VANCOUVER ISLAND UNIVERSITY ECON212: PRINCIPLES OF MACROECONOMICS, Spring 2013 MIDTERM TEST It Name (Last, First): ID a: Signature: This Exam has total 12 pages including the cover page INSTRUCTIONS: * TOTAL MARKS: 75. DURATION: 75 MINUTES. © PLEASE ANSWER YOUR MCQS IN THE TABLE PROVIDED ON THE ADDITIONAL SHEET PROVIDED AND OTHER ANSWERS IN THE SPACE PROVIDED. © FOR SHORT ANSWER AND EASY TYPE QUESTIONS > YOU MUST SHOW YOUR ALL WORK TO GET FULL MARKS. IF YOU DO NOT SHOW WORK, YOU MAY NOT GET FULL MARKS EVEN FOR A CORRECT ANSWER. > USE THE MARKS ASSIGNED TO EACH QUESTION AS A GUIDE TO ALLOCATING YOUR TIME ACROSS QUESTIONS. Luck on Your ExamECON212: Midterm Exam I! | 2 ‘March 18, 2013, PART A: MCQ (There are 30 MCQs in this section which is worth 30 marks) 01. In macroeconomics, the “output gap" is the difference between ‘a) real and nominal national income b) output and employment ) potential real national income and actual real national income 4d) real GNP and real GDP ) output in the current year and output in the base year (02. When the unemployment rate is higher than the natural unemployment rate, real GDP is than potential GOP and the output gap is a) unchanged; unchanged b) smaller; positive ) smaller; negative d)_ greater; positive e) greater; negative 03, The table below provides macroeconomic data for a hypothetical economy, Dollar amounts are all in constant- dolar terms teal Pate Unem Year | output titionsat | Potential Outpt oloyment 3) 2002 402 404 | 71 2008 “408 ant | 72 [aooe ass 63 200s _|___420 418 [ss 2006 220 0 2007 20 223 70 [_ 2008 a5 25 ___63 Refer tothe table. In which years was this economy experiencing an inflationary gap? a) 2002, 2003 b) 2006, 2007 ©) 2005, 2006 4) 2004, 2008, 04, in the simple macroeconomic model, “autonomous expenditures" are a) induced expenditures 'b) non-domestic expenditures )__ not dependent on national income d) dependent on national income e) those which are constant0s. 07. 09, 10, 1. ECON212: ‘erm Exam Il March 18, 2013 ‘The CPI in 2007 was 120 and in 2008 was 125. The inflation rate is a) 5% b) 2.6% 4.2% @) 1128 ) Insufficient information . The inflation rate is the annual percentage change in a) real GDP b)_ the quantity of money ©) the price level 4d) labour productivity Between 1910 and 2010, the real GPD grew at a faster rate than the population growth rate. So, the average growth rate of real GDP per person in Canada was a) Negative b) positive zero d) unknown - Other things being equal, a reduction in the money supply will ead to a {2) rise in the rate of interest and no change in investment expenditure b)_ fallin the rate of interest and an increase in investment expenditure ©) rise in the rate of interest and a decrease in investment expenditure 4) ise in the rate of interest and in increase in investment expenditure €e) fallin the rate of interest and a decrease in investment expenditure According to the quantity theory of money, if the money supply doubles a) real income will double b) money prices will be halved ©) there will be no effect on money prices 4d) money prices will double €) relative prices will double The largest component of the liabilities of the Bank of Canada is, a) Government of Canada securities 'b) deposits of commercial banks and other financial institutions ©) loans to private individuals 4) Government of Canada deposits e) Canadian dollars in circulation Refer to the table. Assume that Bank North is operating with no excess reserves. What is their actual reserve ratio? Bank North's Balance Sheet a) 13.6% | by 20% Assets Liabilities ©) 12% Reserves | $500 _| Deposits $2200 | 5 ee [Loans [$2000 [Capital_[$300__ $2500 $2500 He hed |e eev 3. 14. 15, 16. 17. 18, 19, ECON212: Midterm Exam II March 18, 2013 The main objective of the Bank of Canada is to a) Maintain a low and stable inflation rate b) Keep the unemployment rate low ¢)__ Increase economic growth rate high 4d) Keep the prime interest rate at 3 percent Fullemployment level of unemployment or the natural unemployment is a) a goal that can never be achieved by the economy b) then unemployment when the economy's resources were fully employed at a normal intensity of use ©) achieved during periods when all of the labour force is employed d) the GOP that could be produced if the economy's resources were fully employed at their maximum intensity of use ‘The currency that isin circulation in Canada today is a) fractionally backed by gold bb) backed by the U.S. dollar ©) not officially backed by anything. d)_ fully backed by gold held at the central bank e) backed by the euro Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). ‘his fraction is known as a) the excess reserve ratio bb) the fractional reserve ©) the required reserve 4d) the reserve ratio €) the target res erve ‘The theory of economic growth concentrates on the. over the long run, not on a) growth of real GDP; growth of potential GOP factor utilization rates; growth of real GDP €) factor utilization rates; growth of the supplies of factors 4d) growth of investment in capital goods; short-run fluctuations of investment ‘e) growth of potential output; fluctuations of output around potential Adesire by has no effect on the ability of the banking system to expand bank deposits. 1a) households to stash money in safety-deposit boxes 'b) households to maintain a certain fraction of thelr money holdings in the form of currency )__ potential borrowers to be more cautious in their borrowing 4d) banks to maximize profits The concept of “near money" refers to ‘) financial assets whose capital values are too unstable for them to be classified as money 'b) assets that fulfil the medium-of-exchange function but not the store of value function )_ assets that fulfil the temporary store-of-value function but not the medium-of-exchange function d) cheques on demand deposits ‘The AD curve relates the price level to a) equilibrium nominal GOP if output is demand determine 'b) equilibrium real GDP if output is demand determined ©) equilibrium savings and wealth 4) desired aggregate expenditureECON212: Midterm Exam I! | 5 March 18, 2013, 20. Consider the basic AD/AS macro model. Arise in an input price lke the price of oll would be expected to cause ‘a new macroeconomic equilibrium in which the price level a) Is higher and real GDP lower than in the initial equilibrium b) and real GDP are lower than in the initial equilibrium. ) is higher and real GDP remained the same as in the initial equilibrium 4)_ is lower and real GDP higher than in the intial equilibrium 211. What is sometimes called the “long-run aggregate supply curve” shows the relationship between the price level and the amount of output have adjusted to output gaps. a) supplied by firms after all output prices b) supplied by firms after all factor prices c)_ demanded by households before all factor prices d) supplied by firms before all factor prices 22. A characteristic of the short run in macroeconomics is that a) actual GD? is always less than potential GOP ) the output gap opens or closes as the economy moves through the phases of the business cycle ) actual GD? is always greater than potential GDP 4) actual GOP is always growing at the same rate as potential GOP 23. The diagram shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A, After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process? a. a decrease in wages and other factor prices, bb. an increase in wages and other factor prices ©. an increase in factor supplies d. an increase in the unemployment rate 24, GDP can be represented by the equation: GDP = F x £2) x (22) tisequation 2). factor supply and employment rat are long run components but productivity isa short run component 8). factor supply and unemployment rate ae short run companents But product is aong run component €)_factor supply and produ component 4) employment rate and productivity are shor run components but factor suppl i longun component a short run ity rate are long run components but employment rate iECON212: Midterm Exam Il March 18, 2013 25, Refer to the figure. Suppose the economy isin equilibrium at ¥, .A contractionary fiscal policy would restore the economy to potential output (¥") by shifting the Rat cor a) AS curve to the left to intersect AD at C b) Ab to the left to intersect AS at point A ©) AS curve to the right 4d} potential GOP and the AS curve to the left 26. For a given level of national income, a decrease in private consumption or government purchases will ause the equilibrium interest rate to a) decrease and the flow of national saving to increase b) increase and the flow of national saving to decrease ‘o)_increase and the flow of investment to decrease d)_ increase and the flow of investment to increase 27. The functions of the Bank of Canada include ‘) setting the exchange rate for the Canadian dollar on world markets, 'b) acting as banker for the commercial banks acting as the lender of last resort for the largest private corporations 4) providing deposit insurance at Canadian commercial banks 28. A decrease in the money supply is most likely to a) raise interest rates and investment, and lower aggregate expenditures b) lower interest rates, investment, and aggregate expenditures ¢) raise interest rates, lower investment, and lower aggregate expenditures 4) raise interest rates, investment, and aggregate expenditures 29. The overnight interest rate is crucial to the Bank of Canada when it implements its monetary policy because a) the Bank of Canada has no ability to influence other interest rates b) the Bank of Canada's first priority is to ensure the solvency of commercial banks overnight loans constitute a major source for open-market operations 4d) the overnight interest rate is linked to both short-term and long-term interest ratesECON212: Midterm Exam It | 7 March 18, 2013, 30. Refer to the figure. This figure illustrates b) o a) e) Quant of Sney (Maney demand an py the loanable funds market ‘only the first step of the monetary transmission mechanism the entire monetary transmission mechanism the ultimate effect of a change in the money supply on real GDP the first two steps of the monetary transmission mechanismECON212: Midterm Exam it | 8 March 18, 2013, PART B: SAQ This section is worth 5X7=35 marks. Please use a diagram/figure whenever required/necessary a) Why are checks and credit cards not money? Explain, Chaths and cit crds ont not wereg beau May ane vot aq rrreame of paymint. A cham 4 dn order by framefer a depose fro ore persre fo anolltr. The hpasis fre merty. but checks au ri. A crt und cp an DD earch tok |e & persrre tape v4 a loan at Gt imrtant he ov she begs commas The lean patil reek te be paid ik mene Ao te ert und 2 PSP a wear of paryenind — Utes ni} monty. b) What are the defining features of classical macroeconomics and what policies do classical macroeconomists recommend? Canrsierl werrvermomint fodive below Jol + Ge cermemy dan Left aleme, i erred operate at Gott evcplryrret — in eumvng 4 olf nynlatay: Claseiel weertiammmns!s arrert Mint tr Maple Prper povernment pobiig A fo wmiinindze C4 olsen wmbve feds 4 faxes on ecptogensnt , wnvesthnet anol feeamilegrical change .ECON212: Midterm Exam I! | 9 March 18, 2013, ©) Using the Quantity Theory of Money, show how does the quantity of money trigger the inflation in the economy Tre huanctity Theery oy mereg | MU = PY Dr shart run, uwcler prtewel Urumsbenus, cb anu t tal veloity my mong, VG covotant. Hever fy rent B® owt Y MY = PY (7 te wceoke (ae te noe es fone? So, d Brady of poomny aA rrsents, pric leek P tuv =1PY Ue Lt lhe d) What is stagflation and why does cost-push inflation cause stagflation? Seg flatern means, a niseng prieelerel (unflahe ) We ne eurronie grew lx nearive Grok rak) A cast push unfintere vray rewll thes Yo Trane a Softly rheck, e As oth PO lft — ane foe creas prs ae ovlpent foe ty, ae A, AD super ping o token, cnflabsh ocr. Bet orvtget pater Gelrd (ost of he pe) & SIM Gt |ECON212: Midterm Exam 1! | 10 March 18, 2013, ) Why does the Aggregate demand function slope downward? Beane 4 weal, and P Sirbs habe pis Utne prin falls, for ertiner, real yalas of Den mninnir, pemple gud more, lat Ceres. or prin foto people ab prifey fo renee 08 Z : o i ips tp wea. from foo pemraton Mer temp orok rtsh hehe qhE: ) Why is the Long-run Aggregate supply function vertical? if 4 Las n De LR, o> connrg pradners fe eanploryreit level af ovdpat, wick o Undep bet C ys Y pnce lel .ECON212: Midterm Exam I! | 14 March 18, 2013, 8) How does a government budget surplus or deficit influence the loanable funds market? Tn the loarnobte ks uarkel, supply 4 loamtle fre 3 dehemed by natenl pany SH 6 hob 4 g Pe phe rt iar m i: loannfle Y Ton 0 apt fr bert — affect ; Tie demand are a - ree L, * Ook r pF u tp’ fe Chane ay p* PY fonsECON212: Midterm Exam I! | 12 March 18, 2013 PART C: Essay Question (This section is worth 10 marks) Debate on Causes of Jobl: ‘What is the cause of the high unemployment rate? One side says unemployment is a cyclical problem. The other side says itis structural. Which business cycle theory would say that the rise in US unemployment in last few years is cyclical? Which would say itis an increase in the natural rate? Why How Faery Bal worst of Ga wemurcthene busene S$ gee rern'es pry dal Ma vise Ba wnanpleymet rade a egehial ua neater: Brepori febg Bu heyre aw tyke Mery and ney Kuypevian uyele Dery ayree Bol ba vise 4 vy. The rerl burcress aye (Abe), Misay pen» ie megend pale aul ummplegrenl an woken and we ik aol) aunt Ant Mr vise m Gy npn pete vifledt a Nie ce ke nab “END OF EXAMINATION*