Intermediate Macroeconomic Theory (ECON 305) | ECON 305-D100 SECOND MIDTERM EXAM – ANSWER KEY | Latest 2025 _ SFU.

1 Department of Economics ECON 305-D100 Simon Fraser University March 22, 2024 SECOND MIDTERM EXAM – ANSWER KEY PART 1: Multiple-Choice Questions (1.25 points each, 30 points total) THERE IS ONLY ONE CORRECT ANSWER PER QUESTION 1. Higher wages would make you: (a) Work more due to the income effect (b) Work less due to the substitution effect (c) Work less due to the leisure effect (d) Work more or less, depending on your preferences (e) All of the above 2. Which of the following theories would predict that immigration causes local workers’ wages to decrease? (a) Increasing returns to scale (b) Skill complementarity (c) Capital accumulation (d) Monopsony (e) None of the above 3. One of the implications of the intertemporal budget constraint is that: (a) Current consumption does not have to equal current income (b) There can be income transfers between today and the future (c) Lifetime consumption equals total wealth (d) All of the above are correct (e) None of the above are correct 4. If moving an extra unit of future consumption to today’s consumption improves your lifetime utility, you are NOT: (a) Saving enough (b) Spending all your future income (c) Maximizing your lifetime utility (d) Earning enough income today (e) Discounting the future 2 5. Economic theory predicts that raising tax rates on top income earners above their current levels: (a) Will certainly reduce the labour effort of these people (b) Will certainly increase the labour effort of these people (c) May cause tax avoidance behaviour (d) May cause the stock market to rise (e) Will increase the government debt-to-GDP ratio 6. The Phillips curve is upward sloping because: (a) Monetary policy responds positively to inflation shocks (the “Taylor principle”) (b) Government spending tends to be larger in recessions (c) Capital depreciates faster if underutilized (d) Firms will raise prices when confronted with excess demand (e) None of the above 7. If output is above potential: (a) Wages will rise faster than prices (b) Inflation will increase above expectations (c) The central bank is likely to increase the money supply through open-market operations (d) The currency will depreciate (e) All of the above 8. According to the theory of Ricardian equivalence: (a) The government should smooth its spending over the business cycle (b) Tax cuts affect consumption only if the expected path of government spending changes, too (c) An increase in the income tax rate reduces investment spending (d) Consumers who are borrowing-constrained will spend more than those who are not (e) None of the above 9. According to the quantity theory of money: (a) Velocity is fixed in the short run but flexible in the long run, like capital (b) The price level is independent of real GDP (c) Money demand is proportional to nominal GDP (d) All of the above (e) None of the above 10. Canada’s federal government spends most of its budget on: (a) Transfers 3 (b) Income taxes (c) MSP premiums (d) Defense / military (e) Debt service / interest payments 11. If inflation goes down a lot, we would expect people to: (a) Prefer to use credit in transactions rather than cash (b) Convert their foreign currency holdings into domestic currency (c) Accelerate their consumption plans to take advantage of low prices (d) Spend their money faster (the “hot potato effect”) (e) None of the above 12. According to the Phillips curve, a positive macroeconomic demand shock: (a) Reduces the rate of inflation (b) Has no effect on the rate of inflation (c) Increases the unemployment rate permanently (d) Reduces the unemployment rate temporarily (e) None of the above 13. According to monetary theory: (a) Money is the root of all evil (b) Only a heavy object can be used as money (c) Only an intrinsically useless object can be used as money (d) An intrinsically valuable object makes for the best kind of money (e) None of the above 14. Potential output is defined as: (a) The amount of total output if all inputs were utilized at their long-run, sustainable levels (b) What an economy produces when it is at maximum capacity (c) The market value of all currently produced goods and services in an economy (d) The amount of output when inflation is zero (e) The level of output when unemployment is zero 15. Over the last 30 years, the world income distribution has become: (a) More unequal as the poorest countries have fallen further behind (b) More equal because the rich countries have undergone recessions (c) More unequal because inequality has risen within most countries (d) More equal because of growth in developing countries (e) More unequal because of the superstar effect 4 16. Suppose that in a 50-year time period, real output increases by 700% and the money supply increases by 300%. According to the quantity theory, what happens to the price level? (a) Decreases by 100% (b) Decreases by 50% (c) Stays the same, because velocity adjusts endogenously (d) Increases by 100% (e) Increases by 400% 17. Economists think that in the long run: (a) The government can run a deficit every year as long as the economy is growing (b) A debt-to-GDP ratio above 100% is trouble, but below 100% is safe (c) Government must run a balanced budget (d) A deficit in one year must be matched by an equal surplus in another year (e) Government borrowing is the source of most economic fluctuations 18. The money demand curve is downward sloping because: (a) Bonds are more liquid than money (b) The central bank tends to raise interest rates in booms and lower them in recessions (c) High interest rates represent a high opportunity cost of holding money, so people want less of it (d) Inflation is positively affected by changes in potential output (e) None of the above 19. Consumption is likely affected by short-term output in addition to potential output: (a) Because many consumers are borrowing constrained (b) Because of consumption smoothing (c) Because consumers can read economic forecasts, and short-term output often provides an indicator of where the economy is headed (d) All of the above (e) Actually, consumption only depends on potential output, not on short-term output (the “permanent income model”) 20. Economists think that in the long run: (a) Immigration reduces the wages of local workers, because labour demand curves are always downward sloping (b) Immigration of skilled workers will increase the wealth of the destination country (c) Wages of the average worker will be at the subsistence level, where population growth is zero (d) Immigration hurts local workers but benefits local capital owners (e) None of the above 5 21. Over the last 40 years, the income distribution in the US and Canada has become: (a) More unequal because productivity growth has slowed (b) More equal because financial crises have decimated the wealth of the super-rich (c) More unequal because of increased tax rates (d) More equal because of an increase in the labour share (e) None of the above 22. Which of the following is an example of “money illusion”? (a) Refusing nominal wage decreases when inflation is zero but accepting a 3% wage increase when inflation is 5% (b) Holding too much liquid cash and not enough illiquid (but high-return) investments (c) Thinking that asset-backed money (e.g., gold standard) is safer than fiat money (e.g., Canadian dollars) (d) The fact that tax brackets are typically indexed to inflation nowadays (e) None of the above 23. Which of the following is an advantage of digital over physical money: (a) Privacy: cash transactions are very hard to track (b) No risk of theft: digital transactions can always be reversed (c) Divisibility: with coins and bills, change needs to be exact but digital cash is always precise to the cent (d) All of the above (e) None of the above 24. We would like to know whether GDP growth is stationary in order to _____, but this is difficult because _____. (a) Make short term forecasts; it is not persistent enough (b) Know whether we are in the short run or in the long run; it is not persistent enough (c) Get better information on the state of the economy right now; of macroeconomic shocks (d) Understand the history of economic growth; some countries have experienced so much growth while others became even poorer (e) Make long term forecasts; it is so persistent 6 PART 2: Long Questions (30 points total) 1. (9 points total) Assume that there are two types of work: X-work and Y-work. Workers can freely choose which type of work they want to do. There is also capital in this model, so the production function is: