Download March 19, 2001

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ECONOMICS A02Y – INTRODUCTION TO ECONOMICS (A Mathematical Approach)
Fourth In-Class Test: March 19, 2001
1.
The Central Bank decides to increase the money supply in order to affect the level of the
interest rate. Consider the following statements about the events which happen next:
I) there is an excess demand for money at the original interest rate
II) the public sells more bonds to get rid of this excess money
III) the price of bonds rises, so the effective yield on these bonds (the effective interest
rate) falls
Which of the above events will generally occur when the Central Bank increases the
money supply?
(A) I
(B) II
(E) I and III
(F) II and III
(H) none of the three statements
2.
(C) III
(G) I, II and III
(D) I and II
When the economy is approaching recession, and the Central Bank decides to stimulate
the economy, which of the following problems may occur?
I)
II)
III)
interest rates will get stuck in the liquidity trap
stimulation of the economy will cause crowding-out of investment spending
chartered banks will decide to increase their desired reserve ratio (i.e., will not loan
out all of their excess reserves)
IV) a loss of business confidence will cause investment spending to be unresponsive to
lower interest rates
(A) I
(F) I and III
(K) I, II and III
(O) all four
3.
(B) II
(C) III
(G) I and IV (H) II and III
(L) I, II and IV (M) I, III and IV
(P) none of the four
(D) IV
(E) I and II
(I) II and IV (J) III and IV
(N) II, III and IV
The Canadian economy is in a short and long run equilibrium position with
Aggregate Demand equal to Aggregate Supply at Potential GDP. Now, U.S. GDP shoots
upwards, and as a result, Canada’s Aggregate Demand curve shifts to the right. Consider
the following statements about what happens:
I) the price level rises and real GDP rises as the economy moves towards its new shortrun equilibrium
II) the nominal wage level stays constant in the short-run
III) in the long run, the nominal wage level rises
IV) In the long run, equilibrium GDP is back at Potential GDP, and lower than
the level of GDP in the short-run equilibrium
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Which of the above statements is true about what happens in the AD-AS model when U.S.
GDP rises?
(A) I
(B) II
(C) III
(D) IV
(E) I and II
(F) I and III
(G) I and IV (H) II and III
(I) II and IV (J) III and IV
(K) I, II and III
(L) I, II and IV (M) I, III and IV
(N) II, III and IV
(O) all four
(P) none of the four
4.
A rise in the overall price level will:
(A) cause the Aggregate Demand function to shift downwards.
(B) cause the Aggregate Demand function to shift upwards.
(C) shift the Consumption Function downwards, and therefore shift the Aggregate
Expenditure Function downwards.
(D) shift the Consumption Function upwards, and therefore shift the Aggregate Expenditure
Function upwards.
(E) change the Government Expenditure Multiplier, causing a decrease in the overall level
of National Income.
(F) cause an increase in the level of saving out of Disposable Income, therefore allowing
Investment to rise.
(G) cause the Aggregate Supply Function to shift upwards.
(H) cause the Aggregate Supply Function to shift downwards
(I) none of the above.
5-8
Assume there is only one chartered bank in Never-Never land: the Never-Never Land
Bank. Therefore, the Never-Never Land Bank is the entire banking system. Every time a
loan is taken out of the bank and the money spent, it winds up as a new deposit by the
eventual recipient of the funds. After much excited discussion amongst the shareholders, it
has been decided that the desired reserve ratio on all bank accounts is 0.02. Initially, the
balance sheet of the Bank appears as below:
BANK OF NEVER-NEVER LAND: BALANCE SHEET
ASSETS
Cash Reserves
Loans
5.
LIABILITIES AND NET WORTH
$280 Chequing Deposits
$9800
How much are the excess reserves of the Bank of Never-Never Land at present:
(A) zero
(B) $10
(C) $20
(D) $30
(E) $40
(F) $50
(G) $60
(H) $70
(I) $80
(J) $90
(K) $100
(L) $110
(M) $120
(N) $130
(O) $140
(P) $150
(Q) none of the above
$10000
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6.
The shareholders of the Never-Never Land Bank have a discussion and decide that they do
not need to hold these excess reserves. They make loans up to the desired reserve ratio, and
keep on doing so as money is redeposited into their bank as a result of loans made. How
much of an increase in the money supply (M1) occurs, eventually, as a result of the decision
to stop holding excess reserves.
(A) zero
(B) $20
(C) $60
(D) $80
(E) $100
(F) $200
(G) $400
(H) $480
(I) $600
(J) $800
(K) $1000
(L) $2000
(M) $2450
(N) $3000
(O) $4000
(P) $5000
(Q) none of the above
7.
Assume now that the Never-Never Land Bank is holding zero excess reserves. Peter Pan,
the Governor of the Central Bank of Never-Never Land, decides to engage in open market
operations. The Governor sells bonds on the open market for $50 to some members of the
public. Eventually, what is the overall change in the Never-Never Land money supply as a
result of this open market operation.
(A) zero
(B) +$1
(C) +$49
(D) +$50
(E) +$500
(F) +$1000
(G) +$1225
(H) +$1500
(I) +$1950
(J) +$2000
(K) +$2450
(L) +$2500
(M) +$2750
(N) +$3000
(O) -$1
(P) -$49
(Q) -$50
(R) -$500
(S) -$1000
(T) -$1225
(U) -$1500
(V) -$2000
(W) -$2450
(X) -$2500
(Y) -$3000
(Z) none of the above
8.
In total, by how much does the amount of loans on the Never-Never Land Bank balance
sheet change (increase [+] or decrease[-]) as a result of the open market operations described
in Question 7?
(A) zero
(B) +$1
(C) +$49
(D) +$50
(E) +$500
(F) +$1000
(G) +$1225
(H) +$1500
(I) +$1950
(J) +$2000
(K) +$2450
(L) +$2500
(M) +$2750
(N) +$3000
(O) -$1
(P) -$49
(Q) -$50
(R) -$500
(S) -$1000
(T) -$1225
(U) -$1500
(V) -$2000
(W) -$2450
(X) -$2500
(Y) -$3000
(Z) none of the above
9-12. An economy with no government and no foreign trade sector has the following structure:
C = 50 + 0.75Yd - (P - 100)
I = 100
These equations will be useful in Questions 9 -12.
9.
The Aggregate Demand function for this economy is given by:
(A) AE = 250 + .75Y - P
(B) AD = 250 + .75Y - P
(C) Y = 250 - P
(D) P = 250 - 0.25Y
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(E) Y = 800 - 4P
(F) Y = 600 - 4P
(G) P = 150 - 0.25Y
(H) P = 250 - Y
(I) none of the above
10.
If the amount of Planned Investment Spending in Question 9 were to rise to 200 (i.e., I =
200), by how much would Aggregate Demand for goods and services increase at every
possible price level?
(A) 100
(B) 200
(C) 250
(D) 300
(E) 350
(F) 400
(G) 450
(H) 500
(I) 550
(J) 600
(K) 650
(L) 700
(M) 750
(N) 800
(O) 850
(P) 900
(Q) 950
(R)1000
(S) 1050
(T) 1100
(U) 1150
(V) 1200
(W) 1250
(X)1300
(Y) 1350
(Z) none of the above
11.
If Investment Spending rose to 200, as described in Question 9, what would Aggregate
Demand be at a price level of 100?
(A) 100
(B) 200
(C) 250
(D) 300
(E) 350
(F) 400
(G)450
(H) 500
(I) 550
(J) 600
(K) 650
(L) 700
(M) 750
(N) 800
(O) 850
(P) 900
(Q) 950
(R) 1000
(S) 1050
(T) 1100
(U) 1150
(V) 1200
(W) 1250
(X) 1300
(Y) 1350
(Z) none of the above
12.
Assume that the Short Run Aggregate Supply function is given by: P = 50 + 0.25Y.
Calculate the initial equilibrium level of real GDP when I = 100 (as in Question #9) and
calculate it again when I = 200 (as in Question # 10). What, in this model with price
flexibility, is the amount of increase in real GDP?
(A) 100
(B) 200
(C) 250
(D) 300
(E) 350
(F) 400
(G) 450
(H) 500
(I) 550
(J) 600
(K) 650
(L) 700
(M) 750
(N) 800
(O) 850
(P) 900
(Q) 950
(R) 1000
(S) 1050
(T) 1100
(U) 1150
(V) 1200
(W) 1250
(X) 1300
(Y) 1350
(Z) none of the above
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13-14 The island nation of Eucalyptus is self-sufficient (a closed economy), and in particular, its
financial markets are independent of financial markets elsewhere in the world. Investment
demand in Eucalyptus is given by the equation:
I = 100 - 40r
where I represents planned Investment spending and r represents the interest rate.
Investment is the only type of spending affected by changes in the interest rate. The current
money supply (MS) is 90. Money demand (MD) is given by the equation:
MD = 100 - 80r
The size of the multiplier in this simple economy is 2.5. The price level is fixed.
13.
What is the equilibrium rate of interest?
(A) 0
(B) 0.050
(C) 0.100
(G) 0.130
(H) 0.150
(I) 0.200
(M) 0.500
(N) 0.600
(O) 0.650
(S) 0.850
(T) 0.900
(U) 0.950
(Y) none of the above
(D) 0.110
(J) 0.250
(P) 0.700
(V) 1.000
(E) 0.120
(K) 0.300
(Q) 0.750
(W) 1.050
(F) 0.125
(L) 0.400
(R) 0.800
(X) 1.100
14.
Assume now that the central bank of Eucalyptus decides that it is necessary to decrease
equilibrium GDP by 25. What rate of interest would give Eucalyptus the necessary change
in Aggregate Demand?
(A) 0
(B) 0.050
(C) 0.100
(D) 0.110
(E) 0.120
(F) 0.125
(G) 0.130
(H) 0.150
(I) 0.200
(J) 0.250
(K) 0.300
(L) 0.400
(M) 0.500
(N) 0.600
(O) 0.650
(P) 0.700
(Q) 0.750
(R) 0.800
(S) 0.850
(T) 0.900
(U) 0.950
(V) 1.000
(W) 1.050
(X) 1.100
(Y) none of the above
15.
The short run aggregate supply curve shows the relationship between
(A) the price level and the marginal propensity to consume.
(B) the price level and the desired level of expenditures on National Income.
(C) National Income and total desired Consumption.
(D) National Income and the marginal cost of additional consumer spending.
(E) the price level and the total output that producers wish to produce and sell, with input
prices given.
(F) none of the above