ECON/ENGG 209 Midterm Exam Fall 2023

Midterm Exam
October 25, 2023
70 minutes

DO NOT OPEN UNTIL INSTRUCTED TO DO SO

SOLUTIONS
Name (last, first): Student Number:

Marks Received: /40

Part I, Multiple Choice /17
Part II, Short Answer /3
Part III, Calculation /20

Instructions:
 You have a total of 70 minutes to complete this exam.
 You may not leave in the last ten minutes of the exam. Please remain seated until the exams
are collected.
 Please ensure your name and student number are on your exam and your bubble sheet.
 Only multiple-choice answers in your bubble sheet will be graded.
 Make sure your short answer and calculations are legible and clearly written.
 Show your work for your calculations.
ECON/ENGG 209 Midterm Exam Fall 2023

Part I – Multiple Choice (15 marks). Choose the best answer and fill it into the bubble sheet. Only
answers in the bubble sheet will be graded.

1. Soo Jin shares a one-bedroom apartment with her classmate. Her share of the rent is $700 per
month. She is considering moving to a studio apartment which she will not have to share with
anyone. The studio apartment rents for $950 per month. Recently, you ran into Soo Jin on campus
and she tells you that she has moved into the studio apartment. Soo Jin is as rational as any other
person. As an economics major, you rightly conclude that
A. Soo Jin did not have a choice; her roommate was a slob.
B. Soo Jin figures that the additional benefit of having her own place (as opposed to sharing) is at
least $250.
C. Soo Jin figures that the benefit of having her own place (as opposed to sharing) is at least $950.
D. the cost of having one's own space outweighs the benefits.
E. you made an error in assuming that Soo Jin is rational.
Answer: B

2. Economists reason that the optimal decision is to continue any activity up to the point where the
A. marginal benefit is zero.
B. marginal benefit is greater than the marginal cost.
C. marginal cost is zero.
D. marginal benefit equals the marginal cost.
E. marginal benefit starts declining.
Answer: D

3. Suppose that when the price of hotdogs decreases, the Nguyen family increases their purchases
of ketchup. To the Nguyen family,
A. hotdogs and ketchup are complements.
B. hotdogs and ketchup and substitutes.
C. hotdogs and ketchup are normal goods.
D. hotdogs are normal goods and hamburgers are inferior goods.
E. hotdogs and ketchup are unrelated goods.
Answer: A
ECON/ENGG 209 Midterm Exam Fall 2023

4. Refer to the figure above. An increase in price of inputs would be represented by a movement
from
A. A to B.
B. B to A.
C. S1 to S2.
D. S2 to S1.
E. 0 to A.
Answer: D
ECON/ENGG 209 Midterm Exam Fall 2023

5. Refer to the figure above. Assume that the graphs in this figure represent the demand and supply
curves for blu-ray discs. Which panel best describes what happens in this market if there is a
substantial increase in the price of blu-ray players?
A. Panel (a)
B. Panel (b)
C. Panel (c)
D. Panel (d)
E. Panels (a) and (d)
Answer: D

6. Which of the following goods is directly counted in GDP?

A. the lettuce that Subway purchases for its sandwiches
B. the bread that Subway purchases for its sandwiches
C. a 12-inch Subway sandwich purchased by a student
D. the plastic bags that Subway purchases to wrap its sandwiches
E. the rent paid by the Subway franchise owner for their restaurant
Answer: C
7. Jack just received a promotion at work and now works 50 hours per week instead of 35. As a
result,
A. the unemployment rate increased.
B. the unemployment rate decreased.
C. the labour force participation rate increased.
D. both the unemployment rate and the labour force participation rate changed.
E. neither the unemployment rate nor the labour force participation rate changed.
Answer: E

Year CPI

2019 208

2020 214
ECON/ENGG 209 Midterm Exam Fall 2023

8. Refer to table above. Consider the above values of the consumer price index for 2019 and 2020.
The inflation rate for 2020 was equal to
A. 214 percent.
B. 21.4 percent.
C. 6.0 percent.
D. 3.9 percent.
E. 2.9 percent.
Answer: E

9. Under what circumstances would the GDP deflator be less than 100 after the base year?
A. The GDP deflator will be less than 100 if there has been inflation relative to the base year.
B. The GDP deflator will be less than 100 if there has been inflation of less than 2% per year
relative to the base year.
C. The GDP deflator will be less than 100 if there has been deflation relative to the base year.
D. The GDP deflator will be less than 100 if there has been a recession since the base year.
E. There are no circumstances under which the GDP deflator could be less than 100.
Answer: C

10. 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

11. The primary tool the Bank of Canada uses to increase the money supply is
A. printing more money.
B. lowering the desired reserve ratio.
C. buying government securities.
D. lowering the overnight interest rate.
E. reducing lending to commercial banks.
Answer: C

12. To decrease the amount required today to fund $10,000 debt due two years from now, you could
_____ on your savings.
A. Increase the rate of interest earned
B. Decrease the number of compounding periods per year
C. Earn simple interest rather than compound interest
D. Both decrease the rate of interest and the number of compounding periods per year
E. Either decrease the rate of interest or decrease the number of compounding periods per year
ECON/ENGG 209 Midterm Exam Fall 2023

13. You will receive a $150,000 inheritance in 20 years. You can invest that money today at 7%
compounded annually. What is the present value of your inheritance?
A. $27,491.53
B. $29,767.15
C. $38,762.85
D. $41,476.25
E. $100,000.00

14. Jeff invests $3,000 in an account that pays 7% simple interest. How much more could he have
earned over a 20-year period if the interest had compounded annually?
A. $2,840.00
B. $3,212.12
C. $3,778.54
D. $4,087.18
E. $4,409.05
Answer: E

15. You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded
annually, how long will you have to wait to buy the stereo?
A. 6.58 years
B. 8.42 years
C. 14.58 years
D. 15.75 years
E. 18.78 years

16. How much you should deposit now in a saving account that earns 6% interest compounded
annually to be able to withdraw the amounts below?
End of the Amount
year

3 4000

4 8000

5 1000

6 7000
ECON/ENGG 209 Midterm Exam Fall 2023

A. $15,377.21
B. $17,277.83
C. $21,812.86
D. $77,064.53
E. None of the answers are correct
Answer: A

17. With the time-value of money approach, cash flows further down (later) in the series are which of
the following?
A. They are worth less than earlier cash flows; this means that gains that are predicted long in the
future do not have as much of an effect on the Present Value (PV) of as series as earlier cash
flows do.
B. They are worth just as much as any other cash flow.
C. They are worth more, from a PV perspective, than earlier cash flows.
D. They are ignored in PV analysis.
E. None of the above are true.
Answer: A
ECON/ENGG 209 Midterm Exam Fall 2023

Part II – Short Essay (3 marks)

1. Discuss the differences between a Command Economy and a Pure Market. Which applies best to
Canada? Explain in 3-5 sentences using examples. (3 marks)

Command Economy: Centrally planned economy where the government plan what goods and
services will be produced, how they will be produced, and who will receive them.
Pure Market Economy: an economy where households interacting in the market drives the
supply and demand and allocation of economic resources.
Canada has a mixed economy. We have examples of government planning (healthcare,
national defense, education, etc) but also many markets driven by household choices
(groceries, electronics, clothing, etc.).
ECON/ENGG 209 Midterm Exam Fall 2023

Part III – Calculation (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. (9 marks)
The demand and supply functions for apples are given by:
Demand: P = 12 - 2Q
Supply: P = -6 + 4Q
where P = price per bushel, and Q = quantity (in thousands).

a. Calculate the equilibrium price and quantity. (2 marks)

P=3
Q=6

b. Graph the demand and supply curves, labelling the axis, curves, and equilibrium. Find the two y-axis
intercepts. (4 marks)

c. Provide a specific example of something that might shift the demand curve for apples to the left. (1
mark)
Examples may include decrease in income, decrease in the price of complements such as other
fruit, and many others that would result in a shift. A change in price of apples would NOT cause a
shift but instead movement along the curve.
ECON/ENGG 209 Midterm Exam Fall 2023

d. If the government set a maximum price of $4 per bushel of apples, what impact would this have
on the supply and demand of apples? i.e., would there be a surplus or a shortage? Provide a
numerical value. (2 marks)
At $4 per bushel, demand = 10, supply = 4
This means there will be a shortage of 10-4 = 6 bushels.

2. (6 marks)
Suppose the information in the following table is for a simple economy that produces only four goods:
cars, popcorn, t-shirts, and cotton. Assume that all the cotton is used in the production of t-shirts.
2010 2019 2020
Product Quantity Price Quantity Price Quantity Price
Cars 20 $500 15 $600 25 $650
Popcorn 75 2 100 1.75 120 2.25
t-shirts 50 30 50 25 65 25
cotton 100 0.8 800 0.6 120 0.70

a. Use the information in the table to calculate nominal GDP for 2019 and 2020 (2 marks)

Nominal GDP, 2019

¿(15× $ 600)+(100 × $ 1.75)+(50 × $ 25)=$ 10,425
Nominal GDP, 2020
¿(25× $ 650)+(120 × $ 2.25)+(65 × $ 25)=$ 18,145

b. Use the information in the table to calculate Real GDP for 2019 and 2020, assuming that the base
year is 2010. (2 marks)

Real GDP, 2019

¿(15× $ 500)+(100 × $ 2)+(50 × $ 30)=$ 9,200
Real GDP, 2020
¿(25× $ 500)+(120 × $ 2)+(65 × $ 30)=$ 14,690

c. What is the growth rate of real GDP from 2019 to 2020? (1 mark)
$ 14 , 690−$ 9 , 200
× 100=5 . 97 %
$ 9 , 200

d. What is the GDP deflator for 2020 (1 mark)

18,145
GDP Price Deflator, 2020 = x 100=123.52
14,690
e.
ECON/ENGG 209 Midterm Exam Fall 2023

3. (5 marks)
As a first-year engineering student, you need to purchase a computer to use during the five years
you plan to study engineering. You have done your research and found the computer you would
like to buy. You can buy it outright today at a price of $1,300, or you can finance it with monthly
payments of $30 for 5 years starting at the end of this month. Use an annual interest rate of 9%
with monthly compounding.

a. Determine if you should finance the computer or pay cash for it today and explain why. (3
marks)

Option 1: PV = $1,300
Option 2:
i = 0.09/12 = 0.0075
n = 5 x 12 =60

[ ]
1
1−
PV = ( 1+ .0075 )60
30 = $ 1,445.20
.0075

Pay for it today with cash since $1,445.20 > $1,250.

b. What amount would the payment have to be in order for you to be indifferent between
financing and paying cash? Assume you consider the annual rate of 9% to be reasonable and
will still pay over 5 years. (2 marks)

n = 5 x 12 =60
i = 0.09/12 = 0.0075
PV = 1,300
Solve for C

[ ]
1
1−
1,300 = ( 1+.0075 )60
C C =$ 27
.0075
ECON/ENGG 209 Midterm Exam Fall 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

Expenditures∈the Current year

CPI = ×100
Expenditures∈base year

Inflation rate = Growth of the money supply – Growth rate of real output

Number of unemployed
×100 %=Unemployment rate
Labour force

Labour force
×100 %=Labour force participation rate
Working - age population

Employment
×100 %=Employment - population ratio
Working - age population

Simple Interest F = P(1+in)

Single Payment Compound Amounts

Future Value of Lump Sum F=P(1+i )

n

Present Value of Lump Sum 1 −n

P=F n
=F (1+i)
(1+i)

( )
Solving for Rate F n
1
i= −1
P

Solving for Number of Payments F

ln
P
n=
ln ⁡(1+i)

Annuities

Series Compound Amount (Find F given A)

[ ]
n
(1+i) −1
F= A
i

Sinking Fund (Find A given F)

A=F
[ i
n
(1+i) −1 ]
ECON/ENGG 209 Midterm Exam Fall 2023

Capital Recovery (Find A given P) A=P¿

[ ]
Series Present Worth (Find P given A) 1
[ ]
n
(1+i) −1 1−( )
P= A n OR ( 1+ i )n
i(1+ i) P= A
i