ECONOMICS 1000A - Summer 2014
TUTORIAL ASSIGNMENT 1
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Instructions: Assignment #1 has two parts – Section A - 10 Short Answer Questions worth 80 marks and Section B - 20 Multiple Choice Questions worth 20 marks.

Section A- Short Answer Questions – 80 Marks

1.      What is the mechanism in the economic system that guarantees the saving of the economy will always equal the investment of the economy? You may assume a closed economy in answering the question.

2.    Using a graph representing the market for loanable funds, show and explain what happens to the real interest rate and investment if the Canadian federal government succeeds in running budget surpluses.

3.      Table 1.0 below gives data for the country of Weston

## TABLE 1.0

 YEAR NOMINAL GDP REAL GDP GDP DEFLATOR 2002 3,055 94 2003 3,170 100 2004 3,410 3,280 2005 3,500 108

(i)    Complete the above Table 1.0.

(ii)   What is the base year for the GDP deflator?

(iii) Calculate the percentage change in nominal GDP, real GDP, and the GDP deflator between 2004 and 2005. Was the increase in nominal GDP due mostly to an increase in real GDP or to an increase in the price level?

4.      In 1970, Lyle bought a hand calculator for \$200. The calculator was more accurate in its four functions of addition, subtraction, multiplication, and division than was Lyle’s \$35 slide rule.  In 1990, Lyle could not buy a calculator, which could only perform four functions. The simplest calculator he could fine cost \$5, and was much superior to his 1970 calculator. The CPI in 1970 was 100, and in 1990 it was 250.

(i)    Based on the CPI, what was the value of the 1990 calculator in 1970 dollars?

(ii)   By how much had the price of the calculator fallen in real terms from 1970 to 1990?

(iii)  What problems in the use of the consumer price index as a measure of the cost of living does the above illustrate?

5.      What is the difference between GDP and GNP in theory?  For Canada, would             GDP or GNP be larger?  Explain.

6.      If in 1984, measured GDP in Canada was \$400 billion, and in 1985 it was \$440 billion, explain why we cannot necessarily conclude that the typical Canadian's welfare has improved by 10-percent over the year.

7.      The "government purchases" component of GDP does not include spending on transfer payments such as Employment Insurance. Thinking about the definition of GDP, explain why transfer payments are excluded.

8.      Consider the following data on Canadian GDP:

NOMINAL GDP                             GDP DEFLATOR

YEAR            (IN BILLIONS)                               (BASE YEAR 1992) 1993                            \$725                                                    101.2

1994                            \$762                                                    102.4

a.         What was the growth rate of nominal income between 1993 and 1994? (Note: The growth rate is the percentage change from one period to the next.)

b.         What was the growth rate of the GDP deflator between 1993 and 1994?

c.         What was real income in 1993 measured in 1992 prices?

d.         What was real income in 1994 measured in 1992 prices?

e.         What was the growth rate of real income between 1993 and 1994?

f.          Was the growth rate of nominal income higher or lower than the growth rate of real income? Explain.

9.      Suppose that the residents of Veggieland spend all of their income on cauliflower, broccoli, and carrots. In 1998 they buy 100 heads of cauliflower for \$200, 50 bunches of broccoli for \$75, and 500 carrots for \$50. In 1999 they buy 75 heads of cauliflower for \$225, 80 bunches of broccoli for \$120, and 500 carrots for \$100. If the base year is 1998, what is the CPI in both years? What is the inflation rate in 1999?

10.  Explain carefully the meaning and importance of the term “productivity”

Section B – 20 Multiple Choice Questions – 20 marks

1.      The natural rate of unemployment is

A.  zero percent.

B.  determined by Parliament.

C.  the amount of unemployment that the economy normally experiences.

D.  the amount of unemployment adjusted for the effects of inflation.

2.      The labour-force participation rate is defined as follows:

A.  Labour-Force Participation Rate = Labour Force        x 100
Adult Population

B.  Labour-Force Participation Rate = Labour Force x  100
Population

C.  Labour-Force Participation Rate = Labour Force x  100
Employed

D.  Labour-Force Participation Rate = Labour Force                    x 100
Employed + Unemployed

3.      Which of the following is true of the market for loanable funds?

A.  The supply of loanable funds comes from households and firms who want to borrow for investment.

B.  The supply of loanable funds comes from households who want to save some of their income and lend it out.

C.  The demand for loanable funds comes from households who want to save some of their income and lend it out.

D.  None of the above statements are true.

4.      Which of the following is not a widely-acknowledged problem with the CPI as a measure of the cost of living?

A.  substitution bias

B.  introduction of new goods

C.  unmeasured price change

D.  unmeasured quality change

E.   all of the above are problems with the CPI

5.      Babe Ruth's 1931 salary was \$80 000. The price index for 1931 is 8.7 and the price index for 1995 is 107.6. Ruth's 1931 salary was equivalent to a 1995 salary of

A.  about \$70,000.

B.  about \$800,000.

C.  about \$1,000,000.

D.  about \$8,000,000.

6.      Cyclical unemployment refers to

A.  fluctuations of unemployment around its natural rate.

B.  the experience with unemployment of a typical worker over his or her life cycle.

C.  long-term trends in unemployment.

D.  a and b

E.   none of the above

7.      Which statement represents most correctly the relationship between nominal GDP and real GDP?

A.  Nominal GDP measures base-year production using base-year prices, while real GDP measures current production using current prices.

B.  Nominal GDP measures current production using base-year prices, while real GDP measures current production using current prices.

C.  Nominal GDP measures current production using current prices, while real GDP measures current production using base-year prices.

D.  Nominal GDP measures current production using current prices, while real GDP measures base-year production using base-year prices.

8.      If the GDP deflator is 150 and nominal GDP is \$900 billion, then real GDP is

A.  \$60 billion.

B.  \$600 billion.

C.  \$1350 billion.

D.  \$135 billion.

9.      Productivity is a measure of

A.  the amount of goods and services produced from each worker in a given year.

B.  the amount of goods and services produced from each hour of a worker's time.

C.  the amount of goods and services produced per person in the country.

D.  the amount of goods and services produced by a country relative to another country.

10.    For any given year, the CPI is

A.  the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100.

B.  higher than the previous year.

C.  the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then multiplied by 100.

D.  the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then divided by 100.

11.    Which of the following was not mentioned in the text as a determinant of productivity?

A.  human capital

B.  physical capital

C.  natural resources

D.  technological knowledge

E.   tastes and preferences

12.    All else equal, when people become less optimistic about a company's future,

A.  the demand for the stock (and thus the price) rises.

B.  the demand for the stock (and thus the price) falls.

C.  the supply of the stock (and thus the price) rises.

D.  the supply of the stock (and thus the price) falls.

13.    The GDP deflator can be used to identify

A.  the increase in nominal GDP that is due to an increase in prices rather than an increase in production.

B.  the increase in real GDP that is due to an increase in prices rather than an increase in production.

C.  the increase in the cost of living for typical Canadian consumers.

D.  the reduction in government spending required to balance the federal budget.

14.    During an election campaign, the incumbent argues that he should be reelected because GDP grew by 12% during his term in office. You know that population grew by 4% over the period, and that the GDP deflator increased from 100 to 108 during the past 4 years. You should conclude that

A.  real GDP per person grew by 12% during the term.

B.  real GDP per person grew by 8% during the term.

C.  real GDP per person was unchanged during the term.

D.  real GDP per person decreased by 4% during the term.

15.    The price index in the first year is 125, in the second year is 150, and in the third year is 200. What is the inflation rate between the first and second year and between the second and third year?

A.  25 percent between the first and second year, 50 percent between the second and third year

B.  50 percent between the first and second year, 100 percent between the second and third year

C.  25 percent between the first and second year, 75 percent between the second and third year

D.  20 percent between the first and second year, 33 percent between the second and third year

16.    Gina has the choice of two bonds, one that pays 5 percent interest and the other that pays 10 percent interest. Which of the following is most likely?

A.  The 10 percent bond has a shorter term than the 5 percent bond.

B.  The 10 percent bond is more risky than the 5 percent bond.

C.  The 10 percent bond is a Canadian government bond, and the 5 percent bond is a junk bond.

D.  All of the above are equally likely.

17.    When a country saves a large portion of its GDP,

A.  the standard of living of the population will fall.

B.  less investment will take place.

C.  more resources are available for investment in capital.

D.  the country's productivity and standard of living will rise.

E.   c and d

18.    In the country of Mainia, GDP consists of cranberries and maple syrup. In 2000, 50 units of cranberries are sold at \$10 per unit, and 100 units of maple syrup are sold at \$5 per unit. If the price of cranberries was \$5 per unit and the price of maple syrup was \$7.50 per unit in 1999, the base year,

A.  nominal 2000 GDP is \$1000, real 2000 GDP is \$1000, and the GDP deflator is 100.

B.  nominal 2000 GDP is \$1000, real 2000 GDP is \$1250, and the GDP deflator is 83.3.

C.  nominal 2000 GDP is \$1000, real 2000 GDP is \$1000, and the GDP deflator is 1.

D.  nominal 2000 GDP is \$1000, real 2000 GDP is \$833, and the GDP deflator is 125.

19.    The identity that shows that GDP is both total income and total expenditure is represented by

A.  Y = PI + DI + NX.

B.  GDP = GNP - NX.

C.  Y = C + I + G + NX.

D.  GDP = Y.

20.    The price index in 2001 is 120, and in 2002 the price index is 126. What is the inflation rate?

A.  26 percent

B.  6 percent

C.  5 percent

D.    The inflation rate is impossible to determine without knowing the base year.

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