ECON 1000 V – Introduction to Economics

CARLETON UNIVERSITY

Department of Economics

ECON 1000 V – Introduction to Economics

2015 Summer

ASSIGNMENT 5: Covers MACROECONOMICS Chapters 9-12. Topics: Unemployment and its natural rate; The monetary system; Money, growth and inflation; Open economy macroeconomics.

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

The deadline to submit the answersonline(through cuLearn) is AUGUST 2 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.	st your work on the cuLearn. The second assignment will be
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 po posted very soon. So even now if you are not sure about how to submit your work in one file and on the cuLearn, immediately seek help from the CCS or CUOL.
	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. Answer any 25. (50 marks, each question is worth 2 marks). Any extra questions
answered will be crossed out.

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

____	1. Which of the following conditions causes structural unemployment? a. Wages are kept above the equilibrium level. b. People choose not to work at the equilibrium wage. c. Some wages are below the equilibrium level. d. Conditions for unemployment insurance benefits relax.
___	2. What is the effect of unions on wages and employment? a. Unions are unlikely to affect wages and employment. b. Unions raise wages above the competitive equilibrium level. c. Unions increase the level of employment in unionized firms. d. Unions decrease the level of employment in nonunionized firms.
____	3. Which of the following is included in M2? a. gold b. mortgages c. currency d. investment accounts
____	4. Suppose a bank uses $100 of its $500 excess reserves to make a new loan when the reserve ratio is 20 percent. How does this action by itself initially change the money supply? a. The money supply increases by $80. b. The money supply decreases by $80. c. The money supply increases by $100. d. The money supply decreases by $100.
____	5. If the reserve ratio increased from 10 percent to 20 percent, which of the following would happen to the money multiplier? a. It would rise from10 to 20. b. It would rise from 5 to 10. c. It would fall from 10 to 5. d. It would fall from 20 to 5.
____	6. Which of the following do the Bank of Canada’s policy decisions have an important influence on?

a. both the rate of inflation and the level of employment in the short run

b. the rate of inflation in the long run and the level of employment in the short run

c. the rate of inflation in the short run and the level of employment in the long run

d. both the rate of inflation and the level of employment in both the short run and the long run

____ 7. Suppose the public decides to hold more currency and fewer deposits in banks. Which of the following best describes the effects of this decision?

a. Bank reserves decrease, and the money supply eventually decreases.

b. Bank reserves decrease, but the money supply does not change.

c. Bank reserves increase, and the money supply eventually increases.

d. Bank reserves increase, but the money supply does not change.

____ 8. How can inflation be measured?

a. by the change in the consumer price index

b. by the percentage change in the consumer price index

c. by the percentage change in the price of a specific commodity

d. by the change in the price of a specific commodity

____ 9. Which of the following does real GDP measure?

a. the total quantity of final goods and services produced

b. the dollar value of the economy’s output of final goods and services

c. the total income received from producing final goods and services at current prices

d. the change in prices from the base year to current year

____ 10. An assistant professor of economics gets a $100-a-month raise, but then she figures that with her current

monthly salary she can’t buy as many goods as she could last year. What has happened to her real and nominal wage?

a. Her real and nominal wages have risen.

b. Her real and nominal wages have fallen.

c. Her real wage has risen, but her nominal wage has fallen.

d. Her real wage has fallen, but her nominal wage has risen.

____ 11. According to the classical dichotomy theory, when the money supply doubles, which of the following also doubles?

a. the price level

b. the real interest rate

c. the inflation rate

d. the real income

____ 12. According to the quantity equation, if Y doubles, V is constant, and M doubles, what factor does the price level multiply by? a. 1/4

b. 1/2

c. 1

d. 2

____ 13. What does the evidence gained from studying hyperinflation indicate?

a. The rate of inflation is not closely related to the rate at which the money supply changes.

b. Nominal interest rates are independent of the money supply.

c. Inflation rates parallel money supply growth rates.

d. Inflation rates move in the opposite direction as the growth rate in money supply.

____	14. Suppose that velocity and output are constant and that the quantity theory and Fisher effect are both correct. If the nominal interest rate is 8 percent and inflation is 3 percent, what is the money supply growth rate or the real interest rate? a. The money supply growth rate is 3 percent. b. The real interest rate is 11 percent. c. The real interest rate is 8 percent. d. The money supply growth rate is 11 percent.
____	15. Since 1992, the Bank of Canada has successfully maintained the inflation rate around what level? a. ?2 percent b. ?1 percent c. 1 percent d. 2 percent
____	16. A firm in India sells jackets to a Canadian department store chain. Which of the following correctly identifies the effects of this transaction? a. It increases Canadian and Indian net exports. b. It decreases Canadian and Indian net exports. c. It increases Canadian net exports and decreases Indian net exports. d. It decreases Canadian net exports and increases Indian net exports.
____	17. Tony, an Italian citizen, opens and operates a spaghetti factory in Canada. Which of the following does this counts as? a. Italian foreign direct investment that increases Italian net capital outflow b. Italian foreign direct investment that decreases Italian net capital outflow c. Italian foreign portfolio investment that increases Italian net capital outflow d. Italian foreign portfolio investment that decreases Italian net capital outflow
____	18. Which of the following was an important change in the Canadian economy after 1999? a. National saving fell below investment, and net capital outflow was a large positive number. b. Net capital outflow turned positive. c. Investment equalled saving every year. d. Investment fell below saving, so net capital outflow was a large negative number.
____	19. Suppose that a kilogram can of coffee costs about $6 in Canada. Suppose the exchange rate is 0.7 euro per dollar and that a kilogram can of coffee in Belgium costs about 2.1 euros. What is the real exchange rate? a. 2.45 cans of Belgian coffee per can of Canadian coffee b. 2 cans of Belgian coffee per can of Canadian coffee c. 3/4 cans of Belgian coffee per can of Canadian coffee d. 3/5 cans of Belgian coffee per can of Canadian coffee
____	20. If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, what is implied by purchasing-power parity? a. P = e/P* b. 1 = e/P* c. e = P*/P d. P/P*=1

____ 21. If the world real interest rate exceeds the Canadian real interest rate, what would Canadian savers most likely do?

a. Canadian savers would prefer to buy foreign assets.

b. Canadian savers would prefer to buy Canadian assets.

c. Canadian savers will prefer to wait until the two real interest rates are again equal.

d. Canadian savers will sell their foreign assets and buy Canadian assets instead.

____ 22. Which of the following constitutes the labour force?

a. the number of people who are employed

b. the number of people who are unemployed

c. the number of people employed plus the number of people unemployed

d. the number of people in the adult population

____ 23. Which of the following people would NOT be included in the labour force?

a. Jay, who is on temporary layoff

b. Mike, who has retired and is not looking for work

c. Jane, who does not have a job, but has applied for several in the last week

d. Joan, who has a job but is looking for a new one

____ 24. Sally is on a temporary layoff from the factory where she makes plastic tableware. If Sally participates in the Statistics Canada survey, how will she be classified? a. as unemployed and in the labour force

b. as unemployed and out of the labour force

c. as employed and in the labour force

d. as employed and out of the labour force

____ 25. How is Latoya, a homemaker who works as a volunteer at the local Red Cross and is currently not looking for a job, counted?

a. as employed and in the labour force

b. as unemployed and in the labour force

c. as unemployed and not in the labour force

d. as not in the labour force

____ 26. Tara has just finished school, but she is going to roam around the country awhile before she starts looking for work. Which of the following best characterizes the changes that occur in labour statistics? a. The unemployment rate increases, and the labour-force participation rate increases.

b. The unemployment rate is unaffected, and the labour-force participation rate is unaffected.

c. The unemployment rate increases, and the labour-force participation rate decreases.

d. The unemployment rate increases, and the labour-force participation rate is unaffected.

____ 27. How does Statistics Canada call a person who has a temporary, part-time job? a. not in the labour force

b. unemployed

c. partially employed

d. employed

____ 28. Nancy is searching for a job that suits her tastes about where to live and the people she works with. Laura is looking for a job that makes best use of her skills. Which of the following best describes the nature of Nancy and Laura’s unemployment?

a. Nancy and Laura are both frictionally unemployed.

b. Nancy and Laura are both structurally unemployed.

c. Nancy is frictionally unemployed, and Laura is structurally unemployed.

d. Nancy is structurally unemployed, and Laura is frictionally unemployed.

____ 29. Which of the following best defines “job search”?

a. It is a process through which the firms determine the equilibrium wage.

b. It is an imbalance between labour supply and labour demand.

c. It is the process of matching workers with appropriate jobs.

d. It is the process through which firms hire new employees.

____ 30. How do sectoral shifts in the economy affect unemployment?

a. They create structural unemployment.

b. They reduce unemployment.

c. They increase unemployment due to job search.

d. Overall, they leave unemployment unchanged.

____ 31. The government operates programs for job training and job information intended to reduce unemployment.

Which of the following best describes how economists feel about such programs?

a. Most economists agree that such programs are of no use.

b. Most economists agree that such programs work very well.

c. Some economists claim that the government can do these things no better than firms, and individuals could do them for themselves.

d. Some economists believe that the private sector has no role in the process of job search.

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

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

B1. Which two of the ten principles of economics imply that the Bank of Canada can profoundly affect the economy?

B2.What is the difference between the reserve ratio and the reserve requirement? Which is generally larger?

B3.List and define any two of the costs of high inflation.

B4.Suppose a bottle of wine costs 25 euros in France and $20 in Canada. If the exchange rate is 1.25 euros per dollar, what is the real exchange rate?

B5.What is the logic behind the theory of purchasing-power parity?

B6.What does purchasing-power parity imply about the real exchange rate?

B7.Suppose a lobster supper in Nova Scotia costs fewer dollars than a lobster supper in Moscow. Explain why this is inconsistent with purchasing-power parity and explain why the inconsistency may exist.

SECTION C: LONGER FREE RESPONSE QUESTIONS. ANSWER ANYONEOF THE FOLLOWING
QUESTIONS: EACH QUESTION IS WORTH 30 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.

C1. Select questions ch 9. Pp. 218. PROBLEMS AND APPLICATIONS: Questions 4 (7 MARKS), 6 (7 MARKS), 7 (10

MARKS), 8 (6 MARKS)

C2. Select questions ch 10. Pp. 244. PROBLEMS AND APPLICATIONS: Questions 8 (7 MARKS), 9 (7 MARKS), 10 (8 MARKS), 12 (8 MARKS)

C3. Select questions ch 12. Pp. 301-302. PROBLEMS AND APPLICATIONS: Questions 5 (7 MARKS), 7 (8 MARKS), 8 (8 MARKS), 9 (7MARKS)

*For your convenience, I will keep a scanned copy of the above questions on the course web page.