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Unformatted text preview: Duration: 2 hours UNIVERSITY OF TORONTO
Faculty of Art and Science August Examinations 2006 EC0202Y1Y Total Points: 100 points Examination Aid: Only Regular Calculators. Instructions: We 0 This test consists of 6 questions in 18 pages including the cover page. 0 Answers must be organized, legible, brief, and to the point, otherwise
you may lose points. 0 You need to write the answers only in provided space for each question. Last Name: Student Number: Circle Your Section: First Name: L0101 (TR 1:003:00) L5101 (TR 6:008:00) 2 out of 18 1 Verify if following production functions have Constant Returns to Scale property?
(K and N represent capital and labor, respectively. 0‘ is a constant.) [Total 10 points] 1
a) Y= 5 (KN)§, b) Y= K + 3 JKN, c) Y= [0.5 K("")’ 6 + 0.5 N(“")/“] W“) You can use the back of this page for your answers 3 out of 18 4 out of 18 2 Consider a consumer who lives only 2 periods of time, and likes to have the m consumption
levels in both periods. She has $100 in period 1, and $160 in period 2. Suppose she can borrow
or lend at 28% interest rate. Draw her budget line, and ﬁnd her optimal consumption levels
in each period, and also the optimal level of lending or borrowing. [Total 10 points] You can use the back of this page for your answers 5 out of 18 6 out of 18 3 Consider an open economy, with ﬂexible exchange rate regime, in its medium run equilibrium
in year 0, where Po=1, Eo= l, io=i*o= 10%, money supply growth rate =10% per year every
year, expected inﬂation is always zero, and potential output,Y =100. [Total 10 points] Using neat IS/LM, AS/AD, and UIP curves, show the medium run equilibrium points for years
0, 1, and 2. (No explanation is necessary. Just draw the graph with related numbers.) You can use the back of this page for your answers 7 out of 18 8 out of 18 4) Consider an open economy with a credible pegged exchange rate regime. Suppose, while
the economy is in its medium run equilibrium, foreigners’ income increases. [NOTEz Use IS/LM, AS/AD, and UIP curves. Messy graphs, and graphs without proper labels
do not receive full credits] (Total 20 points) a) Draw a graph, showing the status of the economy in its short run equilibrium. Just verify the
status of these variables compare to the initial medium run equilibrium: investment, capital ﬂow,
trade balance, real exchange rates, and money supply. [No explanation] (6) b) Repeat your gpaphs in part a, and add the new medium run equilibrium, if the government and
Central Bank do not do anything. Just verify the status of these variables compare to the initial
medium run equilibrium: capital ﬂow, trade balance, and real exchange rate. [No explanation] (5) c) Repeat your gpaphs in part a, and add the new medium run equilibrium, if the Central Bank
revalues the exchange rate. Just verify the status of these variables compare to the initial medium
run equilibrium: trade balance, and real exchange rate. [No explanation] (5) d) Repeat your graphs in part a, and add the new medium run equilibrium, if government cuts its
expenditure. Just verify the status of these variables compare to the initial medium run equilibrium:
trade balance, and real exchange rate. [No explanation] (4) You can use the back of this page for your answers 9 out of 18 ...
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 Spring '10
 MasoudAnjamshoa
 Macroeconomics, Inflation, Foreign exchange market, medium run equilibrium

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