ECONOMICS 1BB3 Introductory Macroeconomics

Practice Test #1 ECONOMICS 1BB3 Introductory Macroeconomics Term Test #1 This examination paper includes 13 pages including the title page and 43 questions. You are responsible for ensuring that your copy of the paper is complete. Please bring any discrepancy to the attention of your invigilator. Special Instructions: Only the McMaster Standard (Casio - FX991) Calculator may be used. This test paper must be returned along with the scan sheet. Write your name and student number on the test paper and the scan sheet. If you are writing in the wrong room, you will lose 5 points off your test score. If you are wearing a baseball cap, please turn it so the peak is in the back. Please turn off all cell phones. There should be no electronic devices at your seat other than a calculator. All books and bags must be left at the front of the room. You will need your student ID card at your desk, along with your calculator, a pencil, and a pen. If you complete the short answer section in pencil your test will not be re-graded if there is a dispute. Use an HB pencil to fill in the scan sheet. If a TA has to grade your scan sheet by hand, you will lose 5 points off your test score. You cannot fill in the version number of your test paper on the scan sheet. Part A: Multiple Choice Questions: There are 40 multiple choice questions. Please record your answers on the scan answer sheet provided. Part B: Short Answer Questions: There are 3 short answer questions. Please record your answers on the test paper. Part A Multiple Choice /40 Part B Short Answer /15 Total /55

2 OMR EXAMINATION - STUDENT INSTRUCTIONS NOTE: IT IS YOUR RESPONSIBILITY TO ENSURE THAT THE ANSWER SHEET IS PROPERLY COMPLETED: YOUR EXAMINATION RESULT DEPENDS UPON PROPER ATTENTION TO THESE INSTRUCTIONS. The scanner, which reads the sheets, senses the shaded areas by their non-reflection of light. A heavy mark must be made, completely filling the circular bubble, with a HB pencil. Marks made with a pen or felt-tip marker will NOT be sensed. Erasures must be through or the scanner may still sense a mark. Do NOT use correction fluid on the sheets. Do NOT put any unnecessary marks or writing on the sheets. 1. Print your name, student number, course name, section number and the date in the space provided at the top of Side 1 (red side) of the form. 2. Mark your student number in the space provided on the sheet on Side 1 and fill in the corresponding bubbles underneath. 3. Mark only ONE choice from the alternatives (1,2,3,4,5, or A,B,C,D,E) provided for each question. If there is a True/False question, enter response of 1 (or A) as True, and 2 (or B) as False. The question number is to the left of the bubbles. Make sure that the number of the question on the scan sheet is the same as the question number on the test paper. 4. Pay particular attention to the Marking Directions on the form. 5. Begin answering questions using the first set of bubbles, marked 1".

3 Part A - Multiple Choice (40 points) Identify the choice that best completes the statement or answers the question. Answer on the scan sheet provided. Figure 4-1 1. Refer to Figure 4-1. The movement from point A to point B on the graph shows a. an increase in demand. b. a decrease in demand. c. a decrease in quantity demanded. d. an increase in quantity demanded. 2. Wheat is the main input in the production of flour. If the price of wheat decreases, all else equal, we would expect the a. demand for flour to decrease. b. supply of flour to be unaffected. c. supply of flour to increase. d. supply of flour to decrease. 3. Which goods are supposed to be included in the CPI? a. all the goods, but not the services, in the consumption component of the GDP accounts b. all goods and services that typical consumers buy c. all goods and services produced in the economy d. all goods and services in the consumption component of the GDP accounts 4. Terms used by an economist would include a. comparative advantage and elasticity. b. torts and venues. c. ego and cognitive dissonance. d. vector spaces and axioms.

4 Table 3-1 Labour Hours Needed to Make 1 Pound of: Pounds produced in 40 hours: Meat Potatoes Meat Potatoes Farmer 8 2 5 20 Rancher 4 5 10 8 5. Refer to Table 3-1. The Farmer has an absolute advantage in a. potatoes, and the Rancher has an absolute advantage in meat. b. neither good, and the Rancher has an absolute advantage in both goods. c. meat, and the Rancher has an absolute advantage in meat. d. meat, and the Rancher has an absolute advantage in potatoes. 6. Refer to Table 3-1. The opportunity cost of 1 pound of meat for the farmer is a. 1/4 hour of labour. b. 4 hours of labour. c. 4 pounds of potatoes. d. 1/4 pound of potatoes. 7. Refer to Table 3-1. The Farmer and Rancher both could benefit by the Farmer specializing in a. neither good and the Rancher specializing in both goods. b. meat and the Rancher specializing in potatoes. c. potatoes and the Rancher specializing in meat. d. They cannot benefit by specialization and trade. 8. Suppose that a worker in Agland can produce either 10 units of organic grain or 2 units of incense per year, and a worker in Zenland can produce either 5 units of organic grain or 15 units of incense per year. There are 20 workers in Agland and 10 workers in Zenland. Currently the two countries do not trade. Agland produces and consumes 100 units of grain and 20 units of incense per year. Zenland produces and consumes 50 units of grain and no incense per year. The combined output of the two countries is therefore 150 units of grain and 20 units of incense per year. If the two countries decided to trade, and completely specialized in producing the good for which each has a comparative advantage, the combined yearly output of the two countries would be a. 200 units of grain and 150 units of incense. b. 150 units of grain and 20 units of incense. c. 50 units of grain and 40 units of incense. d. 200 units of grain and 300 units of incense. 9. A person's expectations about the future a. cannot affect demand because expectations change. b. can affect future demand. c. cannot shift a demand curve. d. can affect current demand.

5 Figure 4-10 10. Refer to Figure 4-10. Which of the four graphs represents the market for peanut butter after a major hurricane hits the peanut-growing south? a. C b. B c. A d. D 11. For market economies, which would NOT be correct? a. Prices influence how much of a good buyers choose to purchase and how much sellers choose to produce. b. Prices ensure that quantity supplied and quantity demanded are in balance. c. Prices ensure that anyone who wants a product can get it. d. Prices guide economic decisions and thereby allocate scarce resources. 12. Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. This situation best represents which problem in the construction of the CPI? a. substitution bias b. unmeasured quality change c. introduction of new goods d. income bias

6 13. Suppose that the nominal interest rate is 5 percent and the expected inflation rate is 3 percent. a. The dollar value of savings increases by 5 percent and the value of savings in goods is expected to increase by 2 percent b. The dollar value of savings increases by 5 percent and the value of savings in goods is expected to increase by 3 percent c. The dollar value of savings increases by 8 percent and the value of savings measured in goods is expected to increase by 5 percent d. The dollar value of savings increases by 8 percent and the value of savings measured in goods is expected to increase by 3 percent 14. The number of buyers in a market affects a. individual demand curves for a good. b. neither individual nor market demand. c. both individual demand curves and the market demand for a good. d. the market demand for a good. 15. The GDP deflator is the ratio of a. real GDP to nominal GDP multiplied by 100. b. nominal GDP to real GDP multiplied by 100. c. real GDP to nominal GDP. d. nominal GDP to real GDP. 16. For two people who are planning to trade, it is impossible to a. have an absolute advantage in both goods. b. have a comparative advantage in both goods. c. trade so that both people will be better off. d. specialize in the production of one good. 17. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages? a. Price will rise and the effect on quantity is ambiguous. b. Price will fall and the effect on quantity is ambiguous. c. Quantity will fall and the effect on price is ambiguous. d. Quantity will rise and the effect on price is ambiguous. 18. Consider the following table for the country of Ophir: Year Nominal GDP GDP Deflator 2004 $4000 100 2005 $4100 105 2006 $4200 110 From this information we can conclude that real GDP was higher in a. 2005 than in 2004, and real GDP in 2005 was higher than in 2006. b. 2004 than in 2005, and real GDP in 2005 was higher than in 2006. c. 2006 than in 2005, and real GDP in 2005 was higher than in 2004. d. 2004 than in 2006, and real GDP in 2005 was higher than in 2004.

7 Figure 2-6 19. Refer to Figure 2-6. What is the opportunity cost to society of the movement from point A to point C? a. 100 bananas b. 50 baseballs c. 300 bananas d. 100 baseballs 20. National income is defined as a. the income received by the national government. b. the total income earned by a nation's residents from the production of goods and services within the borders of the country. c. the total income earned by a nation's residents in the production of goods and services. d. all income produced within a country. 21. Real GDP is the production of final goods and services valued at a. future year prices. b. the ratio of current year prices to constant year prices. c. current year prices. d. constant prices. 22. Daniel decides to spend the last two hours of the night before his economics exam studying instead of sleeping. For Daniel, his tradeoff would be a. the six hours of sleep he could have had if he had gone to bed before midnight. b. the two hours of rest he would have gotten. c. nothing, since studying would be more beneficial than sleep. d. nothing, since no dollar value can be put on sleep.

8 Use the table below to answer the following questions. Table 24-1 year peaches pecans 2005 $14 per bushel $9 per bushel 2006 $12 per bushel $14 per bushel 23. Refer to Table 24-1. Suppose that the typical consumer basket consists of 5 bushels of peaches and 10 bushels of pecans and that the base year is 2005. What is the consumer price index for 2006? a. 80 b. 200 c. 125 d. 100 24. Imports are a. goods produced abroad and sold domestically. b. people who work in foreign countries. c. whatever is given up to obtain some item. d. an example of an economic model. 25. Which change in the price index shows the greatest rate of inflation: 80 to 100, 100 to 120, 150 to 170, or 200 to 220? a. 150 to 170 b. 100 to 120 c. 80 to 100 d. 200 to 220 26. The word economy comes from the Greek word for a. "one who participates in a market." b. "environment." c. "one who manages a household." d. "conservation." 27. Which of the following is an example of a normative statement? a. Reducing tax rates on the wealthy would be good for the country. b. If the price of a product decreases, quantity demanded increases. c. If the national saving rate were to increase, so would the rate of economic growth. d. All of the above are correct. 28. The value of housing service provided by the economy's stock of houses is a. not included in GDP since it is not sold on the market. b. counted and is based on an estimate of its rental value. c. counted and is valued as the mortgage payment made on the house. d. counted and uses only the purchase price of the house in the year it is sold.

9 29. Suppose that the country of Samiam produces only eggs and ham. In 2007 it produced 100 units of eggs at $3 each and 50 units of ham at $4 each. In 2006, the base year, eggs sold for $1.50 per unit and ham for $5. a. Nominal 2007 GDP is $500, real 2002 GDP is $400, and the GDP deflator is 80. b. Nominal 2007 GDP is $500, real 2002 GDP is $400 and the GDP deflator is 125. c. Nominal 2007 GDP is $400, real 2002 GDP is $500, and the GDP deflator is 125. d. Nominal 2007 GDP is $400, real 2002 GDP is $400, and the GDP deflator is 100. 30. Efficiency means that a. society is getting the most it can from its scarce resources. b. society has lessened its dependence on foreign energy sources. c. society is conserving resources in order to save them for the future. d. society's goods and services are distributed fairly among society's members. 31. By not taking into account the possibility of consumer substitution, the CPI a. doesn't accurately reflect the cost of living, but it is unclear if it overstates or understates the cost of living. b. may overstate or understate the cost of living depending on how much prices rise. c. overstates the cost of living. d. understates the cost of living. 32. Anna, a Canadian citizen, works only in Germany. The value added to production from her employment is included a. in neither German nor Canadian GDP. b. only in Canadian GDP. c. only in German GDP. d. in both German and Canadian GDP. 33. Economics deals primarily with the concept of a. change. b. scarcity. c. poverty. d. power. Figure 2-1 34. Refer to Figure 2-1. Which arrow shows the flow of spending by households?

10 a. D b. B c. C d. A Figure 4-8 35. Refer to Figure 4-8. If price in this market is currently $14, there would be a a. shortage of 20 units and price would tend to rise. b. shortage of 40 units and price would tend to rise. c. surplus of 20 units and price would tend to fall. d. surplus of 40 units and price would tend to fall. 36. People who provide you with goods and services a. are acting out of generosity. b. are required to do so by government. c. do so because they get something in return. d. are acting because they like you. 37. Babe Ruth's 1931 salary was $80,000. The price index for 1931 is 15.2 and the price index for 2005 is 195. Ruth's 1931 salary was equivalent to a 2005 salary of about a. $635,000 b. $536,000 c. $828,000 d. $1,216,000 e. $1,026,000 38. In computing GDP, investment is spending on a. real estate and financial assets. b. capital equipment, inventories, and structures, excluding household purchases of new housing. c. new capital equipment, inventories, and structures, including new housing. d. stocks, bonds, and other financial assets.

11 39. With trade a a. country is worse off because it becomes dependent on other countries. b. country's consumption possibilities frontier can be outside its production possibilities frontier. c. country will experience a lower unemployment rate. d. country will produce a greater variety of goods and services to trade. 40. In 1964 in London, Ontario one could buy a chili-dog and a root beer for $1.25, today the same chili dog and root beer cost $3.75. Which set of CPI's would mean that the cost in today's dollars was the same as in 1964? a. 60 in 1964 and 141.6 today b. 90 in 1964 and 270 today c. 80 in 1964 and 112 today d. 75 in 1964 and 126.4 today

12 Part B - Short Answer (15 points) Answer on the test paper. 1. Suppose the only three goods produced in Florida are oranges, suntan lotion, and Mickey Mouse hats. The prices and quantities sold are given in the following table: Year Oranges Suntan Lotion Mickey Mouse Hats P Q (dozen) P Q (bottles) P Q (hats) 2008 $2 100 $5 400 $5 200 2009 $4 200 $7 500 $5 200 2010 $6 300 $8 600 $8 300 If the base year is 2009, calculate nominal GDP, real GDP, and the GDP deflator for 2008. (6 points) 2. Calculate the equilibrium price and quantity in a market described by the following demand and supply equations. (4 points)

13 3. Use the following table to answer the questions below. Labor Hours needed to make one unit of: Amount produced in 160 hours: Quilts Dresses Quilts Dresses Helen 40 10 4 16 Carolyn 80 16 2 10 a) The opportunity cost of making one dress is quilts for Helen and quilts for Carolyn. (2 points) b) Assume that there is no trade and each person spends half her time making quilts and half her time making dresses. The total number of quilts made is and the total number of dresses made is. (2 points) c) Suppose that Helen and Carolyn decide to trade with each other. If each person specializes completely in her comparative advantage good, then the total number of quilts made is and the total number of dresses made is. (1 point)