Download April 2003 - Questions

ECONOMICS A02Y - INTRODUCTORY ECONOMICS (A Mathematical Approach)
Final Exam: April, 2003
Professors Cleveland, Furlong, Parker
Time: 180 minutes
NAME:___________________________________________________________
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STUDENT NUMBER______________________________________________
PROFESSOR (Circle One): Cleveland
Furlong
Parker
DO NOT DETACH THIS FIRST PAGE. YOU WILL HAND IN THE ENTIRE
EXAMINATION.
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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WRITE ANSWERS FOR QUESTIONS 29 -31 ON PAGES 12-16 IN THE SPACE
PROVIDED.
2
PART I - MULTIPLE CHOICE (2.5 marks each, for 70 marks)
[These data apply for Questions 1 - 3.] The economy of Wisteria is self-sufficient; it consumes
all of its own production. Wisteria has only two consumption goods (food and clothing) and one
investment good (machines). Wisteria has no inventory, no government and no imports and
exports. Wisteria has the following prices and quantities produced and purchased in 2004 and in
2010:
2004
2010
Price ($/unit) Quantity (units) Price ($/unit) Quantity (units)
Food
6
10
8
15
Clothing
7
20
12
40
Machines
100
2
200
1
1.
What would be the value of the Consumer Price Index (to the nearest integer) in Wisteria
in 2010, if the base year for this index is 2004?
(A) 56
(B) 59
(C) 63
(D) 100
(E) 142
(F) 150
(G) 160
(H) 163
(I) 170
(J) 180
(K) 188
(L) 200
(M) 204
(N) 232
(O) 300
(P) none of the above.
2.
The value of the GDP deflator in 2010 (to the nearest integer) in Wisteria, using 2004 as
the base year, is :
(A) 56
(B) 59
(C) 63
(D) 100
(E) 142
(F) 150
(G) 160
(H) 163
(I) 170
(J) 180
(K) 188
(L) 200
(M) 204
(N) 232
(O) 300
(P) none of the above.
3.
Based on the above data, and using the appropriate exact price index, between 2004 and
2010, Real GDP in Wisteria changed by (“+” = increase; “” = decrease):
(A) 50%
(B) 44%
(C) 41.2%
(D) 12.4% (E) 0%
(F) +12.4%
(G) +17.5% (H) +20%
(I) +24.8%
(J) +32%
(K) +50.6% (L) +58.7%
(M) +60%
(N) +62.5% (O) +70%
(P) +100%
(Q) none of the above.
3
4.
Suppose that the Central Statistical Agency of Zambonia measures the Zambonian adult
(eligible) population at 24 million, full-time employment at 16.6 million, and part-time
employment at 1,400,000. Unemployment is at 1,800,000 individuals, and the number of
discouraged workers is 800,000 people. Hence (to the nearest 0.1%):
A) the unemployment rate = 7.5% and the labour force participation rate = 91.7%
B) the unemployment rate = 7.5% and the labour force participation rate = 88.3%
C) the unemployment rate = 7.5% and the labour force participation rate = 82.5%
D) the unemployment rate = 9.1% and the labour force participation rate = 91.7%
E) the unemployment rate = 9.1% and the labour force participation rate = 88.3%
F) the unemployment rate = 9.1% and the labour force participation rate = 82.5%
G) the unemployment rate = 10.0% and the labour force participation rate = 88.3%
H) the unemployment rate = 10.0% and the labour force participation rate = 82.5%
I) the unemployment rate = 10.0% and the labour force participation rate = 75%
J) the unemployment rate = 22.2% and the labour force participation rate = 88.3%
K) the unemployment rate = 22.2% and the labour force participation rate = 82.5%
L) the unemployment rate = 22.2% and the labour force participation rate = 75%
M) none of the above
5. You have an opportunity to purchase an asset that will pay the owner $1210 one year from
today and $1210 two years from today, and then will vanish in a puff of smoke. There is a
zero rate of inflation in the economy. The nominal interest rate in the perfectly competitive
asset market was initially (and was expected to remain at) 10% per year. If the rate of
interest unexpectedly changes today to 8% per year, and is expected to remain at that level,
then the present discounted value of the asset will change by (“+” = increase; “” = decrease):
(A) 484
(B) 442
(G) 42 (H) 35.76
(I) 0
(M) +48.40 (N) +57.75
(S) none of the above.
6.
(C) 66.20
(D) 57.75
(E) 48.40
(F) 45.98
(J) +35.76
(K) +42
(L) +45.98
(O) +66.20
(P) +442
(Q) +484
(R) +4840
Which of the following is most consistent with the long expansion of GDP and the low
inflation rate in North America in the 1990s?
A) an increase in Aggregate Demand with an increase in productivity
B) an increase in Aggregate Demand with a decrease in productivity
C) an increase in productivity and a decrease in Aggregate Demand
D) an increase in productivity and an increase in factor prices
E) an increase in Aggregate Demand and an increase in factor prices
F) none of the above
4
[These data apply for Questions 7 -8.] The data (which have one major gap) are from the
2004 National Accounts of the country of Elbonia, and are in millions of Elbonian dollars.
There is no statistical discrepancy.
Corporate Profits (before Direct Taxes)
Interest and Miscellaneous Investment Income (before Direct Taxes)
Rent (before Direct Taxes)
Investment Income paid to Non-Residents minus Investment Income paid to
Elbonian residents from other countries
Government Expenditure
Wages and Salaries and Supplementary Labour Income (before Direct Taxes)
Government Transfer Payments
Depreciation (Capital Consumption Allowances)
Gross Investment
Consumption
Net Income of Unincorporated Businesses, Farm and non-Farm (before Direct
Taxes)
Exports
Indirect Taxes minus Subsidies
200
30
40
40
300
550
80
120
250
600
100
400
60
7. Given the National Accounts data above, what was Elbonia’s Gross Domestic Product (in $
million) in 2004?
(A) 980
(B) 1000
(C) 1060
(D) 1100
(E) 1140
(F) 1180
(G) 1300
(H) 1550
(I) 1650
(J) 1670
(K) 1700
(L) 1800
(M) 2120
(N) 2250
(O) 3100
(P) none of the above.
8. Given the National Accounts data above, what was the value (in $ million) of Elbonia’s
Imports in 2004?
(A) 300
(B) 320
(C) 330
(D) 350
(E) 370
(F) 380
(G) 400
(H) 420
(I) 450
(J) 480
(K) 500
(L) 510
(M) 530
(N) 550
(O) 600
(P) none of the above.
5
[The following model applies for Questions 9-13.] An economy in which prices and the
interest rate are constant has the spending plans of different groups in the economy described by
the following functions, where all of the symbols have our standard interpretation. Disposable
Income (represented here by YD) may also be represented as DI or as YD.
C = 40 + 0.9YD
TA = 40 + 0.08Y
TR = 60  0.02Y
I = 150
G = 110
X = 175
IM = 40 + 0.06Y
9.
The equilibrium level of real GDP in this economy is:
(A) 495
(B) 525
(C) 535
(D) 605
(G) 900
(H) 1050
(I) 1100
(J) 1250
(M) 1550
(N) 1625
(O) 1675
(P) 1700
(S) 1950
(T) 2040
(U) 2100
(V) 2200
(Y) 2500
(Z) none of the above
(E) 675
(K) 1400
(Q) 1800
(W) 2350
(F) 800
(L) 1500
(R) 1875
(X) 2400
10.
The Government Budget Balance can be a surplus or a deficit or in perfect balance. If it is
a surplus, it is written as positive (+); if it is a deficit, it is written as negative (). At
equilibrium GDP, the Government Budget Balance is:
(A) 400
(B) 320
(C) 270
(D) 220
(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) +220
(V) +240
(W) +270
(X) +320
(Y) +400
(Z) none of the above
11.
If Potential GDP is 1600, what is the structural deficit or surplus (the level of the
government deficit or surplus when the economy is at potential GDP)?
(A) 360
(B) 270
(C) 240
(D) 216
(E) 195
(F) 180
(G) 150
(H) 110
(I) 90
(J) 80
(K) 60 (L) 50
(M) 0
(N) +50
(O) +60
(P) +80
(Q) +90
(R) +110
(S) +150
(T) +180
(U) +195
(V) +216
(W) +240
(X) +270
(Y) +360
(Z) none of the above
6
12.
Now, the Government is considering increasing the autonomous component of TA by
100. This would cause the following change in equilibrium Y:
(A) 400
(B) 360
(C) 270
(D) 240
(E) 195
(F) 180
(G) 150
(H) 110
(I) 90
(J) 80
(K) 64 (L) 50
(M) 0
(N) +50
(O) +64
(P) +80
(Q) +90
(R) +110
(S) +150
(T) +180
(U) +195
(V) +240
(W) +270
(X) +360
(Y) +400
(Z) none of the above
13.
Now, instead of increasing taxes, the government wants to cut government spending on
goods and services (G) by 100. We can calculate that, after the cut in government
spending, the value of equilibrium GDP will be:
(A) 495
(B) 525
(C) 535
(D) 605
(E) 675
(F) 800
(G) 900
(H) 1050
(I) 1100
(J) 1250
(K) 1400
(L) 1500
(M) 1550
(N) 1625
(O) 1675
(P) 1700
(Q) 1800
(R) 1875
(S) 1950
(T) 2040
(U) 2100
(V) 2200
(W) 2350
(X) 2400
(Y) 2500
(Z) none of the above
14.
For a small open economy having a flexible exchange rate, which of the following
statements is true with regard to the management of aggregate demand:
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
7
[The following model applies for Questions 15-18.] The economy of Asadia has no
government or foreign sector, and is characterized by the following equation system, where the
symbols have our standard meaning:
C = 350 + .8Y  2P
I = 250
15.
If initially, equilibrium Real GDP (Y) =1600, then the equilibrium price level (P) is:
(A) 2
(B) 20
(C) 40
(D) 50
(E) 60
(F) 80
(G) 100
(H) 110
(I) 120
(J) 130
(K) 140
(L) 150
(M) 160
(N) 162.5
(O) 170
(P) 180(Q) 190
(R) 200
(S) 220(T) 240
(U) 250
(V) 260
(W) 280
(X) 400
(Y) 700
(Z) none of the above
16.
From the initial equilibrium, suppose that autonomous investment increased by 60. If the
Aggregate Supply curve were horizontal, then equilibrium Y would increase by:
(A) 0
(B) 12
(C) 20
(D) 24
(E) 40
(F) 60
(G) 90
(H) 100
(I) 120
(J) 130
(K) 140
(L) 150
(M) 160
(N) 162.5
(O) 170
(P) 180(Q) 190
(R) 200
(S) 220(T) 240
(U) 280
(V) 300
(W) 360
(X) 420
(Y) 600
(Z) none of the above
17.
From the initial equilibrium, suppose that autonomous investment increased by 60,
but that Aggregate Supply is actually given by P = 60 + .05Y. In this case, the short-run
equilibrium Y would become:
(A) 300
(G) 900
(M) 1600
(S) 2200
(Y) 4000
18.
(B) 330
(C) 400
(H) 1000
(I) 1200
(N) 1700
(O) 1800
(T) 2400
(U) 2800
(Z) none of the above
(D) 600
(J) 1300
(P) 1900
(V) 3000
(E) 660
(K) 1400
(Q) 2000
(W) 3300
(F) 800
(L) 1500
(R) 2100
(X) 3600
If input (factor) prices, as well as output prices, are flexible in the long run, and if
Long-Run Aggregate Supply LRAS has the form Y* = 1600, then after the increase in
autonomous investment of 60, the price level in long-run equilibrium will be:
(A) 0
(B) 12
(C) 20
(D) 24
(E) 40
(F) 60
(G) 90
(H) 100
(I) 120
(J) 130
(K) 140
(L) 150
(M) 160
(N) 162.5
(O) 170
(P) 180(Q) 190
(R) 200
(S) 220(T) 240
(U) 280
(V) 300
(W) 360
(X) 420
(Y) 600
(Z) none of the above
8
19.
Suppose that the Canadian economy has the following equations describing Export (X),
Import (IM), Capital Export or Outflow (KX  KO), and Capital Import or Inflow(KM 
KI) behaviour. There is no change in official foreign exchange reserves.
X = 0.02YUS – 16EC/US
IM = 0.15YC + 24E C/US
KX  KO = 16 – 500rd
KM  KI = 34 + 1000rd
(rd is the Canadian – U.S. interest differential, i.e, rd = rC – rUS)
If YUS = 6600, YC = 600, the U.S. interest rate = 0.04 (4%/year), and the Canadian
interest rate = 0.02 (2%/year), what is the exchange rate Ec/us?
A) 0.65
B) 0.70
C) 0.72
D) 0.75
E) 0.85
F) 0.92
G) 1.18
H) 1.36
I) none of the above
20.
In a closed economy, which of the following maximizes the impact on equilibrium GDP
of
a given purchase of government bonds by the Central Bank?
A) inelastic Money Demand and inelastic Marginal Efficiency of Investment
B) inelastic Money Demand and elastic Marginal Efficiency of Investment
C) elastic Money Demand and inelastic Marginal Efficiency of Investment
D) elastic Money Demand and elastic Marginal Efficiency of Investment
E) none of the above maximizes the impact more than the others.
[This model applies for Questions 21 - 22.] The closed economy of Bigpictureland has the
following characteristics. Over the relevant range of real GDP, the Short-run Aggregate Supply
curve is horizontal, the Aggregate Demand curve is downward-sloping, Investment is a negative
function of the real interest rate r, and the Demand-for-money (or Liquidity Preference) function
is a positive function of GDP and a negative function of the real interest rate. The economy is
initially in an equilibrium position, and you are to trace the effects of the following changes on
the new short-run equilibrium position, for real GDP (Y) and the real interest rate (r).
21.
If the government decreases taxes by a fixed amount at all levels of real GDP, then we
would expect:
(A) Y to increase and r to increase.
(B) Y to increase and r to decrease.
(C) Y to decrease and r to increase.
(D) Y to decrease and r to decrease.
(E) r to increase, but we don’t know which way Y will move.
(F) r to decrease, but we don’t know which way Y will move.
(G) Y to increase, but we don’t know which way r will move.
(H) Y to decrease, but we don’t know which way r will move.
9
(I) not necessarily any of the above.
22.
If the Central Bank buys government bonds in open market operations at the same time
that the government decreases expenditures, then we would expect:
(A) Y to increase and r to increase.
(B) Y to increase and r to decrease.
(C) Y to decrease and r to increase.
(D) Y to decrease and r to decrease.
(E) r to increase, but we don’t know which way Y will move.
(F) r to decrease, but we don’t know which way Y will move.
(G) Y to increase, but we don’t know which way r will move.
(H) Y to decrease, but we don’t know which way r will move.
(I) not necessarily any of the above.
[This model applies for Questions 23 - 25.] The island nation of Maynardia is self-sufficient (a
closed economy), and in particular, its financial markets are independent of financial
markets elsewhere in the world. Investment demand in Maynardia is given by the
equation:
I = 2000  4000r
where I represents Investment spending and r represents the interest rate. (An interest rate
of 4%/year is represented as 0.04.) Investment is the only type of spending affected by
changes in the interest rate. The current money supply (MS) is 680. Money demand
(MD) is given by the equation:
MD = 840  1000r
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 [B] = 0.9
23.
What is the equilibrium rate of interest?
(A) 0
(B) 0.01
(C) 0.03
(D) 0.04
(E) 0.05
(F) 0.06
(G) 0.07
(H) 0.08
(I) 0.09(J) 0.10
(K) 0.11
(L) 0.12
(M) 0.13
(N) 0.14
(O) 0.15
(P) 0.16
(Q) 0.18
(R) 0.20
(S) none of the above
24.
Assume now that the central bank of Maynardia decides that it is necessary to increase
equilibrium GDP by 2000. What rate of interest would give Maynardia the necessary
change in Aggregate Demand?
(A) 0
(B) 0.01
(C) 0.03
(D) 0.04
(E) 0.05
(F) 0.06
(G) 0.07
(H) 0.08
(I) 0.09(J) 0.10
(K) 0.11
(L) 0.12
(M) 0.13
(N) 0.14
(O) 0.15
(P) 0.16
(Q) 0.18
(R) 0.20
(S) none of the above
10
25.
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
[This model applies for Questions 26 - 28.] Assume there is only one chartered bank in the
land
of Pecunia: the Bank of Moneyall. The quantity of currency that the private nonbank sector wants
to hold (CP, or “currency in circulation”) is constant. 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. The
CEO of the Bank of Moneyall has decided that the desired reserve ratio on all bank accounts will
be 0.05 (1/20th). Initially, the balance sheet of the Bank appears as below:
BANK OF MONEYALL: BALANCE SHEET
ASSETS
Cash Reserves
Loans
LIABILITIES AND NET WORTH
$108,000
$1,332,000
Chequing Deposits
$1,440,000
26.
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) $21,000
(J) $36,000
(K) $40,000
(L) $50,000
(M) $60,000
(N) $72,000
(O) $84,000
(P) $96,000
(Q) none of the above
27.
The people of the land of Pecunia, 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) $18,000
(C) $64,000
(D) $108,000
(E) $180,000
(F) $342,000
(G) $420,000
(H) $720,000
(I) $800,000
(J) $960,000
(K) $1,080,000
(L) $1,260,000
11
(M) $1,440,000
(N) $1,680,000
(Q) none of the above
28.
(O) $1,860,000
(P) $2,100,000
Go back to the beginning of this problem. Assume the situation is as described on the
Balance Sheet shown before question 28. The Governor of the Central Bank of Pecunia
decides to engage in open market operations. The Governor buys $4000 of bonds on the
open market. If the Bank of Moneyall keeps its current level of excess reserves, what,
eventually, is the overall change in loans (increase [+] or decrease[]) as a result of this
open market operation?
(A) +$16,000
(E) +$36,000
(I) +$76,000
(M) $16,000
(Q) $36,000
(U) $76,000
(B) +$18,000
(F) +$38,000
(J) +$78,000
(N) $18,000
(R) $38,000
(V) $78,000
(C) +$19,000
(G) +$40,000
(K) +$80,000
(O) $19,000
(S) $40,000
(W) $80,000
(D) +$20,000
(H) +$72,000
(L) +zero
(P) $20,000
(T) $72,000
(X) none of the above
12
PART II: GRAPH-BASED QUESTIONS (30 marks)
(14 marks) 29. The closed economy of Nonentia can be described initially by the following
functions:
Aggregate Expenditure (AE):
AE = 500  P + 0.6Y
Short-Run Aggregate Supply (SRAS): P = 0.4Y.
(a) Write the equation here for the Aggregate Demand (AD) function, AD1, corresponding
to the initial Aggregate Expenditure function:
(b) Give the initial equilibrium numerical values here for P, Y, and the vertical intercept
of the AE function:
P=
;Y=
;
AE function vertical intercept =
.
(c) On the following page, you will find an AE-Y (45-degree line) diagram. Directly below
it is an AS-AD diagram. The same variable (our standard one) is on the horizontal axis
of both diagrams. Label the axes of both diagrams. Graph the initial Aggregate Demand
and Short-Run Aggregate Supply curves AD1 and SRAS1, respectively, which you
calculated in (a) above. Give the numerical values for the intercepts and for the initial
equilibrium point (label it E1). On the upper diagram, construct the AE curve
corresponding to the equilibrium of AD1 and SRAS1, and on the diagram put the
numerical value of the vertical intercept of the AE function.
(d) Now suppose that Government Expenditures are reduced by 100. Write the equation here
for the new Aggregate Demand (AD) function corresponding to the new Aggregate
Expenditure function:
(e) Give the new equilibrium numerical values here for P, Y, and the vertical intercept of
the new equilibrium AE function:
P=
;Y=
;
AE function vertical intercept =
.
(f) On the following page, graph the new Aggregate Demand curve AD2, and give the
numerical values for its intercepts and for the new equilibrium point (label it E2). On the
upper diagram, construct the AE curve corresponding to the equilibrium of AD2 and
SRAS1, and on the diagram put the numerical value of the vertical intercept of the AE
function.
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[NOTE: YOUR DIAGRAMS DO NOT HAVE TO BE EXACTLY TO SCALE, BUT
THEY SHOULD BE CONSISTENT.]
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(2 x 4 = 8 marks) 30. In parts (a) and (b) of this question, start by drawing an Aggregate
Demand-Aggregate Supply diagram which shows the relevant curves in a position of short-run
and long-run equilibrium at potential GDP. Assume that potential GDP remains at a constant
level during the period under consideration. Then for parts (a) and (b), draw any shifts in curves
that are necessary to show the new short-run equilibrium and long-run equilibrium positions. In
each of your diagrams, label the initial equilibrium E1, the new short-run equilibrium E2, and the
long-run equilibrium E3. [NOTE: You are not required to explain your reasoning. The
diagrams are sufficient.]
(a) From the initial equilibrium, there is then a widespread drop in labour
productivity.
b)
From the initial equilibrium, there is then an increase in government expenditure,
with no crowding out.
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(4 x 2 = 8 marks) 31. There are four graphs below. Each shows the foreign exchange market in
its initial equilibrium position, with a floating exchange rate. The foreign exchange rate
EC/US is the price of one Canadian dollar in U.S. dollars. The following are four possible
changes that could occur. Label all curves on each graph, using the subscript 1 for the
initial curves and equilibrium exchange rate and the subscript 2 for the subsequent
curves and equilibrium exchange rate. 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 Canadian GDP; (b) a decrease in the U.S. interest rate; (c)
an unexpected and unilateral imposition by the U.S of a high tariff on imports of
softwood lumber exported from Canada; and (d) an increase in U.S. prices.
[Notes: 1. These four 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.
2. You need to provide only the diagrams themselves. You do not need to
provide an explanation of the diagrams.]
31. (a) A fall in Canadian GDP:
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31. (b) A decrease in the U.S. interest rate:
31. (c) An unexpected and unilateral imposition by the U.S of a high tariff on
imports of softwood lumber exported from Canada:
31. (d) A decrease in Canadian prices:
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