public debt).

C. An increase in the government budget surplus would cause the (supply/demand)

_____________ curve for saving to (increase/decrease) _____________ . On the above
graph, draw a new curve that would reflect the change caused by the increased
government budget surplus.

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D. As a result of the increased government budget surplus, the equilibrium real interest
rate _________ and the equilibrium quantity of saving/investment ___________ .

4. Consider the following initial balance sheet of the banking system of Moneyland, a
hypothetical economy, shown below:

Balance sheet of the banking system of Moneyland

Assets Liabilities
Currency (= reserves) $10,000 Deposits $10,000

Assuming that the banking system is competitive and that loans are redeposited into the
banking system, answer the following questions:

A. If the banking system of Moneyland has a desired reserve-deposit ratio of 5%, it can
make new loans of $___________ in the form of new ________________. After making
the new loans, the banking system of Moneyland will have total deposit liabilities of
$____________ , and currency (= reserves) of $____________. Its total assets will then
equal $____________ .

B. Now assume the Central Bank of Moneyland buys $5,000 of government securities
from Mr. Rich and he deposits the $5,000 in his chequing account at the banking system
of Moneyland. Following the deposit and making new loans, the banking system of
Moneyland would have currency (= reserves) of $_____________, total loans of
$__________, and total deposit liabilities of $________________. By doing so it would
(increase/decrease) ________________ the money supply by $_____________ .