Vancouver Island University econ100: Principles of Economics Sample Midterm II

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Please note that this is a sample/practice midterm exam. Actual number of questions and structure of the Term exam would be as discussed in class

Vancouver Island University

ECON100: Principles of Economics

Sample Midterm II

Name: _________________________________

ID: ____________________________________

  1. Economics can best be described as 

    1. the study of the use of scarce resources to satisfy unlimited human wants

    2. the study of how to reduce inflation and unemployment

    3. a normative science

    4. the study of how a society ought to allocate its resources

    5. the application of sophisticated mathematical models to address social problems

  1. A modern economy like Canada's is largely organized by

  1. individuals forming cooperative enterprises and labour unions

  2. individuals following their own self interest, doing what seems best for themselves.

  3. benevolent individuals pursuing the public interest.

  4. governments at all levels coordinating the activities of firms and citizens

  5. the directions of international economic consortiums

  1. The circular flow of income illustrates

    1. the interaction of households and firms through the factors and goods markets

    2. that there is no relationship between goods markets and factor markets

    3. that the flow of payments  moves in the same direction as the flow of goods

    4. the flows of expenditures and income in a household

    5. that firms own the factors of production

  1. Choose the answer that best explains why economists build models that abstract from the complexities of reality.

    1. Because economists don't understand the real world

    2. Because economics deals only in the abstract

    3. Because they believe they gain a greater understanding of reality

    4. Because the complexities of reality are unimportant

    5. Because economists are not interested in reality

  1. In a co-ordinate graph, with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the variable Y is negative in the ________ quadrant. 

    1. top, right

    2. top, left

    3. bottom, left

    4. bottom, right

  1. A change in demand is said to take place when there is a

    1. price change

    2. movement along the demand curve

    3. shift of the supply curve

    4. shift of the demand curve

    5. quantity change

  1. Economists usually assume that households and firms, respectively, maximize

    1. Savings and profits

    2. Income and sales

    3. Wages and revenues

    4. Utility and profits

    5. Expenditures and profits

  1. All goods and services produced by one firm but used as inputs into a further stage of production are called

  1. value added

  2. final goods

  3. intermediate goods

  4. consumption goods

  5. national income goods

  1. When calculating GDP using the expenditure approach, the investment component includes

  1. fixed investment minus depreciation

  2. net investment plus depreciation

  3. gross investment plus depreciation

  4. net investment only

  5. net investment minus depreciation

  1. Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies, ________ depreciation.

  1. minus; plus; plus

  2. plus; plus; plus

  3. plus; plus; minus 

  4. plus; minus; minus

  5. plus; minus; plus

  1. Historically, nominal GDP has increased faster than real GDP because

  1. the general price level has fallen

  2. imports have risen more rapidly than exports

  3. improvements in product quality have not been reflected in prices

  4. the general price level has increased

  5. exports have risen more rapidly than imports

  1. In a simple macro model with the price level assumed to be constant, a change in firms' level of desired investment is predicted to influence equilibrium national income by

  1. shifting the saving function

  2. shifting the aggregate expenditure function

  3. shifting the 45-degree line

  4. shifting the consumption function

  5. causing movement along the investment function

  1. Top of Form

  1. In macroeconomics,  if the value of the national product increases, there is

  1. a decrease in the value of income claims on that output, due to importing

  2. a decrease in value of income claims on that output, due to taxation

  3. an equal increase in the value of income claims on that output

  4. a decrease in the value of income claims on that output, due to household saving

  5. an even larger increase in the value of income claims on that output, due to value added

  1. An equivalent term for "real national income" is 

  1. current-dollar national income

  2. actual national income

  3. constant-dollar national income

  4. none of the responses is correct

  5. nominal national income

  1. In macroeconomics, the "output gap" is the difference between

    1. real and nominal national income

    2. output and employment

    3. output in the current year and output in the base year

    4. potential real national income and actual real national income

    5. real GNP and real GDP

  1. The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms.


Actual Output   (billions of $)

Potential Output (billions of $)

Unemployment Rate





























Refer to the table. In which years was this economy experiencing an inflationary gap?

  1. 2005, 2006

  2. 2002, 2003

  3. 2006, 2007

  4. 2004, 2008

  1. Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure to achieve full employment, it can generally be concluded that the larger this output gap, the 

  1. greater is the unemployment rate

  2. more upward pressure there is on prices

  3. lower the deadweight loss of unemployment

  4. greater is the employment rate

  5. lower is frictional unemployment

  1. If a country's labour force is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is

  1. 9.0 percent

  2. 6.7 percent

  3. 3.3 percent

  4. 2.5 percent

  5. 4.5 percent

  1. If a country's labour force is 15 million people, and 1.35 million of those are unemployed, the country's unemployment rate is

  1. 6.7 percent

  2. 3.3 percent

  3. 9.0 percent

  4. 2.5 percent

  5. 4.5 percent

  1. Workers with marketable skills sometimes quit a job and become unemployed, with the expectation of soon finding a better job. This type of unemployment is called 

  1. historical unemployment

  2. frictional unemployment

  3. overly-optimistic unemployment

  4. cyclical unemployment

  5. structural unemployment

  1. The group that tends to be most hurt by unexpected inflation is

  1. individuals with unindexed pensions

  2. banks

  3. fixed-income earners

  4. employers

  5. both individuals with unindexed pensions and fixed-income earners

  1. If nominal national income increased by 10 percent over a certain period of time while real national income increased by 20 percent, then

  1. the price level has increased by approximately 10 percent

  2. the price level has declined by about 10 percent

  3. inflation has occurred during this time period

  4. the labour force increased by 10 percent

  5. everybody in the economy became worse off

  1. Economic theory argues that there will be fewer real effects from inflation as long as the

  1. actual rate of inflation is less than 5 percent

  2. anticipated rate of inflation is more than the actual rate of inflation

  3. inflation is fully anticipated and no one changes their behaviour

  4. whole private sector is unaware that it is happening

  5. anticipated rate of inflation is less than the actual rate of inflation

  1. When there is cost-push inflation, prices rise and employment

  1. is constant

  2. falls

  3. falls or rises

  4. rises

  1. Inflation benefits

  1. all producers

  2. borrowers

  3. lenders

  4. all consumers

  1. The velocity of money is

  1. the time it takes for monetary policy to have an effect on world financial markets

  2. the time lag from when the money supply is increased until the effect takes place

  3. the number of times per year a dollar is spent on final goods and services

  4. the time it takes to produce money

  1. Supply shocks cause

  1. cost-push inflation

  2. increases in GDP

  3. demand-pull inflation

  4. falling wages

  1. Inflation is best defined as

  1. a sustained increase in wages

  2. a persistent rise in average prices

  3. a rise in the value of money

  4. all of the above

  1. An unemployment rate of zero cannot be expected since

  1. the economy can never create enough job vacancies

  2. some portion of the labour force will always be between jobs

  3. there are some people who do not want to work

  4. there will always be discouraged workers

  1. The natural rate of unemployment does not include which of the following?

  1. frictional unemployment

  2. Cyclical unemployment

  3. Seasonal unemployment

  4. The natural rate of unemployment includes all of the above


Question 01

Business Cycle is used to study the short-run fluctuations of an economy. Draw a business cycle clearly labeling axes and various phases. When do we declare that an economy is in recession?


If an economy experiences negative economic growth rate for two and more successive quarters, its called recession. When the recession prolongs, it’s called great recession or depression.

Question 02

Consider the following data for a hypothetical economy that produces two goods, milk and honey.

Quantity Produced


Milk (Litres)

Honey (Kg)

Milk ($/Litre)

Honey ($/Kg)

Year 1





Year 2





  1. Compute nominal GDP for each year in this economy

  1. Using Year 1 as the base year, compute real GDP for each year. What is the growth rate?

  1. Now compute the GDP deflator for each year, using Year 1 as the base year.

Question 03

If you observe any difference between GDP deflator and CPI, explain why?

GDP deflator is a type of price index, which is calculated based on all good/services produced by an economy domestically. Consumer price index (CPI) is calculated based on a consumer basket which may contain imported goods/services and not all goods produced domestically

Question 05

In June 2009, Statistics Canada released data on GDP and personal disposable income for the last two quarters of 2008 and the first quarter of 2009. Use the table below to answer the following questions:

Third Quarter


Fourth Quarter


First Quarter


Change in real GDP (%)

Compared to previous quarter








Government Spending




Investment spending












Personal Disposable income (m$, current income)




  1. Calculate the GDP for the fourth quarter of 2008

  1. Calculate saving for each of the quarters

  1. When did the Canadian economy enter a recession? Why?

calculate GDPs for all three quarters and check since when the economic growth rate was negative for 2 quarters

  1. What spending component of GDP decreased the most since the third quarter of 2008


  1. Did real disposable income increase over this period? (Hint: prices decreased over this period)


Question 06

If real GDP per person was $50 000 last year and increases to $52 000 this year, what is the annual economic growth rate?

A: The growth rate

= (real GDP per person this year — real GDP per person last year) ÷ real GDP per person last year × 100%

= ($52 000 — $50 000) ÷ $50 000 × 100%

= 4%

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