Download April 2003

ECONOMICS A02Y - INTRODUCTORY ECONOMICS (A Mathematical Approach)
FINAL EXAM – April, 2003
1. Value of market basket in 2004 ( ∑P0Q0 ) = $200 (note: does not include machines)
Value of 2004 market basket of goods in 2010 (∑P1Q0 ) = $320
CPI = 320/200 x 100 = 160
The correct answer is (G).
2. ∑P0Q1 = 470
∑P1Q1 = 800
GDP deflator = 800/470 x 100 = 170.2. The correct answer is (I).
3. GDP in 2004 = 400
Nominal GDP in 2010 = 800
Real GDP in 2010 = 800/170 x 100 = 470.59 or 470. The percentage change in real GDP
= (470.59 – 400)/400 x 100 = 17.65% or 17.5%. The correct answer is (G).
4. Unemployment rate = U/U+E x 100 = 1,800,000/19,800,000 = 9.09%
Participation rate = U+E/Popn = 19,800,000/24,000,000 = 82.5%. The correct answer
is (F).
5. PV0 = 1210/1.1 + 1210/1.21 = 2100
PV1 = 1210/1.08 + 1210/1.166 = 2157.75 or an increase of $57.75. The correct
answer is (N).
6. Shift of AD to the right and, because of an increase in productivity, a shift of SRAS to
the right (also a shift of Potential GDP to the right). The correct answer is (A).
7. Income Approach
Corporate Profits (before Direct Taxes) + Interest and Miscellaneous Investment Income
(before Direct Taxes) + Rent (before Direct Taxes) + Wages and Salaries and
Supplementary Labour Income (before Direct Taxes) + Depreciation (Capital
Consumption Allowances) + Net Income of Unincorporated Businesses, Farm and nonFarm (before Direct Taxes) + Indirect Taxes minus Subsidies
= 200 + 30 + 40 + 550 + 120 + 100 + 60 = 1100
GDP = 1100. The correct answer is (D).
8. Expenditure Approach
Government Expenditure + Gross Investment + Consumption + Exports – Imports
=300 + 250 + 600 + 400 – (missing imports) = 1550
Value of imports = 1550 – 1100 = $450 million. The correct answer is (I).
9. C = 40 + .9Yd
TA = -40 +0.08Y
TR = 60 – 0.02Y
I = 150
G = 110
X = 175
IM = 40 + 0.06Y
Yd = Y – TA + TR = Y + 40 – 0.08Y + 60 – 0.02Y
= 100 + 0.9Y
C = 40 + 0.9(100 + 0.9Y) = 40 + 90 + 0.81Y
= 130 + 0.81Y
AE = C + I + G + (X – IM) = 130 + 0.81Y + 150 + 110 + 175 – 40 – 0.06Y = 525 + 0.75Y
Equilibrium Condition = AE = Y
Y = 525 + 0.75Y
Y – 0.75Y = 525
Y(1-0.75Y) = 525
Y* = 1/(1-0.75Y) x 525 = 4 x 525 = 2100. The correct answer is (U).
10. GBB = TA – TR – G
= -40 + 0.08Y – 60 + 0.02Y – 110
= -210 + 0.1Y
Equilibrium GDP is 2100. Therefore, GBB = -210 + 0.1(2100) = 0. The correct answer is (M).
11. GBBYf = 1600 = -210 + 0.1(1600) = -50. The correct answer is (L).
12. The tax or transfer multiplier is dC/dYd x 1/(1-dAE/dY). We can see that dC/dYd = 0.9 and
1/(1-dAE/dY) = 4. Therefore, the tax or transfer multiplier = 3.6. Increasing taxes by 100 would
reduce equilibrium Y by 3.6 x 100 = 360 (i.e., –360). The correct answer is (B).
13. The government expenditure multiplier is 4. Therefore, a cut of 100 in G will lead to a
change in Y of –400. The new value of GDP will be 2100 – 400 = 1700. The correct answer is
(P).
14. For a small open economy with a flexible exchange rate, monetary policy is powerful but
fiscal policy is not. The correct answer is II or (B).
15. C = 350 + 0.8Y – 2P
I = 250
AE = C + I = 600 + 0.8Y – 2P
Y = AE = Y – 0.8Y = 600 – 2P
Y* = [1/(1-0.8)](600 – 2P) = 5(600 – 2P)
Y* = 3000 – 10P
If Y = 1600
10P = 3000 – 1600 = 1400 so P = 140. The correct answer is (K).
16. If ΔI = +60 then the ΔY = M x ΔI = 5 x 60 = +300. The correct answer is (V).
17. Initial AD curve is given by Y = 3000 – 10P. The new AD curve is shifted to the right by
M x ΔI = + 300. Therefore, the new AD curve is Y = 3300 – 10P. If SRAS is P = 60 + 0.05Y,
Y = 3300 – 10(60 + 0.05Y); Y = 3300 – 600 – 0.5Y; Y + 0.5Y = 2700; Y1* = 1800. The correct
answer is (O).
18. If the new AD curve is Y = 3300 – 10P and LRAS: Y = 1600. Then in the LR, 1600 = 3300
– 10P.
10P = 1700
P*LR = 170. The correct answer is (O).
19. X + KM = IM + KX
0.02Yus – 16E + 34 + 1000rd
= 0.15Yc + 24E + 16 – 500rd
or 0.02(6600) – 16E + 34 + 1000(-0.02)
= 0.15(600) + 24E + 16 – 500(-0.02)
or 132 – 16E + 34 – 20
= 90 + 24E + 16 + 10
i.e. 146 – 16E = 116 + 24E
30 = 40E
E = 0.75
The correct answer is (D).
20. An inelastic money demand will mean that r changes by a lot. An elastic MEI (Investment
Demand function) will mean investment changes by a lot. The correct answer is (B).
21. With a decrease in taxes, AD will rise increasing Y* and P*, and therefore MD will rise
pushing up r. (Of course there is a feedback effect, because the rise in r will reduce the size of
the initial increase in Y* and P*, but they will still increase relative to their original position).
The correct answer is (A).
22. Purchase of bonds causes an increase in MS and a decrease in r, leading to an increase in Y*
and P* . The government decreases expenditure and this shift to the left in AD causes Y* and P*
to go down. Further, MD decreases so r decreases. Therefore, r goes down and the change in
Y* and P* is indeterminate. The correct answer is (F).
23. I = 2000 – 4000r
MS = 680
MD = 840 – 1000r
M = 1/(1-dAE/dY) = 10
680 = 840 – 1000r
r0* = 0.16. The correct answer is (P).
24. To increase GDP by 2000, autonomous expenditures would have to rise (i.e., I would rise)
by 200. Previously I0 = 2000 – 4000(0.16) = 1360. I1 = 1560. Therefore, I1 = 1560 = 2000 –
4000r or = 4000r = 440, r = 0.11. The correct answer is (K).
25. To get r1 = 0.11. MD = 840 – 1000(0.11) = 730. Therefore, MS1 = 730 will deliver r = 0.11.
Since MS0 = 680. ΔMS = +50. The correct answer is (F).
26. Desired reserves are 0.05 x 1,440,000 = 72,000. Excess reserves are 108,000 – 72,000 =
$36,000. The correct answer is (J).
27. The initial change in loans is +$36,000. The eventual Δloans is 1/R x 36,000 = 1/0.05 x
36,000 = $720,000. All of this is an increase in M1. The correct answer is (H).
28. Purchase of $4000 of bonds will increase deposits by +$4000. The initial increase in loans
will be $3800. Eventually, the increase in loans = 1/R x 3800 = $76,000. The correct answer is
(I).
29. AE = 500 – P + 0.6Y
Y = AE = 500 – P + 0.6Y
Y – 0.6Y = 500 – P
Y* = [1/(1-0.6)] x (500 – P) = 2.5(500 – P) = 1250 – 2.5P or P = 500 – 4Y. This is the
Aggregate Demand function.
SRAS: P = 0.4Y
500 – 0.4Y = 0.4Y
500 = 0.8Y
Y* = 625
P = 250
AE function vertical intercept = 500 – 250 = 250
New AD function after G goes down by 100 is Y = 1000 – 2.5P or P = 400 – 0.4Y
400 – 0.4Y = 0.4Y; 400 = 0.8Y; Y* = 500, P = 200
The new AE function is AE = 400 – P + 0.6Y; the new vertical intercept is at 400 – 200 = 200.
AE
E1
250
AE1
E2
AE2
200
Y
500
625
P
500
SRAS
E1
400
250
200
E2
500
AD2
625
1000
AD1
1250
Y
30. (a) From the initial equilibrium, there is then a widespread drop in labour productivity.
P
LRAS
SRAS2
E2
SRAS1 = SRAS3
P2
P1
E1 = E3
AD1
Y
Y2
Y1
30. (b) From the initial equilibrium, there is then an increase in government expenditure, with no
crowding out.
LRAS
P
SRAS2
E3
P3
SRAS1
P2
E2
P1
AD2
E1
AD1
Y
Y1 =
Y3
Y2
31. (a) A fall in Canadian GDP:
Ec/us
SD2
SD1 (of Cdn$)
E2
E1
DD1 (for Cdn$)
Q Cdn$
Q2
Q1
31. (b) A decrease in the U.S. interest rate:
Ec/us
SD2
SD1
E2
E1
DD1
DD2
QCdn$
?
31. (c) An unexpected and unilateral imposition by the U.S. of a high tariff on imports of
softwood lumber exported from Canada:
Ec/us
SD1
E1
E2
DD2
DD1
QCdn$
Q2
Q1
31 (d) A decrease in Canadian Prices:
Ec/us
SD2
SD1
E2
E1
DD1
DD2
QCdn$
?