A1_Practice

# A1_Practice - Econ 305 Prof M H Engineer Practice...

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Econ 305 Prof. M. H. Engineer Practice Assignment I We will practice using Assignment I from the Spring 2013. Questions 3-5 are the type of question you can expect for Quiz 1. Questions 1-2 cover material testable on exams. Questions 6-7 relate to interest rate and are the type of question that may show up on an exam (Midterm 1 or Final). More questions on interest rates will be posted later. 1. (6 marks) Playing 'card money' used in New France is described in "A History of the Canadian Dollar" on the course website. (a) 4 marks. Explain when and why "Gresham’s Law" applied to card money. (b) 2 marks. Briefly, explain whether the following two statements are true. (i) Card money was an immediate failure and was never used as a medium of exchange for longer than one year. (ii) After the failure of card money and other paper monies, trade came to a grinding halt. 2. (4 marks) Information for seasonally adjusted Canadian CPI (plotted in slide 2-23): n=3260020..3260022&tabMode=dataTable&srchLan=-1&p1=-1&p2=-1 . For simplicity, denote the CPI price level at time t as P t . (a) 3 marks. Calculate the annual inflation rate from December 2010 to December 2011; i.e. find 2011 . Now calculate the average annual inflation rate from the beginning of 2002 (i.e. December 2001) to the end of 2011. < We have not covered the CPI; do this problem instead using the GDP deflator assuming P Dec2001 =.977 , P Dec2010 =1.181 and P Dec2011 =1.208. > (b) 1 mark. Does the low inflation rate for clothing and footwear partly explain the difference between CPI and Core CPI inflation rates? < You are not responsible for this question; FYI look at the posted answer.> 3. (8 marks) Use the GDP Deflator data in the last question. Let 1/ t t P   be an index of the value of money. The net rate of return on money is 1 1 % 100 t t t t x      . (a) 1 mark. What is the annual rate of return on money from December 2010 to December 2011, i.e. find 2011 %  ? (b) 4 marks. Solve for % t  as a function of t to solve for the general functional relationship. What happens to % t  as t nears its lower and upper bounds? (If you can't solve this, plot the relationship by varying the inflation rates 0%, 2%, 5% and 10% in part (a) for 1 mark. For 1 more mark, plot more points help you conjecture what happens at the bounds.) (c) 3 marks. If the BOC hits its target inflation rate of 2% for 2012, what would be the level of the price index at the end of December 2012? (Note: December 2012 is currently unavailable.) Further suppose the BOC hits the 2% target in subsequent years. What is the value of money in December 2022?

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Econ 305 Prof. M. H. Engineer 4. (6 marks) The basic Quantity Theory (QT) assumes that velocity and output are fixed so that M t / P t = Y / V =constant implying % t t M . A modified QT, while still holding velocity constant, uses the better assumption that real ("potential") output grows over time; i.e. % t Y = g where g is the average long run rate of real output growth.
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