MACRO

1. ECON 1200: Principles of Economics: Assignment 1
Total Marks: 50
Please answer all of the following questions. Numbers in the parentheses indicate weight assigned to the
questions. The assignment is due by Tuesday February 5, 2008, before the class. GOOD LUCK
Section I
Question 1 (10):
Section I: Answer ALL questions of this section.
i. GDP is equal to:
A) C + Ig + G + X n. C) C + In + G + X n.
B) C + Ig + G - X n. D) C + In + G - X n.
ii. If output increases by 2 percent and population growth is 3 percent, per capita
output:
A) falls by 5 percent.
B) falls by 1 percent.
C) grows by 1 percent.
D) grows by 5 percent.
iii. Real gross domestic product is best defined as:
A) the market value of goods and services produced in an economy.
B) all goods and services produced in an economy stated in the prices of a given
year.
C) the market value of all final goods and services produced in an economy stated
in the prices of a given year.
D) the market value of goods and services produced in an economy stated in
current-year prices.
iv. Suppose a country's real GDP is $440 billion and its population is 100 million.
Now suppose that both its price level and its population increase by 10 percent.
As a result of these changes, its new level of per capita real GDP will be:
A) $400.
B) $440.
C) $4,000.
D) $4,400.

2. v. Which of the following statements best characterizes the Classical view of
business cycles?
A) Fluctuations in business activity occur in regular and predictable patterns.
B) Fluctuations in business activity are to be expected and should be accepted just
as changes in the seasons are accepted.
C) Expansions and recessions are symptoms of underlying problems and should
be addressed by macroenomic policy.
D) The appropriate macroeconomic policy can eliminate fluctuations in business
activity.
vi. Which of the following statements best characterizes the Keynesian view of
business cycles?
A) Fluctuations in business activity occur in regular and predictable patterns which
cannot be altered.
B) Fluctuations in business activity are to be expected and should be accepted just
as changes in the seasons are accepted.
C) Expansions and contractions of the business cycle are symptoms of underlying
problems and should be dealt with.
D) The appropriate macroeconomic policy can easily eliminate all fluctuations in
business activity.
vii. Which of the following types of unemployment is considered to be the most
controllable through macroeconomic policy?
A) Frictional unemployment.
B) Natural unemployment.
C) Cyclical unemployment.
D) Structural unemployment.
viii. Which of the following people would not be included among the unemployed?
A) A construction worker laid off because of a slowdown in house building.
B) A young mother on welfare because her husband has left her and she must stay
home to tend her children.
C) A recent high school graduate who has quit his first job as a stock clerk in a
grocery store in order to look for a better job.
D) A recent college graduate who has not yet found a job.
ix.The labour force participation rate measures the number of people:
A) in the labour force.
B) in the labour force as a percentage of the total population.
C) in the labour force as a percentage of the total population at least sixteen years
old.
D) who are working as a percentage of the labour force.
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3. x. According to Okun's rule of thumb, an increase in the rate of unemployment
from 6 percent to 8 percent would be expected to cause income in the economy
to:
A) fall by 4 percent.
B) rise by 4 percent.
C) fall by 2 percent.
D) rise by 2 percent.
xi. According to Okun's rule of thumb, if the economy is producing at an annual
rate of $5 trillion, a decrease in the rate of unemployment from 7 percent to 6
percent would be expected to cause income in the economy to:
A) fall by $100 billion.
B) rise by $100 billion.
C) fall by $200 billion.
D) rise by $200 billion
xii. Which of the following statements regarding inflation is true?
A) Inflation is a continual rise in the general price level.
B) Inflation occurs when prices are changing on average.
C) Inflation is a one-time increase in the general price level.
D) Inflation occurs only when all prices are increasing.
xiii. A price index in its base year:
A) is always greater than 100.
B) is always equal to 100.
C) is always less than 100.
D) cannot be determined without knowing the price level in the base year.
xiv. If the CPI in year 2 equals 110 and the CPI in year 3 equals 121, it can be
concluded that consumer prices:
A) rose from year 2 to year 3 by 11.
B) rose from year 2 to year 3 by 11%.
C) rose from year 2 to year 3 by 10%.
D) are the same in year 2 as in the base year.
xv. In 1969, the United States CPI was 37 (1982-84 = 100) and in 1999 it was 166.
From these figures we can conclude that United States prices increased about
__________ percent between 1969 and 1999.
A) 80
B) 125
C) 210
D) 350
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4. xvi. If nominal output increased from $4 trillion to $4.2 trillion and real output
increased from $4 trillion to $4.1 trillion, then prices must have:
A) increased nearly 2.5 percent.
B) decreased nearly 2.5 percent.
C) increased 5 percent.
D) decreased 5 percent.
xvii. Real output is best defined as the total amount of goods and services produced
adjusted for changes in:
A) quality.
B) Inventories.
C) buying patterns.
D) the price level.
xviii. If nominal output is $5.28 trillion and the GDP deflator is 20 percent higher than
in the base year, then real output is:
A) $4.84 trillion.
B) $4.4 trillion.
C) $4 trillion.
D) $3.84 trillion.
xix. The value of intermediate goods is:
A) Included in both GDP and GNP.
B) Included in GDP but not GNP.
C) Included in GNP but not GDP.
D) Excluded from both GDP and GNP.
xx. To move from gross domestic product (GDP) to gross national product (GNP), one must:
A. add depreciation to GDP.
B. subtract depreciation from GDP.
C. subtract net foreign factor income from GDP.
D. add net foreign factor income to GDP.
Answers:
(i) A (vi) C (xi) B (xvi) A
(ii) B (vii) C (xii) A (xvii) D
(iii) C (viii) B (xiii) B (xviii) B
(iv) C (ix) C (xiv) C (xix) D
(v) B (x) A (xv) D (xx) D
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5. Section II
Question 2 (10): Following is a list of national income figures for a given year. All figures are in
billions.
Item $ million
Wages and other labour income 200
Interest 20
Profits 40
Proprietors' income 60
Exports 120
Imports 140
Income taxes 60
Taxes on expenditure less subsidies 20
Consumer expenditure 180
Investment 120
Government expenditures on goods and services 60
Government transfer payments 10
Using the above data, determine GDP by both the expenditure and income methods.
Answers:
Expenditure Method:
Consumer expenditure 180
Investment 120
Government expenditures on goods and services 60
Exports 120
Imports - 140
Total 340
Income Method:
Wages and other labour income 200
Interest 20
Profits 40
Proprietors' income 60
Taxes on expenditure less subsidies 20
Total 340
Question 3 (10): Which of the following are actually included in deriving this year’s GDP?
a. Interest on a Bell Canada bond.
b. A steel firm increases its inventories.
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6. c. The income of a dentist.
d. You sell your old refrigerator to another person.
e. The monthly allowance a college student receives from home.
f. The purchase of 100 shares of Nortel Networks common stock.
g. A two-hour decline in the length of workweek.
h. The expenditure of $800 by a worker for transportation to and from his work.
i. The purchase of an insurance policy.
j. The $40 you save by cleaning your own apartment rather than hiring a cleaning service.
Answers:
a. INCLUDED f. NOT INCLUDED
b. INCLUDED g. NOT INCLUDED
c. INCLUDED h. INCLUDED
d. NOT INCLUDED i. INCLUDED
e. NOT INCLUDED j. NOT INCLUDED
Question 4 (10): Evaluate as accurately as you can how each of the following individuals would
be affected by unanticipated inflation of 10% per year:
i. A pensioned railroad worker
ii. A department store clerk.
iii. A unionized automobile assembly-line worker;
iv. A heavy indebted farmer;
v. A retired business executive whose current income comes from interest on government
bonds.
Answers:
i. Unaffected
ii. Hurt
iii. Unaffected
iv. Benefited
v. Hurt
Question 5 (10): Evaluate the following statements as true or false. Provide explanation if you
state FALSE.
i. Because official price indexes do not account for some improvements in product
quality, official estimates of real GDP overestimate the true increase in real output.
ii. Your visit to the dentist, college tuition, and the new car you buy are all included in
GDP.
iii. Gross domestic product equals the sum of consumption, investment, and government
expenditure.
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7. iv. The four phases of the business cycle are, in order, expansion, peak, recession, and
trough.
v. The unemployment rate is calculated by dividing the number of people without jobs by
the labour force.
vi. If the economy were producing at its potential output, then the unemployment rate
would be less than the target rate of unemployment.
vii. If the price level doubles, so does real output.
viii. Structural unemployment is caused by people quitting a job just long enough to look
for and find another one.
ix. If the economy were producing at its potential output, then the unemployment rate
would be less than the target rate of unemployment.
x. Inflation is a sustained rise in the general price level.
Answers:
i. FALSE
ii. TRUE
iii. FALSE
iv. TRUE
v. FALSE
vi. FALSE
vii. FALSE
viii. FALSE
ix. FALSE
x. TRUE
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8. c. The income of a dentist.
d. You sell your old refrigerator to another person.
e. The monthly allowance a college student receives from home.
f. The purchase of 100 shares of Nortel Networks common stock.
g. A two-hour decline in the length of workweek.
h. The expenditure of $800 by a worker for transportation to and from his work.
i. The purchase of an insurance policy.
j. The $40 you save by cleaning your own apartment rather than hiring a cleaning service.
Answers:
a. INCLUDED f. NOT INCLUDED
b. INCLUDED g. NOT INCLUDED
c. INCLUDED h. INCLUDED
d. NOT INCLUDED i. INCLUDED
e. NOT INCLUDED j. NOT INCLUDED
Question 4 (10): Evaluate as accurately as you can how each of the following individuals would
be affected by unanticipated inflation of 10% per year:
i. A pensioned railroad worker
ii. A department store clerk.
iii. A unionized automobile assembly-line worker;
iv. A heavy indebted farmer;
v. A retired business executive whose current income comes from interest on government
bonds.
Answers:
i. Unaffected
ii. Hurt
iii. Unaffected
iv. Benefited
v. Hurt
Question 5 (10): Evaluate the following statements as true or false. Provide explanation if you
state FALSE.
i. Because official price indexes do not account for some improvements in product
quality, official estimates of real GDP overestimate the true increase in real output.
ii. Your visit to the dentist, college tuition, and the new car you buy are all included in
GDP.
iii. Gross domestic product equals the sum of consumption, investment, and government
expenditure.
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