1.

National Accounts (15 Marks)

1.1 Here are some data from the national accounts.
C + I + G 500 Wages, Salaries, Benefits 400
Corporate Profits Tax 25 Capital Consumption Allowances 75
Corporate Retained Earnings 50 Transfer from Gov to Households 40
Personal Taxes 60 Indirect Taxes Subsidies 50
Exports 250 Imports 100
Compute the following:
Item $ Value
Gross Domestic Product (GDP)
Net Domestic Product (NDP)
Net Domestic Income (NDI)
Personal Income (PI)
Personal Disposable Income (PDI)
Gross Domestic Expenditure (GDE)



1.2 Here are some activities in the economy. Indicate how they would be treated in the national
accounts. Select the entry that describes how the activity first shows up in the accounts e.g., show a
wage payment as Wages and Salaries, not as GDP or Domestic Income (albeit wages are ultimately
part of both of those).

You can use short form symbols such as C, I, G, etc. so long as theyre well-known and clear. If in doubt, write it out. If an
item has no impact, state that its Excluded (symbol E)
Market Activity Treatment In Nat. Accounts
10% of the machinery in auto plants is scrapped
as being at the end of its useful life

Consumer X buys a used car from the neighbor. It
is unsafe and goes to the scrap heap tool

Canadian student Y travels to Florida during
Reading Week, taking CEO 100 notes to study

The government sends Old Age Security cheques
to Senior Citizens





2. Simple Theory of Income Determination (22 Marks)
You are given the following equations about the behavior of the economy of Krypton that operates
according to the simple, constant-price model developed in class:
C = 4575 + 0.5Yd
I = 1500 + 0.2 Y
G = 1100
T = 750 + 0.1Y
X = 1200
M = 800 + 0.05Y
(You should know the sympbols!)

2.1 What is the equation of Aggregate Expenditure (AE) in reduced form?

AE = _______________________
2.2 What is the equilibrium level of GDP?

Equilibrium GDP = ____________________
2.3 At the equilibrium GDP, what is the governments budget balance?

(Deficit/Surplus) of __________________
2.4 The government wants to achieve the full employment income (YF), which is 500 above the
equilibrium of 2.2. To do so, it will reduce lump sum taxes (i.e. not the tax rate, but the fixed component of taxes
which is currently at 750).

The formula for this multiplier = _____________

Value of the multiplier in this case = ______________

Change in Lump Sum Taxes Required = ______________

2.6 (6 marks) In the diagram below, show the original AE labelled AE1 and the new AE labelled AE2. Show
the initial equilibrium Y1 and the new equilibrium at YF, USING THE APPROPRIATE VALUES FOR EACH.
Show clearly the Deflationary Gap (both its position in the diagram and its value) and the GDP Gap (both
its position in the diagram and its value).











2.7 (4 marks) The economy is nor at YF the full employment point. The government is being pressured to
spend more on a national housing program. It decides to increase G by 120. What must it do to lump
sum taxes in order to ensure that the equilibrium GDP remains at YF? Explain your reasoning and show
your calculations clearly. No diagram required.











Change in Lump Sum Taxes Required = ______________________
3. Constant-Price Money Model (20 marks)
We move now to the economy of Americana, where the government us going to cut taxes and raise
spending.
3.1 If the money supply does not change, how does the government finance the deficit created by its
fiscal policy? (Just describe; you need not show details).



3.2 (5 marks) Suppose that fiscal policy does stimulate the output market. What are the implications of
this expansionary fiscal policy in the money market with a fixed money supply? Use a single diagram in
your answer. Be sure to label he axes. Provide a brief explanation.
Explanation








3.3 (5 marks) Now show how the change in the money market you derived in 3.2 above impacts on the
output market. Use diagrams in your answer. Label the axes. You can ignore the feedback effect.







3.4 (5 marks) How dies the interest elasticity of the investment demand (marginal efficiency of
investment) impact on the analysis you showed in 3.3 above. Use a single diagram in you answer.
Provide a brief explanation. Label he axes.








3.5 (3 marks) Consider the following statement: The spending multiplier used in the simple Keynesian
Model is larger than the spending multiplier in a model that includes money. (agree / disagree)

















4. Money and Banking (23 marks)
4.1 (10 marks) Assume a Canadian banking system in which commercial banks hold no excess reserves,
there is no currency drain, and the reserve ratio for banks against their total deposits is 4%.
For each of the following events (taken separately), what will be the ultimate effect on:
Reserves of the banking system
Total demand deposits; and
The money supply (M1)
Show your answer in the table provided below.
Event A: There are concerns about electricity supply. If brownouts occur, automatic teller machines may
not work. People decide to increase their precautionary demand for money, held in the form of cash. In
total, $12 million is withdrawn from all the chartered banks.
Event B: I think the stock market is about to take off. You think the stock market is going down even
more. I buy you equities (which you had previously bought for $800000) for $400000; you deposit my
cheque in your bank.
Event C: You are going to watch the Leafs play against the Wings in the Stanley Cup finals. You need US
dollars to buy tickets (the Canadian dollar equivalent is $800). You buy the US dollars from your bank.
Now the bank needs more US dollars, and it makes a purchase in the foreign exchange market. The
seller of the US dollars is the bank of Canada. The amount of the transaction, in domestic dollar terms, is
$800.

Provide your answer in the table below; be sure to indicate + or as appropriate.

Event Reserves Demand Deposits Money Supply
A
B
C







4.2 (13 marks) For the event described below, show changes in the balance sheets of the public, the
chartered bank system, and the Bank of Canada. Continue to assume a reserve ratio of 4%.
(You need NOT show the multiple deposit creation process in detail)
Event: The last federal budget signaled increased spending. Suppose that a new program costs $100M.
To pay for the program, the government raises taxes by $80M. To finance the rest of the expenditure, it
issues $20M of new government bonds, all pf which are bought by the bank of Canada.













I concluded that the change in the Money Supply = __________________










5. Aggregate Demand and Aggregate Supply (12 marks)
Lets apply the variable price AD AS Model to analyze the impact of unsetting world events on the
Canadian economy.
5.1 In the diagram below, draw initial AD1 and AS1 curves (with negative and positive slopes respectively)
and show the initial equilibrium. Label the axes.






5.2 Give one reason below why AD is negatively sloped.
5.3 World events have caused the price of oil to rise. In the diagram below, show the impact on the
macro economy, using the labels AD2 and AS2 as appropriate. Assume Canada only imports oil and use it
as an input in the production process.
5.4 World events have eroded consumer and business confidence in Canada, and these economic agents
decide to spend less (on C and I respectively) and save more. In the diagram below, show this impact of
eroding confidence on the macro economy, using the labels AD3 and AS3 as appropriate.
5.5 I concluded that these world events will cause the average price level in the economy to (rise / fall /
stay / the same / do any of the previous) and
I conclude that these world events will cause real GDP to (rise / fall / stay the same / do any of the
previous).