Mid Term Test

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Session 2, 2012
Tutorial Test (Week 17-21 September)
1. Tutorial tests will be constructed from the following pool of short-answer questions.
2. Each Tutorial test will be comprised of a sufficient number of short-answer questions to add-up to a total of 20 marks.
3. The marks for each question provide an indication of how much is required to answer the question.
4. Tutorial tests may contain questions on different topics. 5. The set of short-answer questions used will vary across Tutorial tests. 6. Where questions have numerical parts, the actual numbers used will be changed for the Tutorial tests.

7. You will have 30 minutes to complete your Tutorial test.
8. A non-programmable calculator may be used.
9. Answer sheets will be provided.
10. Since the following questions will be used in an exam; lecturers, tutors and PASS leaders will not provide help in directly answering the questions.

Pool of Short-Answer Questions for Tutorial Tests
Explain the three different approaches that can be used to calculate GDP. Briefly indicate why all three approaches should give the same estimate for GDP. (3 marks)
Is GDP a good measure of a country’s economic welfare? Discuss. (5 marks)
Consider the following National Accounts data for the calendar year 2010. $Bill
Private Consumption
Government Purchases
Gross Taxation Receipts
Government Transfer Payments
Beginning-of-year Inventories
Net Interest Payments on Government Debt 40
End-of-year Inventories
Sales of Existing Houses and Flats
Business Fixed Investment
(a) Use the above data to calculate GDP for 2010. Explain how you arrive at your figure for GDP
(1 mark)
(b) Use the above data to calculate National Saving in 2010. Explain how you arrive at your figure for National Saving.
(1 mark)
(c) Use the above data to calculate Private Saving in 2010. Explain how you arrive at your figure for Private Saving.
(1 mark)
Explain why the CPI may give a biased measure of the “true” rate of inflation or cost of living?
(5 marks)
Identify and briefly explain the various economic costs associated with inflation. (5 marks)
Explain the difference between the nominal interest rate and the real interest rate. Which rate is most relevant to decisions to borrow and lend. Briefly explain. (2 marks)
Explain the Fisher Effect.
(2 marks)

Explain the various factors that will influence a firm’s decision to purchase a new piece of capital equipment. What condition would need to be satisfied for the firm to be willing to invest in the new capital?

(5 marks)
Explain why the labour demand curve for an individual firm is downward sloping and indicate the main factors that cause the curve to shift. Will the same factors that cause a shift in an individual firm’s labour demand curve also shift the aggregate demand curve for labour? Explain.

(5 marks)
Briefly explain the following three motives for saving:
 life-cycle
 precautionary
 bequest
Indicate what effect the widespread availability of home equity loans might have on each form of saving. {Note: A home equity loan allows households to borrow (usually at a relatively low interest rate) against the equity they have in their home. (Equity refers to the difference between the market value of the home and any mortgage debt.)} (5 marks)

What factors might cause households to under-save relative to some rationally optimal level? (2 marks)
Consider the following model for supply and demand of workers in the aggregate labour market, where w is the real wage.
Supply curve

Ls  48  0.5w

Demand curve

Ld  80  1.5w

Calculate the equilibrium real wage and level of employment and illustrate your answer on a diagram.
(3 marks)
Use a model to show the possible effect of a minimum wage law on the level of employment in an economy. Briefly explain which workers benefit and which workers lose from a...
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