Q1. Assume that two countries both have theper-worker production function y=k0.5, neither has population growth or technologicalprogress, depreciation is 5 percent of capital in bothcountries, and country A saves 10 percent of output whereas country B saves 20 percent. If A starts out with acapital-labour ratio of 4 and B starts out with acapital-labour ratio of2, in the longrun:

A.

A's capital-labour ratio will be 4 whereasB's will be 16.

B.

both A and B will havecapital-labour ratios of 16.

C.

A's capital-labour ratio will be 16 whereasB's will be 4.

D.

both A and B will havecapital-labour ratios of 4.

Q2. If the euro appreciates, your purchases of Canadian goods will_______ and your purchases of German goods will_______, since anappreciating euro means that German goods are now__________.

A.

decrease;

decrease;

more

expensive, creating an income effect that also

decreases

the demand for Canadian goods

B.

notchange;

decrease;

more

expensive, but Canadian goods prices are unaffected

C.

decrease;

increase;

less

expensive relative to Canadiangoods, producing a substitution effect

awayfrom

Canadian goods

D.

increase;

decrease;

more

expensive relative to Canadiangoods, producing a substitution effect

infavourof

Canadian goods that is assumed to exceed any income effect on Canadian goods

Q3. With theCobb-Douglas productionfunction, Y=AK1/4L3/4, if both capital and labour increase by 120%, what will happen to realGDP?

A.

Real GDP will also increase by

120%,

but only if A takes a value greater than 1.0.

B.

Real GDP will increase by exactly

120%.

C.

Because the production function exhibits diminishingreturns, real GDP will increase by less than

120%.

D.

Since the average value of the exponents in the production function is1/2, real GDP will only increase by

60%.

Q4. Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a smallcountry's real exchangerate:

A.

and net exports will both fall.

B.

will rise and its net exports will fall.

C.

and exports will both rise.

D.

will fall and its net exports will rise.

Q4. What would be the likely effect of the following scenario onoutput, the real rental cost ofcapital, and the realwage:

Adevastatingearthquakecausesthecapitalstocktobecutinhalf.

Which of the following describes the most likelyresult?

A.

Output will

increase,

the real rental cost of capital will

decrease,

and the real wage will

increase.

B.

Output will

decrease,

the real rental cost of capital willdecrease, and the real wage will

decrease.

C.

Output will

increase,

the real rental cost of capital will

increase,

and the real wage will

increase.

D.

Output will

decrease,

the real rental cost of capital willincrease, and the real wage will

decrease.

Q5. (a) The difference between a nominal exchange rate and a real exchange rate is

A.

that the former is the price of one currency in terms of another while the latter is the rate at which goods and services in one country can be exchanged for goods and services in another country.

B.

that the former is the rate when trade distorting restrictions such as tariffs are imposed and the latter is the rate when trade is completely unimpeded.

C.

that the former is the rate at which goods and services in one country can be exchanged for goods and services in another country while the latter is the price of one currency in terms of another.

D.

the inflation rate.

(b)What is the difference between real GDP per worker and real GDP per effectiveworker?

A.

Real GDP per effective worker incorporates both the number of workers as well as their productive efficiency while real GDP per worker only considers the number of workers.

B.

There is no meaningful difference since all workers are consideredeffective, otherwise they would not be employed.

C.

Real GDP per worker includes all workers whereas real GDP per effective worker excludes those workers who are deemed ineffective(i.e., unproductive).

D.

None of the above accurately defines the difference.

Q6. Ifpurchasing-power parityheld, if a Big Mac costs$2 inCanada, and if 10 Mexican pesos trade for$1 Canadiandollar, then a Big Mac inCancun, Mexico shouldcost:

A.

5 pesos

B.

2 pesos

C.

10 pesos

D.

20 pesos

Q7. If the real exchange rate between Canada and Japan remainsunchanged, and the inflation rate in Canada is 6 percent and the inflation rate in Japan is 3percent, the:

A.

yen will appreciate by 3 percent against the dollar.

B.

dollar will appreciate by 3 percent against the yen.

C.

yen will appreciate by 6 percent against the dollar.

D.

yen will appreciate by 9 percent against the dollar.

Q8. According to an article in the Globe and

Mail,

investors are borrowing money inyen, where interest rates arelow, and exchanging it for currencies in countries where interest rates arehigher, such as Canada and the United States.

Source: ScottBarlow, "The yen carry trade turnsJapan's pain into ourgain," Globe and

Mail,

December27, 2012.

Is it certain that investors are actually profiting from this difference in interestrates?

A.

Yes, this is exactly what banksdo; borrow at low rates and lend at high rates.

B.

Not unless the profits are tax exempt.

C.

No, the difference in rates could be more than offset by an appreciation of the yen.

D.

No, the difference in rates could be more than offset by a depreciation of the yen.

Q9. Assume two economies are identical in every way except that one has a higher population growth rate. According to the Solow growthmodel, in the steadystate, the country with the higher population growth rate will have a______ level of total output and______ rate of growth of output per workeras/than the country with the lower population growth rate.

A.

higher; the same

B.

lower; the same

C.

lower; a lower

D.

higher; a higher

Q10. If Y=AK0.5L0.5and A=28, K=30,and L=40, please answer the following questions.

a) What is the marginal product of capital(MPK)? Please type the answer to the nearest two decimals.

b) What is the marginal product of labour(MPL)? Please type the answer to the nearest two decimals.

c) Both MPK and MPL do not exhibit diminishing marginal returns.

• True
• False

d) What type of returns to scale does this production functionhave?

A.

Decreasing returns to scale

B.

Increasing returns to scale

C.

Constant returns to scale