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Unformatted text preview: Business & Economics Assignments and Practice Exams ECON 201: Principles of Macroeconomics Assignments and Practice Exams ECON 201 Principles of Macroeconomics 401108 Credits Edition: Second edition Course Writer: Peter Kennedy Course Designer: Ted Keating Curriculum Editor: Wendy Stephenson Interim Academic Director, Business & Economics: Gordon Tarzwell Program Coordinator, Business & Economics: John Bryant ISBN 0‐7790‐0584‐5 (set) revised 2nd ed., 2007 This set contains: Course Manual, ISBN 0‐7790‐0585‐6 Course Modules (and Canadian Views), ISBN 0‐7790‐0586‐4 Assignments (and Practice Exam), ISBN 0‐7790‐0587‐2 Copyright © 2005, 1999 Thompson Rivers University All rights reserved. No part of this work may be reproduced in any form by any means without permission in writing from the Intellectual Property office of Thompson Rivers University, Open Learning. Printed in Canada by www.openlearning.tru.ca Thompson Rivers University, Open Learning Box 82080 Burnaby, British Columbia V5C 6J8 Contents Assignments............................................................................ 1 Assignment 1A......................................................................... 1 Assignment 2A......................................................................... 1 Assignment 3A......................................................................... 2 Assignment 4A......................................................................... 2 Practice Midterm Exam ............................................................. 3 Practice Final Exam ................................................................ 11 Answers to Economics 201 Practice Midterm Exam ................... 24 Answers to Practice Final Exam.............................................. 28 ECON 201: Assignments and Practice Exams 1 Assignments and Practice Exams This section of the course materials contains the assignments, the midterm exam, and a practice final exam with its answers. Assignments Assignment 1A Except for the word problems appearing here, the questions are located in the text’s media exercises and numerical exercises. Remember that marks are given for explanations, so be sure to explain your answer, and for the numerical questions, explain how you obtained your answer. 1. Show on a supply‐and‐demand diagram and explain in words what will happen to the Canadian exchange rate compared to the foreign exchange rate when the world demand for lumber, wheat, and paper increases. Ignore interactions with other sectors. Hint: Be sure to label your axes clearly! (5 marks) 2. Chapter 2, #1 (10 marks), N15 (5 marks) 3. Chapter 3, #15 (10 marks), N3 (5 marks) 4. Chapter 4, #13 (10 marks), #15 (5 marks), N5 (10 marks), N9 (5 marks) 5. Chapter 5, #5 (10 marks), #9 (10 marks) 6. Chapter 6, #23 (10 marks), N1 (5 marks) Assignment 2A Remember that marks are given for explanations, so be sure to explain your answer, and for the numerical questions, explain how you obtained your answer. 1. 2. 3. 4. 5. Chapter 7, N1 (5 marks) Chapter 8, N1 (10 marks) Chapter 9, #3 (10 marks), #9 (10 marks), #17 (10 marks), N3 (10 marks) Chapter 10, #13 (5 marks), N5 (5 marks), N7 (5 marks) Chapter 11, #11 (5 marks), #21 (10 marks), #25 (10 marks), N3 (5 marks) TRU Open Learning 2 ECON 201: Assignments and Practice Exams Assignment 3A Remember that marks are given for explanations, so be sure to explain your answer, and for the numerical questions, explain how you obtained your answer. 1. Chapter 12, #7 (10 marks), #13 (5 marks), #19 (5 marks), #27 (10 marks), N1 (5 marks) 2. Chapter 13, #1 (10 marks), #7 (10 marks), #19 (5 marks), N1 (5 marks) 3. Chapter 14, #1 (10 marks), #9 (10 marks), #17 (5 marks) 4. If seigniorage is $6 billion, the current deficit is $40 billion, the structural deficit is $10 billion, the money supply is $600 billion, the publicly‐held national debt is $400 billion, real growth is 2 percent, and the economy is at its long‐run average unemployment rate, what is the inflation rate? (10 marks) Assignment 4A Remember that marks are given for explanations, so be sure to explain your answer, and for the numerical questions, explain how you obtained your answer. 1. 2. 3. 4. Chapter 15, #7 (10 marks), #9 (10 marks), N1 (5 marks) Chapter 16, #7 (10 marks), #19 (10 marks), #29 (5 marks) Chapter 17, #9 (10 marks), #23 (10 marks), N5 (5 marks) Chapter 18, #3 (10 marks), #13 (5 marks), N1 (5 marks), N7 (5 marks) TRU Open Learning ECON 201: Assignments and Practice Exams 3 Practice Midterm Exam This is a two‐hour, closed‐book exam. In addition to the short‐answer questions on the following two pages, there are 23 multiple‐choice questions worth two marks each with no marks deducted for incorrect answers. The total number of marks available is 100; allocate approximately one minute per mark. 1. Explain why and in what direction the value of ʺtheʺ multiplier will change if consumption and investment demand become more strongly affected by the interest rate. (4 marks) 2. Answer the following. a) What is national saving? (2 marks) b) Why is it of interest? (2 marks) 3. Provide a one‐line answer for each of the following (2 marks each). a) If 1991 nominal GDP is $600 billion and the price index is 120.0 (1986 = 100), then what is 1991 GDP measured in 1986 dollars? What name would economists give to this figure? b) If agg D for g&s exceeds output by $130 million, how does the national accounts statistician ensure that this discrepancy does not create a misleading estimate of GDP? c) If GDP calculated by adding up expenditures is $800b and calculated by adding up income payments is $810b, then what is the statistical discrepancy and how is it used to reconcile these two different figures? Be explicit. d) The NRU can be calculated by adding together what three different types of unemployment? 4. Suppose an increase in income of a dollar elicits an increase in consumption of 50 cents, an increase in saving of 10 cents, an increase in investment of 5 cents, and an increase in imports of 5 cents. After three rounds of the multiplier TRU Open Learning 4 ECON 201: Assignments and Practice Exams process, by how much should GDP have increased in response to an increase in government spending of $400 million? Explain your reasoning. (4 marks) 5. By means of a flowchart, explain the reaction of the interest rate to an increase in the money supply. (6 marks) 6. “Countercyclical policy is about filling in holes and shaving off peaks ‐ exactly what John Maynard Keynes prescribed.” (4 marks) a) What is meant here by ʺfilling in holes and shaving off peaks”? b) How does this differ from the monetaristsʹ prescription? 7. “Yesterday, the Bank appeared to make no attempt to influence the results of the weekly auction of federal government treasury bills. Earlier in the week the Bankʹs traders intervened aggressively in the money market to push the yield on last weekʹs bills sharply higher.” (4 marks) a) How would the Bank influence the results of the weekly auction? b) Exactly what kind of intervention is being referred to in the last sentence? (Note that this intervention occurs after the auction.) 8. “A smaller‐than‐expected decrease in the U.S. money supply dealt the North American capital market a hard blow, as bond prices sagged across a broad front.” Explain why bond prices sagged. (4 marks) 9. “There is little doubt that the key reason for this slide toward ever more inflation was an effort by public policy in most countries to achieve and maintain more output and employment from their economies than was consistent with price stability.” Explain in your own words the “key reason for this slide toward ever more inflation,” and note briefly how your explanation would be reflected on an AS/AD diagram. (4 marks) 10. Consider an economy for which the current GDP is $800 billion, ʺtheʺ multiplier is 3, the income multiplier with respect to the money supply is 4, the money multiplier is 5, the marginal tax rate is 20 percent, the real interest rate is 3 percent, the current budget deficit is $30 billion, the long‐run real rate of growth is 2 percent, the current money supply is $200 billion, the rate of money supply growth is 10 percent, and financial innovations are decreasing money demand by 1 percent per year. Marks are given for your explanations, not the final answer. TRU Open Learning ECON 201: Assignments and Practice Exams 5 a) Disregarding growth and inflation, what would the budget deficit become if the central bank bought $3 billion of bonds? (4 marks) b) What is current velocity? (1 mark) c) What should be the long‐run rate of inflation? (2 marks) d) What should be the nominal interest rate? (2 marks) e) What should be the price of a T‐bill due to mature in six months at its face value of $1,000? (3 marks) Midterm Multiple‐Choice Questions 1. Goods and services are valued at market prices when calculating GDP. Because the ʺoutputsʺ of government are not sold, they have no market prices. When calculating GDP a) they are valued at zero b) they are valued at the cost of producing them c) their value is estimated from a survey of recipients of these services d) their value is estimated from the market prices of similar market‐ provided services 2. ʺLabour‐force growth has, in the past, tended to reflect the economic situation. In almost all post‐war recession years the participation rate fell slightly, with the result that .....ʺ a) the rate of unemployment fell by more b) the rate of unemployment rose by more c) the rate of unemployment didnʹt rise by as much d) the rate of unemployment didnʹt fall by as much 3. Suppose the non‐institutionalized population over age 15 is 25 million, the participation rate is 80 percent, the number of discouraged workers is one million, the number of people with full‐time jobs is 16 million, and the number of people with part‐time jobs is two million. What is the measured unemployment rate? a) 10% or less b) more than 10% but less than 11% c) 11% or more but not more than 12% d) more than 12% TRU Open Learning 6 ECON 201: Assignments and Practice Exams 4. ʺBut in a loose sense, we are all Keynesians now, in the sense that we reject the notion that a sick economy heals itself by ʹnaturalʹ recuperative powers, without government action.ʺ This suggests that faced with a sick economy we all would recommend a) doing nothing b) increasing taxes c) increasing the money supply d) either or both of b) or c) above 5. ʺAlthough initially the news looked good, with growth of 4.2 per cent in the final three months of the year, closer examination showed a sharp drop in consumer spending and a large expansion in inventories.ʺ This news is not good because a) firms will cut output to lower inventories b) higher inventories will decrease aggregate demand c) although aggregate demand is higher by 4.2 percent, this is not sustainable d) a drop in consumer spending decreases saving which lowers aggregate demand 6. ʺA $4 billion tax cut was accompanied by a $6 billion increase in consumer spending in the same year.ʺ The most probable reason why consumer spending increased by more than the amount that taxes were reduced is that a) the tax cut reduced interest rates which in turn stimulated consumer spending by others b) lower taxes required lower government spending which in turn encouraged private spending by others c) spending by those with higher take‐home pay in turn generated additional production and spending by others d) the tax cut induced more transfer payments which in turn caused an increase in consumer spending by others 7. Suppose current income is $600 billion, ʺtheʺ multiplier is 4, the marginal tax rate is 20 percent, and the current budget deficit is $20 billion. If government spending is changed to lower income to $580 billion, once equilibrium is attained the budget deficit will be a) $15b or less b) more than $15b but less than $17.5b c) at least $17.5b but less than $20b d) $20b or more TRU Open Learning ECON 201: Assignments and Practice Exams 7 8. ʺWith the economy mired in recession, it is almost a classic case of room for government stimulus without damage.ʺ This means that the government can increase spending with no resulting increase in a) inflation b) income c) tax receipts d) unemployment 9. If you know that investment is quite volatile and you would prefer to see the economy with smaller rather than larger swings in economic activity, then a) you would prefer a small MPM (marginal propensity to import ) b) you would prefer a large MPM c) the value of the MPM is not relevant because the problem is investment behaviour d) the value of the MPM is not relevant because policy authorities can smooth out cycles with appropriate policy action 10. If we are in an area where the aggregate supply curve is completely flat, a) ʺtheʺ multiplier when expressed in real terms should be exactly the same number as when it is expressed in nominal terms b) ʺtheʺ multiplier when expressed in real terms should be a bigger number than when expressed in nominal terms; c) ʺtheʺ multiplier when expressed in real terms should be a smaller number than when expressed in nominal terms; d) there is not enough information given to determine the relative sizes of the real and nominal multipliers 11. An important ingredient in the debate over supply‐side economics is that a) the cost of supplying goods and services is rising b) programs that increase production often increase economic inequality c) economic theory can give no guidance to policy‐makers about the effects of an untried policy d) the gap between ʺwinnersʺ and ʺlosersʺ must be narrowed if society is to provide incentives for success 12. ʺOver the longer term business may be shooting itself in the foot by taking a hard line against government taxing and spending policies if this hard line causes a decline in public spending on the economyʹs infrastructure ‐ roads, sewers, bridges, and other public works.ʺ The essence of this argument is that a decline in infrastructure leads to a) higher taxation b) lower inflation c) lower productivity d) lower national saving TRU Open Learning 8 ECON 201: Assignments and Practice Exams 13. Suppose the multiplier is 3, the marginal tax rate is 25%, and the marginal propensity to consume out of disposable income is 0.9. If government spending increases by $20 billion, then national saving a) increases b) decreases by $2b or less c) decreases by more than $2b but not more than $4b d) decreases by more than $4b 14. In the long run, the rate of growth of real wages is approximately equal to the rate of a) inflation b) growth of labour productivity c) growth of labour productivity plus inflation d) growth of labour productivity minus inflation 15. ʺOne question is whether the government can steel itself to bring its fiscal policy into line with the central bankʹs monetary policy. Will the government be able to borrow the funds it will need to cover this yearʹs deficit out of the existing money supply, which the Bank of Canada is trying to restrict?ʺ If the government tries to borrow more funds than are available there will be a rise in a) bond prices b) inflation c) interest rates d) unemployment 16. ʺThe bang from a buck of direct government spending—say, highway construction—is far greater than the punch from a tax cut of equal dollar magnitude.ʺ This happens because a) some of the taxes are avoided b) a tax cut only increases aggregate demand by the marginal propensity to save times the tax cut c) a tax cut only increases aggregate demand by the marginal propensity to consume times the tax cut d) higher government spending sets the multiplier in motion whereas a tax cut does not 17. ʺIn the process, the money multiplies, since the banks are allowed to lend more money than they actually have. The Bank tries to anticipate how much the money will multiply as this process unfolds. If its calculations are right, just enough money will be created to accommodate the growth it desires for the economy. If the calculations are wrong, it would make them right by pumping some money into the economy or pumping some out.ʺ [The next 3 questions refer to this quote.] TRU Open Learning ECON 201: Assignments and Practice Exams 9 What money is being multiplied here? a) the money you and I hold as cash b) the money the government receives in taxes c) the money obtained by the Bank of Canada when it sold bonds d) the money spent by the Bank of Canada when it bought bonds 18. What technical terminology do economists use to refer to ʺhow much the money will multiply as this process unfolds? a) the multiplier b) the money multiplier c) required reserve ratio d) open market operations 19. The Bank of Canada pumps money out of the economy by a) buying bonds b) selling bonds c) creating cash d) lowering the reserve requirements 20. ʺThe eagerly awaited weekly money stock figures measure more than just the supply of money. The weekly number measures money demand as much as it does supply. The evidence now suggests the alarming growth rate of the money stock mainly reflects an upsurge in money demand, rather than an overly expansive money supply policy.ʺ Monetary policy appears to be a) restrictive b) anti‐inflationary c) targeting on the interest rate d) targeting on the money growth rate 21. ʺThe Governor of the Bank of Canada added that the principal misunderstanding about the Bankʹs role in the present situation is that the Bank could achieve more or less immediately a low level of interest rates if it wanted to.ʺ Why canʹt it achieve immediately a low interest rate if it wanted to? a) because velocity is unstable b) it could—this is just Bank rhetoric c) because it requires lowering inflation, which takes time d) because the Bankʹs control over the money supply is incomplete TRU Open Learning 10 ECON 201: Assignments and Practice Exams 22. If the rate of money growth increases in a fully employed economy, you should a) wait to see what happens b) sell bonds because their price should fall c) buy bonds because their price should rise d) not worry because bond prices should not change 23. Suppose real growth is 2 percent, velocity is constant, the money supply is $200 billion, and the money multiplier is 4. If the monetary authorities want to maintain an inflation of 5%, how many billions of dollars of bonds should the central bank buy this year? a) 2 or less b) more than 2 but not more than 3 c) more than 3 but not more than 4 d) more than 4 TRU Open Learning ECON 201: Assignments and Practice Exams 11 Practice Final Exam This is a three‐hour, closed‐book exam. You are permitted a basic calculator and a dictionary. In addition to the short‐answer questions below, there are 44 multiple‐choice questions worth one mark each. Marks sum to 100; allocate about one and one‐half minutes per mark. 1. (8 marks) Trace out, step by step, the impact on the economy of an increase in the money supply in the context of a flexible exchange rate and comment on whether monetary policy is stronger or weaker than in a closed economy. 2. (4 marks each) Explain a) What are discouraged workers and how they can cause paradoxical movements in measured unemployment? b) What is the monetarist rule, the main argument in favor of adopting it, and the main argument against? c) What is the current account and how it is affected by the budget deficit? d) What are the two main circumstances in which a budget deficit could be viewed as placing a burden on future generations, and why. 3. Be sure that it is clear what reasoning you used to obtain your numerical answers. a) Suppose for the Canadian economy ʺtheʺ multiplier is 3, the income multiplier with respect to the money supply is 4, and the money multiplier is 5. If the government decreases its spending by $6 billion and directs the Bank of Canada to buy $2 billion of bonds, what will happen to the income level? (4 marks) b) Suppose the Canadian economy, on a fixed exchan...
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