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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) TuTh 14 Tu—Th 69 03 Q4 "m 10f17 1  Use the following table to answer the questions. (Show your work.) Durable goods consumption ............................. $ 497
Nondurable 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 ISLM, 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 highpowered 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 2period
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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 Spring '10
 MasoudAnjamshoa
 Macroeconomics

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