Midterm Review Problems

Midterm Review Practice Problems and Solutions 1. The demand and supply equations for the peach market are: Demand: P = 24 - 0.5 Q Supply: P = -6 + 2.5 Q where P = price per bushel, and Q = quantity (in thousands). a. Calculate the equilibrium price and quantity. b. Suppose the government guaranteed producers a price of $24 per bushel. What would be the effect on quantity supplied? Provide a numerical value. c. By how much would the $24 price change the quantity of peaches demanded? Provide a numerical value. d. Would there be a shortage or surplus of peaches? e. What is the size of this shortage or surplus? Provide a numerical value. Answer: a. Quantity = 10 thousand bushels: {24 - 0.5 Q = -6 + 2.5 Q ; 30 = 3 Q ; Q = 10} Price = $19: { P = 24 - 0.5(10); P = 24 - 5; P = $19} b. Quantity supplied would increase to 12 thousand bushels: {24 = -6 + 2.5 Q ; 30 = 2.5 Q ; Q = 12} c. Quantity demanded would fall to zero bushels: {24 = 24 - 0.5 Q ; 0 = -0.5 Q ; Q = 0} d. There would be a surplus. e. Surplus = 12,000 - 0 = 12 thousand bushels. GDP Table 4.1 Product Quantity Price Sweatshirts 50 $35.00 Dental examinations 40 75.00 Coffee drinks 1,000 4.00 Coffee beans 2,000 0.50

2. Refer to Table 4.1. Suppose that a simple economy produces only four goods and services: sweatshirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans are used in the production of the coffee drinks. Using the information in the above table, nominal GDP for this simple economy equals A) $114.50. B) 3,090 units. C) $7,250. D) $8,750. E) $9,750. Answer: D Table 4.11 Year Guns Produced Price of Guns Butter Produced Price of Butter 2012 80 $5 40 $4 2019 90 6 60 10 Consider the above data for Tyrovia, a country that produces only two products: guns and butter. 3. Refer to Table 4.11. Real GDP for Tyrovia for 2019 using 2012 as the base year equals A) $1,140. B) $880. C) $690. D) $560. E) $320. Answer: C 4. Refer to Table 4.11. Nominal GDP for Tyrovia in 2019 equals A) $1,140.

7. Refer to Table 5.19. Looking at the table above, what is the rate of growth of real average hourly earnings from 2018 to 2019? A) 1.2% B) 2% C) 4.3% D) -1% E) -1.8 % Answer: A 8. Refer to Table 5.19. Looking at the table above, what is the approximate rate of growth of real average hourly earnings from 2017 to 2018? A) 0.67% B) 2% C) 0% D) -2% E) -0.5% Answer: A 9. Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level from 2017 to 2018? A) 0.9% B) 1.5% C) 2% D) 2.1% E) 19% Answer: B 10. Refer to Table 5.19. Looking at the table above, what is the rate of growth of the average price level from 2018 to 2019? A) 0.9% B) 1.5% C) 2% D) 2.6% E) 5.25% Answer: A 11. Refer to Table 5.19. Using the above table, calculate real average hourly earnings for 2017, 2018, and 2019. Calculate the rate of growth of real average hourly earnings from 2018 to 2019. Answer: Real average hourly earnings in 2011 are × 100 = $19.18 in 2002 dollars. Real average hourly earnings in 2012 are × 100 = $19.31 in 2002 dollars. Real average hourly earnings in 2013 are × 100 = $19.54 in 2002 dollars. The rate of growth of real average hourly earnings from 2012 to 2013 is

× 100% = 1.2%. Money and Banking 12. Which of the following functions of money would be violated if inflation were high? A) unit of account B) store of value C) certificate of gold D) medium of exchange E) standard of deferred payment Answer: B 13. A commercial bank like Bank of Montreal creates money by A) printing paper money. B) earning profits. C) selling corporate bonds. D) making loans. E) distributing new currency printed by the Canadian mint. Answer: D Suppose a transaction changes the balance sheet of TD Canada Trust bank as indicated in the following T-account. Assets Liabilities Reserves + $1,000 Deposits + $1,000