MGEA06 Midterm – Winter 2019 Iris Au 1
MGEA06 – Introduction to Macroeconomics: A Mathematical Approach
Midterm, Winter 2019

Last name/Family name: ________________________________________________

First name: ___________________________________________________________

ID#: _________________________________________________________________


Date & Time: Saturday, March 9, 2019, 5:00pm – 6:30pm
Instructor: Iris Au
Aids Allowed: Non-programmable calculator
Time Allowed: 90 minutes
Total number of pages (including the cover page): 11

Question Marks Question Marks
1 – 3 (out of 12) 19 – 20 (out of 8)
4 – 6 (out of 12) 21 – 23 (out of 12)
7 – 10 (out of 16) 24 – 25 (out of 8)
11 – 13 (out of 12) Total (out of 100)
14 – 15 (out of 8)
16 – 18 (out of 12)

The University of Toronto's Code of Behaviour on Academic Matters applies to all University of Toronto Scarborough students. The Code prohibits all forms
of academic dishonesty including, but not limited to, cheating, plagiarism, and the use of unauthorized aids. Students violating the Code may be subject to
penalties up to and including suspension or expulsion from the University.

Room:
MGEA06 Midterm – Winter 2019 Iris Au 2
Instructions – please read carefully

1) Questions related to the content of the exam will NOT be answered.

2) On the cover page of this booklet
• PRINT your family name and first name.
• Enter your student number.
• Write down your assigned room.
If you fail to do any one of the above tasks, 4 marks will be deducted from your final
score.

3) If you DO NOT write in your assigned room, 5 marks will be deducted from your
final score.

4) DO NOT UNSTAPLE the booklet. If you do it, 10 marks will be deducted from your
final score.

5) Regrade will NOT be done for penciled answer.

6) For each question, put your answers in the designated boxes. If answers are not
written in the designated boxes, no marks will be given for that question. Each
question is worth 4 marks, and there is no deduction for wrong answers.

7) For questions that required you to show work, you must do so in order to receive
full credit. We will ONLY grade your work in the white space between the question
and the designated answer box. If you do not show your work, you will not receive
full credit even your answer is correct. However, you may receive partial credit for
showing your work even your final answer is incorrect.

8) DO NOT put your answer on the blank pages of the left hand sided of the booklet, we
WILL NOT grade any answers on those pages. However, you can use those pages as
rough/draft paper.


MGEA06 Midterm – Winter 2019 Iris Au 3
Question 1 – Question 2: A closed economy produces and consumes three goods. The following table
shows the prices and quantity exchanged in 2017 and 2018, and the base year is 2018.

2017 2018
Goods Price Quantity exchanged Price Quantity exchanged
A $8 600 $9 500
B $4 100 $3 250
C $3 400 $3 500

Question 1
What is the percentage change in real GDP from 2017 to 2018? Show your work and keep your answer
to 2 decimal places if needed.








Percentage change in (real) GDP (in % terms):



Question 2
Find the GDP deflator in 2017. Show your work and keep your answer to 2 decimal places if needed.








GDP deflator:



Question 3
Determine whether each of the following transactions will be considered as double (or multiple)
counting in the calculation of GDP. Put “YES” into the appropriate category.

Not include in GDP Include in GDP
The commission paid to the seller of a previously owned
collectors skateboard.
Wheels used to produce a skateboard that will be sold new.

A previously owned collectors skateboard.

MGEA06 Midterm – Winter 2019 Iris Au 4
Question 4
Determine whether each of the following statements about GDP is true or false.

__________ Owing to increase in parental involvement, school quality increases. However, this
improvement in school quality will only increase the standard of living but not GDP.

__________ The Arcadia Entertainment Co. produced 20,000 DVDs of the movie Thor in 2011. Only
4,000 copies remained unsold at the end of 2011. As a result, only 16,000 DVDs are
included in GDP of 2011; the remaining 4,000 are counted in GDP of 2012.

__________ Real GDP tends to overstate our economic well-being by including repairs to structures
destroyed by storms.

Question 5
Suppose that roughly 8 million people in an economy were actively seeking jobs but had not found them
this month, the same number as last month. Suppose that 2 million of the people who were unemployed
last month gave up their search this month and stopped looking for work. What will happen to the
unemployment rate this month, all other things unchanged? Why?

Unemployment rate will _______________________ (increase/decrease/remain unchanged) because
___________________________________________________________________________________
__________________________________________________________________________________.
(in no more than 30 words write down your reason on the above lines)

Question 6
Suppose the labour market can be described by the followings:
Labour demand: LD = 880 – 50W, where W = wage per hour
Labour supply: LS = 40W – 200

The initial equilibrium wage is $12 per hour and the level of employment is 280.

Suppose firms are paying their worker $15 per hour, find the change in the level of unemployment.









Change in the level of unemployment:



MGEA06 Midterm – Winter 2019 Iris Au 5
Question 7
Determine the type of unemployment that each of the following events will have an impact on.
Type of unemployment
(frictional, structural, cyclical)

Internet employment agencies have simplified the job search for the
applicants.
An autoworker who is laid off because of a decline in sales caused by
a recession.
A geologist who is permanently laid off from an oil company due to
a new technological advance.


Question 8
• When Joe started his job at the laundromat five years ago, his wage was $5.00 an hour. Today, his
wage is $6.50 an hour. If Joe started his job in the base year, and his real wage is the same as when
he started, then the consumer price index (CPI) today is _________________________________.
• Suppose Al Fresco enjoys eating at Italian restaurants, where the average meal costs $25. He has
$1,000 to spend. In terms of purchasing power, his money is worth _________________________
(make sure to mention the appropriate unit).

Question 9
Determine whether each of the following statements about inflation is true or false.

__________ The threat of future inflation makes people reluctant to lend money for long periods.

__________ The threat of future inflation lowers the quality of economic decisions agents made.

__________ Unanticipated inflation create uncertainty about the future.


Question 10
Determine whether each of the following factors tend to raise or lower labour productivity.
Labour productivity
(increase/decrease)

Factor
The best trained workers in a country migrating to other countries to pursue
better opportunities.
Promoting educational and work opportunities for women.

The government announces that they are eliminating free tuition for low-
income students.

MGEA06 Midterm – Winter 2019 Iris Au 6
Question 11
Holding technology and human capital fixed in Techland, increasing physical capital per worker from
$2,500 to $10,000 would have led to a doubling of real GDP per worker, from $4,000 to $8,000 during
the 1980 to 2010 period. However, not only did physical capital per worker increase from $2,500 to
$10,000, but technological progress shifted the productivity curve upward so that the actual increase in
real GDP per worker during the 1980 to 2010 period was from $6,000 to $48,000. What was the annual
growth rate of real GDP per worker in Techland? Keep your answer to 2 decimal places.










Annual growth rate of real GDP per worker (in % terms):



Question 12
Determine the impact of the following changes on the marginal product of capital (MPk) and the marginal
product of human capital (MPh).

MPk
(increase/decrease)
MPh
(increase/decrease)

Change
An increase in the average years of schooling of
workers.
The extensive use of artificial intelligence (AI) has
raised the level of total factor productivity.

Question 13
Initially, country A has a per capita income of $400 while country B has a per capita income of $800.
According to the Rule of 70, how many years will it take for A to have the same level of per capita
income as B if the annual per capita income growth rate is 4% in A and 2% in B?








Number of years needed (in integer):



MGEA06 Midterm – Winter 2019 Iris Au 7
Question 14 – Question 15: The market for loanable funds for a closed economy can be described by
the following equations:

Demand for loanable funds: DF = 2,000 – 500i
Supply of loanable funds: SF = 1,200 + 1,500i
where i = interest rate (interest rate is expressed in decimal form; i.e., if i = 0.1, then i is 10%)

The initial equilibrium level of interest rate is 0.4 (i.e., 40%) and the equilibrium quantity of funds traded
is 1,800.

Question 14
The loanable fund market is in its initial equilibrium. Suppose the government provides a tax cut on new
capital.

i
SF0




i0 A




DF0
QF
QF0

Question 15
Suppose the tax cut on new capital causes autonomous investment to change by 10%. Find the change
in equilibrium interest rate. Be sure to show your work and keep your answer to 2 decimal places if
necessary. You need to decide whether autonomous investment increases or decreases.












Change in interest rate:



• Show the effect of the change on the diagram
on the left. Be sure to show to identify the new
equilibrium.
• When the market of loanable funds reaches its
new equilibrium, the level of investment
_________________ (increases / decreases /
no change).
MGEA06 Midterm – Winter 2019 Iris Au 8
Question 16
Suppose You hold a bond that has a face value of $1,000 and a coupon rate of 3.8% with 2 years to
maturity. If you sell it for $1,050, what is the current market interest rate? Show your work and keep
your answer to 2 decimal places.












Market interest rate (in % terms):




Question 17
Determine whether each of the following statements is true or false.

__________ For an open economy, if its (financial) capital inflows exceeds outflows, then foreigners
are contributing to this country's investment spending.

__________ A firm is considering a new capital expenditure that would cost $2 million. This
expenditure is expected to yield $1.1 million in annual profits for each of two years. The
firm should undertake the project regardless the level of interest rate since the profits will
be greater than the costs.

__________ Crowding out results in a decrease in physical capital accumulation, which might
slowdown labour productivity growth.


Question 18
Macroland is a closed economy with no taxes and transfers. Besides, interest rate and aggregate price
level are held fixed. Fill in the missing values in the following table. You can show your work in the
space below.

GDP YD C IPlanned IUnplanned G


155

80

60



40

255





60

10

40



MGEA06 Midterm – Winter 2019 Iris Au 9
Question 19 – Question 21: In this question, interest rate and prices are held fixed, and the economy
can be described by the income-expenditure model.
Consumption: C = 930 + 0.75YD; where YD = disposable income
Planned investment: IPlanned = 700 – 500i, where i = 0.04 (i.e., 4% & it is held fixed)
Taxes: T = 400
Transfers: TR = 80
Government spending: G = 340

Question 19
Find the level of output in this economy. Be sure to show your work and keep your answer to 2 decimal
places if necessary.

















Equilibrium level of output:



Question 20
Suppose a recent survey shows that if the current government runs a budget surplus, they are more likely
to get re-elected. This year is the election year, and in attempt to get re-elected the government decides
to run a budget surplus of 40 by changing (lump-sum) transfer.

• To achieve a budget surplus of 40, the change in (lump-sum) transfer should be equal to
_____________________.

• This change in (lump-sum) transfer will shift the AEPlanned line ____________________ (up/down).

• Immediately after the change in autonomous investment, firms find their inventories ____________
(rises/falls) unexpectedly, and the level of unplanned investment is equal to __________________.

MGEA06 Midterm – Winter 2019 Iris Au 10
Question 21
(Continued from Question 20) Find the change in equilibrium level of output and the change in
government budget balance.















Change in output:


Change in GBB:

Question 22
Determine whether each of the following statements is true or false.

__________ Rising inventories typically indicate positive unplanned inventory investment and a
slowing economy.

__________ Vanessa tells people she is consuming more now and probably will continue to do so for
some time, but she believes her consumption will smooth out over her lifetime. Vanessa's
consumption pattern mirrors the permanent income hypothesis.

__________ The Bank of Canada, the central bank of Canada, has been cutting the interest rate in order
to stimulate the recessionary economy. Interest cuts by the Bank of Canada can increase
spending on the building up of physical capital and thus increase GDP through the
accelerator principle.

Question 23
For each of the following events, determine which curve(s), aggregate demand (AD), short-run aggregate
supply (SRAS), and/or long-run aggregate supply (LRAS), will shift and to which direction.

Shift in AD, SRAS,
and/or LRAS
Direction
(left or right)

Event
The Federal Court of Appeal rejected the Trans Mountain
Pipeline Expansion Project.
Due to favourable weather, there is a bumper crop (an
unusually productive harvest) of wheat.

MGEA06 Midterm – Winter 2019 Iris Au 11
Question 24 – Question 25: Consider a closed economy that can be described by the AD-AS model.
In addition, prices can adjust to a change in aggregate demand or aggregate supply.

Planned aggregate expenditure: AEPlanned = 2200 – 5P + 0.5Y
Short-run aggregate supply (SRAS): P = (50 + 0.1Y)(
W
200
), where W = wage

Question 24
If the current level of wage is 192, find the equilibrium levels of price and output. Be sure to show your
work and keep your answer to 2 decimal places if necessary.


















Output:


Price:

Question 25
Suppose the long-run equilibrium level of output is 2200. Find the size of the output gap, and also,
complete the sentence below. Keep your answer to 2 decimal places if needed.







Size of the output gap (in % term) & be sure to identify the kind of output gap:



• Given the nature of the output gap, we expect the price level to ___________________ (rises/falls)
in the long run until output reaches its full employment level.
This is the end of the exam.