MACRO MIDTERM Essay

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UNIVERSITY OF OTTAWA
DEPARTMENT OF ECONOMICS
ECO 1102 D
INTRODUCTION TO MACROECONOMICS
MID-TERM EXAMINATION
Professor: David Gray

Student Name:
Student #: KEY

Winter 2014
You may not consult with any written documents whatsoever (including other students’ papers), and no conversation is permitted while the examination is in progress. Please remove all hats.
The use of smart-phones and programmable calculators is strictly forbidden. Turn off all cellular telephones. There are a total of 80 points.
*****************************************************************************
1. Respond to all of the following 4 questions (4 points). I mentioned the answers to all of them in class a number of times.
a) What is the approximate current rate of unemployment in Canada?
7.0 % - I accepted plus or minus 1 %
b) What is the approximate rate of real GDP growth in Canada that would be desirable and realistic? I mentioned this in class a number of times.
3 – 4 % I accepted plus or minus 1 %

c) What is the approximate current level of nominal, current dollar GDP in Canada?
1.8 trillion $ - I accepted answers that were close.

d) What is the approximate annual rate of price inflation?
1.0 % - I accepted plus or minus 1 %

1

2. In the exercise on national accounting, the estimated value of GDP using the expenditure approach is equal, in theory, to the value produced by using the factor incomes approach. Why is this the case? (4 points)
Because every transaction has a dual identity as expenditure and as income. $ 1 spent by one economic agent represents $ 1 of income earned by other agents, and vice versa. It must therefore be the case that after we sum up all of the expenditures and all of the incomes, aggregate income = aggregate expenditure.
3. This problem is very similar to the one that appeared on the examination that is posted on the courseweb, but it is not the same. (10 points)
Consider the following fictional transactions that took place in the economy of the land of make believe last year.
Wages paid to labour
Consumption expenditure
Corporate profits gross investment expenditure government purchases income from unincorporated businesses exports saving imports depreciation interest and miscellaneous investment income government transfer payments indirect taxes

300,000
350,000
100,000
150,000
130,000
50,000
120,000
135,000
140,000
50,000
30,000
400,000
80,000

a) Calculate the GDP level using the expenditure approach, and explain your work. It is insufficient to write only numbers.
GDP == C + I + G + X – IM = 350,000 + 150,000 + 130,000 + 120,000 – 140,000 = $
610,000 (see the table for the full labels for the abbreviations).
b) Calculate the GDP level using the factor incomes approach, and explain your work. It is insufficient to write only numbers.
GDP == factor incomes + indirect taxes – subsidies + depreciation charge (capital consumption allowance) = 300,000 + 100,000 + 50,000 + 30,000 + 80,000 + 50,000 =
$ 610,000 (factor incomes are wages paid to labour + corporate profits + income from unincorporated businesses + interest and miscellaneous investment income) 2

c) Which of these quantities are the total injections into the circular flow?
Government spending and exports. Technically, consumption spending is not considered to be an injection (since it does not originate from outside of the circular flow), but I accepted that item as well.
4. (24 points) Identify and give the significance of the following six points. You must furnish explanations as to how the topic fits into what we have studied. In other words, why did I bother to bring it up at all? Usually three sentences will suffice.
Each of these was worth 3 points – 1 for the definition, and 2 for the significance.
I went over all of them slowly and explicitly in class. Some of them appeared on last year’s test.
a) indirect taxes (hint: in the context of national accounting)
Indirect taxes are not levied on particular individuals; they are levied anonymously on
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