Download April 19, 2001 - Questions

ECONOMICS A02Y - INTRODUCTORY ECONOMICS (A Mathematical Approach)
Final Exam: April 19, 2001
Time: 180 minutes
Professor Gordon Cleveland (NOTE: YOU MUST BE IN PROF. CLEVELAND’S CLASS TO
WRITE THIS EXAM)
NAME:___________________________________________________________
(Last name)
print clearly
(First name)
STUDENT NUMBER______________________________________________
As indicated in your course outline, only approved calculators are permitted in the exam.
Any programmable calculator may be confiscated, and, if found to contain data relevant to this
course, will result in academic consequences.
If two multiple choice answers both seem to be approximately correct, choose the best of the two
answers. Write answers to multiple choice questions on this front sheet.
USING CAPITAL LETTERS, PRINT YOUR ANSWERS TO ALL MULTIPLE CHOICE
QUESTIONS BELOW
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17. __________
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18. __________
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WRITE ANSWERS FOR QUESTIONS 26 - 30 ON PAGES 10 - 15 IN THE SPACE
PROVIDED.
PART I - MULTIPLE CHOICE (2 marks each, for 50 marks)
1-3
The economy of Wisteria is self-sufficient; it consumes all of its own production.
Wisteria has only two consumption goods (food and shelter) and one investment good
(machines). There is no inventory, no government and no imports and exports. Wisteria
has the following prices and quantities produced and purchased in 1990 and in 2000:
1990
2000
Price
Quantity
Price
Quantity
Food
$4.00
100
$8.00
50
Shelter
$10.00
10
$12.00
20
Machines
$50.00
2
$60.00
2
1.
What would be the value of the Consumer Price Index (to the nearest integer) in 2000 in
Wisteria, if the base year for this index is 1990?
(A) 100
(B) 132
(C) 152
(D) 160
(E) 168
(F) 173
(G) 178
(H) 182
(I) 184
(J) 186
(K) 188
(L) 190
(M) 193
(N) 195
(O) 197
(P) none of the above
2.
If you were to calculate a GDP deflator price index in Wisteria, using 1990 as the base
year, and use it to calculate the value of real GDP, what would be your calculated value of
real GDP for the year 2000 (measured in 1990 dollars)
(A) 100
(B) 117
(C) 128
(D) 173
(E) 240
(F) 300
(G) 360
(H) 400
(I) 440
(J) 480
(K) 500
(L) 600
(M) 720
(N) 760
(O) 800
(P) 1040
(Q) none of the above
3.
Assume that the nominal value of wages in a particular workplace rises by 90% between
1990 and 2000. A union leader in this workplace wants to know if the ability of his
members to consume consumer goods and services has risen or fallen since 1990, and by
how much. Your answer to this union leader should be:
(A)Real wages have fallen by more than 20%;
(B) Real wages have fallen by between 10% and 20%;
(C) Real wages have fallen by between 0% and 10%;
(D) Real wages have stayed the same;
(E) Real wages have risen by between 0% and 10%;
(F) Real wages have risen by between 10% and 20%;
(G) Real wages have risen by more than 20%;
(H) None of the above
2
4.
Consider the following four statements about annual GDP:
I. GDP is a measure of change in purchasing power over a year
II. GDP is a measure of the dollar value of goods and services produced over a year
III. GDP does not include most non-market production
IV. GDP measures the value of production which occurs inside a country’s borders
Which of the above statements is true?
(A) I
(F) I and III
(K) I, II and III
(O) all four
(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
5.
Assume that the value of GDP in a country is $100,000. You learn the following two
facts about transactions with other countries: (a) the value of investment income paid
from this country to non-residents is $10,000; (b) the value of investment income paid
from other countries to residents of this country is $5,000. You are told that there are no
other transactions with other countries that are relevant to your calculation. What is the
value of Gross National Product in this country?
(A) $115,000 (B) $110,000 (C) $105,000 (D) $100,000 (E) $95,000 (F) $90,000
(G) $85,000 (H) None of the above
6.
A three year bond is offered to you. It pays out $100 in interest next year, $100 in interest
the year after that, and $100 in interest plus the principal of $1,000 three years from now.
The current interest rate in the economy is 5%, and this interest rate is expected to
remain the same for the next three years at least. You are offered this bond at a price of
$1200. By how much does the price of this bond have to fall before you would just be
willing to buy it (round your answer to the closest integer)?
(A) zero, I would buy it now
(B) $24
(C) $36
(D) $48
(E) $64
(F) $72
(G) $88
(H) $100
(I) $126
(J) $169
(K) $182
(L) $196
(M) $200
(N) $224
(O) $248
(P) $396
(Q) none of the above
7-8.
A very simple economy in which prices are constant (and the interest rate does not
change) has the spending plans of different groups in the economy described by the
following functions (there is no government and no foreign trade):
3
C = 50 + 0.75Y
I = 150
Questions 7 through 8 can be solved using these equations.
7.
The equilibrium level of real GDP in this economy is:
(A) 400
(B) 600
(C) 650
(D) 700
(G) 900
(H) 1000
(I) 1100
(J) 1250
(M) 1550
(N) 1600
(O) 1700
(P) 1750
(S) 1950
(T) 2040
(U) 2100
(V) 2200
(Y) 2500
(Z) none of the above
(E) 750
(K) 1400
(Q) 1800
(W) 2350
(F) 800
(L) 1500
(R) 1875
(X) 2400
8.
If the Consumption Function in this economy changes to C’ = 25 + 0.5Y, what, in
equilibrium, will the new amount of savings be?
(A) -400
(B) -350
(C) -270
(D) -240
(E) -216
(F) -180
(G) -150
(H) -110
(I) -100
(J) -80
(K) -60 (L) -50
(M) 0
(N) +50
(O) +60
(P) +80
(Q) +100
(R) +110
(S) +150
(T) +180
(U) +216
(V) +240
(W) +270
(X) +350
(Y) +400
(Z) none of the above
9.
Consider the following statements about “the multiplier”
I.
An expansion of spending on goods and services has a multiplied impact on
GDP in the short run because any increase in income leads to a further
increase in spending.
II.
Introducing taxes and transfers into a macroeconomic model generally makes
the size of the multiplier smaller
III.
The multiplier which applies to changes in net exports is smaller than the one
which applies to changes in government spending
Which of the above statements is true?
(A) I
(E) I and III
(B) II
(F) II and III
(C) III
(G) I, II and III
(D) I and II
(H) none of the three
10-12 An economy in which prices are constant (and the interest rate does not change) has the
spending plans of different groups in the economy described by the following functions:
C = 150 + 0.8YD
TA = 150 + 0.2Y
4
TR = 300 - 0.15Y
I = 50 + 0.16Y
G = 300
X = 200
IM = 100 +0.08Y
Questions 10, 11 and 12 can be solved using these equations.
10
The size of the multiplier in this economy is:
(A) 0.6 (B) 1.39
(C) 2.25
(D) 2.5 (E) 2.75
(F) 3
(G) 3.33
(H) 3.5 (I) 3.75(J) 4
(K) 4
(L) 4.5
(M) 5.0
(N) none of the above
11.
The Government Budget Balance can either be a surplus or a deficit or in perfect balance.
If it is a surplus, it is written as a positive (+); if it is a deficit, it is written as a negative
(-). At equilibrium GDP, the Government Budget Balance is:
(A) -400
(B) -350
(C) -270
(D) -240
(E) -216
(F) -180
(G) -150
(H) -110
(I) -100
(J) -80
(K) -60 (L) -50
(M) 0
(N) +50
(O) +60
(P) +80
(Q) +100
(R) +110
(S) +150
(T) +180
(U) +216
(V) +240
(W) +270
(X) +350
(Y) +400
(Z) none of the above
12.
If G increases by 100 and TA increases by 100 at the same time, what will be the effect
on real GDP in the economy in the short run?
(A)
GDP will fall by more than 20%;
(B)
GDP will fall by between 10% and 20%;
(C)
GDP will fall by between 0% and 10%;
(D)
GDP will stay the same;
(E)
GDP will rise by between 0% and 10%;
(F)
GDP will rise by between 10% and 20%;
(G)
GDP will rise by more than 20%;
(H)
None of the above
13-16 Assume there is only one chartered bank in the land of Milk-and-Honey: the Bank of
Moneyall. 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. Matthew Bare-it, the chair of the
Bank of Moneyall has decided that the desired reserve ratio on all bank accounts will be
0.05. Initially, the balance sheet of the Bank appears as below:
BANK OF MONEYALL: BALANCE SHEET
5
ASSETS
Cash Reserves
Loans
LIABILITIES AND NET WORTH
$100,000
$1,400,000
Chequing Deposits
$1,500,000
13.
How much are the excess reserves of the Bank of Moneyall at present:
(A) zero
(B) $1,000
(C) $4,000
(D) $5,000
(E) $8,000
(F) $10,000
(G) $12,000
(H) $18,000
(I) $25,000
(J) $28,000
(K) $30,000
(L) $40,000
(M) $50,000
(N) $62,000
(O) $84,000
(P) $96,000
(Q) none of the above
14.
The people of the land of Milk-and-Honey, all of whom are shareholders in the Bank of
Moneyall, have a discussion and decide that they do not need to hold excess reserves.
The bank makes loans up to the desired reserve ratio, and keeps on doing so as money is
redeposited into the 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) $21,000
(C) $63,000
(D) $100,000
(E) $240,000
(F) $315,000
(G) $420,000
(H) $500,000
(I) $560,000
(J) $600,000
(K) $720,000
(L) $860,000
(M) $920,000
(N) $1,000,000
(O) $1,200,000
(P) $2,100,000
(Q) none of the above
15.
Go back to the beginning of this problem. Assume the situation is as described on the
Balance Sheet. Assume that the Bank of Moneyall decides to keep all the excess reserves
shown on the balance sheet, but no more. David Dodge-em, Governor of the Central
Bank of the land of Milk-and-Honey, decides to engage in open market operations. The
Governor buys $3,000 of bonds on the open market and at the same time sells $1,000
worth of foreign exchange. What, eventually, is the overall change in loans as a result of
this open market operation.
(A) +$2000
(B) +$4,000
(C) +$6,000
(D) +$10,000
(E) +$14,000
(F) +$15,000
(G) +$20,000
(H) +$24,000
(I) +$38,000
(J) +$40,000
(K) +$100,000 (L) +zero
(M) -$2,000
(N) -$4,000
(O) -$6,000
(P) -$10,000
(Q) -$14,000
(R) -$15,000
(S) -$20,000
(T) -$24,000
(U) -$38,000
(V) -$40,000
(W) -$100,000 (X) none of the above
By how much does the money supply change (increase [+] or decrease[-]) as a result of
the open market operations described in Question 15?
(A) +$2000
(B) +$4,000
(C) +$6,000
(D) +$10,000
(E) +$14,000
(F) +$15,000
(G) +$20,000
(H) +$24,000
(I) +$38,000
(J) +$40,000
(K) +$100,000 (L) +zero
(M) -$2,000
(N) -$4,000
(O) -$6,000
(P) -$10,000
(Q) -$14,000
(R) -$15,000
(S) -$20,000
(T) -$24,000
16.
6
(U) -$38,000
17.
(V) -$40,000
(W) -$100,000 (X) none of the above
For a small open economy having a fixed exchange rate, which of the following
statements is true:
I.
fiscal policy is effective
II.
monetary policy is effective
III.
both fiscal and monetary policy are effective
IV.
neither fiscal nor monetary policy is effective
(A) I
(F) I and III
(K) I, II and III
(O) all four
(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
18-21 The island nation of Micronesia is self-sufficient (a closed economy), and in particular, its
financial markets are independent of financial markets elsewhere in the world.
Investment demand in Micronesia is given by the equation:
I = 2,000 - 5,000r
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 3,960. Money demand (MD) is given by the equation:
MD = 4,000 - 2,000r
This is a simple economy in which the price level is fixed (the aggregate supply curve is
horizontal), there is no crowding-out, and dAE/dY = 0.8
18.
19.
What is the equilibrium rate of interest?
(A) 0
(B) 0.020
(C) 0.030
(G) 0.070
(H) 0.080
(I) 0.090
(M) 0.150
(N) 0.160
(O) 0.170
(S) none of the above
(D) 0.040
(J) 0.100
(P) 0.180
(E) 0.050
(K) 0.120
(Q) 0.190
(F) 0.060
(L) 0.140
(R) 0.200
Assume now that the central bank of Micronesia decides that it is necessary to decrease
equilibrium GDP by 2000. What rate of interest would give Micronesia the necessary
change in Aggregate Demand?
(A) 0
(B) 0.010
(C) 0.030
(D) 0.040
(E) 0.050
(F) 0.060
(G) 0.070
(H) 0.080
(I) 0.090
(J) 0.100
(K) 0.120
(L) 0.140
(M) 0.150
(N) 0.160
(O) 0.170
(P) 0.180
(Q) 0.190
(R) 0.200
(S) none of the above
7
20.
What change in the money supply would be necessary to achieve this change in the rate of
interest?
(A) zero
(B) +$10
(C) +$20
(D) +$30
(E) +$40
(F) +$50
(G) +$60
(H) +$75
(I) +$80
(J) +$90
(K) +$100
(L) +$160
(M) +$300
(N) +$400
(O) -$10
(P) -$20
(Q) -$30
(R) -$40
(S) -$50
(T) -$60
(U) -$75
(V) -$80
(W) -$90
(X) -$100
(Y) -$160
(Z) none of the above
21.
Assuming that the desired reserve ratio in all banks in the banking system of Micronesia
is 0.05 and that banks do not hold excess reserves, and that the public keeps its cash
holdings constant, what value of assets would the Central Bank of Micronesia have to buy
(+) or sell (-) in open market operations in order to achieve the required change in the
money supply?
(A) zero
(B) +$1
(C) +$2
(D) +$3
(E) +$4
(F) +$5
(G) +$6
(H) +$7
(I) +$8
(J) +$9
(K) +$10
(L) +$20
(M) +$30
(N) +$40
(O) -$1
(P) -$2
(Q) -$3
(R) -$4
(S) -$5
(T) -$6
(U) -$7
(V) -$8
(W) -$9
(X) -$10
(Y) -$20
(Z) none of the above
22.
What are the three main functions of money?:
(A) Curing output gaps, implementing Okun’s law, and stabilizing the currency
(B) Performing open market operations, switching federal government funds and changes
to the Bank Rate
(C) Fiat money, deposit money, and commodity money
(D) Coins, paper money and chequing accounts in banks
(E) Acting as automatic stabilizers, implementing discretionary monetary policy, and
affecting interest rates
(F) Acting as a store of value, a unit of account and a medium of exchange
(G) none of the above
23.
In Econoland, the equation for the Aggregate Demand curve is P = 100 - 2Y. The
equation for the short run Aggregate Supply curve is P = 2Y. The Long Run Aggregate
Supply curve is vertical at Potential GDP. If this economy is in short and long-run
equilibrium, what is the current price level?
(A) 8
(B) 10
(C) 12
(D) 16 (E) 18
(F) 20
(G) 25
(H) 30
(I) 35
(J) 36
(K) 40
(L) 44
(M) 48
(N) 50
(O) 75
P) none of the above
8
24.
If Econoland has the same Aggregate Demand and Aggregate Supply curves described in
Question #23, and Investment Demand increases by 20 while the multiplier is 5, what
will the long run value of GDP be in Econoland?
(A) 8
(B) 10
(C) 12
(D) 16 (E) 18
(F) 20
(G) 25
(H) 30
(I) 35
(J) 36
(K) 40
(L) 44
(M) 48
(N) 50
(O) 75
P) none of the above
25.
An economy with a floating exchange rate has the following equations describing Exports
(X), Imports (IM), Capital Exports (KX), and Capital Imports (KM):
X = 0.05Yus – 120Ec/us
IM = 0.3Yc + 100Ec/us
KX = 42 – 500rd
KM = 40 + 1000rd
(rd is the Canadian – U.S. interest differential)
If Yus = 5,000, Yc = 400, the U.S. interest rate = 0.04 (4%), and the Canadian interest
rate = 0.05 (5%), what is the exchange rate Ec/us?
A) 0.60
B) 0.65
C) 0.7
D) 0.72
E) 0.75
F) 0.80
G) 0.85
H) 0.9
I) none of the above
9
PART II -- TRUE-FALSE/EXPLAIN (8 marks each)
Indicate whether the statements below are true or false (or uncertain) and explain briefly
(but clearly) why you believe they are true, false or uncertain. Most of the marks are
given for your explanation. You may use diagrams, words and/or algebra in your
answers. Answer the questions in the space provided below the statements.
26.
If the Bank of Canada increases the money supply, the population will increase its
purchases of bonds.
27.
Taxes and transfers are known as “automatic stabilizers” because they redistribute money
towards the poor, increasing social stability.
10
PART III - GRAPH-BASED QUESTIONS
(12 marks)
28.
In an economy with no taxes or transfers, we have the following expenditure equations:
C = 100 + 0.8Y – 0.5P
I = 200
G = 150
X = 200 – 0.25P
IM = 100 + 0.20Y + 1.25P
Using this information, calculate the AE function (Aggregate Expenditure) for P = 100, for P
= 200 and for P =50 and put these three equations in the space provided below:
Now calculate the AD function and put this equation below:
This question continues on the next page.
11
Using the “linked-diagrams” approach, draw the 3 AE curves and the related AD curve on these
graphs. Label all the axes and all relevant curves, lines and intersection points.
12
(12 marks)
29.
There are three graphs below. Each shows the foreign exchange market in its initial
equilibrium position, with a floating exchange rate. The following are three possible
changes that could occur. You should show the effect of the first change on the first
graph, the second change on the second graph, and the third change on the third graph.
Beside each graph, in one or two sentences, you should explain what is happening on the
graph and why. Label all curves on the graph. Indicate on the graphs what happens to
the equilibrium value of the exchange rate and the quantity of Canadian dollars traded.
The changes are (a) a fall in U.S. GDP (b) a rise in the Canadian interest rate (i.e., a rise
in the differential between Canadian and U.S. interest rates), (c ) a rise in Canada’s GDP
(Note: these three changes could have further effects on the Canadian economy beyond
their immediate effects on the foreign exchange market, but you do not need to take these
“second-round” effects into account in your diagrams)
13
14
(10 marks)
30. Assume that in Xanadu, G = 400, TA = 100 + 0.20Y and TR = 150 – 0.05Y.
(a) calculate the GBB function for Xanadu, and write it in the space below:
(b)Draw the GBB curve on the graph below
(c ) Assume that Y* (current level of GDP) is 1000, and that Potential GDP is 1500.
Calculate the value of the actual GBB, the cyclical GBB and the structural GBB and
write them in the space provided below:
Actual:
Cyclical:
Structural:
(d) On the graph below, show the amount of each of these (actual GBB, cyclical
GBB, and structural GBB) as they are shown on the graph.
15