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NAME____________________________________ ECONOMICS 100:15 SECOND WINTER MID-TERM March 26, 2004 100 POINTS 50 MINUTES SECTION A: Answer the question in this section: 1. 35 points: 18 minutes Between 1928 and 1933 the Canadian economy went from a situation of good economic conditions into the most severe recession in the nation’s history. Prices fell, real GDP declined sharply and unemployment reached 20%. Difficult conditions persisted throughout the 1930’s and full employment was restored only after rearmament began at the beginning of World War II. a. Assuming that the economy was at full employment equilibrium in 1928, use an aggregate supply aggregate demand diagram and explain what happened to the Canadian economy. b. Give two examples of the type of events which might have caused a severe recession and explain how they cause a recession. c. Explain why an automatic adjustment process failed to return the economy to full employment automatically during the 1930s and indicate why rearmament restored full employment 1 NAME____________________________________ SECTION B: Answer THREE of the four questions in this section: 36 points: 18 minutes 2. List and define the three types of unemployment. Discuss which one became a serious problem when the steel mill in Sydney was shut down. Do changes in the business cycle have a strong impact on that type of unemployment? Why? 3. a. Complete the following table taking 2010 as the base year: YEAR 2010 2011 2012 COST OF BASKET $2,000 $2,200 $2,420 PRICE INDEX RATE OF INFLATION b. Explain why a price index is an important part of measuring economic growth. 4. Explain the relationship between exports and imports which creates a trade surplus. If Canada has a trade surplus, will it be a net international lender or borrower? Explain your answer. Section continues…. 2 NAME____________________________________ 5. a. Explain the difference between the government debt and the government deficit. b. Define net taxes and explain the relationship between net taxes and government expenditures on goods and services which creates a deficit and the relationship between them which creates a surplus. SECTION C: Answer TWO of the three questions in this section: 28 points: 14 minutes 6. a. Draw a diagram of the Consumption Function, being sure to include the 45 degree line. Label the diagram, showing when savings are positive and when they are negative. c. If the marginal propensity to consume is .8 and income rises by $1000, consumption will increase by _____ and savings will increase by _______. Section continues…. 3 NAME____________________________________ 7. Explain what is happening within firms when short-run equilibrium real GDP exceeds potential real GDP. That, is equilibrium real GDP lies to the right of the long-run aggregate supply curve (LAS). Discuss the impact of this short-run situation on the short-run aggregate supply curve (SAS) in the long-run. 8. a. Give three reasons why the long-run aggregate supply curve (LAS) might shift to the right. b. Draw an aggregate demand, aggregate supply diagram to illustrates what happens to the short-run aggregate supply curve (SAS) curve when the LAS curve shifts to the right and explain the behaviour of the SAS curve. c. Give one reason why the LAS might shift to the left. 4