B06-Midterm-2010Spring-Solutions

# B06-Midterm-2010Spring-Solutions - ECM B06: Midterm Exam...

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ECM B06: Midterm Exam - SOLUTIONS Professor Jack Parkinson Q1. (20 marks) - Solution PART A: LR Output Y = 2(2,500) 0.50 (2,500) 0.50 = 2(50)(50) = 5,000 (2 marks) Real interest rate Y = C + I + G 5,000 = 1,200 + 0.30(5,000 – 1,500) + 1,500 – 50r + 1,500 50r =250 r = (250/50) = 5.00 (percent) (2 marks) Government spending on goods and services (net) = G = .3xY = 1,500 Taxes = T = 1,500 = G Consumption C = 1,200 + 0.30(Y-T) = 2,250 (2 marks) Investment I = 1,500 – 50r = 1,250 (1 mark) Private Saving = S PVT = Y – T – C = 1,250 (1 mark) Government saving = S GOVT = T – G = 0 (1 mark) National saving = S NAT = S PVT + S GOVT = Y – C – G = 1,250 (1 mark)

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Q1. Solution (continued) PART B: LR Output Y = 2(2,500) 0.50 (2,500) 0.50 = 2(50)(50) = 5,000 (1 mark) Real interest rate Y = C + I + G 5,000 = 1,200 + 0.30(5,000 – 1,500) + 1,650 – 50r + 1,500 50r =400 r = (400/50) = 8.00 (percent) (2 marks) Government spending on goods and services (net) = G = 30%xY = 1,500 Taxes = T = 1,500 = G Consumption C = 1,200 + 0.30(Y-T) = 2,250 (1 mark) Investment I = 1,650 – 50r = 1,250 (1 mark) Private Saving = S PVT = Y – T – C = 1,250 (1 mark) Government saving = S GOVT = T – G = 0 (1 mark) National saving = S NAT = S PVT + S GOVT = Y – C – G = 1,250 (1 mark) r S NAT 9% B Graph: 2 points subtract 1 pt if supply of loanable funds curve in NOT vertical subtract 1 pt if wrong curve shift 5% A I 1 (r) I 0 (r) 1,250 S, I 2
Q2. (15 marks) - Solution A) M∙V = P∙Y M = the nominal money supply (the aggregate nominal quantity of money supplied) V = the income velocity of money (the speed at which the nominal money supply circulates each year to pay for nominal GDP) P = the nominal price level = GDP deflator = average price level for domestic output Y = real GDP = aggregate real output (1 mark for each term – 4 marks) M & P are nominal variables (i.e. they are measured in current prices) (1 mark) V & Y are real variables (i.e. they are not measured in current prices) (1 mark) B) In the LR when V & Y are both constant (fixed) M & P move together one-to- one. Initially in LR equilibrium we have Y P V M = 0 0 , later this becomes Y P V M = 0 0 5 5 If the central bank raises the money supply to 5 times its previous level then: 1) P will also be raised to 5 times its previous level; 2) nominal GDP (P∙Y) will be raised to 5 times its previous level; and 3) real GDP (Y) will remain the same (i.e. it is unaffected by this money supply change). 1 mark for point 3) ) C) If M∙V = P∙Y holds in the very LR then over time it holds in rates of changes: + = + Y Y P P V V M M , so + = Y Y M M π % 5 . 3 % 8 + = = M M year per % 5 . 4 = (2 marks)

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## This note was uploaded on 06/19/2010 for the course ECON ECMB06 taught by Professor Parkinson during the Spring '10 term at University of Toronto- Toronto.

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B06-Midterm-2010Spring-Solutions - ECM B06: Midterm Exam...

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