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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$ ?