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EcoA03y: April Final, 1998/99

E

Principles of Macroeconomics: Final Exam, Sample #2 Answers

PRINCIPLES OF MACROECONOMICSfINAL EXAM: SAMPLE #2Duration - 3 hours

Aids Allowed: Non-programmable calculators only

THERE ARE 100 MARKS IN THIS EXAM. THERE ARE TWO PARTS

Part I Ten macroeconomic questions of which you are expected to answer any eight (10 marks each for a total of 80)If you answer more than eight questions without clearly indicating the eight you wish marked, the eight lowest marks will count as your eight.

Part II10 multiple choice questions worth 2 marks each for a total of 20. Wrong answers will not be deducted from right in grading Part II.

All questions are to be answered in the spaces provided in this question paper bookletDo not remove any pages or add any pages. No additional paper will be supplied. The blank backs of pages may be used for rough work. Show your work where applicable.

PRINT YOUR NAME AND STUDENT CLEARLY BELOW

Student Name: ______________________________________________________

(Family Name) (Given Name)

Student Number: ______________________________PUT YOUR NAME AT THE TOP OF EACH PAGE.There are 13 pages to the exam

Marks Awarded

#1

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MC

PART I : Answer only 8 of the 10 questionsPlace your answers (and work where necessary) in the space provided.

1.Prices Indices (10 marks)

19972000

Price/unitQuantityPrice/unit Quantity

Rice (kilo)$1.5060$2.5040

Potatoes (kilo)$2.0030$1.2050

The above table gives data for the price/unit and quantity of Rice and Potatoes consumed by the average student in 1997 and 2000. Assuming that 1997 is the base year, calculate the following values.

a) nominal student consumption in 2000 (1 mark)

1 mark: correct setup (formula or numbers): 2.50*40 + 1.20*50= $160

b) the consumer price index for 2000 (3 marks)

1 mark: correct numerator (2.5*60 + 1.2*30) = 186

1 mark: correct denominator = 1.5*60 + 2 * 30 = 150

1 mark: correct answer = 100*186/150 = 124

c) real consumption in 2000 relative to 1997 according to the consumer price index (1 marks)

1 mark: right answer (or consistent with a) and b)) = $160/124 =$129

d) the total inflation between 1997 and 2000 relative to 1997 (1 mark)

1 mark: (124 100)/100 = 24 % (or consistent with b)

e) real consumption in 2000 according to the GDP deflator measure using CPI (1 mark)

1 mark: = 160 from 1.5*40 + 2 * 50 [or could also divide Nom by deflator]

f) the GDP deflator for 2000 given 1997 as the base year (3 marks)

1 mark: correct numerator = 2.5*40 + 1.2*50

1 mark: correct denominator = 1.5*40 + 2 * 50

1 mark: correct answer = 100*160/160 = 100

2.National Accounts (10 marks)

The following data are from the National Accounts of Canada for 1980 ($Billions)

Corporate Profits (before Taxes)65,000

Interest and Miscellaneous Investment Income45,000

Gross Investment120,000

Net Investment Income of Non-Residents20,000

Government Spending130,000

Wages and Salaries and Supplementary Labour Income330,000

Government Transfer Payments55,000

Depreciation (Capital Consumption Allowances)70,000

Exports160,000

Net Income of Unincorporated Businesses (Farm and non-Farm) 30,000

Imports155,000

Consumption350,000

Corporate Taxes20,000

Personal Taxes25,000

Indirect Taxes Less Subsidies60,000

Retained Earnings (Undistributed Corporate Profits)30,000

Rent (Rental Income)5,000

Calculate (show your work)

a) Net Domestic Income calculated from Factor Incomes (2 marks)

1 mark: correct except for one mistake

1 mark: correct answer: = 330 + 65 + 30 + 5 + 45 = 475,000 (must do it this way not as below)

b) Gross Domestic Product from Net Domestic Income (1 mark)

1 mark: = 475 + 70 + 60 = 605,000

c) Gross Domestic Product from Aggregate Expenditure (1 mark)

1 mark: missing only one number1 mark: 605,000 = from 350 + 120 + 130 + 160 155 (must be correct since same as b)

d) Personal Income (1 mark)

1 mark: 475 20 30 + 55 = 480,000 (must be correct)

e) Personal Savings (1 mark)

1 mark: = 480,000 25,000 350,000 = 105,000 (or consistent with their mistake in d))

f) Net Domestic Product (1 mark)

1 mark: = 475 + 60 = 535,000 (or 605 70)

g) Gross National Product (1 mark)

1 mark: = 605 - 20 = 585,000 (must be correct)

h)Dividends

1 mark: = 15,000 from 65,000 30,000 20,000

3.MacroModel (10 marks)

An economy has the following set of macroeconomic equations.

Consumption: C = 445 + 0.9Yd Exports:

X = 640

Investment:

I = 65 + 0.08Y Imports:

IM = 150 + 0.2Y

Government Spending G = 510 Net Taxes (Taxes Transfers) T = -30 + 0.2Y(note that net fixed taxes are 30 not simply 30)

a)Calculate the Aggregate Expenditure equation. (2 marks)

1 mark: calculate correct constant term = 1,537

1 mark: calculate correct induced term = 0.6Y

from (say) AE = 445 + 0.9(Y (-30 + 0.2Y) + 65 + 0.08Y + 510 + 640 (150 + 0.2Y)

= 1,537+ 0.6Y

b)Calculate the value of Equilibrium Income (1 mark)

1 mark: = 3,842.5 from 1,537/(1 0.6) or consistent with their answer in a)

IN GENERAL, MARK CORRECT IF THE METHOD IS CORRECT BUT THE ANSWER IS WRONG BECAUSE THEY MADE A MISTAKE IN a). c) What is the change in Inventories at GDP (Y) equal to 4,000? (2 marks)

1 mark: AE = 3,937 from something like 1,537 + 0.6*4,000 (or consistent with a))

1 mark: Change in Inv = 4,000 3,937 = +63 (must not be negative)

(Give marks to students who divide 4,000 by 2.5 to get 1600 1537 = +63)

d)Suppose that there is a recessionary gap of 225.i) What change in government spending will eliminate the recessionary gap? (1 mark)

1 mark: = +90 from 225 * 0.4 or 225/(1 0.6) or consistent with multiplier from a)

ii) What change in fixed taxes will eliminate the recessionary gap of 225? (2 marks)

1 mark: recognition of fixed tax multiplier as 0.9/(1 0.6) = 2.25 or any use of 0.9*225 and the multiplier even without calculation of fixed tax multiplier(Dont worry about the negative sign here) or consistent with multiplier from a)1 mark: = -100 (must be negative) from some work such as 225*0.9*2.5

iii) What change in fixed transfer payments will eliminate the recessionary gap? (1 mark)

1 mark: = +100 (must be positive) with some work such as 225/2.25 or consistent with multiplier from a)

4.Money Supply (10 marks)

Assume that the following conditions hold in Canada's banking system: deposits are all demand deposits, the required reserve ratio for deposits is 8% [0.08], there are neither excess reserves nor excess circulation, and banks hold all interest bearing assets as loans. Suppose that the Bank of Canada has an outstanding currency issue of $53 billion; the chartered banks have $3 billion worth of deposits at the bank of Canada; and the currency in circulation (i.e., in the hands of the public) is $31 billion.

a) What is the money supply at equilibrium? (1 mark)

1 mark: = 343.5 from something like 31 + (53 31 + 3)/0.08 b) What is the amount of loans at banks at equilibrium? (1 mark)

1 mark: = 287.5 from something like 312.5 25 or (64 38 + 2)/0.125 - 25

Now calculate the change in reserves and in the money supply at the new equilibrium for each of the following circumstances given the above information.

c)The Bank of Canada spends $80 million Canadian to buy $US in the foreign exchange market. i) the change in reserves is? (1 mark)

1 mark: +80 (m) (must be positive) ii) the change in money supply is? (1 mark)1 mark: = +80m/0.08 = +$1000m (need not be negative if mark already lost for positive in i)

d)The public permanently increases currency in circulation by $50 million to avoid taxes. i) the change in reserves is? (1 mark)

1 mark: -$50 m (must be negative)ii) the change in money supply is? (1 mark)

1 mark: = -$575 m from +50 50/0.08 (need not be negative if lost negative mark in i)

e) The Federal Government spends $180 million from $210 million in taxes and deposits $10 millon in the Bank of Montreal and $20 million in the Bank of Canada. i) the change in reserves is? (1 mark)

1 mark: = -20 m (must be negative)ii) the change in money supply is? (1 mark)

1 mark: = -$250m from -20/0.08 (need not be negative if mark lost for wrong sign in i)

f) The Bank of Canada buys $30 million in bonds from the Toronto-Dominion bank and switches another $30 million to the Bank of Nova Scotia from federal government deposits at the Bank of Canada.i) the change in reserves is? (1 mark)u

1 mark: +$60 m (from 30 + 30) Must be positiveii) the change in money supply is? (1 mark)

1 mark: = +750 m from something like 60/0.08 (dont worry about sign if mark lost in i)

5.Monetary and GDP Equilibrium: Linear Equations (10 marks)

Suppose that the following equations describe Money Demand, Marginal Efficiency of Investment (MEI), and Aggregate Expenditure for an economy. Magnitudes are in $billion except for r which is the real interest rate in decimal form.

Money Demand: Md = 0.15Y 1600r

MEI: I = 233 2,400rAggre