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ECO102 Midterm 1 Main online
Due: Thursday, February 17, 2022 745 pm (Eastern Standard Time)
Assignment description
Instructions There are quite a few instructions: please take a few minutes to read them carefully, that will save
you time and stress later.
. For this test you will need
A non-programmable calculator
A ruler
Your T-card
At least 4-6 sheets of standard format white paper (A4 or legal). Paper may be empty or underlined. You
will need one separate sheet for each Crowdmark field. If one page is not enough for your answers, you can
upload a second page in Crowdmark for the same question.
All questions need to be handwritten on paper. There may be a point deduction if you do not follow the
instructions.
. The test is closed book: any use of notes, book, slides etc. is an academic offense.
. The test consists of 4 short answer questions. Some questions have sub-questions (1a, 1b and 1c).
Those are to be answered on one sheet of paper. The number of points that can be earned for each
question is indicated. A total of a 100 points can be earned.
. The test is 80 minutes. After the 80 minutes, you will have 15 minutes to upload your answers. Uploads
after 80+15 minutes will not be graded.
. If you experience technical difficulties with uploading, you need to let your TA know and try to upload your
answers in every field after 80 minutes (=7.30pm ET). We can see in Crowdmark if you tried. If everything
else fails, you have to email your answers as attachments to eco102@utoronto.ca before 8.45pm ET.
. writing instructions
Make sure that you take one sheet for each question. That is, questions 1a, 1b, and 1c are to be answered
on one sheet of paper, and so on.
All answers need to be hand-written on paper.
Put your T-Card at the top right of each page, face up. If you have no T-Card write your name and student
id on each sheet of paper.
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Submit your assignment  Help
Take a picture of the entire page (but not the surroundings), make sure it is visible and upload the .jpg or
.pdf file to Crowdmark. Make sure that the picture is Portrait orientation. If it is Landscape, please do the
rotating yourself.
Files that are too large (>2mb per file) might take a long time to upload. Uploading from a phone can give
trouble. It is better to upload from a laptop or a tablet.
After you have completed the assignment, please save, scan, or take photos of your work and upload your files
to the questions below. Crowdmark accepts PDF, JPG, and PNG file formats.
Q1 (30 points)
The following is information for the macro economy of a small open economy. Assume that the price level is fixed
in the short run. Show your calculations.
1a. (8 points) What is the equation for Aggregate Expenditure (AE)? What is the level of equilibrium GDP? Show
in the appropriate graph. Make sure to label lines and axes.
1b. (7 points) At the equilibrium level of GDP at 1a, what are total savings in the economy? What is the
relationship between savings and investment?
1c. (8 points) What do the level of savings and investment at 1b imply about net exports in the economy? Explain
and confirm this with calculations. What do the level of savings and investment imply about net foreign
investment? Explain briefly in words.
1d. (7 points) Suppose that the government lowers the tax on income (Y) from 0.25 to 0.20. What effect will this
have on the multiplier in the economy? Show your calculations and explain in words why.
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Q2 (25 points)
The table below shows the behavior of real wages between 1979 and 2015 for wage earners in the bottom 10%
of the wage distribution, in the middle (median), the top 10% and the average wage earner. In panel A, nominal
wages have been deflated by the CPI. In panel B, the same nominal wages have been deflated by adjusted CPI: a
CPI deflator that adjusts for new-product bias, quality bias, and outlet-substitution bias. All wages are per hour
worked.
2a. (4 points) The two CPI deflator series use the same year as a base year. Explain briefly the concept of a base
year. Which year is the base year?
2b. (4 points) How much did real average wages grow between 1979 and 2015 using the CPI? How much using
the adjusted CPI? Write your answers as a percentage.
2c. (7 points) What does the difference in the growth in real wages using these two deflators imply about the
behavior of the CPI versus the adjusted CPI between 1979 and 2015? How do you explain the difference?
2d. (6 points) What implication does the use of the adjusted CPI to deflate nominal wages have for our
assessment of the behavior of real wages for those in the 10th percentile of the wage distribution?
2e. (4 points) If you wanted to say something about the development of inequality in wages between 1979 and
2015, which of the two series is better to use? Explain your answer.
Q3 (30 points)
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The table below presents data for one year of an economy that is made up of only three firms that produce
respectively widgets, metal, and iron ore. Canadian Widget Co. produces widgets using all the metals produced
that year by Canadian Metal. Canadian Metal Co., on the other hand, uses all iron ore mined that year from
Canadian Iron Ore Co. The economy produces 100 widgets, each of which sells for $1,000.
3a. (5 points) What is the expenditure on Intermediate Goods by Canadian Widget? Canadian Metal? Canadian
Iron Ore?
3b. (5 points) What is the GDP for this economy using information on the value of sales? Explain.
3c. (5 points) How much is value added by each of the three firms? Show your work.
3d. (5 points) What are the total factor payments of the three firms? Show your work.
3e. (5 points) Do the three approaches estimating GDP yield the same value? Explain.
3f. (5 points) Now all three companies realize they have not properly accounted for depreciation of their capital.
They consult the same accountant, who suggests that they use 30% of their profits for depreciation. Show how
GDP is calculated with depreciation after the three firms follow the accountantʼs advice.
Q4 (15 points)
High Tech, Inc. is considering two investment projects, each of which offers a return of $500 in year 1, $750 in
year 2, and $1,000 in year 3. The initial investment for project 1 is $2,000 and for project 2 $2,100.
4a. (5 points) Suppose the country is a closed economy. If the rate of interest is 4% per year, which of these
projects (if any) will the firm undertake? Show your calculations.
4b. (5 points) Suppose the country opens to foreign trade and becomes a small open economy with interest
rates set globally. Suppose the world interest rate is now 6% per year. What effect does a higher interest rate
have on the firmʼs investment decision? Show your work.
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4c. (5 points) Graphically, what is the effect on the loanable fund market of opening the economy? In other
words, show in one graph the change from 4a to 4b. Please label all lines and axes of your graph.
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