ECON 209 Midterm Solutions - W23

ECON/ENGG 209 Midterm Winter 2023 - ECON/ENGG 209 Midterm Exam March 13, 2023 70 minutes DO NOT OPEN UNTIL INSTRUCTED TO DO SO Name (last, first): Student Number: SOLUTIONS Marks Received: /40 Part I, Multiple Choice /20 Part II, Calculation /20 Instructions: • You have a total of 70 minutes to complete this exam • Please ensure your name and student number are on your exam and your bubblesheet • Only multiple-choice answers in your bubble sheet will be graded • Make sure your short answer and calculations are legible and clearly written • Part marks may be awarded even if your answer is wrong. Show your work!

ECON/ENGG 209 Midterm Winter 2023 Part I – Multiple Choice (20 marks). Choose the best answer and fill it into the bubble sheet. Only answers in the bubble sheet will be graded. 1. Making optimal decisions "at the margin" requires A. making decisions according to one's whims and fancies. B. making consistently irrational decisions. C. weighing the costs and benefits of a decision. D. making borderline decisions. E. advanced knowledge of economics. Answer: C 2. How does the invisible hand primarily work to promote general well-being in the economy? A. through government intervention B. through the political process C. through the banking process D. through self-interest E. through altruism Answer: D 3. If the price of grapefruit rises, the substitution effect due to the price change will cause A. a decrease in the demand for grapefruit. B. a decrease in the demand for oranges, a substitute for grapefruit. C. a decrease in the quantity demanded of grapefruit. D. a decrease in the quantity supplied of grapefruit. E. an increase in the number of citrus farmers. Answer: C Figure 1 4. Refer to Figure 1 above. If the price is $25, A. there would be a surplus of 300 units. B. there would be a shortage of 300 units. C. there would be a surplus of 200 units. D. there would be a shortage of 200 units. E. there would be a surplus of 500 units. Answer: A

ECON/ENGG 209 Midterm Winter 2023 A. $114.50. B. 3,090 units. C. $7,250. D. $8,750. E. $9,750. Answer: D 8. Which of the following is a true statement about real and nominal GDP? A. If nominal GDP increases from one year to the next, we know that production of goods and services has risen. B. Nominal GDP is a better measure than real GDP in comparing changes in the production of goods and services year after year. C. Increases in average prices do not affect the calculation of nominal GDP. D. If real GDP increases from one year to the next, nominal GDP will have risen as well. E. If real GDP increases from one year to the next, we know that production of goods and services has risen. Answer: E 9. When an economy is at its natural rate of unemployment, which of the following will be true ? A. The unemployment rate will be 0%. B. The labour force participation rate will be 100%. C. The unemployment rate will be greater than 0%. D. The employment population ratio will be 80%. E. Only structural unemployment as a result of technological change will exist in the economy. Answer: C 10. A consumer price index of 150 in 2020 with a base year of 2010 would mean that the cost of the market basket A. equaled $150 in 2020. B. equaled $150 in 2010. C. rose 150% from the cost of the market basket in the base year. D. rose 50% from the cost of the market basket in the base year. E. is 150 times more than it cost in 2010. Answer: D 11. The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket. A. also; understate B. also; overstate C. not; understate D. not; overstate E. also; not change Answer: B 12. When you withdraw money from an ATM, the banking system’s: A. reserves decrease. B. deposits decrease.

ECON/ENGG 209 Midterm Winter 2023 C. excess reserves decrease. D. All of the above are correct. E. None of the above is correct. Answer: D 13. Lowering the overnight interest rate will A. decrease reserves, encourage banks to make fewer loans, and decrease the money supply. B. decrease reserves, encourage banks to make fewer loans, and increase the money supply. C. increase reserves, encourage banks to make more loans, and increase the money supply. D. increase reserves, encourage banks to make more loans, and decrease the money supply. E. decrease reserves, encourage banks to make more loans, and decrease the money supply. Answer: C 14. A bank's largest liability is its A. short-term borrowing. B. long-term debt. C. deposits of its customers. D. shareholder equity. E. borrowing from the Bank of Canada. Answer: C 15. On your thirteenth birthday, you received $1,000 which you invested at 6.5% interest, compounded annually. Your investment is now worth $5,476. How old are you today? A. age 29 B. age 32 C. age 35 D. age 37 E. age 40 Answer: E 16. Your credit card company quotes you an APR of 21%. Interest is billed monthly. What is the actual rate of interest you are paying? A. 24.48% B. 20.63% C. 23.14% D. 22.87% E. 21.00% 17. You just paid $425,000 for an insurance annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy? A. 3.31% B. 3.33% C. 3.42% D. 3.47% E. 3.53% 18. Compute the present value of a series of cash flows starting at $25 at the end of the year and growing each year by another $25 for 5 years. Assume an interest rate of 10% A. $79.25 B. $109.45

ECON/ENGG 209 Midterm Winter 2023 Part II (20 marks) Please write down how you arrived at your conclusions. If reasoning is rigorous and correct, you will get partial credits even if the answer is not. 1. (6 marks) The demand and supply functions for minivans are given by: Demand: P = 35,000 - 0.5 Q Supply: P = 8,000 + 0.25 Q where P = Price and Q = Quantity. a. Calculate the equilibrium price and quantity. (2 marks) b. Graph the demand and supply curves, labelling the axis and equilibrium. (2 marks)

ECON/ENGG 209 Midterm Winter 2023 c. Provide a specific example of something that might shift the minivan supply curve to the left. (1 mark) d. Provide a specific example of something that might shift the minivan demand curve to the right. (1 mark) 2. (5 marks) Environmental Science and Engineering Magazine offers three types of subscriptions, payable in advance ( meaning beginning of the period ) : one year at $75, two years at $130, and three years at $190. If your interest rate is 7% per year, which subscription should you take? (Assume that you plan to subscribe to the journal over the next three years). Note that there are 4 options: one year 3 times, one-year + two-year, two-year + one-year, and finally, the three-year option. To find the best option, compute the equivalent PV for each option. a. ? ??𝒕𝒊?? ? = 𝟕? [ ?− ? (?+.?𝟕) ? .?𝟕 ] (?+. ?𝟕) = $210.60 b. ? ??𝒕𝒊?? ? = 𝟕? + ??? (?.?𝟕) = $196.50 c. ? ??𝒕𝒊?? ? = ??? + 𝟕? (?.?𝟕) ? = $195.51 d. ? option ⥄? = $?𝟗? ∴ Option 4 is the best option. Students may solve for the comparison at differing points in time. So long as every option is calculated for the same time before being, students should be given full marks. Possible alternate solutions available in Excel 3. (7 marks) You’ve graduated and landed a great job. To reward yourself, you’ve decided to buy a brand new Mercedes GT Coupe. The car costs $115,000 and Mercedes has offered to finance the car for you and has quoted you a monthly compounded APR of 4.99%. You are planning to make payments bi- weekly (every two weeks, 26 payments per year) for 5 years. a. What is the bi-weekly payment you will need to make on this car? ?𝐴𝑅 = (1 + .0499 12 ) 12 − 1 = 0 .05106 (1 mark) Zero if students use a value other than 12 for the compounding period

ECON/ENGG 209 Midterm Winter 2023 Formula Sheet Nominal GDP (year) = Current prices of final goods (year) x Quantity of final goods (year) Real GDP (year) = Prices (base year) x Quantity of final goods (year) Real GDP = (Nom GDP/ Index) x 100 CPI = Expenditures in the Current year Expenditures in base year × 100 Inflation rate = Growth of the money supply – Growth rate of real output Number of unemployed Labour force × 100% = Unemployment rate Labour force Working - age population × 100% = Labour force participation rate Employment Working - age population × 100% = Employment - population ratio Simple Interest F = P(1+in) Single Payment Compound Amounts Future Value of Lump Sum ? = 𝑃(1 + 𝑖) 𝑛 Present Value of Lump Sum 𝑃 = ? 1 (1 + 𝑖) 𝑛 = ?(1 + 𝑖) −𝑛 Solving for Rate 𝑖 = ( ? 𝑃 ) 1 𝑛 − 1 Solving for Number of Payments 𝑛 = ?𝑛 ? 𝑃 ln (1 + 𝑖)