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VANCOUVER ISLAND UNIVERSITY

DEPARTMENT OF ECONOMICS
ECON 212: PRINCIPLES OF MACROECONOMICS
SAMPLE FINAL EXAMINATION, APRIL 2013

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THIS EXAM HAS TOTAL 17 PAGES INCLUDING THE COVER PAGE

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Total marks 85. Duration: 2 Hours.

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present value of the asset d.ECON 212 Sample Final Examination. the equilibrium price of an asset will equal the a. issue price of the asset b. interest rates rising c. personal consumption affect real GDP c. The monetary transmission mechanism describes the process by which changes in a. future value of the asset e. future value of the asset multiplied by the interest rate 2. April 2013 PART A (There are 50 MCQs in this section. When there is an excess supply of money. In a competitive financial market. the price of bonds increasing d. Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds. precautionary demand c. The analyst is probably encouraging an increase in money balances for which reason? a. individuals attempting to sell bonds 5. speculative demand d. monetary equilibrium influence the interest rate b. worth 50 marks) 1. monetary equilibrium influence real GDP through changes in desired investment d. the price of bonds falling b. transaction demand e. sum of present value of the asset multiplied by the interest rate c. business investment influence real GDP 2 . insufficient information 3. the price level falling e. present value demand b. interest rate affect the demand for money e. monetary equilibrium is restored through a.

relative prices will double 8. the GDP that would be produced if the economy's resources were fully employed at a normal intensity of use c. a goal that can never be achieved by the economy b. prices will double c. a reduction in the money supply will lead to a a. there will be no effect on money prices e. both the amount by which the capital stock is depleted during the accounting period.ECON 212 Sample Final Examination. the amount by which the capital stock is depleted during the accounting period b. all inputs and outputs in the economy b. achieved during periods when all of the labour force is employed d. Other things being equal. rise in the rate of interest and in increase in investment expenditure 7. real income will double b. According to the views of the Classical economists. if the money supply doubles a. rise in the rate of interest and no change in investment expenditure b. the GDP that could be produced if the economy's resources were fully employed at their maximum intensity of use 9. rise in the rate of interest and a decrease in investment expenditure d. April 2013 6. Which of the following illustrates the use of fiat money? 3 . "depreciation" refers to a. the difference between gross investment and net investment 11. Total value added in an economy is equal to the value of a. In national-income accounting. fall in the rate of interest and an increase in investment expenditure c. and the difference between gross investment and net investment d. all final and intermediate goods produced 10. all final goods produced d. money prices will be halved d. Potential or full-employment output is a. all profits of all firms in the economy c. the increase in the economy's stock of capital per year c.

a store of value 13.ECON 212 Sample Final Examination. Canadian dollars in circulation b. a medium of exchange c. 20% Assets Reserves $300 Loans $2200 Liabilities Deposits $2000 Capital $500 . bartering goods for services b. dollar d. all of the responses are correct b. a unit of account d. loans to private individuals e.S.6% c. Government of Canada securities c. the reserve ratio d. The currency that is in circulation in Canada today is a. deposits of commercial banks and other financial institutions d. What is their actual reserve ratio? Bank North's Balance Sheet a. The largest component of the liabilities of the Bank of Canada is a. Refer to the table. 15% b. backed by the U. fractionally backed by gold c. the target reserve 16. April 2013 4 a. 13. the excess reserve ratio b. fully backed by gold held at the central bank 14. keeping gold as a hedge against inflation c. exchanging money-market funds for insurance 12. not officially backed by anything b. Assume that Bank North is operating with no excess reserves. The function of money in an economy is to serve as a. the required reserve c. Government of Canada deposits 15. Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). exchanging Canadian dollars for a T-shirt d. This fraction is known as a.

households to maintain a certain fraction of their money holdings in the form of currency d.00 c.00 100 units $2.00 120 units Bananas $3.500. The concept of "near money" refers to a. assets that fulfill the medium-of-exchange function but not the store of value function c. a parallel downward shift in the AE curve b.ECON 212 Sample Final Examination. The table below shows total output for an economy over 2 years 2007 Goods 5 2008 Price Quantity Price Quantity Coconuts $1. 12% $2500 e.00 20. April 2013 $2500 d.00 200 units Pineapples $6. $1.00 d. assets that fulfill the temporary store-of-value function but not the medium-of-exchange function 19. which rotates it downward . a movement to the left along the AE curve c. A desire by ________ has no effect on the ability of the banking system to expand bank deposits. a. expressed in 2007 prices. potential borrowers to be more cautious in their borrowing 18. which rotates it upward d.00 200 units $4. financial assets whose capital values are too unstable for them to be classified as money b. $1. 25% 17. banks to maximize profits b. A decrease in the marginal propensity to spend out of national income will cause a.00 100 units $8.760. $410. was a.00 b. cheques on demand deposits d.260. households to stash money in safety-deposit boxes c.00 90 units The real GDP in 2008. $1. a decrease in the slope of the AE curve. an increase in the slope of the AE curve.

actual GDP is always less than potential GDP 6 . the destruction of jobs due to labour skills of certain workers becoming obsolete 24. Consider the basic AD/AS macro model. growth of potential GDP b. growth of potential output. a. there is upward pressure on wages c. April 2013 21. An important social cost of economic growth is a. desired aggregate expenditure 22. When actual GDP is above potential GDP. there is upward pressure on output prices b. When actual GDP is above potential GDP. there is downward pressure on wages 26. A characteristic of the short run in macroeconomics is that a. fluctuations of output around potential c. and real GDP are lower than in the initial equilibrium d. the sacrifice of current consumption required for a higher level of future consumption b. equilibrium savings and wealth d. the associated frictional unemployment d. growth of real GDP d. the increasing inequality of income c. not on ________. growth of real GDP. is lower and real GDP higher than in the initial equilibrium b. growth of the supplies of factors 23. factor utilization rates.ECON 212 Sample Final Examination. When actual GDP is above potential GDP. there is downward pressure on output prices d. equilibrium real GDP if output is demand determined b. equilibrium nominal GDP if output is demand determine c. is higher and real GDP remained the same as in the initial equilibrium 25. Which of the following statements about output gaps is true? a. The theory of economic growth concentrates on the ________ over the long run. When actual GDP is below potential GDP. factor utilization rates. is higher and real GDP lower than in the initial equilibrium c. A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level a. The AD curve relates the price level to a.

The functions of the Bank of Canada include a. and lower aggregate expenditures d. increase and the flow of investment to increase d. Other things being equal. raise interest rates. A decrease in the money supply is most likely to a. the output gap opens or closes as the economy moves through the phases of the business cycle d. generally acceptable as a medium of exchange d. actual GDP is always greater than potential GDP 27. investment. actual GDP is always growing at the same rate as potential GDP c. vary inversely with interest rates c. raise interest rates. acting as banker for the commercial banks d. decrease and the flow of national saving to increase 29. increase and the flow of investment to decrease c. For a given level of national income. raise interest rates and investment. and lower aggregate expenditures c. issued by a government agency c. increase and the flow of national saving to decrease b. are unaffected by interest-rate changes 28. providing deposit insurance at Canadian commercial banks c. bond prices a. lower interest rates. a decrease in private consumption or government purchases will cause the equilibrium interest rate to a. paper currency must be a.ECON 212 Sample Final Examination. lower investment. In order to be considered "money". are unaffected by changes in the demand for money d. and aggregate expenditures 7 . convertible into a precious metal b. impossible to counterfeit 30. vary proportionally with interest rates b. April 2013 b. setting the exchange rate for the Canadian dollar on world markets b. and aggregate expenditures b. investment. acting as the lender of last resort for the largest private corporations 31.

To keep the interest rate below 4 percent a year d. and moderate long-term interest rates b.ECON 212 Sample Final Examination. stable prices. only the first step of the monetary transmission mechanism b. the first two steps of the monetary transmission mechanism c. Aggregate demand ____ 8 . increases. A currency drain ___________ bank deposits and ________bank reserves a. This figure illustrates a. To keep real GDP growth above 3 percent a year c. To keep the unemployment rate below 5 percent 34. April 2013 32. decreases. decreases b. Maximum employment. What is the objective of monetary policy? a. A lower Canadian dollar exchange rate ______exports and _______imports. increases 35. the ultimate effect of a change in the money supply on real GDP 33. Refer to the figure. increases c. the entire monetary transmission mechanism d. decreases. decreases d. increases.

Laffer curve. decreases d. tax cut can increase tax revenue c. taxes can never be too low d. decreases. decreases b. increases 36. Fiscal policy attempts to achieve all of the following objectives except __________ a. a higher tax rate brings greater tax revenue b. increases. sustained economic growth d. a stable money supply b. This curve shows that____. April 2013 a. decreases. increases. increases. maximum tax rate. increases c. a. increases. tax revenues. price level stability 37. tax cuts can increase tax revenue 9 . Reagan.ECON 212 Sample Final Examination. decreases. increases. The relationship between the tax rate and the amount of tax revenue collected is called _________curve. full employment c.

the demand for dollars equals supply of dollars 42. At the equilibrium exchange rate ____ a. The decrease in productivity growth also _____the demand for labour. increases. natural disasters c. a surplus may exist but a shortage may not exist d. a correct forecast d. the pace of technological change 40. lowers c. raises 39. increases 10 . increases. increases. decreases. fall. decreases. which is based on all the relevant information is called ___________ a. _______the supply of labour. decreases. does not change. climate fluctuations d. and _______the real wage rate a. _________employment. a shortage may exist but a surplus not exist c. . decreases. As the exchange rate rises. changes in the growth rate of money b. increases. In real business cycle theory. a rational expectation c. a correct expectation 41. decreases. decreases. prices of Canadian-produced goods and services to foreigners ____ and the volume of Canadian exports _______ a. increases.ECON 212 Sample Final Examination. a rational forecast b. the quantity of dollars demanded equals the quantity of dollars supplied b. all of the following events can be sources of fluctuation in productivity except ___ a. The best forecast available. April 2013 38. does not change b.lowers d.

02 yen per dollar b. Canada is ______ a. a net borrower and a creditor nation d. the Japanese price level is 95.4. and the real exchange rate is 105. does not change c. What is the nominal exchange rate a. 92 yen per dollar 45. improves the quality 44. decreases d.4 Japanese real GDP per unit of Canadian real GDP. rise. decreases d. 100 yen per dollar d. a net borrower and a debtor nation b. A decrease in world demand for Canadian exports ___ the demand for Canadian dollars a. fall. a net lender and a creditor nation 11 . a net lender and a debtor nation c. The Canadian price level is 112. April 2013 b. 2. 89. decreases c. 90. increases 43.ECON 212 Sample Final Examination. increases b. rise.62 yen per dollar c.

Net export equals ______ a. ( T −G ) +(I −S) 47. decreases and longrun AS decreases 50. The Bank of Canada cuts the quantity of money and all other things remain the same. nest exports ________ a. increase c. AD _____ a. In the short run. April 2013 46. with no change in the private sector surplus. ( G−T ) +(S−I ) b. borrowing from rest of the world b.ECON 212 Sample Final Examination. equal zero d. increases b. Economic growth results when there are increases in ____ a. decrease 48. longrun aggregate supply b. increased taxes c. If the government sector deficit increases. A current account deficit “must be financed by capital inflows” current account deficit is paid by because the a. increasing Canadian foreign reserves d. ( G−T ) + ( I −S ) d. decreases d. increasing our investment in capital and increasing real GDP 49. change but we cannot predict id they will increase or decrease b. the nominal wage rate d. the interest rate c. aggregate demand 12 . increases and longrun AS increases c. ( T −G ) + ( S−I ) c.

ECON 212 Sample Final Examination. April 2013 13 .

The equilibrium exchange rate is the exchange rate that sets the quantity of Canadian dollars demanded equal to the quantity of Canadian dollars supplied. the quantity of Canadian dollars demanded in the foreign exchange market increases. Here the expression indicates that. Question 02 The diagram below shows the demand for money and the supply of money Interest Rate MS iB E i¿ iA M D( P . and vice-versa. which increases the quantity demanded for Canadian dollars needed to finance their purchases. Y ) Demand for money depends on price level and the real GDP beside the interest rate. So if the exchange rate falls. Interest rate is negatively related to the quantity demanded for money b. At equilibrium exchange rate there is neither a shortage nor a surplus of Canadian dollars. Explain why the M D function is downward sloping If other things remain the same. April 2013 PART B (The section contains short answer questions. Y ) Quantity of Money a.) Question 01 How is the equilibrium exchange rate determined? Provide an example of the exports effect on the demand for Canadian dollars. Suppose the Canadian exchange rate falls. A. What is the interpretation of writing the money demand function as M D (P . The exports effect is the result that the larger the value of Canadian exports. Please note that answers with necessary explanation will receive full marks only. quantity demanded for money and the interest rate are negatively related. worth 50 marks. the larger the quantity of Canadian dollars demanded for purchasing those exports from Canadian firms. if the interest rate falls the quantity demanded for money increases.ECON 212 Sample Final Examination. Canadian exports become cheaper relative to other countries’ goods and services. The volume of Canadian exports increases. when P and Y are kept fixed. When the Canadian exchange rate falls. 14 .

If there is an increase in the transaction demand for money. Question 03 The diagram below shows a simple AD/AS diagram. the unemployment rate is 6%. What type of unemployment is this? 15 . the interest rate increases.ECON 212 Sample Final Examination. What is the effect of their actions? At i A . people start to sell off their bonds. When everyone starts to sell bonds. The economy begins in longrun equilibrium at E0 with real GDP equal to Y* P AS’ AS E1 E0 AD Y* Real GDP Economy B a) At E0. Suppose the interest rate is at i A . April 2013 c. Now suppose there is an increase in the transactions demand for money. Beginning at i ¿ . How is this shown in the diagram. the money demand for money shifts to the right. the interest rate will start to increase d. bonds’ prices start to fall. With the given supply function. meaning y is increasing. explain what happens in the money market. Explain how firms and households attempt to satisfy their excess demand for money. quantity demanded for money is greater than the quantity supplied of money – an excess demand for money at a lower interest rate. To satisfy this excess demand. As bond price and interest rates are negatively related. When y increases.

the Canadian dollar was trading on the foreign exchange market at 0. There is cyclical unemployment of 1. Europeans are higher prices to buy Canadian dollars. output falls and the unemployment rate rises to 7. in aggregate.465 USD per euro Question 06 What are the main features of the unemployment rate in Canada and the USA since 2000? 16 . The unemployment that exists at E0 is only frictional and structural. that means how many USD is needed to buy 1 euro =$1. we know that the natural rate of unemployment is 6%. Following the negative AS shock. The Canadian dollar depreciated against euro because $1CAD bought a smaller number of euros. is $ 1 CAN = $1.04 US & $1 CAN= €0. there is no cyclical unemployment.ECON 212 Sample Final Examination. b) A negative AS shock now shifts the AS curve to AS’.5%. The Canadian dollar appreciated because its exchange rate rose. The euro depreciated because its exchange rate (price in terms of Canadian dollars) fell from 1. in balance. What was the value of the US dollar in terms of Canadian dollars in June 2010? The US dollar exchange rate in June 2011 was 0.71 Euro So.04 US/ €0. and it decreased from 77 euro cents in June 2010 to 71 euro cents in June 2011. Did the Canadian dollar appreciate or depreciate against the US dollar? Did Canadian dollar appreciate or depreciate against the eurpo? A. At E 1 the unemployment rate is 7. Since the unemployment rate is 6% when Y = Y*.04) per US dollar c. and there is neither excess demand nor excess supply in aggregate factor markets.96CAD (=1/1. the unemployment rate has risen above what it would be if labour markets were.04US in June 2011. April 2013 A.28 Canadian dollars per euro Question 05 The Canadian dollar exchange rate increased from $0. Question 04 Suppose that yesterday.71 Euro And the euro exchange rate.04 US = €0. What type of unemployment is there? Explain. b.5%.94 US in June 2010to $1. What was the euro exchange rate against the US dollar in June 2011? In June 2011.75 euros per Canadian dollar and today the Canadian dollar is trading at 0. $1. Which of the two currencies has appreciated and which has depreciated today? A.71 Euro = = $1.33 Canadian dollars per euro to 1. a. The Canadian dollar appreciated against the US dollar because $1 CAD bought a larger number of US dollar. Factor markets are in a state of excess supply.5%.78 euros per Canadian dollar. In other words. Since output equals potential. A.

ECON 212 Sample Final Examination. April 2013 A. a. The unemployment rates in Canada and US increased from 2000 to 2004 and then decreased. which instruments the Bank of Canada are using? A. if the AS curve is flat. The fall in exchange rate increases AD. Discretionary FP. requires an act of parliament to either change government spending and/or change tax rates Question 08 What is the main objective to Canadian monetary policy? To achieve the objective. raising the price level and increasifn real GDP. The extent to which the price level rises (inflation) or real GDP increases (unemployment rate falls) depends on shortrun AS. Real GDP increases and the price level rises b. Question 07 What is the distinction between automatic and discretionary fiscal policy (FP)? A. however. The main objective of the Canadian monetary policy is to keep the CPI (core) inflation rate around 2% level (target rate 2% with a ±1% band). then the fall in the exchange rate will affect mainly unemployment and not much to inflation rate. To achieve the objective. the Bank of Canada targets the overnight interest rate. then the fall in exchange rate will mainly inflation and not unemployment rate. which eventually affects other interest rates in the market Question 09 What is overnight interest rate? How does the Bank of Canada influence the overnight interest rate? Question 10 “The Canadian dollar was down to 98 cents US on news that Chian’s international trade growth slowed”. If the shortrun AS curve us steep. How does a lower Canadian dollar exchange rate influence monetary policy transmission? A. Net exports increases which increases AD. On the other hand. Would a fall in the exchange rate mainly influence unemployment or inflation? A. ** END OF EXAM ** 17 . The unemployment rate reached a peak in 2009 (around 10% in US and under 9% in Canada) and then began a gradual fall. The fall in the exchange rate makes Canadian exports less expensive to foreigners and makes imports more expensive to Canadian residents. Automatic FP is triggered by the state of the economy with no need for any government action. The Canadian unemployment rate kept falling to 2008 but the US started to rise in 2007 and by the end of 2008 was higher than the Canadian rate.