second midterm practice_update

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University of Ottawa *

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ECO11

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Economics

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Jan 9, 2024

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1-When the value of money rise, what happens to the number of dollars needed to buy representative basket of goods? a. It decreases, and so the price level falls. b. It increases, and so the price level rises. c. It decreases, and the price level rises. d. It increases, and the price level falls. 2-Suppose that a country initially had no banks but did have currency of $10 million. The country then established a banking system with a reserve requirement of 5 percent, and the citizens of the country deposited half of the currency into the banking system. If its bank do not hold excess reserves, what is the country ’ s money supply now? a. $10 million b. $95 million c. $105 million d. $200 million Money supply= $5+ $5/0.05= $5+$100=$105 3-When the money market is depicted in a graph with the value of money on the vertical axis, which of the following happens to the value of money as the price level increases? a. It decreases, so the quantity of money demanded increases. b. It increases, so the quantity of money demanded decreases. c. It decreases, so the quantity of money demanded decreases. d. It increases, so the quantity of money demanded increases. 4-Which of the following best explains how unemployment relates to business cycles? a. Unemployment is unrelated to short-run economic fluctuations. b. Cyclical unemployment is inversely related to short run economic fluctuations. c. Unemployment can be eliminated through economic policies when the economy grows at normal rates. d. Unemployment only exists during periods of economic slowdown. 5-When a country ’ s central bank increases the money supply, which of the following best predicts the consequences? a. Its price level rise, and its currency depreciates relative to other currencies in the world. b. Its price level rise, and its currency appreciates relative to other currencies in the world. c. Its price level falls, and its currency appreciates relative to other currencies in the world. d. Its price level falls, and its currency depreciates relative to other currencies in the world. 6-Frictional unemployment: a. Is the most alarming cause of unemployment. b. Is the effect of wage remaining persistently above the market-cleaning level. c. Is unemployment that results from a mismatch between the skills workers can offer and the skills that are in demand.

d. Is unemployment caused by workers who are changing their location, job or career. 7-Unemployment occurs when someone: a. Wants to work but cannot find a job. b. Should be working but choose not to. c. Has useful skills that are not being used. d. Is not working. 8-Employment insurance: a. Is offered by the employer as a way to affect the level of structural unemployment. b. Will not affect the natural rate of unemployment. c. Is an explanation for why wages do not reach equilibrium. d. Can affect how quickly people find job and frictional unemployment. 9-Unemployment is a: a. Lagging indicator because it follows the business cycle. b. Lagging indicator because the business cycle follows it. c. Leading indicator because the business cycle follows it. d. Leading indicator because it follows the business cycle. 10-Supporters of minimum wage legislation argue that: a. Some workers will become unemployed because of the minimum wage. b. Workers deserve a basic standard of living. c. It should be set below the market equilibrium wage. d. All the above true. 10-Structural unemployment can be caused by which of the following? a. A firm giving a rise to its employees. b. Minimum wage laws. c. Increases in income tax. d. Sectoral shifts. 11-During time of recession, the labour force participation typically: a. Falls, as more people give up and stop looking for work. b. Raises, as more incomes per household are needed to make ends meet. c. Falls, as more people cannot find work, they stay in jobs that are not a good fit. d. Rises, as more people need work. 12-Carol is a coal miner who just get laid off when the last coal mine in the area was shut down. She has looked everywhere for another job as a miner but cannot find one. Given that Carol is unlikely to find another job as a miner, she would be considered. a. Structurally unemployed. b. Frictionally unemployed. c. Discouraged worker.

d. Real wage unemployed. 13-Someone who is underemployed is someone who: a. Is working in a job for which they are under qualified. b. Is working parttime but wants full-time employment. c. Could be contributing less output to society by either working more or by working using more advanced skills he possesses but doesn’t currently use. d. All of these describe one who is underemployed. 14-Which of the following are action that decrease the money supply? a. Make open market sale, raise the reserve ratio. b. Make open market sale, lower the reserve ratio. c. Make open market purchase, lower the reserve ratio. d. Make open market purchase, raise the reserve ratio. 15-Which of the following is most likely to happen under a fractional reserve banking system? a. Banks hold more reserves than deposits. b. Banks generally lend out a majority of the deposited funds. c. Banks only accept saving deposits. d. Banks cause the money supply to fall by lending out reserves. 16-During the recession banks typically choose to hold more excess reserves relative to their deposits. Which of the following best describe the effects of the increase in reserves? a. The money multiplier decreases and the money supply decreases. b. The money multiplier does not change but the money supply decreases. c. The money multiplier increases and the money supply increases. d. The money multiplier does not change but the money supply increases. This table shows the 2013 data for males and females aged 15 and over in the county of Krakavia. Not in the labour force Unemployed Employed Male Female Male Female Male Female 45 million 35 million 5 million 5 million 85 million 65 million 17- Refer to the table, what is the adult labour force participation rate in Kakavia? a. 4.12 percent. b. 12.50 percent. c. 37.50 percent. d. 66.67 percent. LP= ?+𝑈 𝐴𝑃 = 150+10 80+150+10 × 100 = 66.67 18-The money supply in the country of Freedonia is $200 billion. Nominal GDP is $ 800 billion and real GDP is $400 billion. The central bank of Freedonia has instituted a policy of zero inflation. Assuming that

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velocity is stable, if real GDP growth by 10 percent this year, how will the central bank of Freedonia change the money supply this year. a. It will not change the money supply at all. b. It will reduce the money supply by 10 percent. c. It will increase the money supply by 10 percent. d. It increases money supply by 2.5 percent. 𝑃 × 𝑌 = 𝑀 × ? = 𝑃 0 + 𝑌 0 = 𝑀 0 + ? 0 = 0 + 10 = 𝑀 0 + 0 = 10 = 𝑀 0 19-If the money is neutral and velocity is stable an increase in the money supply creates a proportional increase in which of the following? a. Both real and nominal interest rate b. Inflation rate. c. Real output. d. The price level. 20-In the 1970s, in response to recessions caused by an increase in the price of oil, the central bank in many countries increased the money supply. How might the central banks have done this? a. By purchasing bonds on the open market, which would have raised the value of money. b. By selling bonds on the open markets, which would have raised the value of money. c. By purchasing bonds on the open market, which would have lowered the value of money. d. By selling bonds on the open market which would have lowered the value of money. 21-A central bank raised the reserve requirement ratio from 10 percent to 12 percent. Other things the same, how does the money multiplier change? a. It increases by 1.67. b. It increases by about 2. c. It decreases by 1.67. d. It decreases by 2. 1 0.12 − 1 0.1 = 8.33 − 10 = −1.66 22-If the reserve ratio is 7 percent and a bank receives a new deposit of $ 300, by how much can the bank increase its new loan? a. By $21 b. By $279 c. By $ 300 d. By $2.285 23-Which of the following best describes the effect of an open market operation undertaken by the bank of Canada? a. If the bank of Canada sells bond in the open market, then money supply shifts left and the price level increases.

b. If the bank of Canada purchases bonds, then the money supply shifts right and the price level increases. c. If the bank of Canada sells bonds, then the money supply shifts right and the price level decreases. d. If the bank of Canada purchases bonds, then the money supply shifts left and the price level decreases. 24-Suppose GDP is $800 billion, taxes are $150 billion, private saving is $50 billion, and public saving is $20 billion. Assuming this economy is closed what is consumption in the economy? a. $550 billion b. $ 600 billion c. $400 billion d. $650 billion Y = 800, T = 150, Sprivate = 50 = Y – T – C, Spublic = 20 = T – G. Since Sprivate = Y – T – C, then rearranging gives C = Y – T – Sprivate = 800 – 150 – 50 = 600. 25-What are government purchases, national saving, and investment. a. $100, $80, $85 billions. b. $130, $80, $80 billions. c. $100, $80, $80 billions. d. $130, $70, $70 billions. Since Spublic = T – G, then rearranging gives G = T – Spublic = 150 – 20 = 130. Since S = national saving = Sprivate + Spublic = 50 + 20 = 70. Finally, since I = investment = S, I = 70. 26-If a popular TV show on personal finance convinces more Canadians about the importance of saving for retirement, the ……… curve for loanable funds would shift, driving the equilibrium interest rate …… .. . a. Supply, up b. Supply, down c. Demand, up d. Demand, down

27-If the business community becomes more optimistic about the profitability of capital, the ……… . curve for loanable funds would shift, driving the equilibrium interest rate …… . a. supply, up b. supply, down c. demand, up d. demand, down

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28-Nina wants to buy and operate an ice- cream truck but doesn’t have the financial resources to start the business. She borrows $5000 from her friend Max, to whom she promises an interest rate of 7 percent, and gets another $10 000 from her friend David, to whom she promises a third of her profits. Which of the following best describes this situation? a.Max is a shareholder, and Nina is a bondholder. b.Max is a shareholder, and David is a bondholder. c.David is a shareholder, and Nina is a bondholder. d.David is a shareholder, and Max is a bondholder. 29-Matt loses his job and decides to sit around at home for a few months. Assuming that other things remain the same, what happens to the unemployment rate? a. The unemployment rate increases because he is still in the labour force. b. The unemployment rate decreases because he is not in the labour force anymore. c. The unemployment rate decreases because he is still in the laboure force. d. The unemployment rate increases because he is not in the labour force anymore. 30-You put money in an account that earns interest at a rate of 2 percent. The inflation rate is 1.5 percent, and your marginal tax rate is 25 percent which of the following is your after tax real rate of interest? a. 1.5 percent b. 0.5 percent c. 0 percent d. -0.5 percent 𝑟 = 𝑖(1 − 𝑡) − 𝜋 = 2(1 − 0.25) − 1.5 = 0 31-Suppose that neither textile workers nor shoemakers are initially unionized. If textile workers then unionize and so are able to raise their wage, which of the following will most likely happen to shoemakers? a. The demand for shoemakers will rise, and their wages will rise. b. The supply of shoemakers will fall, and their wage will fall. c. The demand for shoemakers will fall and their wages will fall. d. The supply for shoemakers will raise., and their wages will fall. 32-What impact would an increase in the minimum wage have on the quantity of labour demanded and the quantity of labour supplied? a. It would decrease the quantity of labour demanded while increasing the quantity of labour supplied. b. It would increase both the quantity demanded and the quantity supplied of labour. c. It would increase the quantity of labour demanded while decreasing the quantity supplied. d. It would decrease both the quantity demanded and the quantity supplied of labour.

The following information pertains to the Bank of Kingston. Assets Liabilities Reserves $ 12000 Deposits $240000 Loans $228000 33-Refer to the table , assume that all other banks hold only the required 4 percent of deposits as reserves, and people hold only deposits and no currency. If the bank of Kingston decides to hold reserve of 4 percent, by how much would the economy ’ s money supply increase? a. $5000 b. $6000 c. $6200 d. $6540 Money created by other banks=22800/0.04=5,700,000 Whole money created in the economy= 240,000+5,700,000=5,940,000 If the reserve ration is 4 percent, the money supply will be 6,000,000=240,000/0.04 Change in money supply=6,000,000 -5,940,000=60,000 34- Refer to the table, if the bank of Canada requires a reserve ratio of 4 percent. How much in excess reserves does the bank of Kingston now hold? a. $1200 b. $2400 c. $2880 d. $3000 2400=(240000*4%-12000) 35-What is the rough estimate of the natural rate of unemployment in Canada? a. 1 to 2.5 percent. b. 3 to 5.5 percent. c. 6 to 8 percent. d. 8.5 to 11 percent. 36-How does M1 compare with M2. a. M1+ is smaller and less liquid than M2. b. M1+ is smaller but more liquid than M2. c. M1+ is larger ad less liquid than M2. d. M1+ is larger than but more liquid than M2.

37-If the money supply decreases, which of the following are its immediate and longer-term effects? a. It creates an excess supply of money that is eliminated by raising prices. b. It creates an excess demand for money that is eliminated by raising the prices. c. It creates an excess demand for money that is eliminated by falling prices. d. It creates an excess supply of money that is eliminated by falling prices. 38-When does the supply of money increases? a. When the value of money increases. b. When the price level decreases. c. When the bank of Canada increases the bank rate. d. When the bank of Canada makes open market purchases. 39-Assuming that velocity is stable, if real GDP grows by 10 percent this year, and if the money supply does not change this year, how does the price level or nominal GDP changes? a. The price level will increase by 10 percent. b. Nominal GDP will stay the same. c. Nominal GDP will grow by 10 percent. d. The price level will not change. 40-In 2016 the Canadian unemployment rate was about 7 percent, the labour force participation rate was about 66 percent, and the adult population was about 29 million. How many people were unemployed? a. About 19.1 million. b. About 27.0 million. c. About 1.3 million. d. About 17.8 million. In this question labour force participation=66%, Adult population =29 million, UR=7% So, 𝑃𝑅 = 𝐿? 𝐴𝑃 × 100 = 0.66= 𝐿? 29 LF=0.66 × 29 = 19.4 ?𝑅 = 𝑈 𝐿? = 0.07= 𝑈 19.4 U=19.4 × 19.4 = 1.33 millions 41-Which of the following does an increase in the money supply growth rate increase? a. Inflation and nominal interest rate, but it does not change real interest rates. b. Inflation and real interest rate but does not change the nominal interest rats. c. Nominal and real interest rate, but it does not change inflation. d. Inflation, nominal interest rate and real interest rate.

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42-If money is neutral and velocity is stable, an increase in money supply creates a proportional increase in which of the following? a. Both real and nominal interest rate. b. Inflation rate. c. Real output. d. The price level. 43-Chloe takes $100 of currency from her wallet and deposits it into her chequing account. If the bank adds the entire $100 to reserves, the money supply ……… , but if the bank lends out some of the $100, the money supply ……… ... a. Increases, increases even more. b. Increases, increases by less. c. Is unchanged, increases. d. Decreases, decreases by less. 44-Which of the following occurs when the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income? a. private and public saving are both positive b. private and public saving are both negative c. private saving is positive, but public saving is negative d. Private saving is negative, but public saving is positive. 45-What is the source of the supply of and demand for loanable funds, respectively? a . saving and investment b. investment and saving c. saving and saving d. investment and investment 46-Which of the following is true according to the theory of efficiency wages? a. firms may find it profitable to pay above-equilibrium wages b. an excess supply of labour puts downward pressure on wages c. sectoral shifts are the main source of frictional unemployment d. right-to-work laws reduce the bargaining power of unions 47-Suppose that changes in bank regulations expand the availability of credit cards, so that people need to hold less cash. How does this event affect the demand for money? a. the demand for money shifts to the left, since there will be less money demanded at any price level. b. the demand for money shifts to the right, since there will be more money demanded at any price level. c. Supply for money shifts to the left since there will be more less supply at any price level. d. the supply for money shifts to the right since there will be less money supply at any price level. . 48-The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to

work full-time, 10 are looking for a job, 10 would like to work but are so discouraged they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. What is the number of unemployed in Ectenia? a. 10 b. 20 c. 30 d. 40 49-The classical principle of monetary neutrality states that changes in the money supply do not influence …… variables and is thought most applicable in the ……… run. a. nominal, short b. nominal, long c. real, short d. real, long 50-According to the quantity theory of money, if nominal GDP is $400, real GDP is $200, and the money supply is $100, then which of the following is correct? a. the price level is 1/2, and velocity is 2 b. the price level is 1/2, and velocity is 4 c. the price level is 2, and velocity is 2 d. the price level is 2, and velocity is 4

second midterm practice_update

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