Final Macro April 2009 Ans

Final Macro April - CARLETON UNIVERSITY Economics 1000 Section B Answer Sheets Final Exam April 2009 George Kowalski 1 PART A MULTIPLE CHOICE

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CARLETON UNIVERSITY Economics 1000 Section B, Answer Sheets Final Exam, April 2009 George Kowalski 1
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PART A . MULTIPLE CHOICE ANSWER SHEET NAME___________________________________________________________ [SURNAME, GIVEN NAME] STUDENT NUMBER_______________________________________________ USE UPPER CASE LETTERS TO ANSWER. 1. __________B 2. __________B 3. __________D 4. __________D 5. __________C 6. __________A 7. __________A 8. __________B 9. __________B 10. __________C 11. __________A 12. __________B 13. __________B 14. __________D 15. __________C 16. __________B 17. __________B 18. __________B 19. __________B 20. __________C 2
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PART B: SHORT ANSWERS. DO 5 OUT OF 8. 8 MARKS EACH 1. Suppose that there was a bad harvest in Brazil, and as a result coffee prices went up this year at coffee shops all over Canada. What do you expect would happen to coffee consumption? In what direction would the CPI move, ceteris paribus? Would that change correctly reflect the impact on consumers’ welfare? Explain briefly. ANS. Consumption of coffee would fall. The CPI would rise, ceteris paribus. Regarding impact on consumers’ welfare: First, since coffee would represent only a very small portion of the market basket used to calculate the CPI, the impact on consumers’ welfare would be small. Secondly, the CPI does not account for: (1) consumers’ ability to substitute towards goods that become cheaper over time; (2) the increased purchasing power due to the introduction of new goods; and (3) unmeasured changes in quality of goods. Therefore, consumers could switch to cheaper substitutes for coffee, such as tea, thereby further mitigating any fall in welfare. 2. Suppose that Canadian citizens start saving more as a result of changes to tax laws (i.e., tax incentives provided to encourage saving). Assume that Canada is a small open economy with perfect capital mobility. What does this imply about the supply of loanable funds, the real interest rate and net capital outflow? What is the impact on the real exchange rate and net exports? Use diagrams to illustrate your answer. ANS. The supply of loanable funds increases, and initially the equilibrium domestic real interest rate falls. Because of the lower domestic interest rate, Canadian net capital outflow rises (see diagram (a) below). Or alternatively, net capital outflow rises because national saving has increased but domestic demand for loanable funds for domestic investment remains the same. Hence, the additional surplus is invested abroad. 3
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This increase in NCO makes the supply of dollars in the foreign-currency market shift to the right, and the real exchange rate of the dollar depreciates (diagram b). The lower dollar results in higher net exports. To sum up: (a) the supply of loanable funds increases, (b) initially the domestic interest
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This note was uploaded on 02/26/2010 for the course ECON 1000 taught by Professor Unknown during the Spring '10 term at Carleton.

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Final Macro April - CARLETON UNIVERSITY Economics 1000 Section B Answer Sheets Final Exam April 2009 George Kowalski 1 PART A MULTIPLE CHOICE

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