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E C O N O MI C S 100
T E R M T E S T #4
Monday March 18, 2013
1. Duration of Test: 90 minutes
2. Thereare6 questionsof unequal value:
1. Yes or No / National Accounts
2. Constant PriceKeynesian Model
< 3. AD and SRAS
4. Money and Banking
5. Impact of Money
6. Multiple Choice
TOTAL
24
22
8
28
10
8 + Bonus
100
3. Show your work for full marks (excludingYes/No and MC questions).
4. I wi l l pick my test paper upnext week at thefollowingtutorial room:
Monday
Monday
Tuesday
Tuesday
Wednesday
3:00PM
4:30PM
4:00PM
6:00PM
4:00PM
UC52
UC 244
V C 115
AH 107
UC 163
UC87
UC85
V C212.
V Cl Ol
I wi l l pick up test at lectureon Wed. March 27 at 6:00PM because:
I attend theThursday tutorial at 4pm X\
I don't attend tutorials*
* N O T E : Answers to the test provided in the tutorials only.
Name
First Last
Student No.
Max Grade = 100
I f you write in pen, disputes over re-marking are less likely;
iicvciilicless, you may write in pencil if you wish.
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1. Yes or No / National Accounts (24 marks)
1.1 Yes or No
(12) Circleeither Yes or No for thefollowing statements to indicatewhether you agree
("Yes") or disagree("No") with each of them.
a) (Adapted from In-Class Prep) I f real GDP falls, then it must bethe case
that nominal GDP falls too. Yes (, No
b) In theconstant priceKeynesian Model, i f AggregateExpenditure(AE)
exceeds theeconomy's current level of production ( Y) , inventories wi l l
increase, pushingtheeconomy to ahigher level of pi-oduction.
Yesi No
c) (From Sample Test) TheBalanced Budget Multiplier ( K B B M ) is always
greater than 1 because K G | > K L S T
(i.e., absolutevalues of thesemultipliers).
Ye s y No
d) In ECO 100 macro models, households can consume, saveor pay taxes
with theincomes they receive. Their accumulated savings represent
wealth, which they can hold in theformof money or an alternate asset
that brings an interest return. [Hint: consider the last lecture prior to this test!]
Yes) No
e) (Adapted from Sample Test) Thedesired reserveratio, adhered to by all
banks, is 8%. Total demand deposits of all banks arecurrently $60M. I f
thedesired reserveratio rises to 10% and banks adhereto this higher
level, demand deposits must contract (i.e., bereduced) by $12M.
f) In theNational Accounts, thedifferencebetween Gross Investment and
Net Investment is Depreciation (or "Capital Consumption Allowances").
Thesameis trueof Gross Domestic Product and Net National Product.
Yes / No
Yes / No
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1.2 National Accounts
(12) Below aresometransactions that haveoccurred recently in theCanadian economy. In each
case, indicatehow each onewould betreated in theNational Accounts for thecurrent year.
Usetermslike"Consumption, Imports, Wages", etc. or other appropriatedescriptors as
needed . Indicatei f theitemis on theLeft Side(IncomeSide) or theRight Side
(ExpenditureSide) of theIncomeand ExpenditureAccounts or doesnot appear (DNA).
(Circle your choice).
Transaction Entry/Description Side of the Account
a) An American travels to Canada
and paysbigbucks to dineat a
fancy restaurant in Toronto.
b) TheToronto restaurant buys
sweet potatoesfroman Ontario
farmer to makesweet potato
fries for its customers.
c) Therestaurant paysrent to its
local landlord.
d) Therestaurant reports that the
market valueof its kitchen
equipment, purchased in the
past, has decreased.
Left (mght^ DNA
Left DNA
- ; ' " ? ? "r '
f
Lef ty Right DNA
Left ) DNA
e) Thegovernment collects an
additional excisetax on
restaurant meals in Ontario.
f) A Canadian hockey fan seesa
1970s Boston Bruins hockey
jersey in therestaurant's
showcase; hepersuadesthe
owner to sell it to him.
Left ( Right^ DNA
Left Right (DNAJ )
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Simple Keynesian Model (22 marks)
Thefol l owi ng equations describethebehavior of an economy that operates accordingto the
simpleconstant priceKeynesian model.
Consumption C= 100+0.9 Y d Disposable Income Y d=Y -T
Investment 1=50 Government Spending G=75
Exports X=80 Imports M =l 0+0.06Y
Full employment Y F = 1,200 Personal Taxes T=50+0.1Y
2.1 (2) In thespacebelow, draw theAggregate Supplyj(AS) function that is associated wi th
this model.
2.2 (4) DeterminetheAE equation and theequilibriumGDP.
AE equation in reduced form: _
EquilibriumGDP =
2.3 (4) Calculatethevalues of theGovernment Spending M ul ti pl i er (KG ) and theLumpSum
Tax M ultiplier (KL ST ). Fi l l in theTablebelow.
KG KL ST
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2.4 (4) What is thevalueof theGDP Gap? By how much must Government Spending change
(and in what direction +or - )' to movetheeconomy to full employment? F i l l in theTable.
GDP Gap A G
2.5 (4) Return to theoriginal equilibrium. What is thechangein equilibriumGDP (and in what
direction +or -) arisingfrom each of thefollowing two events, taken separately. Fill in the
Tablebelow.
, A. The government increasesLump Sum Taxes by IDO and usesthe entire proceeds to buy
imported products.
B. The government increases Lump Sum Taxes by 100. I t uses 80 to increase Transfer
Paymentsto householdsand 20 to purchasedomestically produced products.
Event A Event B
2.6 (4) Go back to theoriginal equilibrium. Supposenow thegovernment increasesboth Lump
Sum Taxesand Government Spending by 100. What is thefinal changein A E (and in what
direction +or -)? Show thestepsin your analysis.
Final changein A E
In themodel, what ECO 100 term(name) is given to thisfinal value?
Term:
^ A reminder on this test; no reminders on the final examination!
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3. Aggregate Demand and Short Run Aggregate Supply (8 marks)
Assumetheeconomy of Oakwood has apositively-sloped Short Run AggregateSupply (SRAS)
and anegatively-sloped AggregateDemand (AD).
3.1 (2) In thediagrambelow, label theaxesand draw an initial macro equilibriumfor
Oakwood (AD, and SRAS,). "A"
3.2 (2) Oakwood iswell known for its smart techiedevices. Many moreforeigners demand
thosedevices. Show thenew equilibriumpoint on thediagramabove. [Use"2" as
subscripts in your answer].
3.3 (2) Oakwood is an innovativesociety that is constantly finding improved ways to produce
its goods and services. Oakwood did it again - anew production process has been adopted
by many of Oakwood's firms. Now show thenext equilibriumpoint in thediagram, as
selected by you. [Use"3" as subscripts in your answer]. "/" "
3.4 (2) As "general conclusions", takingboth economic events of 3.2 and 3.3 together, wecan
say that:
Thepricelevel in Oakwoodwi l l (rise / fall / stay the s
Real GDP in Oakwood wi l l / fall / stay the same / cannot be determined).
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T H I S P A G E I S B L A N K !
(Doodle here as you M'ish!)
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4. Money and Banking (28 marks)
(14) Imagineabanking systemwhich follows all theassumptions weused in class, so the
"money multiplier" can beapplied. Thebanking systemhas areserveratio of 5%.
Determinethefinal changein themoney supply of each of thefol l owing e
separately. Usethebalance sheets (BSs) below to demonstrateyour answer.
[Pay aUention to the instructions below; in some questions, you do not have to provide every balance sheet entry
leading to the final answer. But every BS you do show needs to balance! Well-chosen short form notation is ok.]
4.1 (5) Chartered banks own corporatebonds; someof themhavebecome"toxic" (i.e., there
is ahigh probability that they wi l l not get repaid). As occurred in theU.S. during the
recent financial crisis, theCentral Bank buys $1M of thesestoxic bonds to strengthen the
domestic banking system. (Show thepurchaseonly on theBSs).
Public Ch Banl<s Central Bank (CB)
L
Final Changein theMoney Supply = -
4.2 (5) Ms. Apple(A) sells aused car to Mr. Berry (B) for $4,000. Mr. Berry has $5,000 in
cash in his pocket. He uses $4,000 of it to pay for thecar. Ms. Appledeposits the$4,000
in her bank. (Show thedeposit only on theBSs).
Public Ch Banks Central Bank (CB)
A A
L

L
Final Changein theMoney Supp
4.3 (5) Ms. Apple's bank sends the$4,000 received from Ms. Appleto theCentral Bank for
"safekeeping"! (Show this transfer only on theBSs).
Public Ch Banks Central Bank (CB)


i
L
k i
Final Changein theMoney Supply =
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4.4 (13) Thegovernment has just announced a"stimulus budget" that includes $500M of
additional spendingon infrastructurelikehighways, airports, and transit expansion.
Rather than raisetaxes, it finances thespendingby borrowing$250tfromthepublic and
by borrowing$250M fromtheCentral Bank. (Show all entries on theBSs).
Public Ch Banks Central Bank (CB)
I
Final Changein theMoney Supply
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5. The Impact of Money (10 marks)
(Economists Have To Write Too!)
Theeconomy of Greenbank needsstimulus as it is currently operatingat lessthan full
employment. Nevertheless, it does haveapositively-slopedShort Run AggregateSupply curve.
Themonetary authorities decideto changethemoney supply.
Writean articlefor thelocal newspaper that statesthedirection of thechangein themoney
supply andtheresultingeffects in theshort run. No diagrams allowedandavoidbeing"too
technical" (e.g., avoidsayingascheduleor curve"shifts up(or down)" or that thereis a
"movement alongacurve"); remember that your audiencehas not hadthepleasureof ECO 100
yet! Besureto cover output, employment, prices amongother things. Write well!
You can assume the usual shape for the various curves you have in the back of your mind. Thank your kindly prof
that you do not have to explain how the monetary authorities changed the money supply!
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6. Multiple Choice (8 marks)
Providethebest answer to thefol l owing multiplechoicequestions by circling your response
directly on thequestion paper. A correct answer isworth 2 marks; no penalty for awrong
answer. Read questions fully beforeanswering!
6.1 (From Sample Test) In national incomeaccounting, an increasein inventories counts as
a) depreciation
b) consumption
c) negativeinvestment
(S^) positiveinvestment
e) savings.
6.2 (Adaptedfrom In-Class Test Preparation) In farm country, afarmer takes $0 worth of
inputs and produces raspberries, which hesells to thejam maker for $ 1,600. Thejam
maker then sells jam to thecanner for $2,800, and thecanner then sells $5,200 worth of
canned jam to consumers. Thevalueadded from thesetransactions is
a) $9,600
b) $4,400
c) $2,800
d) $0
Noneof theabove.
6.3 {From Web Quiz) Supposean open economy is producingat itsequilibrium level of
income. I f at theequilibrium level, thegovernment's budget shows asurplus, then in the
simpleKeynesian model ^
a) an inflationary gapmust exist
l^bp savingmust exceed intended investment S- I f i >^o g^cv.--
c) adeflationary gapmust exist
d) investment and exports combined must exceed savings and imports combined
e) C+I +G+X must exceed GDP.
6.4 {From Web Quiz) I f theBank of Canadasells government securities in theopen market,
then accordingto our macro model with money
a) theinvestment demand ( M E I ) curvewi l l shift to theright
b) real GDP wi l l rise I I
c) therewi l l bean increasein investment expenditures /
therewi l l beadecreasein investment expenditures x
e) theinterest ratewi l l fall, y