Economics Exam Short Answer

Page 1

1) A monopolist has a lot of influence on price because they have no competition being the only producer in an industry. This makes monopolists price makers.

2) A monopolist faces a downward slope demand curve because they face the demand for the entire market meaning it follows all laws of demand.

3) A monopolistic competitor's demand curve is elastic because there are many substitutes so consumers will react to price changes.

4) The relationship among businesses in an oligopoly is characterized by mutual interdependence meaning oligopolists can't ignore their competitors.

5) Businesses in an oligopoly can choose to operate as rivals or they can choose to work together to maximize profit.

Page 2

1) What organization keeps track of the Canadian economy?Statistics Canada

2. Why does GDP use dollar Value?

Dollar Value simplifies GDP and makes it easy to quantify and combine a wide range of goods and services.

3. Explain what the inner circle of the Circular Flow represents, and does it go clock or counter-clock wise?

The inner circle represents the flow of payments and goes clockwise.

4. Explain what the outer circle of the Circular Flow represents, does it go clock or counter-clock wise?

The outer circle represents the flow of products and resources and goes counterclockwise.

5. In a simple economy does the Income Approach and the Expenditure Approach equal or differ? Why?

They don’t equal because one takes into account the spending and one takes into account the income.

6. What makes up Canadians incomes?

Wages, rent, profit, and interest.

7. List and briefly explain each of the seven categories Statistics Canada uses to calculate GDP using the Income Approach.

Wages and Salaries - direct payments to workers, pension funds, employee benefits

Corporate Profits - payments to shareholding households, profits put back into a business, corporate income tax

Interest Income - interest paid on loans and bonds

Proprietors’ Incomes and Rents - earnings of sole propietorships and partnerships

Indirect Taxes

Depreciation

Statistical Discrepancy

8. What are two excluded categories of purchases in calculating Expenditure Approach? Why are they excluded?

Financial exchanges and second hand goods because counting these would be double counting.

9. List and briefly define the four categories of purchases included in calculating Expenditure Approach GDP.

Personal Consumption - household spending on goods and services

Gross Investment - Purchases of assets that are intended to produce revenue

Government Purchases - spending of all levels of government

Net Exports - Exports - imports

10. How do personal savings provide funds to businesses?

By depositing funds in banks and investing in stocks and bonds, households provide a flow of personal savings to businesses.

11. What do Government purchases include?

Any current spending by all levels of government on goods and services.

12. Why are transfer payments not included in Government purchases?

Transfer payments are just a redistribution of purchasing power, so counting these would be double counting

13. How do governments finance its spending?

From taxes from households and businesses and through borrowing in financial markets.

Page 3

1) The demand for ice-cream cones is more inelastic in summer than it is in winter because ice-cream cones are more of a necessity in summer than in winter

2) The demand for a silk shirt would be elastic because silk shirts are luxury items with many substitutes such as cotton shirts

3) The demand for salt would be inelastic because there aren't many substitutes for it and it's a necessity

4) The demand for bread would be inelastic because there are few substitutes and it's a necessity

5) The demand for a BMW is elastic because it's a large budget luxury item with many substitutes