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Simon Fraser University, Surrey
Principles of Macroeconomics (ECON 105-4D9), Summer 2009
Sample Midterm
(This is a sample only. Duration for this sample test is 60 minutes. However, in midterm you will
have 120 minutes to solve MORE problems. )
NOTE: This is a closed book exam. Calculators (non-programmable, non-graphic) are allowed.
Unauthorized use of any other electronic device, talking during exams or leaving the classroom
without permission, showing (whether unintended or not) answer to others, possession of notes or
books are considered academic dishonesty (Please read the university academic dishonesty rules).
PART A: (one point each)
Circle ONE alternative that best completes the statements or answers the question. More than
one circle will be considered as WRONG answer!
1) The Cost-Benefit Principle tells people they should take an action if
A) benefits exceed costs.
B) costs exceed benefits.
C) marginal costs exceed marginal benefits.
D) marginal benefits exceed marginal costs.
E) benefits are positive.
2) The time value of money tells you that
A) a dollar received in the future is worth less than a dollar received today.
B) a given dollar amount today is equivalent to a smaller dollar amount in the future.
C) charging interest on a loan is not fair.
D) the opportunity cost of loaning money is equal to the interest rate.
E) the opportunity cost should not always be considered when performing a cost-benefit analysis.
3) A sunk cost is
A) the value of money sunk into an investment.
B) beyond recovery at the moment a decision must be made.
C) important to consider when conducting cost-benefit analysis.
D) equal to the opportunity cost when the interest rate is zero.
E) the same as a marginal cost.
4) Equilibrium
A) is a concept unique to economics.
B) always occurs where supply equals demand.
C) results when opposing forces fail to cancel each other out.
D) indicates balance.
E) all of the above.
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5) To have an effect on a market, a price ceiling must
A) be above equilibrium.
B) be equal to equilibrium.
C) be below equilibrium.
D) result in a surplus.
E) none of the above.
6) The socially optimal quantity maximizes
A) economic surplus.
B) producer surplus.
C) consumer surplus.
D) quantity demanded.
E) quantity supplied.
7) An increase in price will
A) decrease demand.
B) decrease quantity demanded.
C) increase demand.
D) increase quantity demanded.
E) not affect quantity demanded.
8) An increase in the price of a complement will
A) decrease demand.
B) decrease quantity demanded.
C) increase demand.
D) increase quantity demanded.
E) not affect quantity demanded.
9 Jenna decides to see a movie that costs $7 for the ticket and has an opportunity cost of $20. After the movie,
she says to one of her friends that the movie was not worth it. Apparently,
A) Jenna failed to apply the cost-benefit model to her decision.
B) Jenna was not rational.
C) the economic model of cost-benefit analysis failed.
D) Jenna overestimated the benefits of the movie.
E) this proves the limitations of economic models, specifically the cost-benefit principle.
10) If the total benefits of watching 1,2, and 3 baseball games on TV are 100, 120, and 125 then the marginal
benefits are
A) 100,120, and 125.
B) 100, 20, and 5.
C) 100, 609, and 41.67.
D) 100, 240, and 375.
E) 100, 10, and -30.
11) Which of the following is not a determinant of demand for gasoline?
A) The price of gasoline.
B) The price of diesel.
C) The price of automobiles.
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D) The quantity of gasoline supplied.
E) Consumers' incomes.
12) The country of Southland produced $2,000 billion of output in one year. The population of Southland was
100 million, 60 million of whom were employed, What was average labour productivity in Southland?
A) $20
B) $33
C) $20,000
D) $33,333
E) $50,000
13) The unemployment rate is the:
A) number of workers unemployed.
B) number of workers in the labour force.
C) number of workers minus those without a job.
D) percentage of the labour force that is out of work.
E) percentage of the population that is out of work.
14) Gross domestic product (GDP) equals the ______ of final _______ produced within a country during a given
period of time.
A) market value; goods
B) market value; services
C) market value; goods and services
D) quantity; goods
E) quantity; goods and services
15) If a pizza maker pays $1 for tomatoes, $1 for cheese, $2 for sausage, and sells the pizza made with these
ingredients for $7, then each pizza sold contributes how much to GDP?
A) $3
B) $4
C) $7
D) $9
E) $11
16) Government purchases include all of the following except:
A) pension benefits paid by the federal government.
B) the construction of a new court house built by a local government.
C) the salary paid to an elementary school teacher employed by a local public school board.
D) the purchase of new military hardware by the Canadian Army.
E) the construction of new highways by provincial governments
17) The process of dividing a nominal quantity by a price index in order to express the quantity in real terms is
called:
A) deflating
B) negative inflation
C) indexing
D) depressing
E) hyperinflation
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18) Suppose the value of the CPI is 110 in year 1, 116 in year 2, and 127 in year 3. Assume also that the price of
computers increases by 3% between year 1 and year 2, and by another 3% between year 2 and year 3. The price
level is increasing, the inflation rate is _______, and the relative price of computers is _________.
A) increasing; increasing
B) constant; increasing
C) constant; decreasing
D) increasing; decreasing
E) decreasing; decreasing
19) Fred and Norma just had a baby girl and want to make sure they save enough in the future to send her to
college. This is an example of the ____ motive for saving.
A) life-cycle
B) public
C) private
D) precautionary
E) bequest
20) If currency = $80 million, personal chequing accounts = $60 million, current accounts = $160 million, non-
personal notice deposits = $100 million, and personal savings deposits = $600 million, how much is M1?
A) $80 million.
B) $140 million.
C) $300 million.
D) $400 million.
E) $1 billion.
PART B: (3 points each)
Give the definition of EACH term.
Write in the space below the questions.
1. Substitutes and Complements
Ans: See text
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PART C: (4 points each)
True/ False with EXPLANATION (Without explanation, there is no part marking)
1) Sohini said “It’s true that unanticipated inflation redistributes wealth from creditors to debtors, for
example. But what one side of the bargain loses, the other side gains. So from the perspective of society as a
whole, there is no real cost.”
Do you agree? Discuss.
ANS: FALSE! The first two sentences are correct; the losses that unanticipated inflation imposes on creditors
(for example) are just offset by the gains to debtors. However, there is an overall cost to society when
wealth is redistributed arbitrarily. First, risk is increased, which makes people feel worse off. Second,
when wealth is determined more by random forces than by hard work and intelligent investment, the
incentives to engage in the latter are reduced, harming the efficiency of the economy. Finally, people use
up resources attempting to anticipate inflation and protect themselves against it; from society’s point of
view, these resources are wasted.
2) Guifa considers growth in average labour productivity to be the key factor in determining long run living
standard. Do you agree? Explain.
ANS: TRUE! Real GDP per person (a basic determinant of living standards) equals average labour
productivity times the share of the population that is employed. The share of the population that is
employed can only rise so far; it can never exceed 100%. Thus, large long-term gains in output per
person (and hence living standards) generally must come from increases in average labour productivity.
PART D: (10 points)
Short answer
Write in the space below the questions.
1. Question no. 7, Chapter 8.
ANS: a.
Number of Marginal product Value of marginal
screens product
1 40,000 $80,000
2 35,000 $70,000
3 30,000 $60,000
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4 25,000 $50,000
5 20,000 $40,000
The marginal products decline as screens are added, illustrating diminishing returns to capital.
b. The interest cost of each screen is 5.5% × $1,000,000, or $55,000. There are no other costs mentioned.
The value of marginal product exceeds $55,000 for three screens but not four. So three screens should be built.
c. The value of marginal product exceeds the interest cost (7.5% of $1,000,000, or $75,000) for only the
first screen. One screen will be built.
d. At 10% interest the interest cost of a screen is $100,000, more than the value of the marginal product of
even the first screen. No screens will be built. Parts b through d illustrate that capital investment (and,
consequently, the demand for saving) falls as the real interest rate rises.
e. The value of the marginal product of the fifth screen is $40,000. At an interest rate of 5.5%, building five
screens is profitable only if 5.5% times the per-screen construction cost is no greater than $40,000. Since 5.5% ×
$727,273 = $40,000, the construction cost would have to fall to $727,273 per screen to make the five-screen
complex profitable.
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