a04-part1 - UNIVERSITY OF TORONTO 6 Faculty of Arts and...

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Unformatted text preview: UNIVERSITY OF TORONTO 6 Faculty of Arts and Science ”9/ , AUGUST 2004 EXAMINATIONS P88?) EC0202Y1Y 9"?) Macroeconomics, Theory and Policy Exam Duration: 3 hours. Examination Aid: Only Regular Calculators. Using programmable calculators, or calculators with capabilities of storing graphs, or texts are prohibited. All communication, or recording devices in any fonn, including cellular phones, and cameras must be turned Off, and kept out of reach during the exam. Total Mark: 100 points. Masoud Anjomshoa Instructions 0 This exam consists of 8 questions in 17 pages including the cover page. 0 Answer all questions on the exam papers. 0 Write your first and last name, student number, and section. 0 Answers should be brief and. to the point. You need to write the answers ONLY in the provided space for each question. Good Luck. Last Name: First Name: Student Number: Section: (Please Circle One) Tu-Th 1-4 Tu—Th 6-9 03 Q4 "m 10f17 1 - Use the following table to answer the questions. (Show your work.) Durable goods consumption ............................. $ 497 Non-durable goods consumption ......................... 1,301 Services consumption .................................... 2,342 Non residential investment .................................. 566 Residential investment ....................................... 224 Inventory investment ............................................ 7 Federal government purchases .............................. 449 State and local government purchases ...................... 683 Exports .......................................................... 640 Imports .......................................................... 670 Investment income paid to non—residents ................... 7 Investment income from abroad to residents ............... 14 Depreciation ................................................... 658 Indirect business taxes ......................................... 551 Retained corporate profits .................................... 255 Social insurance contributions by individuals ............. 556 Government transfers to individuals ........................ 837 Personal tax and non tax payments .......................... 645 (Total points 11, 1 point per calculation) a)- Calculate the consumption, gross fixed investment, gross investment, government spending, and net export. b)- Calculate the gross domestic product, GDP, gross national product, GNP, net national product, NNP. c)- Calculate the national income, NI, personal income, PI, and disposable income, DI. 20f17 2- Suppose an individual with his truck can carry cargos for a company for a salary of $75,000 a year. He also has the option to buy a license for carrying specialized manufacturing shipments for $510,000 from Transportation Canada, and earn $225,000 a year. The license is valid only for 4 years. (Total points 10) a)- Which option might he choose, if the real interest rate is 6%? (4) b)- Which option might he choose, if the real interest rate is 10%? (4) c)- Are the results in parts (a) and (b) are different? Why or why not? (2) 3ofl7 3:. Recently some European Countries have started scaling back their unemployment insurance benefits. For analyzing this issue consider a closed economy, and start from a medium run equilibrium: (Total points 9, 3 points apiece) a)- Use the wage and price setting relations (WS/PS), explain the possible shifts, and the changes in natural rate of unemployment, real wage, and potential output level (Ybar, or Yn natural level of output) in medium run. b)— Use the aggregate supply and demand (AS/AD), and LM/IS curves to find the short run equilibrium. Compare the short run equilibrium, and the medium run equilibrium before the shock in terms of output, investment, consumption, interest rate, price and expected price levels. [No explanation is necessary.] c)- Use the aggregate supply and demand (AS/AD), LM/ IS curves to find the new medium run equilibrium. Compare the short run, and new medium run equilibrium points in terms of output, investment, consumption, interest rate, price and expected price levels, real and nominal wages. [No explanation is necessary.] ____-_-______——__—___—__-——__—-__—-__——__—___--__—__..____-___—____——___—_-_——__..—....__-________—____-___....___..____— _______ 4of17 50f17 4- Consider an open econdmy, at existing equilibrium the domestic and foreign interest rates are equal, also trade is balanced, i.e. i=i*, Ee=E, and NX=O. (Assume that the price level, P, is fixed.) (Total points 10) a)- Draw a set of IS-LM, UIP, and NX curves for the economy, showing the equilibrium output/income, interest rate, exchange rate, expected exchange rate, and trade balance. (1) (No AS/AD curves, because the price level, P, is assumed fixed.) b)— Starting from the equilibrium in part (a), show the outcomes of an increase in E“, expected exchange rate. Make sure you draw all shifis of curves, and explain all changes in all markets. (7) (No AS/AD curves, because the price level, P, is assumed fixed.) c)- Summarize the changes in output, consumption, investment, interest rate, trade balance, real and nominal exchange rate after and before the shock. (2) 6of17 70f17 5— In an economy, the required reserves for the commercial banks deposits, set by the Central Bank, is 25%. People keep 50% of their money in form of cash, and keep the rest in form of deposits in commercial banks. Suppose, starting from no money in economy, the Central Bank buys $1000 bonds from a person. (Total points 15) a)- Show the commercial banks, and the Central Bank balance sheet, by calculating total amounts of deposits, required reserves, loans, cash. (8) b)- How much are total levels of high-powered money, money supply, and money multiplier. (3) c)- Name and explain 3 ways that a Central Bank can control the money supply. Which ones are currently used by Bank of Canada to control money supply? (4) 8of17 9of17 6s Consider a consumer who likes to have the same consumption level in both periods of a 2-period horizon. She has $28 in period one, and $39 in period 2. Suppose interest rate is 20%. (Total 10 points) a)— Suppose there are only borrowing/lending possibilities. Draw her budget line, and find her optimal consumption levels in periods 1, and 2, and also the optimal level of lending/borrowing amount. (6 points) Suppose the table below shows the marginal product of capital, i.e. the extra units of output that we can get by an additional unit of capital (investment). b)- Suppose there are both, borrowing/lending and investment, possibilities available. Find her optimal consumption levels in periods 1, and 2, and also the optimal levels of lending/borrowing, and investment amounts. 10 of 17 ...
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