Instructions: You are to consider all of the following statements. Determine whether each statement is absolutely True, absolutely False or Uncertain (i.e., 'it depends'). Then carefully explain why your determination is correct, making sure to define the key terms and relationships you use in your explanation, using graphical analysis where appropriate. (2 marks for the determination; 8 marks for the explanation).

Part 1: Microeconomics

1.Profit maximizing behavior on the part of enterprises will lead to the efficient production of commodities.

2.According to Marshall, unsatisfied sellers will reduce the price of a commodity when it is above the equilibrium price.

3.The principle of diminishing returns to production implies a principle of increasing costs of production.

4.The universal economic problem is scarcity.

5.The demand for products with close substitutes tends to be own-price elastic, while the demand for products without close substitutes tends to be own-price inelastic.

6.The distribution of income is ultimately determined by: (a) the distribution of the ownership of the factors of production and (b) the prices of the services of these factors of production.

7.Economic rent is price determined, not price determining.

8.Perfectly competitive markets provide an incentive for enterprises to pollute.

9.If the value of the marginal product of an input exceeds that input's price, the perfectly competitive enterprise will increase its profit (or reduce its losses) by decreasing its use of that input.

10.Because of the substitution and income effects, a decrease in the price of pretzels will cause, ceteris paribus, an increase in demand for pretzels.

Part 2: Macroeconomics

1.Inflation does not make a nation poorer, it redistributes income to those who can or do raise their prices and away from those who cannot or do not raise their prices.

2.An increase in the price of Canada's imported commodities, with the price of its exports remaining unchanged, indicates an increase in Canada's terms of trade and an increase in the gains from trade to Canada.

3.Income transfers that result in a less unequal distribution of income will result in an increase in aggregate consumption expenditure.

4.With specialization (based on comparative advantage) and trade, countries can produce at points outside their production possibility frontiers.

5.Per capita GDP provides an accurate index of a country's standard of living.

6.The existence of the net export effect reinforces the counter cyclical impact of fiscal policy stabilization initiatives.

7.If aggregate demand and aggregate supply both increase then equilibrium, GDP and the price level will both increase.

8.Tariffs are considered to be inefficient because they redistribute real income to domestic producers and the state and away from domestic consumers.

9.The policy tools available to address demand-pull inflation are not useful in addressing the problems of cost-push and structural inflation.

10.The demand for Canadian dollars by foreigners is automatically matched by the supply of foreign currency.