Final Exam Practice Questions

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```					 40 M/C and 3 Short Answer/Numerical
Problems (choice of 5 questions)
 M/C is Comprehensive (whole course)
 Short Answer/Numerical Problems on 2nd
half of course (from Chapter 23)
 Cheat/Formula Sheet – one-sided
8.5”x11” sheet
 Calculator
 Dictionary for ESL students
Final Exam
Practice Questions
Chapters 24 to 29
a)   Labour force growth due to increased
birth rate and lower death rate
b)   The wider adoption of energy-saving
technology.
c)   A temporary increase in the price level
due to an oil price shock.
d)   The destruction of nation’s capital stock
due to a massive earthquake
If nominal wages rise by a greater percentage than
the price level, real wages

a)   increase.
b)   do not change.
c)   decrease.
Which of the following is true about the
aggregate production function in the
Neoclassical Growth Model?
a)   It exhibits constant returns to scale in
production in labour and capital.
b)   It exhibits increasing marginal product of
capital.
c)   It exhibits diminishing marginal product of
labour and diminishing marginal product of
capital.
d)   a) and c)
If the real interest rate is 4 percent and the
expected rate of inflation is 3 percent, then the
nominal interest rate will be approximately

a)   7 percent.
b)   6 percent.
c)   5 percent.
d)   1 percent.
The Average Product of Labour
a)   is the same as the marginal product of
labour.
b)   is total output divided by the labour force.
c)   is the change in output resulting from a
unit increase in labour.
d)   is increasing when it is greater than the
marginal product of labour.
If the demand for money increases by the
same percentage as the supply of money
increases, the interest rate _______.

a)   rises
b)   does not change
c)   falls
is needed
An increase in interest rates means that

a)   bank’s reserves will increase.
b)   the present value of the stream of future
payments from bonds will fall.
c)   bond prices will rise.
d)   households will increase the amount of
their cash holdings.
“Crowding out” is a decrease in investment
caused by

a)   contractionary monetary policy
b)   expansionary monetary policy
c)   an increase in the demand for money
d)   increased government spending
Supply inflation starts when

a)   aggregate demand increases
b)   aggregate demand decreases
c)   aggregate supply increases
d)   aggregate supply decreases
Which of the following form of

a)   Forward-looking expectations
b)   Rational expectations
c)   Backward-looking expectations
d)   They all adjust at the same speed.
Which of the following is true of a rational
expectation forecast?

a)   It uses all available information.
b)   It is the best forecast possible.
c)   It is on average correct.
d)   All of the above.
Which of the following decreases
the money supply?
a)   A decrease in the bank rate
b)   A decrease in the target reserve ratio of
commercial banks
c)   A Bank of Canada sale of government
securities
d)   None of the above
The current price-stability policy of the Bank of

a)   3 – 5 percent
b)   0 – 2 percent
c)   1 – 3 percent
d)   2 – 4 percent
A constant rate of inflation over a significant period
of time means that

a)   actual inflation equals expected inflation.
b)   actual GDP equals potential GDP.
c)   money supply growth is constant.
d)   All of the above.
Suppose that for an economy desired
aggregate demand can be represented by the
function
YAD  900  100 P

where Y is real GDP and P is the price level.
Aggregate supply can be represented by the
function
YAS  100  300 P
Find short-run equilibrium output and the
price level.
Equilibrium Condition:
100  300P  900  100P
300P  100P  900  100
400P  800
P2
Y  100  300( 2)  700
or
Y  900  100( 2)  700
Y  700
Price
Level   9
YAD  900  100 P

YAS  100  300 P

4
E
2

100                700    900   1300
Real GDP
Now suppose that for this economy full-
employment output is 500.

What is the output gap?

Y – Y* = 700 – 500 = 200

Is the economy experiencing a recessionary gap
or an inflationary gap?
Y > Y*: an inflationary gap
Y*
Price
Level   9

YAS  100  300 P

4
E
2
YAD  900  100 P

100   500   700    900     1300
Real GDP
Output
gap of 200
In the absence of government intervention, what
will be the adjustment process to bring the
economy to its long-run equilibrium?

There is excess demand in the economy for
factors of production. Therefore there is
pressure on factor prices to rise. The
increase in factor prices raises the unit costs
of firms, decreasing aggregate supply. The
AS curve shifts to the left to close the output
gap at a higher price level.
What is the long-run equilibrium level of output?

Output will be at the full-employment level in
the long-run. Therefore Y = Y* =500

What is the long-run equilibrium price level?

The long-run equilibrium price level is the price
level that equates aggregate demand with full-
employment output.
YAD  900  100P  500  Y *
 900  500  100P
 P  400 / 100  4
Y*
Price
Level   9
Long run equilibrium       YAS '

YAS  100  300 P
E2
4
E1
2
YAD  900  100 P

100   500   700    900      1300
Real GDP
Use the AS-AD model to show the short and long
run effects of the following events on real GDP
and the price level.
i. A negative supply shock that is not validated by
an increase in money supply.
P                       AS’

AS

P1
P0

Y’ Y*            Real GDP, Y
ii. A negative supply shock that is
validated by an increase in money
supply.
P                      AS’
AS
P2
P1
P0

Y’ Y*            Real GDP, Y
iii. Successive increases in the money
supply in order to maintain actual GDP
above potential after a positive demand
shock.                    AS”
P                          AS’
AS
P3
P2

Y* Y’       Real GDP, Y
The Money Multiplier
   Let v be the target reserve ratio
   Let c be the cash to deposit ratio/cash drain.
   The money multiplier =       1
vc

Initial Deposit
   Total Change in Deposit Money =          vc
Consider a deposit into the Canadian banking
system of \$1000. Suppose that all commercial
banks have a target reserve ratio of 10 percent and
that there is no cash drain.
Round           Δ in Deposits   Δ in Reserves   Δ in Loans
1            \$1000           \$100            \$900
2            \$900            \$90             \$810
3            \$810            \$81             \$729
4            \$729            72.90           \$656.10
5            \$656.10         \$65.61          \$590.49

Total After 5 rounds   \$4095.10        \$409.51         \$3685.59

Total for Banking      \$10000          \$1000           \$9000
System
changes in money demand and money supply to
changes in

a)   interest rates
b)   inflation
c)   expected inflation
d)   economic activity

Money              Monetary             Economic
i                  I, NX
Demand/Money         Transmission            Activity
Supply Changes        Mechanism
(Y, P)
The End

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