Answer Either Question 11 Or Question 12

NAME______

1.

a.5 points

Using an aggregate expenditure diagram,show the impact of a decrease in exports on the equilibrium level of income of an economy currently producing at full employment. Explain the diagram.

b.2 points

Describe a change the government could make in its fiscal policy to restore full employment? What impact would this change have on the federal deficit? Explain.

ANSWER EITHER QUESTION 11 OR QUESTION 12.

1.Using an aggregate demand, aggregate supply diagram, and a diagram showing how the interest rate is determined by the money supply, explain how Bank of Canada policy to reduce inflation influences equilibrium income and employment as well as the price level.

2.Paul Martin has recently brought down a balanced budget. Using a diagram of government expenditures and revenues, explain how rising income, falling interest rates and cuts in program spending have produced this result. Mr. Martin has predicted that the budget will be balanced for the next three years. Will this prediction likely be true if the economy unexpectedly enters a serious recession? Explain your answer.

Explain what is happening within in firms when short-run equilibrium real GDP exceeds potential real GDP. That, is equilibrium real GDP lies to the right of the long-run aggregate supply curve (LAS). Discuss the impact of this short-run situation on the short-run aggregate supply curve (SAS) in the long-run.

Give three reasons why the long-run aggregate supply curve (LAS) might shift to the right.
Draw an aggregate demand, aggregate supply diagram to illustrates what happens to theshort-run aggregate supply curve (SAS) curve when the LAS curve shifts to the right and explain the behaviour of the SAS curve?
Give one reason why the LAS might shift to the left.
Give three reasons why the aggregate demand curve slopes down. Explain WHY each reason causes an increase in the aggregated quantity of goods and services as prices fall.
Draw the diagram of the Consumption function, being sure to include the 45 degree line. Label the diagram, showing when savings are positive and when they are negative.

DISPOSABLE INCOME / CONSUMPTION / SAVINGS
120 / 130 / -10
140 / 145 / -5
160 / 160 / 0
180 / 175 / 5
200 / 190 / 10

Using the preceding table, calculate the marginal propensity to consume and the marginal propensity to save.

Draw two aggregate demand, aggregate supply diagrams. Each should begin in long-run equilibrium. One should show the impact of an increase in aggregate demand on the short-run equilibrium price level and real GDP. The other should show the impact of a decrease in aggregate demand on the short-run equilibrium price level and real GDP.
In the following table, indicate which items would increase aggregate demand, and which items would decrease aggregate demand. Explain WHY each item would have that impact .

CHANGE / IMPACT ON AD / Element* of AD which changes / Why that element of AD changes and the direction it changes.
Profits are expected to rise
Decreasing transfer payments
The exchange rate rises
Foreign income rises

*I for investment is one of the five elements of Aggregate Demand.

Discuss the forces which will automatically tend to bring the short-run equilibrium back to long-run equilibrium. Es it always sensible to wait for the economy to adjust automatically>

Working Age Population / 24,000
Employed / 18,000
Unemployed / 2,000
Labour force / ______

Complete the preceding table and calculate

1.The unemployment rate. ______

2.The employment to population ratio.______

3.The participation rate. ______

4.Explain a limitation of the unemployment rate as a measure of the ability of the economy to provide jobs for all who wish to work.

5.List and define the three types of unemployment. Discuss which one became a serious problem when the steel mill in Sydney was shut down. Do changes in the business cycle have a strong impact on that type of unemployment? Why?

6.Complete the following table:

YEAR / COST OF BASKET / PRICE INDEX / RATE OF INFLATION
2010 / $2,000
2011 / $2,200
2012 / $2,420

Explain why a price index is an important part of measuring economic growth.

Complete the following equation IN WORDS, not letters:

AD = Consumption +

7.On the following diagram, draw in the flows through the goods market required to show the total aggregate demand for the output of firms. (Ignore the financial markets and financial flows.)

Are unemployment insurance payments and old age pensions included in government expenditures when GDP is calculated? Briefly explain why or why not.

What productive activities are not measured and thus are not included in GDP? Is this a serious problem?

ANSWER EITHER QUESTION 0 OR QUESTION 0. 15 points

i)Draw an aggregate expenditure diagram which illustrates an economy with less than full employment. Show a change in investment which results in full employment on the diagram. Explain the impact that rising prices would have on the change in income as a result of the change in investment.

ii)Draw an aggregate demand, aggregate supply diagram which illustrates an economy with less than full employment and show the impact of an increase in investment on income and prices. Discuss the impact that any changes in prices would have on the size of the multiplier and the increase in income resulting from the change in investment.

ANSWER QUESTION (1). 15 points

iii)(1) If an economy has a MPC of .75, an MPM of .25 and if GDP is $100 million less than full employment GDP, calculate the change in government spending required to bring the economy to full employment.

(2) What impact would the change in goverment spending described in part (a.) have on the federal budget deficit?

(3)

(4) Using appropriate diagrams of the money market and interest rates, and the investment demand schedule explain how an increase in the money supply would alter the equilibrium level of income.

(5) Discuss the impact of the change in the value of the Canadian dollar on Canadian exports and imports. Will equilibrium income be likely to rise or fall as a result of the change in exports and imports? Explain your answer.

iv)A goal of discretionary fiscal policy is the reduction of the swings in the business cycle. Explain how fiscal policy can stabilize the business cycle and discuss the lags which complicate the effective use of fiscal policy to eliminate recessions.

Continue on reverse as required.

The economy of Cockney produces only two goods, fish and chips.

a)Use the information in Table A to complete Table B.

Table A

Cockney / 1990 / 1990 / 1991 / 1991 / 1992 / 1992
price/lb. / Quantity (lbs.) / price/lb. / Quantity (lbs.) / price/lb. / Quantity (lbs.)
Fish / $5.00 / 10,000 / $5.25 / 12,000 / $5.50 / 12,000
Chips / $1.00 / 20,000 / $1.25 / 25,000 / $1.50 / 25,000

Table B

YEAR / NOMINAL / REAL / GDP
GDP / GDP (in 1990 $) / DEFLATOR
1990
1991
1992

b. The rate of inflation between 1990 and 1991 is ______. The rate of inflation between 1991 and 1992 is ______.

Indicate whether each item is included in M1, M2+, or is not money.

ITEM / amount / M1 / M2+ / not money
Chequing account with the Scotia bank / 10,000
Chequing account with the Bergengren Credit Union / 25,000
Savings account with the Scotia bank / 25,000
General Motors stock / 10,000
Canada Savings Bond / 5,000
Guaranteed Investment Certificate / 5,000
Currency in Joe Doe's pocket / 25
Currency in the vault of the Scotia Bank / 25,000
Currency in the cash register of Piper's Pub / 2,500

a)The total value of M1 in the table is ______.

b)The total value of M2+ in the table is ______.

Given the following information: / Calculate:
Population / 30 million / Labour force / ______
Population 15 years and older / 20 million / Participation rate / ______
Employed / 10 million / Unemployment rate / ______
Unemployed / 2 million

Without any government action, both recessions and inflationary booms eventually end and the economy returns to long-run equilibrium income. Use an aggregate demand aggregate expenditure diagram to explain how long-run equilibrium is restored.

SECTION B: ANSWERALL OF THE FOLLOWING QUESTIONS.

10 points

GDP / C / I / G / X / M / AE
300 / 250 / 50 / 140 / 100 / 40
400 / 325 / 50 / 140 / 100 / 65
500 / 400 / 50 / 140 / 100 / 90
600 / 50 / 140 / 100
700 / 50 / 140 / 100
800 / 50 / 140 / 100
900 / 50 / 140 / 100

a)Complete the preceding table.

b)Equilibrium income is _____?

c)The marginal propensity to consume is ____?

d)The marginal propensity to import is _____?

e)The multiplier is _____?

f)A change in government spending of ______will move the economy to full employment.

15 points

Assume an economy which begins at full employment experiences an increase in investment. (A world shortage of energy has made development of the extensive tar sand deposits profitable.)

a)Draw an aggregate expenditure diagram which shows the economic impact of the increase in investment. Explain the changes which occur.

b)Assume that the change in investment equals $10 million. If the marginal propensity to consume is .8 and the marginal propensity to import is .3 how much will GDP change, assuming no change in prices?

c)Draw an aggregate demand, aggregate supply diagram showing an economy at equilibrium with full employment. Show the economic impact of the increase in investment on this diagram. Explain the changes which occur.

d)Is the assumption that prices do not change which was made in part (b) reasonable? Explain your answer

15 points

Assume an economy which begins at full employment suffers a decline in exports.

a)Draw a diagram showing the relationship of government expenditures and government revenues to real GDP. Assume the government budget was balanced when the economy was at full employment. Explain the impact that the recession has on the budget balance of the government.

b)Explain how the government could restore full employment by cutting taxes. Show the impact of the policy on an aggregate expenditure diagram.

c)Show the impact of the government policy described in b) on the diagram of the government budget drawn in a). What is the budget balance of the government when it has restored full employment? Explain your answer.

15 points

An economy enjoying full employment suffers a decline in exports.

a)Assume that the Central Bank uses monetary policy to restore full employment. Discuss the impact of the change in the money supply on the interest rate and investment.

b)Use and aggregate demand aggregate supply diagram to show the impact of these changes on the economy. Explain the diagram.

15 points

The Bank of Canada decided to increase the interest rate to fight rising inflation in the late 1980s when the unemployment rate was 7.5% and inflation had increased to 5.6%. At the same time, the government of Brian Mulroney had a large deficit and began cutting government spending to reduce the deficit. By 1992 unemployment was 11.3% and inflation was 1.3%. Explain how the policies of the Bank of Canada and the Brian Mulroney affected the inflation and unemployment rates. (Diagrams are not required in the answer to this question, but you may use them to clarify your discussion if you wish.)

3 points

In 1989 when Mike graduated from high school his grandfather gave him a present of $200. His cousin is graduating from university in 1997. In 1994 the CPI was 114. In 1997 it is 135. How much money must his grandfather give Mike’s cousin for the sum to be equivalent in purchasing power to the sum given in 1989?

6 points

Given the following information:

Population20 million

Civilian population over 15 years of age:16 million

Employed10 million

unemployed 4 million

a)The size of the labour force is ______.

b)The participation rate is ______.

c)The unemployment is ______.

6 points

Given the following data:

$25,000 demand deposit at the Canadian Imperial Bank of Commerce

$2000 in the cash register of Piper’s Pub

$15,000 demand deposit at the Montreal Trust Company

$15,000 notice deposit at the Toronto Dominion Bank

$20,000 Canadian savings bond

$75,000 in the vault of the Royal Bank

$ 250 balance on a credit card

a)M1 is ______.

b)M2+ is ______.

10 points

Complete the following table.

GDP / C / I / G / X / M / AE
400 / 340 / 120 / 100 / 125 / 110
500 / 430 / 120 / 100 / 125 / 125
600 / 520 / 120 / 100 / 125 / 140
700 / 120 / 100 / 125
800 / 120 / 100 / 125
900 / 120 / 100 / 125
1000 / 120 / 100 / 125
1100 / 120 / 100 / 125
1200 / 120 / 100 / 125
1300 / 120 / 100 / 125

Equilibrium income is _____?

The marginal propensity to consume is ____?

The marginal propensity to import is _____?

The multiplier is _____?

If full employment income is 1200, there is a recessionary gap of ______?

The change in government spending required to close the recessionary gap is ______?

5 points

Draw an aggregate demand aggregate supply diagram in long-run full employment equilibrium. Show the impact of an increase in exports on equilibrium income and prices. Be sure to label the diagram fully.

3 points

On the aggregate demand aggregate supply diagram show the changes which will occur as the economy automatically moves to full employment. Explain why these changes occur.

5 points

Using an aggregate expenditure diagram,show the impact of an increase in government spending on the equilibrium level of income of an economy currently experiencing considerable unemployment, assuming that prices do not change.

2 points

What impact will the increase in government spending have on the federal deficit?

6 points

Given the following information:

Population20 million

Civilian population over 15 years of age:16 million

Employed10 million

unemployed 4 million

a)The size of the labour force is ______.

b)The participation rate is ______.

c)The unemployment is ______.

6 points

Indicate whether each item is included in M1, M2+, or is not money. The Royal Bank is a chartered bank.

ITEM / amount / M1 / M2+ / not money
Chequing account with the Royal bank / 20,000
Chequing account with the Bergengren Credit Union / 5,000
Savings account with the Royal bank / 50,000
IBM stock / 60,000
Canada Savings Bond / 2,000
Guaranteed Investment Certificate / 15,000
Currency in Joe Doe's pocket / 250
Currency in the vault of the Royal Bank / 125,000
Currency in the cash register of Mom’s Pizza / 2,500

a)The total value of M1 in the table is ______.

b)The total value of M2+ in the table is ______.

15 points

Complete the following table.

Equilibrium income is _____?

The marginal propensity to consume is ____?

The marginal propensity to import is _____?

The multiplier is _____?

If full employment income is 1200, there is a recessionary gap of ______?

The change in government spending required to close the recessionary gap is ______?

10 points

Assume that an economy is currently at full employment when exports decrease dramatically. Show the change in equilibrium income on an aggregate expenditure diagram. Explain a change in government fiscal policy which would return the economy to full employment and show its impact on the diagram. What impact would the change in fiscal policy you describe have on the federal budget? Explain.

10 points

If an economy has a MPC of .80, an MPM of .20 and if GDP is $100 million less than full employment GDP, calculate the change in government spending required to bring the economy to full employment.

6 points

Draw a diagram of the revenues and expenditures of the government in relation to GDP. Assume the government has a balanced budget. Use the diagram to show the impact that a significant increase in government spending will have on the government’s budget immediately and after the economy has adjusted to the higher level of government spending. Explain your answer.

4 points

Draw an aggregate expenditure diagram representing an economy in equilibrium at full employment. Show the impact of a increase in investment on equilibrium income. Be sure to label the diagram fully.

4 points

Draw an aggregate demand aggregate supply diagram in long-run full employment equilibrium. Show the impact of the same increase in investment as in part (a) on equilibrium income and prices. Be sure to label the diagram fully.

2 points

On the aggregate demand aggregate supply diagram in part (b) show the changes which will automatically return this economy to full employment. Would you recommend that government wait for automatic adjustment or that government intervene? Explain your answer.

Assume that in the town of Mobilia, Will Bates has bought up all the taxi licenses and his firm Mono Cabs provides the only taxi cab service in town. No one regulates the prices he can charge.

Using the cost curves of a firm, and assuming that all customers pay the same price, show the profits of the firm and the price and quantity he will charge in order to maximise his profits.

Will this industry achieve productive and allocative efficiency? Explain.

SECTION B: ANSWER FOUR OF THE FOLLOWING SIX QUESTIONS

(6 points each for 24 points)

Given the following information (in millions): / Calculate the following:
Total Population / 60
Population 15 years and older / 40 / Participation rate / _____
Labour force / 30 / Unemployment rate / _____
Unemployed / 5 / Employment rate / _____
disposable income / consumption expenditure / savings / average propensity to consume / average propensity to save
0 / 200
500 / 600
1000 / 1000
1500 / 1400
2000 / 1800
2500 / 2200

a.Complete the table.

The marginal propensity to consume is ______.
The marginal propensity to save is ______.

The items in the first column belong in one of the other three columns. Put a mark in the column to which the item in the first column belongs.

Item / M1 / M2 / Not Money
Cash in Joe’s pocket
Cash in the Royal Bank’s vault
Mary’s chequing account with a Chartered Bank
Sam’s Canada Savings Bond
George’s credit card
Paul’s saving account with a chartered bank

Are unemployment insurance payments and old age pensions included in government expenditures when GDP is calculated? Briefly explain why or why not.

List and explain two reasons why the aggregate demand curve slopes down.

SECTION C: ANSWER THREEOF THE FOLLOWING FOUR QUESTIONS

(12 points each for 36 points)

Given the following information: (2004: you will be given the cost of the basket each year.)

GOOD / QUANTITY / PRICE / PRICE / PRICE / PRICE
1996 / 1997 / 1998 / 1999
SHOES / 5 / $ 50.00 / $ 55.00 / $ 60.00 / $ 60.00
HATS / 3 / $ 25.00 / $ 20.00 / $ 25.00 / $ 30.00
BEEF / 20 / $ 2.00 / $ 2.50 / $ 2.25 / $ 2.50
BREAD / 40 / $ 0.50 / $ 0.75 / $ 0.75 / $ 1.00
COST OF BASKET

a.Compute the Consumer price index for the following years.

YEAR / INDEX
1996
1997
1998
1999

b.Calculate the rate of inflation between 1998 and 1999. Show your work.

Gross Domestic Production has a number of weaknesses as a measure of economic welfare. Give three weaknesses of GDP as a measure of economic well being. Is this measure better used to determine the state of the business cycle or as a means of comparing the level of economic welfare in two nations? Explain your answer.

Describe the stages of the business cycle and explain the changes in the rate of growth of GDP and the unemployment rate in each stage.

SECTION D: ANSWER FOUROF THE FOLLOWING FIVE QUESTIONS