WILFRID LAURIER UNIVERSITY
Waterloo, Ontario
Midterm I
Name:
Winter 2019
ID#:
Economics 290
Section:
Intermediate Macroeconomics I
Instructor: Ke Pang
Number of Pages: Cover page plus 14 question pages
Time Allowed: 1 and 1/2 hours
Total Marks: 100
Aids: Non-programmable calculator
To qualify for a grade reassessment, students must complete the exams in
permanent ink. No questions about the exam content will be answered. If
you think a question is not clear, state your interpretation of the question and
continue. If you think assumptions are required to form an answer, provide
those assumptions. Reasonable interpretations and assumptions will be given
fair consideration.
1. (Total 50 marks, 2 marks each) Choose the one alternative that best answers the
question. Your final answer must be on the scantron card.
(1) Because government services are not sold in markets
(A) they are excluded from measurements of GDP.
(B) the government tries to estimate their market value and uses this to measure
the government’s contribution to GDP.
(C) they are valued at their cost of production.
(D) taxes are used to value their contribution.
(2) A brewer sells beer, using barley it buys from another company for $10,000. The
brewer’s beer is sold for $41,000. It pays its workers $20,000 and pays $5,000 in
taxes. What is the value added of the brewer?
(A)
(B)
(C)
(D)
$20,000
$25,000
$31,000
$41,000
(3) A brewer sells beer, using barley it buys from another company for $10,000. The
brewer’s beer is sold for $41,000. It pays its workers $20,000 and pays $5,000 in
taxes. What is the profit of the brewer?
(A)
(B)
(C)
(D)
$5,000
$6,000
$11,000
$31,000
(4) Countries A and B have the same GDP. In country A people eat often at home,
but in country B people eat more often in restaurants. Therefore
(A)
(B)
(C)
(D)
economic activities are underestimated in country A.
economic activities are overestimated in country A.
GDP represents accurate measure of economic activities in both countries.
GDP is underestimated in country B.
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(5) In using the expenditure approach to GDP, consumption includes
(A) all final and intermediate goods consumed by domestic households produced
at home and abroad.
(B) all final and intermediate goods consumed by domestic households produced
at home, but not those produced abroad.
(C) all final goods consumed by domestic households produced at home and
abroad.
(D) all final goods consumed by domestic households produced at home, but not
those produced abroad.
(6) Assume that the government of Newworld has taxes of $1 million, transfer payments of $0.6 million, and interest payments on the government debt of $0.1
million. If government purchases of goods and services are $0.3 million. Investment of Newworld is $0.2 million and the current account balance of Newworld
is $-0.1 million. How much is the government saving in Newworld?
(A)
(B)
(C)
(D)
$0.1 million.
$0 million.
$-0.1 million.
$-0.3 million.
(7) Assume that the government of Newworld has taxes of $1 million, transfer payments of $0.6 million, and interest payments on the government debt of $0.1
million. If government purchases of goods and services are $0.3 million. Investment of Newworld is $0.2 million and the current account balance of Newworld
is $-0.1 million. How much is the private saving in Newworld?
(A)
(B)
(C)
(D)
$0.1 million.
$0 million.
$-0.1 million.
$-0.3 million.
(8) If real interest rate is 1% and the expected inflation rate is 2%, then the nominal
interest rate is
(A)
(B)
(C)
(D)
−1%
1%
2%
3%
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(9) The country of Newworld produces cheese and bread, and it has published the
following macroeconomic data, where prices are dollars per unit:
2017
Quantity
1500
3000
Product
Cheese
Bread
Price
$3
$1
2018
Quantity
2000
7000
Price
$9
$2
Between 2017 and 2018, the percent rate of increase in the price level as measured
by a fixed-weight index that uses production in 2018 as the fixed basket of goods
was
(A)
(B)
(C)
(D)
146%
160%
242%
327%
(10) If national saving in an economy is equal to $10 billion, exports are $2 billion,
imports are $3 billion, and net factor payments from abroad is $2 billion, total
investment will be
(A)
(B)
(C)
(D)
$5 billion.
$9 billion.
$10 billion.
$11 billion.
(11) Citizens of the country of Blackland produce and export oil and import food.
In 2000 they produced $100 million worth of oil, all sold to neighbouring countries. They purchased $60 million worth of food from neighbouring countries, all
consumed by domestic citizens. At the beginning of 2000, the country of Blackland’s net foreign asset position is $1,000 million and the rate of return on their
net foreign asset position is 2%. Calculate the gross national product (GNP) of
Blackland.
(A)
(B)
(C)
(D)
$100
$120
$160
$180
million
million
million
million
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(12) Citizens of the country of Blackland produce and export oil and import food. In
2000 they produced $100 million worth of oil, all sold to neighbouring countries.
They purchased $60 million worth of food from neighbouring countries, all consumed by domestic citizens. At the beginning of 2000, the country of Blackland’s
net foreign asset position is $1,000 million and the rate of return on their net
foreign asset position is 2%. Calculate the current account (CA) of Blackland.
(A)
(B)
(C)
(D)
$20
$40
$60
$80
million
million
million
million
(13) Groovy! The hotdog Store has the following production function:
Number of Workers
1
2
3
4
5
Number of Hotdogs Produced
200
380
530
640
700
If a hotdog sold for $2 and the nominal wage rate was $240, how many workers
would the firm employ?
(A)
(B)
(C)
(D)
0
2
3
4
(14) Parliament has just passed a law eliminating all mandatory retirement in Canada.
How would you expect this to affect the nation’s labour market?
(A)
(B)
(C)
(D)
The
The
The
The
labour
labour
labour
labour
supply curve would shift to the right.
supply curve would shift to the left.
demand curve would shift to the right.
demand curve would shift to the left.
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(15) A tremendous wildfire in Western Canada destroys thousands of factories, reducing the nation’s capital stock by 5%. What happens to current employment and
the real wage rate?
(A)
(B)
(C)
(D)
Both employment and the real wage rate would increase.
Both employment and the real wage rate would decrease.
Employment would increase and the real wage would decrease.
Employment would decrease and the real wage would increase.
(16) What is the participation rate if there are 15 million people in the labour force,
14 million people employed, and 6.5 million not in the labour force?
(A)
(B)
(C)
(D)
43%
70%
85%
93%
(17) The city of Fairyland has a labour force of 5000. 50 people lose their jobs each
month and remain unemployed for exactly 1 month before finding jobs. On January 1 and July 1 of each year, 200 people lose their jobs for a period of 6 months
before finding new jobs. What is the unemployment rate in any given month?
(A)
(B)
(C)
(D)
1%
3%
4%
5%
(18) The city of Fairyland has a labour force of 5000. 50 people lose their jobs each
month and remain unemployed for exactly 1 month before finding jobs. On January 1 and July 1 of each year, 200 people lose their jobs for a period of 6 months
before finding new jobs. What is the average duration of an unemployment spell?
(A)
(B)
(C)
(D)
1.5 months
2 months
3 months
3.5 months
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(19) The more permanent an employee perceives an increase in her real wages to be
(A) the larger the substitution effect is and the more likely it is that the quantity
of labour supplied will be increased.
(B) the larger the substitution effect is and the more likely it is that the quantity
of labour supplied will be reduced.
(C) the larger the income effect is and the more likely it is that the quantity of
labour supplied will be increased.
(D) the larger the income effect is and the more likely it is that the quantity of
labour supplied will be reduced.
(20) A widespread productivity growth led by maturing AI technologies will lead to
(A) a higher desired capital stock because the
capital is higher
(B) a lower desired capital stock because the
capital is higher
(C) a higher desired capital stock because the
capital is lower
(D) a lower desired capital stock because the
capital is lower
future marginal productivity of
future marginal productivity of
future marginal productivity of
future marginal productivity of
(21) A firm just purchased a new machine which costs $1000 in real dollars and plan
to depreciate the machine at a rate of 25% each year. The firm can borrow
money from the bank at a nominal rate of 8%, or receive a nominal rate of 3%
for depositing money at the bank. The expected inflation rate in the coming year
is 2%. The firm borrowed money from the bank to purchase the machine. The
firm’s user cost of capital for the first year is
(A)
(B)
(C)
(D)
$250
$260
$280
$310
(22) Suppose a company is in equilibrium, with its capital stock at its desired level. A
permanent increase in the depreciation rate now has what effect on the company’s
desired capital stock?
(A)
(B)
(C)
(D)
raises it, because the user cost of capital is now higher
raises it, because the user cost of capital is now lower
lowers it, because the user cost of capital is now higher
lowers it, because the user cost of capital is now lower
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(23) John’s firm has a capital stock of $20 million at the beginning of this period.
Suppose depreciation rate is 10%. Gross investment is $3 million in this period.
How much is net investment in this period?
(A)
(B)
(C)
(D)
$0
$1
$2
$3
million
million
million
million
(24) All else equal, a decrease in effective tax rate will lead to
(A)
(B)
(C)
(D)
an increase in the desired investment.
a fall in the desired investment.
a decrease in the interest rate.
an increase in inventory.
(25) If Ricardian equivalence holds, a reduction in taxes this year that is accompanied
by an offsetting increase in future taxes would cause
(A) a rightward shift in the saving curve and a rightward shift in the investment
curve.
(B) a leftward shift in the saving curve, but no shift in the investment curve.
(C) no shift in the saving curve, but a rightward shift in the investment curve.
(D) a shift in neither the saving nor the investment curve.
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2. (15 marks in total) Consider an economy that produces only two types of goods:
Apples and Oranges. In the base year, the production and price data were as follows:
Product
Apples
Oranges
Quantity
4000
2000
Price
$1
$2
In the current year, the production and price data were as follows:
Product
Apples
Oranges
Quantity
8000
6000
Price
$3
$4
(a) (5 marks) Find nominal GDP in the current year and in the base year. What is
the percentage increase in nominal GDP since the base year?
(b) (5 marks) Find real GDP in the base year and in the current year. What is the
percentage increase in real GDP since the base year?
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(c) (5 marks) Find the GDP deflator for the current year and the base year. What
is the inflation rate using the GDP deflator?
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3. (15 marks in total) Suppose a firm’s hourly marginal product of labour is given by
M P N = 0.2(200 − N ), where N is the number of labour hours used in production.
The amount of labour supplied by workers, N S, is given by N S = 100 + 5w, where w
is the real wage.
(a) (5 marks) Suppose the current real wage is equal to 20. How much labour will
the firm want to hire? How much labour will the workers want to supply? Is
there excess supply or excess demand of labour in the economy? Do you expect
the real wage to go up or go down in this case?
(b) (5 marks) Find the equation of the labour demand and calculate the equilibrium
levels of real wage and full-employment.
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(c) (5 marks) If the government decides to tax the labour income, the equation of
labour supply becomes N S = 100 + 5(1 − τ )w. Suppose τ = 40%. Repeat part
(b). Compared to the results in (b), do the equilibrium levels of real wage and
full-employment increase or decrease? Provide an intuitive explanation to your
answers.
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4. (20 marks in total) Suppose that the economywide expected future marginal product of capital is M P K f = 10 − 0.05K f , where K f is the future capital stock. The
depreciation rate of capital, δ, is 20% per period. The current capital stock, K, is 100
units of capital. The real price of a unit of capital is 1 unit of output. Firms pay taxes
equal to 20% of their output. The consumption equation is C = 90+0.6Y −25r, where
C is consumption, Y is output, and r is the real interest rate. Government spending
equals 200 and full-employment output is 1000.
(a) (6 marks) Suppose the current real interest rate is 20% per period. What are the
values of the tax-adjusted user cost of capital, the desired future capital stock,
and the desired level of investment?
(b) (2 marks) When the real interest rate equals 20%, what are the desired levels of
consumption and saving (assuming output is at the full-employment level)?
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(c) (2 marks) Is the goods market in equilibrium when the real interest rate equals
20%? Provide an intuitive explanation to your answers.
(d) (10 marks) Solve for the real interest rate that clears the goods market. What are
the goods market-clearing values of consumption, saving, and investment? What
is the desired amount of capital stock in this equilibrium?
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.
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