Ryerson University

Department of Economics
ECN 204 Midterm Winter 2013
Instructor Dr! "!#ar$iero Duration 1 %our 4& minutes
Name'''''''''''''''''''''''''' (tudent )''''''''''''''''''''''''''''''''
Choose the #E(" answer and record on your scanner sheet.
1. The higher is the current level of saving:
A) the higher is the current level of investment and higher the future level of
consumption.
B) the lower is the current level of investment and lower the future level of
consumption.
C) the higher is the current level of investment and lower the future level of
1
consumption.
D) the lower is the current level of investment and higher the future level of
consumption.
E) The higher the slope of the !"
#. The ine$uality of saving and planned investment:
A) is attri%uta%le to a low level of consumption.
B) may %e of considera%le significance %ecause of the su%se$uent changes in income&
employment& and the price level.
C) is of no conse$uence %ecause a compensating ine$uality of ta' collections and
government spending will always occur.
D) is of no conse$uence %ecause saving and actual investment will always %e e$ual.
E) is of no conse$uence %ecause they are not positively related.

(. )n response to some une'pected changes in demand:
A) the economy could always ad*ust its production level if the prices are infle'i%le.
B) the economy would always produce less than what was e'pected if the prices of
goods and services are infle'i%le.
C) the economy could always produce at its optimal capacity if the prices of goods and
services are infle'i%le.
D) the economy could always produce at its optimal capacity if the prices of goods and
services are fully fle'i%le
E) The self+ad*usting mechanism of the will insure full employment whether rices are
fle'i%le or infle'i%le.
2
,. Assuming infle'i%le prices& if the demand for many goods and services falls across the
the entire economy and for an e'tended period of time:
A) many firms will face a constant reduction in their inventories.
B) many firms will face with an inventory pile up and will %e forced to cut production.
C) many firms will face with an inventory pile up and will %e forced to hire more
wor-ers.
D) many firms will face a constant reduction in their inventories and will %e forced to
hire more wor-ers.
E) %oth A and D are correct.
.. )n response to an une'pected change in demand& if the prices are free to ad*ust $uic-ly:
A) a firm could always operate at its optimal output level.
B) a firm would e'perience a decline in its output and employment.
C) a firm would not %e a%le to ad*ust its output according to the plan.
D) a firm would not %e a%le to change its employment accordingly.
E) !C for the economy would also change.
/efer to the following diagrams to answer $uestions 0+1:
3
0. The a%ove diagram 2a) represents the demand for and supply of a %rand of automo%ile
2 Tur%o+car) for a car manufacturing company named 3ancy Auto. Assume that
D
4
represents low demand for the Tur%o+car& D

represents the medium level of demand and&

D
5
represents the high level of demand for Tur%o+car and& 3ancy Auto6s optimal output
level is 788 cars per wee-. )f the prices are fle'i%le& the 3ancy Auto:
A) can continue to sell its optimal output regardless of the demand level.
B) can continue producing its optimal output level only if demand is at D
4
level.
C) can continue producing its optimal output level only if demand is at D

level.
D) can continue producing its optimal output level only if demand is at D
5
level.
E) none of the a%ove.
9. /efer to the a%ove diagram 2%)& assume that D
4
represents low demand for the Tur%o+car&
D

represents the medium level of demand and& D

5
represents the high level of demand
for Tur%o+car and& 3ancy Auto6s optimal output level is 788 cars per wee-. )f the 3ancy
Auto Company has a fi'ed price policy of :(9&888 per vehicle:
A) the $uantity demanded will %e 788 cars per wee- if the demand is D
4
.
B) the $uantity demanded will %e 988 cars per wee- if the demand is D
4
.
C) the $uantity demanded will %e 11.8 cars per wee- if the demand is D
4
.
D) the $uantity demanded will %e 11.8 cars per wee- if the demand is D

1. /efer to the a%ove diagrams& one can conclude that if e'pectations are always fulfilled&
3ancy Auto Company:
A) will never have to ad*ust the optimal output and employment levels accordingly.
B) has to ad*ust the employment level %ut not the optimal output.
C) has to ad*ust the optimal output level %ut not the employment.
D) has to ad*ust %oth optimal output level and employment accordingly.
4
;se the following to answer $uestion 7:
7. /efer to the a%ove diagram. Curve 2a) is the current production possi%ilities frontier for
the economy. <ther things e$ual& society=s current choice of point ! on curve 2a) means:
A) a possi%le more rapid economic growth than would the choice of point >.
B) a slower rate of economic growth than would the choice of point >.
C) the same rate of growth as would the choice of point >.
D) it is unachieva%le %ecause it e'ceeds the productive capacity of the economy.
E) none of the a%ove.
;se the following to answer $uestion 18:
The following information a%out the relationship %etween input $uantities and real domestic
output in a hypothetical economy:
)nput /eal domestic
$uantity output
188 (88
1.8 ,.8
#88 088
18. /efer to the a%ove information& the level of productivity is:
A) #.
B) ...
C) ,.
D) (.
E) 1?(
11. During the recession of #881+87 the price level
5
A) stayed more or less the same.
B) fell for the first time in decades.
C) rose due to the high price of oil.
D) stayed the same %ut the !C fell.
E) fell and was accompanied %y a fall in !".
1#. Transfer payments are:
A) e'cluded when calculating @D! %ecause they only reflect inflation.
B) e'cluded when calculating @D! %ecause they do not reflect current production.
C) included when calculating @D! %ecause they are a category of investment
spending.
D) included when calculating @D! %ecause they increase the spending of recipients.
E) %oth C and D are correct.
1(. )n 1771 Trail%laAer Bicycle Company produced a mountain %i-e which was delivered to
a retail outlet in >ovem%er of 1771. The %icycle was sold to E.B. /yder in arch of
1777. This %icycle is counted as:
A) consumption in 1771 and as disinvestment in 1777.
B) disinvestment in 1771 and as consumption in 1777.
C) disinvestment in 1771 and as investment in 1777.
D) investment in 1771 and as disinvestment in 1777.
E) a value added product only in 1777.
1,. Chen an economy=s production capacity is e'panding:
A) nominal @D!& %ut not necessarily real @D!& is rising.
B) net e'ports is always a positive amount.
C) disposa%le income e'ceeds personal income.
D) domestic investment e'ceeds depreciation.
E) %oth A and B are correct.
1.. oney spent on the purchase of a new house is included in the @D! as a part of:
A) the consumption of private fi'ed capital.
B) personal consumption e'penditures.
C) personal saving.
D) investment
6
10. A nation=s capital stoc- was valued at :(88 %illion at the start of the year and :(.8 %illion
at the end. Consumption of private fi'ed capital in the year was :#. %illion. Assuming
sta%le prices& gross investment was:
A) :#. %illion.
B) :.8 %illion.
C) :9. %illion.
D) :78 %illion.
E) :9#. %illion
;se the following to answer $uestions 19 and 11:
All figures are in %illions of dollars.
@ross investment :.0
!ersonal ta'es #(
>et investment ((
!ersonal saving 18
>et e'ports 7
>ational income #91
Canadian e'ports #8
@overnment e'penditure 01
Disposa%le income ##8
)ndirect ta'es (#
;ndistri%uted corporate profits 1.
>et income of nonfarm unincorporated %usiness ,.
>et investment income from Canada +(
7
19. /efer to the a%ove information. Canadian imports:
A) cannot %e calculated
B) are :#0.
C) are :10.
D) are :11.
E) are :1(
11. /efer to the a%ove information. The gross domestic product is:
A) :(#1.
B) :,8#.
C) :(1#.
D) :(.0
E) :((0
;se the following to answer $uestions 17 and #8:
Assume an economy which is producing only one product. <utput and price data for a three+year
period are as follows.
Dear ;nits of output !rice per unit
1 #8 :,
# #. ,
( (8 0
8
17. /efer to the a%ove data. The nominal @D! for year ( is:
A) 1#. percent higher than the nominal @D! for year 1.
B) .8 percent higher than the nominal @D! for year 1.
C) :1#8.
D) :(8.
E) :78.
#8. /efer to the a%ove data. )f year # is chosen as the %ase year& real @D! for year 1 is:
A) :#..
B) :188.
C) :.8.
D) :18.
E) :1#8.
;se the following to answer $uestions #1:
Answer the $uestion %ased on the following data& using year 1 as the %ase year. All dollars are in
%illions.
*ear Nomina+ ,D- -rice Inde.
1 :(&100 188
# :(&,8# 18,
( :(&99, 181
, :(&717 11#
#1. /efer to the a%ove data. /eal @D! in year # was appro'imately:
A) :(&#,. %illion.
B) :(&#91 %illion.
C) :(&#7. %illion.
D) :(&,8# %illion.
##. @D! data are criticiAed as %eing inaccurate measures of economic welfare %ecause:
A) they do not ta-e into account changes in the amount of leisure.
B) they do not ta-e into account changes in product $uality.
C) they do not ta-e into account the adverse effects of economic activity on the
environment.
D) of all of the a%ove considerations.
E) %oth A and C are correct.
9
#(. The consumption schedule in the diagram %elow indicates that:
A) consumers will ma'imiAe their satisfaction where the consumption schedule and
,.E line intersect.
B) up to a point consumption e'ceeds income& %ut then falls %elow income.
C) the !C falls as income increases.
D) households consume as much as they earn.
E) consumption cannot %e a%ove income.
#,. )f "mith=s disposa%le income increases from :1&#88 to :1&988 and her level of saving
increases from minus :188 to a plus :188& it may %e concluded that her marginal
propensity to:
A) save is three+fifths.
B) consume is one+half.
C) consume is three+fifths.
D) consume is one+si'th.
E) save is one+half
;se the following to answer $uestions #.+#9:
Disposa%le
income "aving
:8 :+18
.8 8
188 18
1.8 #8
#88 (8
10
#.. /efer to the a%ove data. The marginal propensity to consume is:
A) .18.
B) .9..
C) .#8.
D) .#..
E) .(.
#0. /efer to the a%ove data. At the :188 level of income& the average propensity to save is:
A) .78.
B) .#8.
C) .#..
D) .(8.
E) .18.
#9. /efer to the a%ove data. The slope of the saving schedule is:
A) .18.
B) .18.
C) .#8.
D) .1.
E) .#..
#1. The consumption schedule is such that:
A) %oth the A!C and the !C increase as income rises.
B) the A!C is constant and the !C declines as income rises.
C) the !C is constant and the A!C declines as income rises.
D) the !C and A!C must %e e$ual at all levels of income
E) none of the a%ove.
#7. Chich of the following relations is not correctF
A) 1 + !C G !"
B) !" G !C H 1
C) A!" H A!C G 1
D) !C H !" G 1
E) !" G 1+ !C
(8. Chich of the following will not cause the consumption schedule to shiftF
A) a sharp increase in the amount of wealth held %y households
B) a change in consumer incomes
C) the e'pectation of a recession
D) a growing e'pectation that consumer dura%les will %e in short supply
E) %oth C and D
11
(1. Assume a machine which has a useful life of only one year costs :#&888. Assume& also&
that net of such operating costs as power& ta'es& and so forth& the additional revenue from
the output of this machine is e'pected to %e :#&(88. The e'pected rate of return on this
machine is:
A) 9.. percent.
B) 18 percent.
C) 1. percent.
D) #8 percent.
E) #. percent.
(#. )f the firm in the previous $uestion finds it can %orrow funds at an interest rate of 18
percent the firm should:
A) not purchase the machine %ecause the e'pected rate of return e'ceeds the interest
rate.
B) purchase the machine %ecause the e'pected rate of return e'ceeds the interest rate.
C) not purchase the machine %ecause the interest rate e'ceeds the e'pected rate of
return.
D) purchase the machine %ecause the interest rate e'ceeds the e'pected rate of return.
E) none of the a%ove.
((. )f a :#88 %illion increase in investment spending creates :#88 %illion of new income in
the first round of the multiplier process and :108 %illion in the second round& the
multiplier in the economy is:
A) ,.
B) ..
C) (.((.
D) #...
E) 1.8
;se the following to answer $uestions (,+(9:
The following ta%le illustrates the multiplier process in a private closed economy:
Change in Change in Change in
income consumption saving
Assumed increase in
investment
:#8 :IIII :,
"econd round :III :1#.18 :III
All other rounds :III :.1.#8 :III
Totals :III :IIII :#8
12
(,. /efer to the a%ove ta%le. The marginal propensity to consume is:
A) ...
B) .0.
C) .9..
D) .1.
E) .7.
(.. /efer to the a%ove ta%le. The marginal propensity to save is:
A) ...
B) .,.
C) .#..
D) .#.
E) .1.
(0. /efer to the a%ove ta%le. The change in income in round two will %e:
A) :,.
B) :10.
C) :#8.
D) :#,.
E) :#.
(9. /efer to the a%ove ta%le. The total change in income resulting from the initial change in
investment will %e:
A) :188.
B) :#8.
C) :18.
D) :#88.
E) :#.8
(1. )n an economy e'periencing persistent deflation:
A) potential @D! will necessarily e'ceed actual @D!.
B) changes in nominal @D! may either overstate or understate changes in real @D!.
C) changes in nominal @D! understate changes in real @D!.
D) changes in nominal @D! overstate changes in real @D!.
E) Both A and B are correct.
;se the following to answer $uestions (7+,1:
13
The ta%le %elow indicates the following price and output data over a five+year period for
an economy that produces only one good. Assume that year # is the %ase year.
Dear ;nits of output !rice per unit
1 1 :#
# 18 (
( 1. ,
, 11 .
. #8 0
(7. /efer to the a%ove data. )f year # is the %ase year& the price inde' for year ( is:
A) 1#8.
B) 1#..
C) 1((.
D) 1.8.
E) none of the a%ove.
,8. /efer to the a%ove data. /eal @D! in year . is:
A) :1#8.
B) :78.
C) :08.
D) :(8.
E) none of the a%ove.
,1. /efer to the a%ove data. The percentage increase in real @D! from year # to year , is:
A) ,8 percent.
B) 08 percent.
C) 18 percent.
D) 188 percent.
E) none of the a%ove.
,#. "uppose a family=s consumption e'ceeds of its disposa%le income. This means that its:
A) !C is greater than 1.
B) !" is negative.
C) A!C is greater than 1.
D) A!" is positive.
E) none of the a%ove
14
;se the following to answer $uestions ,(+,,:
Disposa%le
income Consumption
:#88 :#8.
##. ##.
#.8 #,.
#9. #0.
(88 #1.
,(. /efer to the a%ove data. The marginal propensity to consume is:
A) .#.
B) .9..
C) .#8.
D) .18.
E) none of the a%ove
,,. /efer to the a%ove data. At the :#88 level of disposa%le income:
A) the marginal propensity to save is #
1
?
#
percent.
B) dissaving is :..
C) the average propensity to save is .#8.
D) the average propensity to consume is .18.
E) none of the a%ove
,.. A rightward shift of the investment+demand curve might %e caused %y:
A) an increase in the price level.
B) a decline in the real interest rate.
C) an increase in the e'pected rate of return from investment.
D) an increase in %usiness ta'es.
E) none of the a%ove
,0. )f the !C is .1 and the disposa%le income is :#88& then
A) consumption and saving cannot %e determined from the information given.
B) saving will %e :#8.
C) personal consumption e'penditures will %e :18.
D) saving will %e :,8.
E) %oth C and D are correct.
;se the following to answer $uestions ,9+,1:
15
,9. /efer to the a%ove diagram. At disposa%le income level D& consumption:
A) is e$ual to CD.
B) is e$ual to <D minus CD.
C) is e$ual to CD?<D.
D) is e$ual to CD plus BD.
E) is e$ual BD
,1. /efer to the a%ove diagram. Consumption e$uals disposa%le income when:
A) disposa%le income is B.
B) disposa%le income is D.
C) CD e$uals A.
D) B e$uals CD.
E) %oth C and D are correct.
,7. 3or all levels of income to the left of the intersection of the ,.+degree line and the
consumption schedule& the A!C is:
A) greater than 188 percent.
B) less than the A!".
C) e$ual to the !C.
D) e$ual to 188 percent.
E) e$ual to .8 percent.
.8. "uppose a family=s consumption e'ceeds its disposa%le income. This means that its:
A) !C is greater than 1.
B) !" is negative.
C) A!C is greater than 1.
D) A!" is positive.
E) %oth A and B are correct.
.1. )f "mith=s disposa%le income increases from :1&#88 to :1&988 and her level of saving
increases from minus :188 to a plus :188& it may %e concluded that her marginal propensity to:
A) save is three+fifths.
B) consume is one+half.
C) consume is three+fifths.
D) consume is one+si'th.
E) consume is one+eight
16
;se the following to answer $uestions .#+.(:
.#. /efer to the a%ove data. The marginal propensity to consume is:
A) .#.
B) .9..
C) .#8.
D) .18.
E) .78
.(. /efer to the a%ove data. At the :#88 level of disposa%le income:
A) the marginal propensity to save is #
1
?
#
percent.
B) dissaving is :..
C) the average propensity to save is .#8.
D) the average propensity to consume is .18.
E) none of the a%ove.
;se the following to answer $uestions .,+.7:
3ollowing is consumption schedules for three private closed economies. D) signifies disposa%le
income and C represents consumption e'penditures. All figures are in %illions of dollars.
.,. /efer to the a%ove data. The marginal propensity to consume in economy 21):
A) is ...
B) is .(.
17
C) is .1.
D) is .9.
... /efer to the a%ove data. The marginal propensity to consume:
A) is highest in economy 21).
B) is highest in economy 2().
C) is highest in economy 2#).
D) cannot %e calculated from the data given.
.0. /efer to the a%ove data. The marginal propensity to save:
A) is highest in economy 21).
B) is highest in economy 2#).
C) is highest in economy 2().
D) cannot %e determined from the data given.
.9. /efer to the a%ove data. At an income level of :,8 %illion& the average propensity to
consume:
A) is highest in economy 21).
B) is highest in economy 2#).
C) is highest in economy 2().
D) cannot %e determined from the data given.
.1. /efer to the a%ove data. At an income level of :,88 %illion& the average propensity to save in
economy 2#) is:
A) .71#..
B) .89#..
C) .819..
D) .7(8..
E) .7,8..
.7. /efer to the a%ove data. "uppose that consumption increased %y :# %illion at each level of D)
in each of the three countries. Ce can conclude that the:
A) marginal propensity to consume will remain unchanged in each of the three countries.
B) marginal propensity to consume will decline in each of the three countries.
C) average propensity to save will fall at each level of D) in each of the three countries.
D) marginal propensity to save will rise in each of the three countries.
E) %oth B and C are correct.
;se the following to answer $uestions 08+.7:
18
08. /efer to the a%ove information. )f the real interest rate is 7 percent& the e$uili%rium level of
@D! will %e:
A) :088.
B) :.88.
C) :,88.
D) :(88.
E) :#88
01. /efer to the a%ove information. )n this economy a ( percentage point decrease in the interest
rate will:
A) increase e$uili%rium @D! %y :#88.
B) increase e$uili%rium @D! %y :188.
C) increase e$uili%rium @D! %y :.8.
D) decrease e$uili%rium @D! %y :.8.
E) not change e$uili%rium.
0#. /efer to the a%ove data. )f gross investment is :1#8& the e$uili%rium level of @D! will %e:
A) :(18.
B) :(98.
C) :(08.
D) :,88.
E) :088.
0(. Achieving aggregate e$uili%rium in the economy is indicated %y:
A) an e$uality of saving and planned investment.
B) an e$uality of aggregate e'penditures and domestic output.
C) the a%sence of unplanned investment or disinvestment.
D) all of the a%ove.
E) A and B only
0,. Actual investment is :0# %illion at an e$uili%rium output level of :0#8 %illion in a private
closed economy. The average propensity to save at this level of output:
A) is 8.18.
B) is 18.
19
C) is 8.0#.
D) is. 8.9#.
D) cannot %e determined on the %asis of the information given.
0.. )n which of the following situations for a private closed economy will the level of @D!
e'pandF
A) when planned investment e'ceeds saving
B) when planned investment e'ceeds consumption
C) when saving e'ceeds consumption
D) when consumption e'ceeds investment
E) when !C is greater than 1.
/ns0ers
1.A
#.B
(.D
,.B.
..A
0.A
9.B
1.A
7.A
18.D
11.B
1#.B
1(.D
1,.D
1..D
10.C
19.D
11.E
20
17.A
#8.D
#1.B
##.D
#(.B
#,.C
#..A
#0.E
#9.C
#1.C
#7.B
(8.B
(1.C
(#.B
((.B
(,.D
(..D
(0.B
(9.D
(1.C
(7.C
,8.C
,1.C
,#.C
,(.D
,,.B
,..C
21
,0.A
,9. B
,1.A
,7.A
.8.C
.1.C
.#.D
.(. B
.,.D
...B
.0.A
.9.B
.1.C
.7.A
08.D
01.B
0#.D
0(.D
0,.A
0..A
22