Download 2013 Spring Sample Final Solutions

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Student Number:
Total: 50 Points
University of British Columbia
Econ 102
Sample Final
Instructor: Alfred Kong
This exam has 25 multiple choice questions in Part A and 5 long questions in Part B. Complete all the
questions. Good luck.
Part A.
Multiple choice questions. Each question is worth 1 point.
1) Do we get a useful and meaningful statistic by dividing the national debt by the GDP?
A) Yes -- we can then see how much of the national debt is owed by each individual citizen.
B) No -- dividing a stock by a flow can never be sensible.
C) No -- we are essentially "dividing apples by oranges", which is unhelpful.
D) Yes -- we can see the burden of the debt more clearly than using the national debt figure
alone.
E) No -- the GDP is not a meaningful measure of the well-being of the economy.
1) __D____
2) The extent to which tax revenues are able to finance the discretionary part of total government
expenditure is best measured by the
A) cyclically adjusted deficit/surplus.
B) tax-to-GDP ratio.
C) debt-to-GDP ratio.
D) government's budget constraint.
E) government's primary budget deficit/surplus.
2) __E____
The diagram below shows two budget deficit functions for a hypothetical economy.
FIGURE 32-2
3) Refer to Figure 32-2. Initially, suppose that real GDP is $100 million and the budget deficit is $14
million, as shown by point A. Which of the following events could result in a move from point A
to point B?
A) the implementation of a contractionary fiscal policy
B) the implementation of an expansionary monetary policy
C) the implementation of an expansionary fiscal policy
D) the economy entering into a boom
E) the implementation of a contractionary monetary policy
3) __A____
4) Two nations want to engage in trade but discover that one of them is more efficient in producing
all goods. In this case,
A) the less efficient country should engage in importation of goods only.
B) each nation should export the good in which it has a comparative advantage.
C) the more efficient country should produce all goods and export them.
D) no trade is possible.
E) the more efficient country should import all goods.
4) __B____
5) Governments often implement programs designed to encourage research and development.
Such programs may change the comparative advantage of that country because
A) they are expected to change the endowments of each country.
B) increases in research and development always lead to an increase in imports.
C) they are expected to lead to improvements in technology.
D) the opportunity costs of exported products cannot change.
E) they will raise the costs of production of the trading partners.
5)
__C___
6) A country with a ________ domestic market is most likely to gain from international trade, in
part because of its prospects of benefitting from ________.
A) large; learning by doing
B) mature; a devaluation of its currency
C) mature; a less diversified economy
D) small; economies of scale and learning by doing
E) small; diseconomies of scale and learning by doing
6)
__D___
7) Which of the following is true? A credit entry in the Canadian balance-of-payments accounts
A) arises when Canadian assets are sold to foreigners.
B) is a credit in the balance-of-payments accounts for foreign countries.
C) typically results in more foreign exchange being held by foreigners.
D) is any transaction that results in a payment to other nations.
E) arises when Canadians purchase assets from foreigners.
7)
__A___
8) An appreciation of the Canadian dollar implies
A) a fall in the external value of the dollar, such that more dollars are required to buy foreign
currency.
B) a rise in the external value of the dollar, such that more dollars are required to purchase
foreign currency.
C) a fall in the external value of the dollar, such that fewer dollars are required to purchase
foreign currency.
D) is shown only by changes in the official reserves of the Bank of Canada and does not
influence the exchange rate.
E) a rise in the external value of the dollar, such that fewer dollars are required to purchase
foreign currency.
8)
__E___
9) The existence of inflation in a country that is higher than inflation in the rest of the world will
tend to
A) increase its exports.
B) decrease its imports.
C) increase the supply of that country's currency in the foreign-exchange market.
D) increase the demand for that country's currency in the foreign-exchange market.
E) have no effect on the foreign-exchange market.
9)
__C___
10) If the Bank of Canada chooses to expand M2 by exactly $1 million, it could do so by
A) selling $1 million worth of government securities on the open market.
B) increasing reserves at the commercial banks by $1 million.
C) buying $1 million worth of government securities on the open market.
D) decreasing reserves at the commercial banks by $1 million.
E) none of the above - the Bank of Canada cannot precisely control the money supply.
10) __E___
11) Suppose the Bank of Canada were to implement an expansionary monetary policy by buying
government securities on the open market, thereby increasing cash reserves in the banking
system. If the commercial banks do not expand their lending in response, then
1) there would be no change in the money supply at all;
2) the Bank of Canada could force the commercial banks to expand their lending, based on
regulations in the Bank Act;
3) the increase in the overall money supply would be smaller than the Bank of Canada may have
intended.
A) 1 or 2
B) 2 or 3
C) 2 only
D) 3 only
E) 1 only
11) __D___
12) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S.
housing collapse. By the spring of 2009, the Bank of Canada had reached a practical minimum
for its nominal policy interest rate of ________ percent.
A) 0.75
B) 1.00
C) 0
D) 0.25
E) 0.50
12) __D___
13) Suppose an economic analyst suggests that investors should now hold cash instead of stocks or
bonds. The analyst is probably encouraging an increase in money balances for which reason?
A) precautionary demand
B) speculative demand
C) portfolio demand
D) present value demand
E) transaction demand
13) __B___
14) When there is an excess demand for money balances, monetary equilibrium is established by a
process that involves
1) movement down the money demand function;
2) interest rates falling;
3) the price of bonds falling.
A) 2 only
B) 2 and 3
C) 1 only
D) 3 only
E) 1 and 2
14) __D___
15) The long-run neutrality of money implies that
A) changes to the money supply never have any effect on real GDP.
B) in response to any change in the money supply, the economy's adjustment process will
bring Y back to Y*, which is unaffected by the change in the money supply.
C) in response to any change in the money supply, the demand for money will adjust to cancel
out its effects on all macroeconomic variables.
D) the economy's level of potential output will adjust to accommodate any change in the
15) __B___
money
supply.
E) changes to the money supply have no effect on either the price level or real GDP.
16) If most individuals accept paper currency in transactions, and paper currency is convertible into
gold, then banks can safely issue
A) no more paper currency than the value of the gold they hold.
B) as much paper currency as they please.
C) paper currency equal to the bank's commercial debt divided by their gold reserves.
D) more paper currency than the value of the gold they hold.
E) paper currency equal to a fraction of the gold they hold.
16) __D___
17) Commercial banks in Canada are prohibited by law from
A) accepting term deposits.
B) accepting demand deposits.
C) settling inter-bank debts through a clearinghouse.
D) issuing paper currency.
E) lending money to households and firms.
17) __D___
18) Suppose the rare event occurs that a major Canadian commercial bank is on the verge of
insolvency and collapse due to volatile world credit markets. The likely initial response is
A) the provision of funds by the World Bank as the "lender of last resort".
B) the provision of funds by the Bank of Canada as the "lender of last resort".
C) the adoption of all of the bank's liabilities by the Bank of Canada as the "lender of last
resort".
D) a bankruptcy filing overseen by the Superintendent of Financial Institutions.
E) the sale of the bank's assets to the remaining commercial banks.
18) __B___
19) Long-run economic growth can help alleviate the problems of poverty by
A) generating more resources that can be used to reduce income inequality.
B) reallocating income away from low-value production to increase the incentives for highvalue production.
C) requiring increased saving on the part of most of the population.
D) creating new low-paying jobs for the unemployed.
E) increasing future consumption for the middle class.
19) __A___
20) For a given level of national income, a decrease in private consumption or government
purchases will cause the equilibrium interest rate to
A) decrease and the flow of investment to increase.
B) increase and the flow of investment to decrease.
C) increase and the flow of investment to increase.
D) decrease and the flow of investment to decrease.
E) increase and the flow of national saving to fall.
20) __A___
21) With respect to long-run economic growth, one rationale for the idea that there may be
increasing marginal returns to investment is that
A) the investment costs to "followers" are lower than those for "pioneers".
B) initial investment shifts the the aggregate demand schedule to the left, making further
investment less costly.
C) as further investment takes place the economy moves upward to the left along the marginal
product schedule.
D) as further investment takes place the economy moves down to the right along the marginal
product schedule.
E) initial investment shifts the the investment demand schedule to the left, making further
investment less costly.
21) __A___
22) The wage-adjustment process is asymmetrical because
A) factor prices fluctuate more frequently than goods prices.
B) wages rise quickly in a boom but fall slowly during a slump.
C) taxes rise quickly in a boom but do not fall during a slump.
D) goods prices rise more quickly than factor prices.
E) employers delay wage increases in a boom but lay off workers quickly during a slump.
22) __B___
23) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary
fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be
________, and real GDP may ________ potential GDP.
A) too weak; stay below
B) too weak; rise above
C) too strong; rise above
D) appropriate; equal
E) too strong; stay below
23) __A___
24) Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the
economy because
1) households may save the extra income from a tax cut rather than spend it;
2) private investment is crowded out by government's borrowing;
3) there are long and uncertain lags in implementing fiscal policy.
A) 2 only
B) 3 only
C) 1 and 2
D) 1 and 3
E) 1 only
24) __D___
Consider the balance-of-payments accounting information for Lalaland in 2010 as shown in the table below. All values are
in billions of dollars and any variables not provided below have a value of zero.
Exports
Imports
Net foreign-investment income
Capital outflows
Capital inflows
TABLE 35-1
500
350
-60
180
90
25) Refer to Table 35-1. What is the current account balance for Lalaland in 2010?
A) $90 billion
B) -$250 billion
C) $210 billion
D) -$90 billion
E) $0
25) __A___
Part B.
Long questions. Each question is worth 5 points.
Question 1
a) Why targeting MS is less desirable when MD is unstable? (2.5 points)
If MD is unstable (shifts around), then an increase in MS might not have the positive
effect on the economy as expected by the central bank. Students should show an
increase
(or decrease) in MS might not lead to a decrease (or increase) in interest rates
when MD
also shifts at the same time.
b) Why would the central bank target the interest rate, not MS, even when MD is stable? (2.5
points)
Even when the MD is stable, general public understands the interest rate target better
than the money supply target.
Question 2
The following table shows the production of wheat and corn in Brazil and Mexico. Assume
both countries have one million acres of arable land.
Wheat
Corn
Brazil
90 bushels per acre
30 bushels per acre
that
Mexico
50 bushels per acre
20 bushels per acre
a) What is the opportunity cost of producing an extra bushel of wheat in Brazil? In Mexico?
Which country has the comparative advantage in wheat production? Explain. (1.5 points)
The country with the comparative advantage in wheat is the country that produces wheat with
the lowest opportunity cost—that is, the country that gives up the least corn for each bushel of
wheat produced. Brazil must give up 1/3 of a bushel of corn to produce each bushel of
wheat.
Mexico must give up 2/5 of a bushel of corn to produce each bushel of wheat. Since 2/5
exceeds 1/3, it is clear that Brazil has a comparative advantage in wheat production.
b) Which country has the comparative advantage in corn production? Explain. (1.5 points)
Using the same logic as in (b), we see that Mexico has a comparative advantage in corn
production.
c) Explain why one country can have an absolute advantage in both goods but cannot have a
comparative advantage in both goods. (2 points)
It is certainly possible for a country to have an absolute advantage in both goods—this
only requires that the country be more efficient than the other country in the
production
of both goods. Here, by “more efficient” we mean less input per unit of output. In this
case, Brazil is more efficient in both wheat and corn and so it has the absolute advantage in
both goods. But comparative advantage is based on the idea of opportunity cost—what
must be given up in the production of one good to get more of the other good. The opportunity
cost is revealed by the slope of the production possibilities boundary. And if a country has a
lower opportunity cost for one good then it must have a higher opportunity cost for the other
good.
Question 3
a) What is the inflation target set by the Bank of Canada? (2 points)
The BOC wants to keep the inflation rate at 2%. When the inflation rate is higher than
2%, the BOC would use contractionary monetary policy to bring it down (increase the
overnight rate). When the inflation rate is lower than 2%, the BOC would use
expansionary monetary policy (decrease the overnight rate).
b) What is the overnight rate? (2 points)
The overnight rate, which is controlled by the Bank of Canada, is the interest rate that
commercial banks charge one another for overnight loans. Changes in the overnight
rate would also lead to changes in other interest rates in the financial market. Right now is at
1%.
c) During the financial crisis, the actual inflation rate was lower than the target level. Discuss
what the Bank of Canada would do. (1 point)
If the actual inflation rate is lower than the target level, then there is a recessionary gap. The
Bank of Canada should lower the overnight rate to stimulate AD.
Question 4
a) Briefly explain the multiplier process in the AE model. (2.5 points)
An initial increase in production (government increases spending) is going to generate
extra income for some people, and those people with extra income will consume more
which makes firms to produce more thus increases income of some other people. At the
end, the overall increase in output is bigger than the initial increase because of the above
multiplier process.
b) Briefly explain the money creation process. (2.5 points)
An initial deposit in bank A would result in excess reserve in Bank A. Bank A will get
rid
of the excess reserve by lending the money out. A borrower will take the loan and since
he/she does not hold cash, he will put the money into bank B (or the same bank,
does
not
matter). Therefore, Bank B now also has excess reserve and will do the same thing as A. By
creating additional loans and borrowers keep putting the money back into the banking system,
the money supply is going to increase by more than the amount of the initial deposit.
Question 5
Briefly discuss the effect of monetary policy on real GDP, price level and the interest rate
the SR and LR using clearly labelled diagrams. (5 points)
in
In the LR, money is neutral. That is, any changes in the money supply have real effects in the
SR but not in the LR.
An increase in MS from MS0 to MS1 lowers the interest rate from i0 to i1’, as a result, AD shifts
from AD0 to AD1. As real GDP and price level increase in the SR, the
demand for money
increases to MD1, thus pushing i1’ up to i1. In the LR, the
increase in factor prices causes AS
shifts to the left. The increase in price level would
increase MD and i would return to its
previous level (before MS increases), i0.