Midterm 2 Review iC Questions Flashcards
Consider the Solow model. Which of the following would lead to an increase in GDP per capita, but a decrease in GDP per worker?
a) A decrease in population
b) A decrease in labour force participation
c) An increase in human capital
d) An increase in labour force participation
e) An increase in population
d) An increase in labour force participation
“We have more people working and the same number of people, more people, but those additional people working increase income by less than the increase in the labour force which leads to a reduction in GDP per worker/productivity”
You have the following data for youth (15-24) in Canada in January of each year (numbers in thousands):
2020 - Population - 4,452, Labour Force - 2,879, Employed - 2,597
2025 - Population - 5,000, Labour Force - 3,154, Employed - 2,724
Which of the following are true?
a) The participation rate is higher now
b) The employment rate is higher now
c) The unemployment rate is higher now
d) More than one of the above is true
c) The unemployment rate is higher now
Participation Rate: 64.7 -> 63.1
Employment Rate: 58.3 -> 54.5
Unemployment Rate: 9.8 -> 13.6
In January 2020, the median wage for employed youth (age 15-24) in Canada was $15. In January 2025, it was $19. Over the same time period, the Consumer Price Index rose from 136.8 to 161.3
Given this information, we can say that real wages:
a) Decreased
b) Were unchanged
c) Increased
d) None of the above
c) Increased
15 X 161.3/136.8 = 17.69
Which of the following will lead to an increase in current consumption and a decrease in current savings?
a) An increase in interest rates
b) An increase in wealth
c) A decrease in current income
d) The expectation of a decrease in future income
e) None of the above
b) An increase in wealth
“If people feel richer, they don’t need to save as much because the wealth will carry forward into the future, so they can spend more now leading to an increase in current consumption and a decrease in current savings”
Consider the loanable funds model. In the long-run, which of the following would lead to a decrease in the interest rate and a decrease in the quantity of investment
a) An increase in business optimism
b) The expectation of higher corporate taxes in the future
c) A reduction in the government budget deficit
d) An increase in household consumption
e) None of the above
b) The expectation of higher corporate taxes in the future
Which of the following would cause the Canadian dollar to depreciate in value?
a) A decrease in Canadian exports
b) A decrease in Canadian investments in the US
c) A decrease in Canadian tourism in Mexico
d) A decrease in foreign tourism in Canada
e) None of the above
a) A decrease in Canadian exports
d) A decrease in foreign tourism in Canada
“Will reduce the demand for the Canadian dollar, causing a depreciation”
If frictional unemployment is 4%, structural unemployment is 2%, and cyclical unemployment is 1% then following Okun’s rule, the output gap is:
a) -9%
b) -3%
c) -1%
d) 3%
e) 9%
Cyclical Unemployment = -1/3 * Output Gap
1 = -1/3 * OG
OG = -3%
b) -3%
Which of the following pairs of changes will certainly lead to a negative output gap?
a) Lower overnight interest rates and less government purchases
b) An increased risk premium and lower tax rates
c) An increase in overnight interest rates and higher business optimism
d) A decrease in net exports and a decrease in consumer confidence
e) None of the above
d) A decrease in net exports and a decrease in consumer confidence
“A decrease in net exports would lower the output gaps, so would a decrease in consumer confidence”
Which of the following economic shocks would cause unexpected inflation to increase?
a) An increase in real interest rates due to monetary policy
b) An increase in government tax rates
c) A depreciation of the Canadian dollar
d) A decrease in government purchases
e) None of the above
c) A depreciation of the Canadian dollar
“Causes both cost-push and demand pull inflation, shifting the Phillips curve up and the IS curve to the right, generating both output gaps and cost-push inflation”
Starting in long-run equilibrium, unemployment falls and inflation rises above expected inflation. Which of the following shocks could have caused this?
a) Shift left of the IS curve
b) Shift up of the MP curve
c) Shift down of the MP curve
d) Shift up of the Phillips curve
e) None of the above
c) Shift down of the MP curve
“MP curve shifts down, leads to more output, less unemployment, leads to inflation”
