1. CIA4U1 EXAM REVIEW

2. Format Multiple Choice 25 marks (Knowledge)
Short Answer 37 marks (Application)
Essay marks (Thinking)
2.5 hours (more than enough)
Monday, June 25 8:30 pm

3. Multiple Choice

4. 1. The economic problem is essentially one of deciding how to make the
best use of:
a. limited resources to satisfy limited wants
b. unlimited resources to satisfy unlimited wants
c. limited resources to satisfy unlimited wants
d. unlimited resources to satisfy limited wants c

5. d 2. Which of the following is a macroeconomic statement?
a. The price of beef declined by 3 percent last year.
b. The productivity of Canadian steelworkers increased by 1 percent
in 1992.
c. Canadian Pacific's profits increased in 1991.
d. The gross profits of all Canadian businesses were $18 billion
last year. d

6. 3. Suppose an economist says "Ceteris paribus, the lower the price of
the breakfast cereal, Wheaties, the larger the amount of Wheaties
purchased." This statement indicates that:
a. all factors other than the price of Wheaties (for example,
consumer preferences and incomes) are assumed to be constant
b. economists can conduct controlled laboratory experiments
c. the quantity of Wheaties purchased determines the price of
Wheaties
d. one cannot generalize about the relationship between the price of
Wheaties and quantity purchased a

7. d 4. Which of the following expressions best states the idea of
opportunity cost?
a. "All that glitters is not gold."
b. "A penny saved is a penny earned."
c. "He who hesitates is lost."
d. "There is no such thing as a free lunch." d

8. 5. The production possibilities curve illustrates the basic principle
that:
a. any production point below the curve reflects high opportunity
costs
b. an economy automatically seeks that level of output that employs
all of its resources
c. the production of more of any one good will in time require
smaller and smaller sacrifices of other goods
d. if all the resources of an economy are in use, more of one good
could be produced only if less of another good is produced d

9. d 6. The demand curve for chocolate shifts to the right if:
a. the government imposes a new tax on milk
b. consumers expect the price of chocolate to fall in the future
c. the price of chocolate increases
d. medical studies conclusively find that chocolate does not cause
migraines d

10. c 7. If the demand for product X is inelastic, a 4 percent increase in
the price of X:
a. increases the quantity demanded of X by more than 4 percent
b. decreases the quantity demanded of X by more than 4 percent
c. decreases the quantity demanded of X by less than 4 percent
d. increases the quantity demanded of X by less than 4 percent c

11. d 8. If average cost is declining, then:
a. total cost must also be declining
b. marginal cost must be greater than average cost
c. the average fixed cost curve must lie above the average variable
cost curve
d. marginal cost must be less than average cost d

12. c 9. The type of market that possesses the least market power is a(n):
a. monopolistically competitive market, as each business
differentiates its products
b. oligopoly, as each business' size is large relative to the
industry
c. perfectly competitive market as each business is a price-taker
d. monopoly, as it has no competitors c

13. a 10. A kinked demand curve: a. is typical of rival oligopolists
b. has a bend at the new price
c. has a flat section below the business' original price
d. has three segments a

14. 11. An employer in a perfectly competitive market should hire additional
labour as long as:
a. MC exceeds MR
b. the wage rate is less than MP
c. average product exceeds MP
d. MRP exceeds the wage rate d

15. b 12. The demand curve for loanable funds is downward-sloping:
a. because households are willing to save more at high interest
rates than they are at low interest rates
b. because more investment projects are profitable for businesses at
low interest rates than at high interest rates
c. because the amount of profitable business investment varies
directly with the interest rate
d. only at high interest rates b

16. a 13. A large GDP gap implies: a. a high rate of unemployment
b. an excess of imports over exports
c. a sharply rising price level
d. that the majority of consumer demand has changed from goods to
services a

17. b 14. Inflation and purchasing power: a. are the same thing
b. move in opposite directions if real incomes don't increase
c. are not related
d. help boost GDP per capita b

18. c 15. Ceteris paribus, an improvement in productivity will shift the
aggregate:
a. demand curve to the left
b. supply curve to the left, while potential output remains constant
c. supply curve to the right, while potential output remains
constant
d. supply curve to the right, while potential output increases c

19. d 16. What do investment and government purchases have in common?
a. Both are influenced by the wealth effect.
b. Both represent withdrawals from the income-spending stream.
c. Neither affects aggregate demand.
d. Both represent injections to the income-spending stream. d

20. b 17. Assume that the economy is operating below its potential output.
Under these conditions, government fiscal policy should be directed
toward a(n):
a. decrease in government purchases and/or tax increases
b. increase in government purchases and/or tax cuts
c. increase in both government purchases and taxes
d. decrease in both government purchases and taxes b

21. b 18. Which of the following is correct?
a. Government purchases and taxes both decrease real output.
b. Government purchases increase, but taxes decrease, real output.
c. Government purchases and taxes both increase real output.
d. Government purchases decrease, but taxes increase, real output. b

22. 19. If the monetary authorities want to reduce chartered bank lending,
they can:
a. lower the bank rate
b. do none of the others
c. sell federal bonds in the open market
d. buy federal bonds in the open market c

23. 20. According to the theory of comparative advantage, a product should
be produced in that nation where:
a. its absolute money cost of production is least
b. there is an absolute advantage in its production
c. its opportunity cost is lowest in terms of alternative products that might
otherwise be produced
d. the opportunity cost is greatest c

24. Short Answer Applications

25. Scientists discover a way to produce faster-growing tomatoes through genetic manipulation.Q S D
S 1

26. company due to recent piracy.
Rolling Stones CD prices are raised $10 by the record
company due to recent piracy.
Surplus P Q S D P2

27. 23. The health benefit of riding bikes is proven to be enormous.Q S D D1

28. Canadian dollar has increased its value this past year.
Industrial factories export goods annually. However, the
Canadian dollar has increased its value this past year. P Q S D D1

29. 25. Farmer Greg sees peas as a more profitable venture than potatoes and shifts his production focus accordingly. S1 P Q S D

30. 26. In a deflationary gap period (and equilibrium) show,
using our aggregate model, what happens when the
government increases its spending.
Price Level
Output (GDP) AS AD FE
AD1

31. 27. CPI is 0.87 in 1994 and 1.07 in 2004. If a house cost
$ in 1994, what should it cost now if its price
rose only by inflation? If in fact it is now priced at
$ , has the buyer's purchasing power risen or
fallen over this period?
= ___X___
0.87X = (1.07)
X = (1.07)
X = $ which is less than $
Therefore if income has risen by the rate of inflation, the purchasing power of a buyer has fallen.

32. 28. If Adam can sell 10 ski club sweatshirts at $50 or 8 at
$75, what is the elasticity over this range? What's the
best choice?
__(10-8)/9_ (75-50)/62.5 = 0.222/0.4
= 0.55
Since the elasticity is inelastic, they should raise the price to increase revenue … unless they want to encourage school spirit!

33. Therefore 400/0.92 = 434.78 billion is potential GDP
Use Okun's Law to predict potential GDP if actual GDP was $400 billion and unemployment is 4% over full.
4% x 2 = 8% GDP Gap
Therefore 400/0.92 = billion is potential GDP

34. 50 x 1/0.17 = $294.12 million increase to GDP
30. MPC is The government injects $50 million into the economy to gain what GDP?
If MPC is 0.83, MPS is 0.17
50 x 1/0.17 = $ million increase to GDP

35. 41.5 x 1/0.17 = $244.12 million increase to GDP
31. Use a tax cut instead. What is the gain to GDP?
Taxpayers will save or withdraw the first 17% of the tax cut, therefore
50 x 0.17 = $8.5 million is saved or withdrawn, but the remaining $41.5 million is,
41.5 x 1/0.17 = $ million increase to GDP

36. 32. Using supply and demand for loanable funds graph,
what happens if the government buys bonds while at the same time consumers are warned interest rates will rise in six months?
QLF S D
Interest Rate Q1 S1 D1 Q2

37. Average Variable Cost AVC Average Variable Cost AVC
33.
Acme Widget Ltd. Sells widgets at a price of $24 each. Their cost schedule appears in the following table. Complete the table. Draw the average and marginal curves. Identify the revenue rectangle, the prime breakeven point and the shutdown point.
Output (Q)
Total Revenue
Fixed Costs
Variable Costs
Total Costs
Average Variable Cost AVC
ATC
(or AC)
Marginal Cost MC
Marginal Revenue MR
200 - 10
240
170
370 17 37 24 20
480
320
520 16 26 15 30
720
440
640
14.7
21.3 12 40
960
580
780
14.5
19.5 14 50
1200
800
1000 22 60
1440
1100
1300
18.3
21.7
Output (Q)
Total Revenue
Fixed Costs
Variable Costs
Total Costs
Average Variable Cost AVC
ATC
(or AC)
Marginal Cost MC
Marginal Revenue MR
200 - 10
240
170
370 17 37 24 20
480
320
520 16 26 15 30
720
440
640
14.7
21.3 12 40
960
580
780
14.5
19.5 14 50
1200
800
1000 22 60
1440
1100
1300
18.3
21.7

38. Perfect Competition Profit Maximization
Quantity
Revenue MC AC 24
D=AR=MR P
Profit
AVC
Cost
Revenue Rectangle 52

39. Essay Thinking question:
Analyze an analysis of our economy (from a bank’s economic website.
Know your macro “tools” and consequences.
Use three seminar topics to suggest improvements to our economy