11S_Mid1_Sol

# 11S_Mid1_Sol - ECONOMICS 204 PAGE NUMBER 1 UNIVERSITY OF...

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ECONOMICS 204 PAGE NUMBER 1 UNIVERSITY OF VICTORIA ECONOMICS 204 ANSWERS MIDTERM 1 SPRING 2011 Section 1 (20 marks) Answer ALL 20 multiple-choice questions 1. B 2. B 3. C 4. A 5. A 6. B 7. C 8. A 9. A 10. B 11. B 12. C 13. D 14. B 15. C 16. B 17. C 18. C 19. A 20. C Section 2 (20 marks) 1. Brief explanation of following terms: (a) Okun’s law Okun’s law describes the negative relationship between cyclical unemployment and GDP. +1 {Aside. Because employed workers help to produce goods and services and unemployed workers do not, increases in the unemployment rate should be associated with decreases in real GDP.} Okun’s law indicates that roughly 4% growth in real GDP is necessary to keep the growth in the number of jobs in pace with growing size of the labour force. +1 (b) Classical Dichotomy The theoretical separation of real and nominal variables in the classical model, which implies nominal variables do not affect real variables. +2 (c) Income velocity of money The income velocity of money is defined in an identity MV = PY , the quantity equation.

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