# m3 - YORK UNIVERSITY Department of Economics ECON1010N...

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YORK UNIVERSITY Department of Economics ECON1010N: Principles of Macroeconomics Midterm #3: March 25, 2011 Duration – 1 Hour Aids Allowed: Non-programmable calculators only Time Allowed : 1 Hour The total marks in this test are 50. The test is divided into two parts: Part I - Problem format - is worth 40 marks (40 of the total mark of 50) Part II – Explanations (5 marks) and Multiple choice (5 marks) (10 of the total mark of 50) Show your work where applicable . Please use pen instead of pencil . Print your name and student number clearly on the front of the exam and on any loose pages. Name: . (Family Name) (Given Name) Student # : . There are 6 pages to the exam. - 1/5 -

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Name: ______________________ Part I: Place your answers (and work where necessary) in the space provided. Clearly label all axes, curves, and points. 1. Monetary Policy (10 marks) Suppose that the Bank of Canada decreases the money supply to slow down the Canadian economy to prevent inflation. In the space below, use Money Demand/Supply, MEI, and AE/Y diagrams to demonstrate the impact of a decrease in money supply on interest rate, investment, and GDP equilibrium. Ignore ‘Crowding Out’. Label your axes carefully. Use the subscript ‘o’ to represent the original equilibrium and ‘ 1 ’ to represent subsequent changes. In particular, a) Draw AE/Y, Money D/S, and MEI diagrams showing an initial equilibrium before the monetary policy. Use the subscript ‘o’ for initial curves and equilibria. (5 marks) b) Now show the effect of the Bank of Canada’s monetary policy on the interest rate, investment, and equilibrium GDP using the subscript ‘ 1 ’. (5 marks) r r M (or M/P) real I real AE real Y (or GDP) r 0 Io Mo MEI S M 0 D M Yo AE 0 r 0 S M 1 r 1 r 1 I 1 Y 1 AE 1 1 mark: vertical M (or S M ) and negatively sloped M D o with r on the vertical and M on the horizontal 1 mark: ro at intersection of M (or S M ) and negatively sloped M D o 1 mark: downward sloping MEI in diagram with r on vertical and I on horizontal axis 1 mark: Io from negatively sloped MEI at ro 1 mark: Yo from intersection of AEo and 45 degree line 1 mark: Decrease in Money Supply (S M 1 ) Take off 2 marks if they get this wrong(i.e., don’t give the next mark) and then see if they are consistent with this change 1 mark: increase in interest rate (r 1 ) from intersection of new S M and M D o (no mark for decrease in interest rate even if it is consistent with an increase in money supply) 1 mark: Decrease in I (I 1 ) (or increase if they increased money supply) 1 mark: shift down of AE to AE1 (or shift up if they increased money supply)
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