Download doc - Macro Economics Final Sample 2 Answers

PRINCIPLES OF MACROECONOMICSFINAL EXAM: SAMPLE #2

Duration - 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 II 10 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#2#3#4#5#6#7#8#9#10MC

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Principles of Macroeconomics: Final Exam, Sample #2 Answers

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

1. Prices Indices (10 marks)

1997 2000Price/unit Quantity Price/unit Quantity

Rice (kilo) $1.50 60 $2.50 40Potatoes (kilo) $2.00 30 $1.20 50

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 = 1501 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 * 501 mark: correct answer = 100*160/160 = 100

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2. National Accounts (10 marks)

The following data are from the National Accounts of Canada for 1980 ($Billions)Corporate Profits (before Taxes) 65,000Interest and Miscellaneous Investment Income 45,000Gross Investment 120,000Net Investment Income of Non-Residents 20,000Government Spending 130,000Wages and Salaries and Supplementary Labour Income 330,000Government Transfer Payments 55,000Depreciation (Capital Consumption Allowances) 70,000Exports 160,000Net Income of Unincorporated Businesses (Farm and non-Farm) 30,000Imports 155,000Consumption 350,000Corporate Taxes 20,000Personal Taxes 25,000Indirect Taxes Less Subsidies 60,000Retained Earnings (Undistributed Corporate Profits) 30,000Rent (Rental Income) 5,000Calculate (show your work) a) Net Domestic Income calculated from Factor Incomes (2 marks)1 mark: correct except for one mistake1 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

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3. MacroModel (10 marks)

An economy has the following set of macroeconomic equations.

Consumption: C = 445 + 0.9Yd Exports: X = 640Investment: I = 65 + 0.08Y Imports: IM = 150 + 0.2YGovernment 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 = 1,5371 mark: calculate correct induced term = 0.6Yfrom (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(Don’t 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)

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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 (don’t worry about sign if mark lost in i)

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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– 2,400rAggregate Expenditure: AE = 595 + I + 0.6Y

a)i) What is the equilibrium interest rate if Money Supply = 198 and Y = 1,800? (2 marks)

1 mark: set up of the equation 198 = 0.15(1,800) – 1600r1 mark: = 0.045 (4.5%) from some work like the above equation.

ii) What is equilibrium Investment as a function of the interest rate? (1 mark)

1 mark: = 233 – 2,400(0.045) = 125

iii)Show that Y = 1,800 is equilibrium Income. (1 mark)

1 mark: Y = 1,800 from Y (=AE) = (595 + 125)/(1 – 0.6) or something comparable

b) Suppose that the economy is at the above equilibrium with Y = 1,800 at a Money Supply still equal to 198 and r and I as you calculated for this equilibrium. What is equilibrium Y, r, and I given an increase in Government Spending of +32 (G = +32)? Ignore the effect of crowding out on Aggregate Expenditure. (3 marks)

1 mark: Y = 1,880 from Y = (595 + 125 + 32)/(1 – 0.06) or1 mark: r = 0.0525 (5.25%) from something like r = (0.15*1,880 – 198)/16001 mark: I = 107 from something like 233 – 2,400(0.0525)

c)i) Ignore part a) and b). The economy still has the equations Md = 0.15Y – 1600r and I = 233 – 2,400r but AE = 679 + I + 0.6Y (Note 679). The economy is in equilibrium. We do not know Money Supply but Investment is 89. What is Income? (1 mark)

1 mark: Y = 1,920 from something like (679 + 89)/(1 – 0.6)

ii) What is the interest rate if Investment is 89? (1 mark)

1 mark: r = 0.06 from something like 89 = 233 – 2,400r

iii)What is Money Supply if Investment is 89 assuming equilibrium? (1 mark)1 mark: = 192 from something like Ms = 0.15(1920) – 1600(0.06) Since the economy is in equilibrium, they should get the same answers even if they calculate from different equations.

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6. Spending and Money Equilibrium: Decrease in Government Spending (10 marks)

Suppose that government fears inflation because the economy is growing too quickly. Economists suggest that the best way to slowdown the economy is a decrease in government spending. Use our money, investment, and income equilibrium diagrams to explain their position. The following instructions will help you through this process.

a) Draw income, money, and investment diagrams to show an initial equilibrium before the decrease in government spending. Use the subscript ‘o’ for initial curves and equilibria. (3 marks)

b) Show the effect of the decrease in government spending on equilibrium GDP, the interest rate, and investment using the subscript ‘1’. (4 marks)

c) Now show the equilibrium GDP that ensues due to the impact on investment of the decrease in government spending. Use the subscript ‘2’. (3 marks).

So

Do

r r

IM/P

ro

Io

r1

D1

I1

AEo

Y/GDPYoY1

AE2AE1

AE

Y2

MEI

1 mark: ro at intersection of vertical M and negatively sloped Do1 mark: Io from negatively sloped MEI at ro1 mark: Yo from intersection of AEo and 45 degree line1 mark: shift down of AE to AE1 to give Y1 < Yo at intersection of AE1 and 45 degree line1 mark: shift down (left) of money demand1 mark: decrease in r to r1 at intersection of Md1 and Ms1 mark: increase in investment to I1 from MEI at r1

1 mark: shift up of AE from AE1 to AE2

1 mark: AE2 must fall between AEo and AE1

1 mark: equilibrium Y2 > Y1 but less than YoTAKE 2 MARKS OFF IF THEY INCREASE RATHER THAN DECREASE G BUT THEN

MARK FOR CONSISTENCY SUBSEQUENT TO THAT MISTAKE, I.E., GIVE THEM A MARK IF THEY DECREASE I BECAUSE THEY INCREASED G

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7. Aggregate Demand/Supply: Diagrammatic (10 marks)

Suppose that the Canadian economy is at long-run price and GDP (Y) equilibrium. Show the effect of an increase in government spending on Aggregate Expenditure, equilibrium real GDP, and the equilibrium Price level by using Aggregate Expenditure/GDP and Aggregate Demand/Supply diagrams. The following subsections help you do this.

a) Draw an Aggregate Expenditure/Income diagram and Aggregate Demand/Supply diagram to show the initial equilibrium Price (Po) and real GDP (Yo) if the economy is presently at potential GDP (Y*). Be sure to draw both the Long-run (LRAS) and Short-run Aggregate Supply (SRAS) curves. Use the subscipt ‘o’ for all curves and equilibria. (3 marks)

b) Now show in your AE/Y diagram and on your AD/AS diagram the new short-run equilibrium Price (Ps) and GDP (Ys) that results from the increase in government spending. Make sure that the AE/Y diagram equilibrium accords with the AD/AS equilibrium Ys. Use the subscipt ‘s’ for all resultant curves and equilibria. (4 marks)

c) What brings about short-run equilibrium in the AE/Y diagram? (1 mark)1 mark: AE shifts down (between initial and increase in G AE) due to increase in prices.NOTE THIS MARK! c) Now show the long-run equilibrium Price and real GDP. Use the subscript ‘1’ for all

changed curves and equilibria. (2 marks)

real Y

real Y

real AE

PYo

SRASo

ADo

Po

AEo

Y*

LRAS

ADs

Ps

Ys

SRAS1

AE1

AE1

P1

Y1

1 mark: vertical LRAS in AD/AS diagram at Yo (or Y*) from intersection of positively sloped AEo and 45 degree line

1 mark: positively sloped SRAS intersecting ADo at Yo (and Po)1 mark: Po and Yo at intersection of downward sloping AD and SRAS1 mark: shift up of AE to intersect 450 line at LRAS (don’t worry what they call it)1 mark: AD shifts to the right1 mark: AD shifts to the right to pass through Po and Y*1 mark: equilibrium Ps > Po & Ys > Yo but < Y* (LRAS) from intersection of ADs and SRAS1 mark: P1 from wherever ADs intersect LRAS (Y*)(doesn’t have to be at Po)1 mark: SRAS shifts to intersect AD where AD intersects LRAS (i.e., at P1)

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8. Aggregate Expenditure/GDP and Aggregate Demand/Supply (10 marks)

Suppose that Aggregate Expenditure, Aggregate Demand, and Short Run Aggregate Supply in an economy are described by the following equations.

AE = 1,800 + 0.75Y – 5P Y = 7,200 – 20P Y = 1,950 + 30P

a) What is the Price level and real GDP at short-run equilibrium in this economy? (3 marks)

1 mark: recognition that 7,200 – 20P = 1,950 + 30P 1 mark: P = 105 from 7,200 – 20P = 1,950 + 30P 1 mark: Y = 5,100 from either 7,200 – 20(105) or Y = 1,950 + 30 (105) = 3,750

b) Suppose that long-run equilibrium occurs at P = 100. What is long-run equilibrium real GDP? (1 mark)

1 mark: Y = 5,200 from Y = 7,200 – 20P

c) What is Nominal GDP in long-run equilibrium given that long-run equilibrium occurs at P = 100? (1 mark)

1 mark: nominal Y = 5,200*100 from 520,000 or consistent with their answer to b)

d)What is Aggregate Demand if an international recession causes Exports to decrease by 100 (X = -100)? (1 mark)

1 mark: Y = 6,800 – 20P from something like Y = (1,800 – 100 – 20P)/(1 – 0.75) or Y = 7,200 – 4*100 – 20P.

e) Suppose that SRAS is still Y = 1,950 – 30P. What is the new Price and GDP at short-run equilibrium given the decrease in Exports by 100 (X = -100)? (2 marks)

1 mark: P = 97 with work such as 6,800 – 20P = 1,950 + 30P 1 mark: Y = 4,860 from either 6,800 – 20(97) or Y = 1,950 + 30 (97)

(Must be correct; no continuation marks if AD is incorrect from b))

f) Ignore the change in exports in c) and d). What is long-run equilibrium real GDP and the price level if Aggregate Demand decreases to Y = 7000 – 20P due to a fall in Investment? (2 marks)

1 mark: Y = 5,200 from above1 mark: P = 90 from 7,000 – 20P = 5,200

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9. Aggregate Demand and Aggregate Supply (10 marks)

a) Assume that an economy is initially in short-run Price (Po) and GDP (Yo) equilibrium with considerable unemployment due to a recessionary gap. Draw an Aggregate Demand/Aggregate Supply diagram to show the short-run (Ps, Ys) and long-run (P1, Y1) effects of an increase in government spending that would eliminate the recessionary gap if there was no change in prices. (5 marks)

real Y (or GDP)

P level SRASo

ADs

ADo

PoPs

LRAS

Y*Yo Ys

SRAS1

1 mark: Po and Yo at intersection of AD and SRASo, and vertical LRAS1 mark: increase AD to intersect LRAS (or Y*) > Yo 1 mark: AD must intersect LRAS (or Y*) at Po so that Ps > Po and Ys > Yo but Ys < Y* from intersection of SRASo and AD1 mark: increase SRAS to intersect AD at LRAS (Y*)1 mark: P1 = Po (i.e., no change in price) and Y1 = Yo

b) Suppose that an economy is initially in short-run and long-run Price (Po) and GDP (Yo) equilibrium. Draw an Aggregate Demand/Aggregate Supply diagram to show the short-run (Ps, Ys) and long-run (P1, Y1) effects of a significant technological improvement. Be sure to shift all necessary curves. (5 marks)

P

Po

ADo

SRASoLRASo

AD1

Ys

P1

Y*

SRAS1

Ps

LRAS1

SRAS2

Y*1

1 mark: SRAS shifts to the right 1 mark: Ps < Po and Ys > Yo at SRASs (SRAS1 in my diagram) intersect Ado1 mark: LRAS shifts right (must be beyond Ys)1 mark: P1 < Ps and Y1 > Ys at AD intersect LRAS1

1 maark: SRAS shifts down to SRAS1 (SRAS2 in my diagram) to intersect AD at LRAS1

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10. Exchange Rates (10 marks)

a) Suppose that a country has the following balance of payments data (not including the change in official reserves)Merchandise Exports $320b Merchandise Imports $315bCapital Exports $ 53b Capital Imports $ 55bService Exports $ 40b Service Imports $ 35bInterest and Dividend Payments $ 32b Interest and Dividend Receipts $ 26b

i) What is the balance on current account? (1 mark) 1 mark = +4 from something like +320 – 315 + 40 – 35 + 26 – 32

ii) What is the private balance of payments (i.e., ignoring change in official reserves)?1 mark: = +6 from +4 + 55 – 53

The following diagrams represent the original equilibrium position in the exchange market for the Canadian dollars: quantity is $C and price is the $US price of $C (e.g., $1C = $0.80US). Show the shift in the demand and/or supply of Canadian dollars and the new equilibrium exchange rate under the following circumstances, each considered separately. Assume that the exchange rate is flexible unless otherwise advised.

a) A decrease in Canadian exports and increase in Canadian imports. (2 marks)

1 mark: Demand falls (shifts left)1 mark: Supply increases (shifts right)

b) An increase in U.S prices relative to Canadian prices (2 marks)

1 mark: Demand increases (shifts right)1 mark: Supply decreases (shifts left)

c) An increase in the U.S. interest rate. (2 marks)

1 mark: Demand decreases (shifts left)1 mark: Supply increases (shifts right)

d) Suppose that the Canadian exchange rate was fixed, not flexible, in part c). Show on

your diagram in c) what the Bank of Canada must do to maintain the fixed exchange rate at Eo given the increase in the U.S. interest rate. (2 marks)

1 mark: show Qs from new S and Qd from new D at Eo in diagram for C1 mark: write that the BofC buys surplus $C (or sells $US).

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Q $C

S $C

D $C

Eo

$Co

E US/C

Q $C

S $C

D $C

Eo

$Co

E US/C

Q $C

S $C

D $C

Eo

$Co

E US/C


PART II: MULTIPLE CHOICE: Circle the best answer for each question.Each question is worth 1 mark. No marks deducted for wrong answers.

1. Which of the following is false for Canadian employment data in the March, 2007?a) the unemployment rate didn’t change because participation rose with employmentb) the unemployment rate didn’t change because there was little growth in employment c) Canadian employment grew proportionally more than U.S. employmentd) Canadian employment growth in the first quarter of 2007 was very goode) the 2007 unemployment rate is below the natural rate of unemployment in 2000f) none of the above

Questions 2 and 3 refer to the table below that gives the average household’s consumption of electricity and natural gas in 1996 and 2006. 1996 is the base year.

1996 2006Price/unit Quantity Price/unit Quantity

Electricity (KWs) 0.06 1500 0.08 2400Natural Gas (CF) 0.15 2000 0.3 1200

2. What is the Consumer Price Index for 2006 (to the nearest decimal)?A) 86.5 B) 95.2 C) 100 D) 125.8 E) 137.6F) 141.5 G) 170.4 H) 184.6 I) none of the above

CPI = 184.6 from 100*0.06*2000 + 0.3*1500/0.06*1500 + 0.15*2000

3. What is the GDP Deflator index for these goods for 2006 (to the nearest decimal)?A) 86.5 B) 95.2 C) 100 D) 125.8 E) 137.6F) 141.5 G) 170.4 H) 184.6 I) none of the above

GDP Deflator = (0.08*2400 + 0.3*1200)/( 0.06*2400 + 0.15*1200) *100 = 170.4

4. What is the net present value of a return of $5,000 at the end of two years and $8,000 at the end of 3 years if the interest rate is 4%?a) $10,462.54 b) $10,768.24 c) $11, 526.68 d) $11,734.75e) $11,919.66 f) $12,204.14 g) $12,019.23 h) none of the above

5. Which of the following combinations of Aggregate Demand (AD) and Short-run Aggregate Supply (SRAS) might be an economic reason for the war in Iraq?a) decrease in AD and decrease in SRAS through decrease in the price of oilb) decrease in AD and decrease in SRAS through increase in the price of oilc) decrease in AD and increase in SRAS through decrease in the price of oild) decrease in AD and increase in SRAS through increase in the price of oile) increase in AD and decrease in SRAS through decrease in the price of oilf) increase in AD and decrease in SRAS through increase in the price of oilg) increase in AD and increase in SRAS through decrease in the price of oil

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h) increase in AD and increase in SRAS through increase in the price of oili) none of the above

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6. Which of the following is likely to happen if employment data in the next few months shows the U.S. economy growing rapidly? The Federal Reserve will likelya) increase interest rates to prevent inflation, causing bond prices to fall b) increase interest rates to prevent inflation, causing bond prices to rise c) do nothing since the economy is moving well on its own d) decrease interest rates to prevent inflation, causing bond prices to falle) decrease interest rates to prevent inflation, causing bond prices to risef) none of the above

7. Which of the following would increase the effectiveness of government spending as a stimulus to economic growth? a) more inelastic Demand for Money b) a higher tax ratec) more inelastic Marginal Efficiency of Investment d) a higher savings rate (MPS)e) none of the above

8. Which of the following policy combinations could possibly (depending on their magnitures) increase equilibrium GDP without changing the equilibrium interest rate?a) increase Government Spending and decrease Taxesb) increase Government Spending and decrease Transfer Paymentsc) increase Government Spending and decrease Money Supplyd) increase Money Supply and decrease Government Spendinge) increase Money Supply and decrease Taxesf) increase Money Supply and decrease Transfer Paymentsg) none of the above

9. An economy is initially in short-run equilibrium (Ps and Ys) above potential GDP (Y*). Which of the following is the long-run equilibrium effect on equilibrium Income (Y), the price level (P), and wages (W) relative to this short-run if the market is allowed to correct itself without government intervention? ( = increase, = decrease)a) Y, P, W b) Y, P, W c) Y, P, W d) Y, P, W e) Y, P, W f) Y, P, W g) Y, P, W h) Y, P, Wi) none of the above

10. Suppose that an economy is presently at potental (full employment) income. What is short-run and long-run equilibrium effect (relative to initial equilibrium) on the Price level (P) and real GDP (Y) of a significant decrease in the price of oil?a) decrease in P and Y in the short-run and decrease in Y in the long-runb) decrease in P and Y in the short-run and no change in Y in the long-runc) decrease in P and increase in Y in the short-run and decrease in Y in the long-rund) decrease in P and increase in Y in the short-run and no change in Y in the long-rune) increase in P and decrease in Y in the short-run and decrease in Y in the long-runf) increase in P and decrease in Y in the short-run and no change in Y in the long-rung) increase in P and increase in Y in the short-run and decrease in Y in the long-h) increase in P and increase in Y in the short-run and no change in Y in the long-runi) none of the above

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