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Econ204 F01 Page1
UNIVERSITY OF VICTORIA
EXAMINATIONS DECEMBER 2005
ECONOMICS 204 F01
INTERMEDIATE MACROECONOMICS
TO BE ANSWERED IN BOOKLETS
DURATION: 2 HOURS
INSTRUCTOR: W.CHEN
STUDENTS MUST COUNT THE NUMBER OF PAGES IN THIS EXAMINATION
PAPER BEFORE BEGINNING TO WRITE, AND REPORT ANY DISCREPANCY
IMMEDIATELY TO THE INVIGILATOR. THIS QUESTION PAPER HAS 5 PAGES.
INSTRUCTIONS:
1. You will be asked to present a student I.D. when you hand in your exam paper.
2. You may use a calculator. The use of electronic dictionaries, and cell phones during the
exam is not allowed.
3. The exam paper has two parts. Part I consists of fifteen multiple-choice questions.
Write down all the answers in the booklet. Part II consists of two long-answer
questions. Answer both of these two questions in the booklet.
Econ204 F01 Page2
Part I: (15 marks) Multiple-choice questions.
1. If the nominal money supply rises by 6 percent, the price level rises by 4 percent, and
output rises by 3 percent, then, according to the quantity equation, income velocity
rises by:
a. 13 percent;
b. 7 percent;
c. 3 percent;
d. 1 percent
2.
a.
b.
c.
d.
If domestic investment exceeds domestic savings, one would observe:
negative net foreign investment;
a government budget deficit;
a trade deficit;
both a and c.
3.
a.
b.
c.
d.
In the long run, if the German government places high tariffs on all imports:
Germany’s net exports rise;
Germany’s real foreign exchange rate increases;
net foreign investment in Germany decreases;
all of the above.
4. In a small open economy, a government policy of deficit reduction (I) leads to an
increase in domestic investment spending if international bond-rating agencies
respond by up-grading the country’s debt, but (II) this policy leads to no change in
domestic investment if there is no adjustment in the perceived risk differential.
a. I is true; II is not;
b. II is true; I is not;
c. Both I and II are true;
d. Neither I nor II is true.
5.
a.
b.
c.
d.
The long-run effects of an increase in the money supply include:
an increase in the price level but no change in output;
an increase in output but no change in the price level;
an increase in both the price level and output;
no change in either the price level or output.
6. If the consumption function is C=100+0.8(Y-T), where T is a lump-sum tax, the
government-purchases multiplier is :
a. 0.8;
b. 1.25;
c. 4;
d. 5.
Econ204 F01 Page3
7.
a.
b.
c.
At the intersection of the IS and LM curves:
actual expenditure is equal to planned expenditure;
real money supply is equal to real money demand;
the levels of Y and r satisfy both the goods market equilibrium condition and the
money market equilibrium condition;
d. all of the above.
8. Which of the following statements explains why the aggregate demand curve is
downward-sloping?
a. A lower price level forces the Bank of Canada to increase the money supply.
Consequently, the LM curve shifts down (to the right) and the level of income
increases.
b. A lower price level increases real balances. Consequently, the LM curve shifts
downward (to the right) and the level of income increases.
c. A lower price level induces the government to reduce taxes. Consequently, the IS
curve shifts to the right and the level of income increases.
d. all of the above.
9. As we move along a stationary aggregate demand curve, one factor that is held
constant is:
a. real income;
b. the aggregate price level;
c. the (nominal) money supply;
d. real money balances.
10. The exchange rate is defined as the amount of foreign currency needed to buy one
unit of domestic currency (for example, 100 yen per dollar). A higher exchange rate:
a. leads to a decrease in net exports;
b. makes domestic goods less expensive relative to foreign goods;
c. stimulates exports and depresses imports;
d. leads to higher income.
11. If the current yen-to-dollar exchange rate (for example, 200 yen per dollar) is above a
fixed exchange rate set by the Bank of Canada (for example, 150 yen per dollar),
arbitragers can make profits by:
a. buying yen in foreign exchange markets and selling them to the Bank of Canada;
b. buying yen from the Bank of Canada and selling them in foreign exchange markets;
c. buying dollars in foreign exchange markets and selling them to the Bank of Canada;
d. none of the above.
Econ 204 F01 Page4
12. An increase in a country’s perceived risk premium will:
a. shift its IS and LM curves to the right (in the Y-e diagram), resulting in an
appreciation of its exchange rate;
b. shift its IS and LM curves to the left (in the Y-e diagram), resulting in a depreciation
of its exchange rate;
c. shift its IS curve to the left and its LM curve to the right (in the Y-e diagram),
resulting in a depreciation of its exchange rate;
d. shift its IS curve to the right and its LM curve to the left (in the Y-e diagram),
resulting in an appreciation of its exchange rate.
13. Suppose the initial level of income is less than the long –run equilibrium level. Then,
in the Mundell-Fleming model with a changing price level, the price level will:
a. fall, shifting the IS curve (in the Y-e diagram) to the right;
b. fall, shifting the LM curve (in the Y-e diagram) to the right.
c. rise, shifting the IS curve (in the Y-e diagram) to the left;
d. rise, shifting the LM curve (in the Y-e diagram) to the left;
14. According to the sticky-price model, if all firms in the economy have fixed prices in
the short run:
a. the short-run and long-run aggregate supply curves will be identical;
b. the short-run aggregate supply curve will be vertical;
c. none of the above will be true.
d. the short-run aggregate supply curve will be horizontal;
15. Assume that a typical estimate of the sacrifice ratio is about 5. Thus, if the inflation
rate were to be lowered by 2 percentage points, the amount of one year’s GDP we
must give up is:
a. 2 percent;
b. 2.5 percent;
c. 5 percent;
d. 10 percent.
Econ204 F01 page5
Part II: (25 marks) Long-answer questions.
1. West Bubble makes ordinary soap bars that are sold for 5 guilders each. East Bubble
makes deluxe soap bars that are sold for 100 florins each. The real exchange rate
between West and East Bubble is two ordinary soap bars per deluxe soap bar.
a. What is the nominal exchange rate of guilder?
(2 marks)
b. During the following year, West Bubble has 10% domestic inflation and East Bubble
has 20% domestic inflation. Two ordinary soap bars are still traded for a deluxe soap
bar. At the end of the year, what has happened to the nominal exchange rate? Which
country has a nominal appreciation? Which has a nominal depreciation?
(4 marks)
The following question is independent of the above conditions and questions.
c. On this Monday, the Canadian dollar hit a near 14-year high against the US dollar –
the loonie closed at 86.41 cents US. The CBC news said high energy products’ prices
boosted loonie since a big share of the country’s exports are resource commodities.
Please explain why higher energy products’ price causes appreciation.
(2 marks)
2. Consider the following small open economy:
Cd=200+0.69Y; Id=80-1000r; G=20; NX=85-0.09Y-e;
e=90; MS=115; (M/P)D=L(Y,r)=0.5Y-200r; Y=300.
From questions a) to c), assume the domestic price P=1 and the real domestic interest
rate does not deviate from the foreign or world interest rate.
a. Assuming this economy is in general equilibrium, what is the value of the interest rate
r?
(4 marks)
b. Assuming fixed nominal exchange rates and a fixed domestic price level, what is the
effect (quantitative) on domestic output if the foreign interest rate increases by 0.05?
What is the size of the nominal money supply in the new short-run equilibrium?
Graphs are helpful.
(3 marks)
c. Assuming flexible exchange rates and a fixed domestic price level, what is the effect
(quantitative) on domestic output if the foreign interest rate increases by 0.05? What
is the value of the real exchange rate in the new short-run equilibrium? Graphs are
helpful.
(3 marks)
d. Suppose that political instability increases the country risk premium and, thereby, the
domestic interest rate. What’s the effect on the exchange rate and aggregate output?
Assume we have a floating exchange rate system. Graphs are helpful.
(3 marks)
e. Assuming the foreign price P*=1, derive the aggregate demand function. (4 marks)
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