ECON 1000 V assignment 6

CARLETON UNIVERSITY

Department of Economics

ECON 1000 V – Introduction to Economics

2015 Summer

ASSIGNMENT 6: Covers MACROECONOMICS Chapters 13-17. Topics:A Macroeconomic theory of the small open economy; Aggregate demand and aggregate supply; The influence of monetary and fiscal policy on aggregate demand; The short run trade-off between inflation and unemployment; five debates over macroeconomics policy.

(Sixth edition)

There are THREE sections: MCQs (Section A, 30 marks), short free response questions (Section B, 20 marks) and longer free response questions (Section C, 50 marks). TOTAL MARKS: 100

The deadline to submit the answersonline(through cuLearn) is Aug 14 at 11:55 pm. This deadline will be strictly enforced.

GOOD LUCK!

PLEASE NOTE THE FOLLOWING
	ALL TECHNICAL ISSUES REGARDING POSTING OF COMPLETED ASSIGNMENT MUST
BE RESOLVED BY THE STUDENTS BY CONSULTING CCS.	or a reason what appears to ssignment will be posted very soon. So even now if you are not
Some of the students in this course could not submit the assignment 1 f be associated with some technical issues. But I assume that you have learnt by this time how the system works. So be very sure next time to adhere to the deadline and also know how to post your work on the cuLearn. The second a sure about how to submit your work in one file and on the cuLearn, immediately seek help from the CCS or CUOL. http://carleton.ca/ccs/contact/ Computing and communications services (CCS) Telephone 613-520-3700 E-mail ccs.service.desk@carleton.ca ............................................................................................ http://carleton.ca/cuol/contact-us/ cuol contact centre Phone: 613-520-4055 Fax: 613-520-3459 Email General Inquiries: cuol@carleton.ca Video On Demand Support: vod@carleton.ca CUOL Exam queries: cuolexams@carleton.ca Graded material/convocation DVDs: student_centre@carleton.ca
	One of the TAs observed the following: Would you please take these comments/observations into
	consideration as you complete the assignment 2, please??
-Some students took pictures of their assignments (or graphs), however some pictures were blurry and hard to read. It would be great if you could mention to the students that they need to be sure the TA can read it. - Would you also be able to remind people to put all their answers in 1 file (some people used a zip file, with several files in that folder). - Would you also be able to ask people to put their name either in the title of the document or at the top of the document - this would avoid having a possible mix up
	Yet another TA observed that some students did not read the questions properly as they answered all
questions in a section where they were supposed to answer only a few of them, not all. I also personally
feel that some students are missing the instructions as in the assignment two, some MCQs were not there
(MCQ 5, 12 and 37) and I mentioned it at the beginning of section 1. In spite of that, at least 20 students
E-mailed about that they are not finding questions 5, 12 and 34. SO, Read instructions real well

SECTION A: Multiple Choice. 30 marks, each question is worth 1 mark.

Identify the choice that best completes the statement or answers the question.

1. In 2002, it looked like the Argentinean government might default on its debt (which eventually it did). Which of the following is consistent with what the open-economy macroeconomic model predicts? a. This event should have raised Argentinean interest rates and caused the Argentinean currency to appreciate.

b. This event should have raised Argentinean interest rates and caused the Argentinean currency to depreciate.

c. This event should have lowered Argentinean interest rates and caused the Argentinean currency to appreciate.

d. This event should have lowered Argentinean interest rates and caused the Argentinean currency to depreciate.

2. What is classical dichotomy?

a. It is the separation of variables that move with the business cycle and variables that do not.

b. It is the separation of changes in money and changes in government expenditures.

c. It is the separation of endogenous and exogenous variables.

d. It is the separation of real and nominal variables.

3. Which of the following best describes the aggregate demand and aggregate supply model?

a. Aggregate supply adjusts to equate aggregate demand at the prevailing market prices.

b. The price level adjusts to equate aggregate demand to aggregate supply.

c. Aggregate demand adjusts to equate aggregate supply at the prevailing market prices.

d. Both aggregate demand and supply adjust to become equal at the prevailing market prices.

4. Which of the following adjusts to bring aggregate supply and demand into balance? a. the price level

b. the real rate of interest

c. the money supply

d. technology

5. Which of the following best describes the effects of an increase in real interest rates in Canada?

a. It discourages both Canadian and foreign residents from buying Canadian assets.

b. It encourages both Canadian and foreign residents to buy Canadian assets.

c. It encourages Canadian residents to buy Canadian assets, but discourages foreign residents from buying Canadian assets.

d. It encourages foreign residents to buy Canadian assets, but discourages Canadian residents from buying Canadian assets.

6. In the market for foreign-currency exchange in the open-economy macroeconomic model, which of the following does the amount of net capital outflow represent?

a. the quantity of dollars supplied for the purpose of selling assets domestically

b. the quantity of dollars supplied for the purpose of buying assets abroad

c. the quantity of dollars demanded for the purpose of buying Canadian net exports of goods and services

d. the quantity of dollars demanded for the purpose of importing foreign goods and services

7. If a government increases its budget deficit, which of the following best predicts the effects?

a. Interest rates rise, and the trade balance moves toward surplus.

b. Interest rates rise, and the trade balance moves toward deficit.

c. Interest rates fall, and the trade balance moves toward surplus.

d. Interest rates fall, and the trade balance moves toward deficit.

8. If a government started with a deficit and moved to a surplus, which of the following best describes the effects of these changes?

a. Domestic investment and the real exchange rate would rise.

b. Domestic investment and the real exchange rate would fall.

c. Domestic investment would rise, and the real exchange rate would fall.

d. Domestic investment would fall, and the real exchange rate would rise.

9. Which of the following is NOT included in aggregate demand?

a. purchases of stock and bonds

b. purchases of services such as visits to the doctor

c. purchases of capital goods such as equipment in a factory

d. purchases by foreigners of consumer goods produced in Canada

10. What happens when the price level rises?

a. The value of money rises, and exchange rates and interest rates also rise.

b. The value of money rises, while exchange rates and interest rates fall.

c. The value of money falls while exchange rates and interest rates rise.

d. The value of money falls, and exchange rates and interest rates also fall.

11. Which of the following best describes what happens when the price level rises?

a. Households increase foreign bond purchases, and the supply of dollars increases.

b. Households increase foreign bond purchases, and the supply of dollars decreases.

c. Households decrease foreign bond purchases, and the supply of dollars increases.

d. Households decrease foreign bond purchases, and the supply of dollars decreases.

12. In which of the following situations does investment spending increase?

a. when the price level rises, causing interest rates to rise

b. when the price level rises, causing interest rates to fall

c. when the price level falls, causing interest rates to rise

d. when the price level falls, causing interest rates to fall

13. Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp increase in the minimum wage. In the short run, what would we expect to happen? a. the price level to rise, and real GDP to fall

b. the price level to fall, and real GDP to remain unchanged

c. the price level to remain unchanged, and real GDP to fall

d. the price level to fall, and the real GDP to rise the same

14. Which of the following reasons for the downward slope of the aggregate demand curve would likely be more important for a small closed economy? a. the wealth effect

b. the interest-rate effect

c. the exchange-rate effect

d. the real-wage effect

15. What is the variable that balances the money demand and supply in the liquidity-preference and the classical theories?

a. the interest rate in both theories

b. the price level in both theories

c. the interest rate in the liquidity-preference theory and the price level in the classical theory

d. the price level in the liquidity-preference theory and the interest rate in the classical theory

16. Suppose a stock market crash makes people feel poorer. What are the effects of this decrease in wealth?

a. a decrease in consumption, which shifts aggregate supply left

b. a decrease in consumption, which shifts aggregate demand left

c. an increase in consumption, which shifts aggregate supply right

d. an increase in consumption, which shifts aggregate demand right

17. Which of the following does NOT determine the long-run level of real GDP? a. the price level

b. the supply of labour

c. available natural resources

d. available technology

18. Which of the following shifts the short-run, but not the long-run, aggregate supply right? a. a decrease in the price level

b. a decrease in the expected price level

c. a decrease in the capital stock

d. a decrease in the savings rate

19. Which of the following shifts the short-run aggregate supply to the right?

a. an increase in the minimum wage

b. an increase in immigration from abroad

c. an increase in the price of oil

d. an increase in the actual price level

20. How does an economic contraction that is caused by a shift in aggregate demand remedy itself over time?

a. The expected price level rises, shifting aggregate demand right.

b. The expected price level rises, shifting aggregate demand left.

c. The expected price level falls, shifting aggregate supply right.

d. The expected price level falls, shifting aggregate supply left.

21. What is the effect of bad weather for farming or some other temporary decrease in the availability of raw materials?

a. Aggregate supply shifts right.

b. Output falls in the short run.

c. Prices fall in the short run.

d. Long-run aggregate supply shifts to the left.

22. Which of the following is most likely to happen in the short run?

a. The price level alone adjusts to balance the supply and demand for money.

b. Output responds to changes in the aggregate demand for goods and services.

c. Changes in the money supply cause a proportional change in the price level.

d. Changes in the money supply shift the aggregate-supply curve, causing output to rise.

23. In the long run, which of the following do changes in the money supply affect? a. prices

b. output

c. unemployment rates

d. nothing

24. Which of the following did Phillips discover?

a. a positive relation between unemployment and inflation in the United Kingdom

b. a positive relation between unemployment and inflation in Canada

c. a negative relation between unemployment and inflation in Canada

d. a negative relation between unemployment and inflation in the United Kingdom

Figure 16-1

25. Refer to the Figure 16-1. If the economy starts at c and 1, then in the short run, where does a decrease in the money supply growth rate move the economy? a. e and 1

b. d and 2

c. d and 3

d. a and 3

26. The position of the long-run Phillips curve depends on what?

a. the natural rate of unemployment

b. the actual rate of unemployment

c. the actual inflation rate

d. the expected inflation rate

27. How does an increase in the expected rate of inflation shift the Phillips curves?

a. It shifts only the short-run Phillips curve to the right.

b. It shifts only the short-run Phillips curve to the left.

c. It shifts both the short-run and long-run Phillips curves to the right.

d. It shifts both the short-run and long-run Phillips curves to the left.

28. Which of the following would NOT be associated with a favourable supply shock?

a. The short-run Phillips curve shifts left.

b. Unemployment falls.

c. The price level rises.

d. Output rises.

29. Which of the following tends to make aggregate demand shift right farther than the amount that government expenditures increase?

a. the crowding-out effect

b. the multiplier effect

c. the wealth effect

d. the interest-rate effect

30. Which of the following terms refers to the positive feedback from aggregate demand to investment? a. the investment multiplier

b. the stock-market effect

c. the investment accelerator

d. the crowding-in multiplier

Figure 15-2

SECTION B: SHORT FREE RESPONSE QUESTIONS. ANSWER ANY FOUR OF THE FOLLOWING
QUESTIONS. EACH QUESTION IS WORTH 5 MARKS. TOTAL MARKS: 20 MARKS

INSTRUCTIONS: Your answers to the following questions should take advantage of the relevant economic tools, principles and perspectives. Your answers must be precise.

B1. How are the identities S = NCO + I and NCO = NX related to the foreign-currency exchange market and the loanable funds market?

B2. Suppose that consumers become pessimistic about the future health of the economy, and so cut back on their consumption spending. What will happen to aggregate demand and to output? What might the government have to do to keep output stable?

B3. Why and in what way are fiscal policy lags different from monetary policy lags?

B4. Explain the connection between the vertical long-run aggregate supply curve and the vertical long-run Phillips curve.

B5. Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists?

SECTION C: LONGER FREE RESPONSE QUESTIONS. TOTAL MARKS: 50 MARKS.

INSTRUCTION: Take a few minutes to plan and outline each answer. In answering the questions, you should
emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis.
Include diagrams, if useful, in explaining your answers. All diagrams should be correctly labeled.

ANSWER ANY ONE OF THE FOLLOWING TWO QUESTIONS (QUESTION C1 OR C2): 20 MARKS

QUESTION C1. Q4 CH 14. PP. 373.

Suppose an economy is in long run equilibrium.

a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply (4 marks)

b. The Central Bank raises the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from initial to the new short run equilibrium (call it point B) 4 marks

c. Now show the new long run equilibrium (call it point C). What causes the economy to move from B to point C? 4 marks

d. According to the sticky wages theory of aggregate supply, how do the nominal wages at point A compare to the nominal wages at point B? How do nominal wages at point A compare to the nominal wages at point C? 4 marks

e. According to the sticky wages theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages at point A compare to the real wages at point C? 4 marks

QUESTION C2 Q1. CH15. PP. 415. 20 marks

Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate. For each case, show what happens in a closed economy and in a small open economy. Illustrate your answers with diagrams.

a. The bank of Canada’s bond traders buy bonds in open-market operations.

b. An increase in credit card availability reduces the cash people hold.

c. Households decide to hold more money to use for holiday shopping

d. A wave of optimism boosts business investments and expands aggregate demand.

e. An increase in oil prices shifts the short run aggregate supply curve to the left.

(ANSWER ANY 3 OF THE FOLLOWING QUESTIONS (FROM C3 TO
QUESTION C6). 30 MARKS

QUESTION C3. Q5. CH15. PP. 416. 10 marks

Suppose that the government of a closed economy reduces taxes by $20billion, that there is no crowding out of investment, and that the marginal propensity to consume is ¾.

a. What is the initial effect of the tax cut on aggregate demand? 2 marks

b. What additional effects follow this initial effect? What is the total effect of the tax cut on aggregate demand? 4 marks

c. How does the total effect of this $20 billion tax cut compare with the total effect of a 20$ billion in-crease in government purchase? 4 marks

QUESTION C4. Q4-C16-PP 447. 10 marks

Suppose the economy is in long run equilibrium.

a. Draw the economy’s short and long run Phillips curve 2 marks

b. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part a. If Bank of Canada undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? 4 marks

c. Now suppose the economy is back in long run equilibrium, and then the price of imported oil rises. Show the effect of this shock with a new diagram like that in part a. If the Bank of Canada undertakes expansionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? If the Bank of Canada undertakes contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? Explain why this situation differs from that in part b. 4 marks

QUESTIONC5 Q 1, CH 17, PP 469. 10 marks

The economy like the human body, has ‘natural restorative powers,.

A. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/aggregate supply diagram. What happens to total output, income and employment? 4 marks

B. If the government does not use stabilization policy, what happens to the economy over time? Illustrate this on your diagram. Does this adjustment generally occur in a matter of months or a matter of years? 4marks

C. Do you think the ‘natural restorative powers’ of the economy mean that policy makers should be passive in response to the business cycle? 2 marks

QUESTIONC6 Q5, CH 17, PP. 470. 10 marks

The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories.

a. If investors believed that capital taxes would remain low, how would the government’s action affect the level of investment? 2 marks

b. After investor’s have responded to the announced tax reduction, does the government have an incentive to renege on its policy? Explain. 4 marks

c. Given your answer to part b, would investors believe the government’s announcement? What can the government do to incredibility of the announced policy changes? 4 marks