University of Alberta Version 111 Department of Economics

ECON 102 Final exam Fall 2015

Instructor: Mesbah Sharaf
Allowed time: 140 minutes
Please copy your answer in the multiple choice scantron sheet provided
The exam is 52 multiple choice You are allowed to use a calculator

1.Which of the following is a debit in the Canadian current account?

a. the purchase of insurance from Lloyd’s of London by a Canadian
b. the purchase of Canadian lumber by a German
c. a trip to Canada by a Chinese student
d. the purchase of the Eaton Centre by Japanese investors
2. If your father in Italy lends you $5000 to complete your Canadian education, how will this be
entered on the Canadian balance of payments account?
a. as a devaluation, since the net value of the Canadian capital stock will be reduced
by the amount of your debt
b. as a nonentry, affecting Italy's payments but not those of Canada
c. as a debit (-)
d. as a credit (+)
3. Under a pure flexible exchange rate system, what does the rate that equates demand and supply in
the exchange rate market imply?
a. The capital account balance equals zero.
b. Merchandise exports equals merchandise imports.
c. The current and capital account balances will be equal in magnitude, but opposite
in sign.
d. The current account balance equals zero.
4. On March 16th, 2012, the Canadian dollar was worth 0.7698 euros. Roughly how many Canadian
dollars did it take to buy one euro?
a. 0.2302
b. 0.7698
c. 1.2990
d. 1.4232
5.Suppose the exchange rate between the Japanese yen and the Canadian dollar is 130 yen to the
dollar. If it then changes to 150 yen to the dollar, what will happen to the price of Canadian
goods for Japanese importers?
a. It will change in an indeterminate direction.
b. It will rise.
c. It will fall.
d. It will stay the same.
6.Suppose the exchange rate between Mexican pesos and Canadian dollars is 8 pesos per dollar. If
the exchange rate goes to 6 pesos per dollar, what will happen to the exports of Canadian goods
into Mexico?
a. They will tend to change in an indeterminate direction.
b. They will tend to fall.
c. They will tend to rise.
d. They will tend to stay the same.

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7.If a dollar is more expensive in terms of a foreign currency than the equilibrium exchange rate,
what will happen in the foreign exchange market?
a. There will be a shortage of dollars and downward pressure on the exchange rate.
b. There will be a shortage of dollars and upward pressure on the exchange rate.
c. There will be a surplus of dollars and downward pressure on the exchange rate.
d. There will be a surplus of dollars and upward pressure on the exchange rate.
8.Suppose Canada imposed a high tariff on a major imported item. What effect would this have?
a. It would tend to cause the dollar to appreciate in value.
b. It would tend to decrease the Canadian merchandise trade surplus.
c. It would tend to increase Canadian exports of goods.
d. It would tend to cause the dollar to depreciate in value.
9.Other things being constant, which of the following will most likely cause the dollar to appreciate
on the exchange rate market?
a. expansionary domestic monetary policy
b. reduced inflation abroad
c. higher interest rates abroad
d. higher domestic interest rates
10. If real interest rates in Canada rise relative to real interest rates in other countries, other things
equal, what would likely occur?
a. The exchange rate of the dollar would increase relative to other currencies.
b. There would be an indeterminate effect on the exchange rate of the dollar relative
to other currencies.
c. There would likely be no effect on the exchange rate of the dollar relative to other
currencies.
d. The exchange rate of the dollar would decline relative to other currencies.
11. If the rate of inflation in Canada rises relative to the rate of inflation in foreign nations, what will
happen to the amount of Canadian net exports and subsequently the exchange rate for the
Canadian dollar?
a. It will decrease net exports, which in turn will increase the value of the dollar.
b. It will increase net exports, which in turn will increase the value of the dollar.
c. It will decrease net exports, which in turn will decrease the value of the dollar.
d. It will increase net exports, which in turn will decrease the value of the dollar.
12. Under what circumstances would a country tend to experience currency depreciation relative to
other countries?
a. Real interest rates rise relative to other countries.
b. Traders in the foreign currency markets expect the value of the currency will fall in
the near future.
c. The foreign demand for its exports increases.
d. The profitability of investments in other countries decreases relative to that
country.
13. If interest rates rise, what will happen to demand for money?
a. It will decrease; people want to avoid inflationary losses.
b. Nothing; the money market can sustain long periods of disequilibrium.
c. It will increase.
d. Nothing; the economy will move to a new quantity demanded at a new interest
rate.

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14. If money supply and money demand both fell, but money supply fell more than money demand,
what would be the effect on interest rates and investment?
a. Interest rates would decrease, and investment would decrease.
b. Interest rates would decrease, and investment would increase.
c. Interest rates would increase, and investment would increase.
d. Interest rates would increase, and investment would decrease.
15. Under a flexible exchange rate system, what will a contractionary monetary policy lead to?
a. an appreciation of the domestic currency
b. a decrease in foreign reserves
c. an increase in foreign reserves
d. a depreciation of the domestic currency
16. If policy makers wanted to use both monetary and fiscal policy to stimulate demand and reduce a
high rate of unemployment, which of the following would be most appropriate?
a. a larger government surplus and a reduction in the bank rate
b. a government surplus and the sale of securities in the open market by the Bank of
Canada
c. a larger government deficit and an increase in the bank rate
d. a larger budget deficit and the purchase of securities in the open market by the
Bank of Canada
17. If the target for the overnight lending rate is 5 percent, what would be the respective bank rate?
a. 4.75 percent
b. 5 percent
c. 5.25 percent
d. 5.5 percent
18. Suppose the Bank of Canada purchases $100 million of government bonds from the public. If the
desired reserve ratio is 20 percent and all banks keep zero excess reserves, what will the total
impact of this action on the money supply be?
a. $100 million decrease in the money supply
b. $500 million increase in the money supply
c. $200 million increase in the money supply
d. $100 million increase in the money supply
19. Which of the following would tend to decrease unemployment in the short run?
a. chartered banks calling in loans to build up their excess reserves
b. a chartered bank purchasing government securities from the Bank of Canada as an investment
c. the Bank of Canada increasing the bank rate
d. the Bank of Canada buying government securities from investment dealers
20. Assume the Bank of Canada sells $1000 worth of government bonds to Paul, who deposits the money
in the First National Bank. If the desired reserve ratio is 25 percent, what effect will this transaction
have?
a. It will decrease the excess reserves of the Trust National Bank by $750, and eventually decrease
the money supply by $4000.
b. It will decrease the excess reserves of the Trust National Bank by $1000, and eventually decrease
the money supply by $4000.
c. It will decrease the excess reserves of the Trust National Bank by $1000, and eventually decrease
the money supply by $1000.
d. It will decrease the excess reserves of the Trust National Bank by $750, and eventually decrease
the money supply by $1000.

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21. If policy makers wanted to use both monetary and fiscal policy to help reduce a high rate of
inflation, which of the following would be most appropriate?
a. a larger budget deficit, the purchase of securities in the open market by the Bank of
Canada, and a higher bank rate
b. a government budget surplus, the purchase of securities in the open market by the
Bank of Canada, and a lower bank rate
c. a larger government budget deficit, the sale of securities in the open market by the
Bank of Canada, and a lower bank rate
d. a government budget surplus, the sale of securities in the open market by the Bank
of Canada, and a higher bank rate
22. Which of the following would tend to increase AD?
a. an increase in the bank rate
b. a decrease in the money supply
c. a chartered bank using excess reserves to extend a loan to a customer
d. a chartered bank purchasing government bonds from the Bank of Canada as an
investment
23. If the unemployment rate and the inflation rate both increase simultaneously, what curve will
shift right?
a. the Phillips curve
b. the SRAS
c. the LRAS
d. the AD
24. If nominal GDP is $1200 billion and M2 is $150 billion, what is the velocity of circulation?
a. 0.5
b. 2
c. 4
d. 8
25. What is the relationship between inflation and a situation where the velocity of money (V) and
real output (Q) were increasing at approximately the same rate?
a. The expansion of money will lead to deflation.
b. It would be impossible for monetary authorities to control inflation.
c. Monetary acceleration would not lead to inflation.
d. Inflation would be closely related to the long-run rate of monetary expansion.

26. If the velocity of money increases from 5 percent and real GDP increases 3 percent, what will the
Bank of Canada need to do keep prices the same?
a. They would have to decrease the money supply by 8 percent.
b. They would have to decrease the money supply by 2 percent.
c. They would have to increase the money supply by 2 percent.
d. They would have to increase the money supply by 8 percent.

27. Why does fiat money have value?

a. because it is has been decreed by the government
b. because it is divisible
c. because it is backed by gold
d. because it can be exchanged for the commodity backing it

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28. What effect would a decrease in currency in circulation combined with an equal increase in
savings account deposits in charted banks have? Hint: ignore the deposit creating process.
a. It would increase M2 but have no effect on M2+.
b. It would decrease both M2 and M2+.
c. It would increase both M2 and M2+.
d. It would have no effect on either M2 or M2+.

29. Can bankers create money?

a. No, they do not have this power.
b. Yes, through multiple deposit creation.
c. Yes, by printing cheques for customers.
d. No, unless they have a special charter which permits it.

30. Other things being constant, if the public decides to hold more money in the form of currency
rather than chequing deposits, what will be the effect on bank reserves and M2?
a. Bank reserves will increase, and M2 will ultimately decline as well.
b. Bank reserves will decline, and M2 will ultimately increase as well.
c. Bank reserves will decline, and M2 will ultimately decline as well.
d. Bank reserves will increase, and M2 will ultimately increase as well.

31. If the desired reserve ratio is 15 percent and a customer makes a new cash deposit of $50 000,
how much new excess reserves are created?
a. $7500
b. roughly $33 000
c. $67 500
d. $42 500

32. What impact will a decrease in the excess reserves banks want to hold, together with people
taking currency out of their demand deposit accounts, have on the money supply?
a. It would leave the money supply unchanged.
b. It would decrease the money supply.
c. It would have an indeterminate effect on the money supply.
d. It would increase the money supply.

33. If a bank has $1 million in demand deposits, $350 000 in reserves, and desires a 30 percent
reserve ratio, how much money could a bank directly create by loaning out its excess reserves?
a. $50 000
b. $300 000
c. $350 000
d. $700 000

34. If banks desired a 100 percent reserve ratio, what would a decrease in banking reserves of $4
million do?
a. increase the money supply by $4 million
b. increase the money supply by $400 million
c. decrease the money supply by $4 million
d. decrease the money supply by $400 million

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35. What effect would a cut in taxes combined with an increase in transfer payments have on AD?
a. It would decrease AD.
b. It would increase AD.
c. It would have an indeterminate effect on AD.
d. It would leave AD unchanged.
36. The whole world is currently in a recession. If neither the governments nor the central banks
intervened in the economy, what will happen in the long run?
a) Input prices will fall, and the SRAS curve shifts to the right.
b) Input prices will rise, and the SRAS curve shifts to the left.
c) Input prices will fall, and the AD curve shifts to the right.
d) Input prices will rise, and the AD curve shifts to the left.
e) Goods and services prices will fall, and the AD curve will shift back to its original pre-
recession position.

37. If net exports increase by $10 billion and the MPC to 0.6, what will the resulting increase in the
consumption component of AD be?
a. $25 billion
b. $15 billion
c. $6 billion
d. $4 billion

38. What will an increase in government purchases or a decrease in taxes, other things being equal,
tend to do?
a. increase interest rates and decrease investment
b. decrease interest rates and decrease investment
c. decrease interest rates and increase investment
d. increase interest rates and increase investment

39. What will an increase in government purchases or a decrease in taxes, other things being equal,
tend to do?
a. decrease interest rates and decrease net exports
b. increase interest rates and increase net exports
c. increase interest rates and decrease net exports
d. decrease interest rates and increase net exports
40. Which of the following statements about the relationship between the federal budget and net
exports is the most accurate?
a. When the federal budget moves toward deficit, net exports do not change as a
result.
b. When the federal budget moves toward deficit, net exports tend to decrease as a
result.
c. When the federal budget moves toward deficit, net exports tend to increase as a
result.
d. When the federal budget moves toward deficit, there is an indeterminate effect on
net exports that results.

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41. What does the impact lag refer to?
a. the time required for the Bank of Canada to formally announce the impact of an
economic downturn
b. the time required for changes in fiscal policy to affect the real economy
c. the time required for politicians to realize that the economy is slowing and to react
d. the time required for a downturn to have an effect on unemployment
42. Which of the following statements about the short-run aggregate supply curve is most accurate?
a. It shifts only when the LRAS shifts in the same direction.
b. It is not as steeply sloped as the LRAS.
c. It normally has a slope of zero, meaning the curve is horizontal.
d. It normally slopes upward to the right because the costs of labour and other inputs
are relatively fixed in the short run.
43. Under what circumstances would the SRAS be vertical?
a. if there was no profit effect
b. under no conceivable set of circumstances
c. if there was no misperception effect
d. if there was no profit effect or misperception effect
44. If a one-time natural disaster such as an earthquake struck, raising the cost of production, what
would the result on the short-run and long-run aggregate supply curves be?
a. It would shift LRAS left, but leave SRAS unchanged.
b. It would leave both the SRAS and LRAS unchanged.
c. It would shift SRAS left, but leave LRAS unchanged.
d. It would shift both the SRAS and the LRAS left.
45. What effect will the combination of a decrease in the capital stock and increasingly costly
government regulations have on LRAS?
a. It will shift LRAS to the left.
b. It will shift LRAS to the right.
c. It will leave LRAS unchanged.
d. It will have an indeterminate effect on LRAS.
46. If labour productivity increases by 15 percent, under which of the following circumstances will a
change in wages lead to a decrease in short-run aggregate supply?
a. if wages increase by 20 percent
b. if wages increase by 15 percent
c. if wages increase by 10 percent
d. if wages are stable
47. In a stagflation situation, what happens to unemployment and the price level?
a. Unemployment decreases and the price level increases.
b. Unemployment increases and the price level increases.
c. Unemployment increases and the price level decreases.
d. Unemployment decreases and the price level decreases.
48. In the Keynesian AE model, if the autonomous components of consumption, investment,
government spending, and net export spending total $200 billion and the MPC is 0.8, under what
circumstances will unplanned changes in inventory be zero?
a. when output is $160 billion
b. when output is $250 billion
c. when output is $1000 billion
d. when output is $1600 billion

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49. Which of the following changes in taxes would lead to the greatest increase in consumption?
a. a $15 000 decrease in taxes, if MPC equals 0.6
b. a $20 000 decrease in taxes, if MPC equals 0.5
c. a $12 000 decrease in taxes, if MPC equals 0.75
d. a $30 000 decrease in taxes, if MPC equals 0.25
50. Which of the following will NOT increase the investment demand curve?
a. the introduction of new technology offering profitable investment opportunities
b. business expectations of higher future sales and profits
c. a decrease in the real interest rate
d. business inventories that have fallen far below desired levels
51. What impact would a combination of higher business taxes, reduced expected future profitability
of businesses, and a reduction in the level of new profitable technological investment
opportunities have?
a. It would increase the investment demand curve.
b. It would leave the investment demand curve unchanged.
c. It could either increase or decrease the investment demand curve.
d. It would decrease the investment demand curve.
52. What impact will an increase in the Canadian price level have?
a. It will decrease money demand in Canada.
b. It will increase real GDP demanded in Canada.
c. It will increase Canadian exports.
d. It will increase Canadian imports.