econ102_april2001

econ102_april2001 - THE UNIVERSITY OF BRITISH COLUMBIA...

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Unformatted text preview: THE UNIVERSITY OF BRITISH COLUMBIA FINAL EXAMINATIONS — APRIL 2001 ECONOMICS 102 — Sections 002 & 004 Principles of Macroeconomics TlME: 2 HOURS CANDIDATE’S NAME: (Last) " " TFii‘st) ' ' (Middle) STUDENT NUMBER: CANDIDATE’S SIGNATURE: THIS EXAMINATION CONSISTS OF 18 PAGES. MAKE SURE YOU HAVE A COMPLETE COPY. INSTRUCTOR’S NAME: John Boyd 1. EACH CANDIDATE SHOULD BE PREPARED TO PRODUCE, UPON REQUEST, HIS/HER LIBRARY AMS CARD. 2. READ AND OBSERVE THE FOLLOWING RULES: No candidate shall be permitted to ask questions of the Invigilators, except in casesof supposed errors or ambiguities in examination questions. No candidate shall be permitted to enter the examination room after the expiration of one—half hour, or to leave during the first half-hour of the examination. CAUTION: Candidates suspected of the following, or similar, dishonest practices shall be immediately dismissed from the examination and shall be liable to disciplinary action: a) Making use of any books, papers or memoranda, other than those authorized by the examiners 1)) Speaking or communicating with other candidates c) Purposely exposing written papers to the View of other candidates. The plea of accident or forgetfulness shall not be received. 3. SMOKING IS NOT PERMITTED DURING EXAMINATIONS. Name: Discussion Group: TA: THE UNIVERSITY OF BRITISH COLUMBIA Department of Economics Economics 102 — Sections 002 & 004 April Examinations — April 2001 Time: 2 hours Please Note: (i) Make sure your Name, Discussion Group and TA are on your exam. (ii) Place your answers to the Multiple Choice questions on the Answer Sheet which follows the questions. Marks: Part I Part II Part III Part IV Part V Part VI Total: /200 Part I — Multiple Choice Questions (Marks) (45) Select the best answer and place your answers on the Answer Sheet which follows the questions: 1. Suppose a customer comes in to the New Money Bank of Speedy Creek and makes a deposit of $500. The New Money Bank and all other banks in the banking system have a desired reserve ratio 0.20. All else constant, how much new money can be created after this deposit has worked it way through the banking system? (a) $1,600. (13) $400. (0) $2,000. (d) $1,500. (e) $2,500. In a situation of unemployment, an increase in the money supply will lead to a (a) rise in real GDP and the price level. (b) rise in real GDP, but a fall in the price level. (0) rise in real GDP, but no change in the price level. ((1) rise in the price level, but no change in real GDP. (e) fall in the price level and real GDP. Suppose the economy is operating at full employment and the short-run aggregate supply curve decreases due to a one-time increase in the price of oil. If the money supply is not increased, then (a) (b) (C) (d) (6) prices will rise and stay at the higher level with no further increase in the price level. read GDP will be less than long-run real GDP and the short-run aggregate supply curve will eventually increase again. aggregate demand will shift up and cause further inflation. aggregate demand will shift down and worsen the shock’s impact on real GDP. aggregate demand will shift down and eventually offset the shock. If the Bank of Canada announces its intention to slow the rate of growth of the money supply, the short-run Phillips curve will (a) (b) (o) (d) (6) shift lefiward. shifi rightward. not shifi. become horizontal. (a) and (d). If the rate of interest is above the equilibrium rate of interest, which one of the following describes the process by which equilibrium is achieved in the money market? (a) People buy goods to get rid of their excess money, lowering the price of goods and raising the rate of interest towards the equilibrium value. (b) People sell goods to get rid of their excess money, lowering the price of goods and raising the rate of interest towards the equilibrium value. (0) People sell bonds to get rid of their excess money, lowering the price of bonds and raising the rate of interest towards the equilibrium value. ((1) People sell bonds to try and raise more money, lowering the price of bonds and raising the rate of interest towards the equilibrium value. (e) People buy bonds to get rid of their excess money, raising the price of bonds and lowering the rate of interest towards the equilibrium value. If the interest rate on a perpetual bond is 20 percent and the bond pays $200 per year, then the price of the bond is (a) $10. (b) $2,000. (0) $1,000. (d) $200. (e) none of the above. If the Bank of Canada sells $1 million worth of government bonds, the money supply will (a) decrease by $1 million. (b) expand by $1 million. (0) decrease by more than $1 million. ((1) expand by more than $1 million. (e) expand by less than $1 million. The impact of monetary policy on aggregate demand will be greater the (a) flatter the demand for real money curve the investment demand curve. (b) steeper the demand for real money curve and the investment demand curve. (c) flatter the demand for real money curve and the steeper the investment demand curve. (d) steeper the demand for real money curve and the flatter the investment demand curve. (e) steeper the demand for real money curve and the flatter the aggregate expenditure curve. Which one of the following is an apparent cause of demand-pull inflation? (a) (b) (0) (d) (6) Sharp increases in the price of oil. Higher wages negotiated by unions. Open market purchases of government bonds by the Bank of Canada. Open market sales of government bonds by the Bank of Canada. Decreases in government purchases of goods and services. 10. 11. 12. 13. Which one of the following items is not included in the M1 definition of the money supply? (a) Currency held outside banks. (b) Saving deposits held at chartered banks. (c) Demand deposits held at chartered banks. ((1) Demand deposits held at trust companies. (e) Neither (b) nor (d). Fighting inflation through the use of contractionary policy is (a) generally endorsed by politicians in election years. (b) generally unpopular with politicians in election years. (c): is a zero cost way to reduce inflation. (d) always easily accepted by workers. (e) none of the above. Decreases in SAS create a policy dilemma because (a) contractionary policy may cause higher inflation and higher unemployment. (b) contractionary policy designed to reduce inflation may lead to even higher unemployment, and expansionary policy designed to reduce unemployment may lead to even higher inflation. (c) expansionary policy may cause higher inflation and higher unemployment. (d) contractionary policy designed to reduce unemployment may lead to even higher inflation, and expansionary policy designed to reduce inflation may lead to even higher unemployment. (e) expansionary policy will lead to lower inflation at the cost of higher unemployment. Which one of the following best describes the correct sequence of events following an expansionary open market operation? (a) The Bank of Canada sells government bonds, which decreases bank reserves, leading to a decrease in lending, leading to a decrease in the money supply. (b) The Bank of Canada sells government bonds, which decreases bank reserves, leading to a decrease in lending, leading to an increase in the money supply. (c) The Bank of Canada sells government bonds, which decreases bank reserves, leading to an increase in lending, leading to an increase in the money supply. ((1) The Bank of Canada sells government bonds, which increases bank reserves, leading to an increase in lending, leading to a decrease in the money supply. (e) The Bank of Canada buys government bonds, which increases bank reserves, leading to an increase in lending, leading to an increase in the money supply. 14. 15. Whenever desired reserves exceed actual reserves, banks (a) can lend out additional funds. (b) will call in loans. (0) will go out of business ((1) is in a profit—making position. (e) has excess reserves. Monetary policy is relatively ineffective according to Keynesians because the (a) demand for money and investment demand curves are relatively flat. (b) demand for money curve is relatively steep and the investment demand curve is relatively flat. (0) demand for money curve is relatively flat and the investment demand curve is relatively steep. (d) aggregate expenditure curve is relatively steep. (e) demand for money and the investment demand curves are relatively steep. 10. 11. 12. 13. 14. 15. Answer Sheet for Multiple Choice Questions Part II — Explain/Define the Concept (20) Briefly explain or define two of the three following concepts. Do not answer more than two! (a) Desired Reserve Ratio (b) Crowding-In (c) The Bank Rate Part III — Short Answer Questions (40) Indicate whether you agree or disagree with two of the following statements and briefly explain why. Do not answer more than two! (a) “When an individual changes banks and withdraws $1000 from Bank A and deposits it into Bank B the money supply will increase because Bank B will have excess reserves!” 10 (b) “In a major depression, i.e. the Keynesian Case, an increase in the money supply will not affect level of income or GDP!” 11 (c) “If an economy is initially at fiill employment, an increase in investment will cause a demand-pull inflation!” 12 Part IV — Compare/Contrast Questions (28) Briefly compare/contrast two of the following pairs of concepts. Do not answer all three! a) Gross Domestic Product vs Net Domestic Product b) Short Run Phillips Curve vs Long Run Phillips Curve l3 c) Government Expenditures of a Consumption Nature vs Government Expenditures of an Investment Nature 14 , Part V — Money & Banking Question Assume that the following “T Accounts” pertain to the Bank of Canada and All Chartered Banks respectively and that the Bank of Canada purchases $10,000 of Government of Canada bonds from the banks (Assume a desired reserve ratio of 20%) Bank of Canada Bank Reserves Bonds (Gov’t) All Chartered Banks Bank Reserves Demand Deposits Bonds (Gov’t) Loans (6) (a) Show the initial transaction (purchase) as transaction 1 (6) (b) Show the subsequent transactions (how banks react) as transaction 2 (6) (c) What has happened to the money supply? (Be specific) 15 (6) (d) What two assumptions underlie any change in the money supply you note in (c). (Be specific!) Part VI — Problem Assume that the diagram below show the Canadian economy in overall macroeconomic equilibrium: A P 16 (10) (a) If Yfe is full employment does that mean that there is no unemployment? Briefly explain! (10) (b) Assume a recession occurs in the U.S. Show the short run effect of this on the Canadian economy identifying the new situation as B. Briefly explain what caused the movement from A to B. 17 (13) (c) Briefly explain what would happen if the Government and Bank of Canada did nothing. Would you recommend that they do nothing? Why? (10) ((1) List one specific fiscal policy measure that the Government might use to reattain overall macroeconomic equilibrium and the one specific quantitative monetary policy measure that the Bank of Canada might use to attain the same goal. (200) 18 ...
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