Midterm

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Midterm

• Midterm on Thursday February 14th
• Time 1 hour 20 minutes
• Materials One-sided 8.5x11 formula sheet,
  calculator
• Structure of test
• Section A 25 Multiple Choice Questions
• Section B Two out of Three Problems
• Covering Chapters 1-4, 19-22

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National Income Accounting
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Using the expenditure approach to calculate GDP
Using the factor payments approach to calculate
GDP GDP (Wages and Salaries Business Profits
Interest Income Rental Income) (Indirect
Taxes Subsidies) Depreciation
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Net Domestic Income

• NDI Wages and Salaries Business Profits
  Interest Income Rental Income

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(No Transcript)
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Question 1 Change in Demand or Change in
Quantity Demanded?
The price of GM cars decline as the price of
steel falls and GM increases production.
Change (increase) in quantity demanded
Karl Lagerfeld announces that wide-legged pants
are hot leading to an increase in the price of
wide-legged pants.
Change (increase) in demand
A recession in Western Europe leads to a sharp
decline in the price of Canadian wheat.
Change (decrease) in demand
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Question 2 Price Elasticity of Supply
Suppose that when the price of apples is 1.00
per pound, the quantity supplied is 1500 pounds
per day. If the price drops to 75 cents per
pound, the quantity supplied drops to 900 pounds
per day. What is the price elasticity of supply?
Supply is elastic very responsive.
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Remember

• Price elasticity of demand/supply is NOT the same
  as the slope of the demand/supply curve.
• The slope is only a part of the elasticity.

Slope
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Question 3 Point-Elasticity

• So when calculating elasticity at a point on a
  demand curve, we can use the slope. Suppose
• The slope is -4. So what is the price elasticity
  of demand when the price is 10?

QD 100 4P
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Demand is inelastic when P 10.
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Tax Burden of a Sales Tax
A sales tax drives a wedge between the consumer
and seller prices which is equal to the tax. The
tax reduces equilibrium quantity exchanged.
The distribution of the burden of the sales tax
will depend on the relative elasticities of
supply and demand.
If demand is inelastic relative to supply,
consumers bear most of the burden.
If supply is inelastic relative to demand,
producers bear most of the burden.
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Question 4 Employment

• In a country with a working-age population of 180
  million, 125 million workers are employed and 25
  million workers are unemployed. The size of the
  labour force is
• 150 million
• 180 million
• 125 million
• 25 million

Labour force Employed Unemployed
125 25 150 million

• What is the unemployment rate?
• 10
• 14
• 17
• 69

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• What is the labour force participation rate?
• 10
• 14
• 69
• 83

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Question 5 Short Run Macro Model
C 50 0.8YD T 0.0625Y I 75 G 100
YD Y T Y 0.0625Y 0.9375Y C 50 0.8YD
50 0.8(0.9375Y) 50 0.75Y
The AE function AE C I G
AE 50 0.75Y 75 100
AE 225 0.75Y
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AE
AE 225 0.75Y
Slope is the marginal propensity to spend, z
0.75
Slope 0.75
225
Intercept is autonomous expenditure, A 225
0
Y
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Y AE at equilibrium ? Y 225 (.75)Y ? Y(1 -
.75) 225 ? YE 225/(.25) 900
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AE
AE 225 0.75Y
900
Equilibrium National Income occurs where the AE
function crosses the 45 line (AE Y).
225
45
0
Y
900
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Suppose that investment, I, increases from 75 to
100. What happens to equilibrium national income?
AE C I G
AE 50 0.75Y 100 100
AE 250 0.75Y
Y AE at equilibrium ? Y 250 (.75)Y ? Y(1 -
.75) 250 ? YE 250/(.25) 1000
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What is the value of the multiplier?
Method 1
Method 2
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Question 6 Suppose that full-employment income
is 700 and actual income is 800. We can say that
the economy is currently experiencing

• a recession
• a recessionary gap
• an expansion
• an inflationary gap

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Question 7 Suppose that in 2005 the consumer
price index (CPI) was 113. In 2006, the CPI was
117. What is the rate of inflation?

• 4.0
• 3.5
• 3.4
• 3.0

Inflation
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Question 8 Suppose an economy is producing at
point A on their production possibility boundary
(PPB). What is the opportunity cost of 10 more
guns?

• 120 lbs of butter
• 180 lbs of butter
• 280 lbs of butter
• 300 lbs of butter

600
A
500
Butter (lbs)
400
B
300
220
200
100
10
20
30
40
46
35
Guns
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Question 9 Suppose an economy is producing at
point B on their production possibility boundary
(PPB). What is the opportunity cost of 100 lbs
more butter?

• 3 guns
• 5 guns
• 10 guns
• 20 guns

600
A
500
Butter (lbs)
400
B
300
220
200
100
10
20
30
40
46
35
Guns
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Question 10 What is the supply function
corresponding to the following supply curve?
Price
S

• QS 2P 5
• QS 2P -10
• QS (1/2)P -10
• QS (1/2)P -5

A
15
5
20
Quantity
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Question 11 What is the price elasticity of
supply at point A of the supply curve below.

• 1
• 2.5
• 4
• 5

Price
QS 4P
A
5
20
Quantity
A linear supply curve that passes through the
origin has a price elasticity of 1 at any point
along it.
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Question 12 Given the data below, how much does
Acer add to 2007 GDP?

• 84 million
• 79 million
• 54 million
• 49 million