Principles of Macroeconomics

Final Exam: Sample #3

Duration - 3 hours
Aids Allowed: Non-programmable calculators only
INSTRUCTIONS:
This examination consists of TWO PARTS
Part I

10 diagrammatic/calculation questions of which you are expected to

ANSWER ANY 8 (10 marks each for a total of 80%)

Part II

10 multiple choice questions of which you are expected to answer ALL 10.
(2 marks each for a total of 20%).
Wrong answers will not be deducted from right in grading Part II.

All questions are to be answered in the spaces provided in this question paper booklet
Do not remove any pages or add any pages. No additional paper will be supplied.
The blank backs of pages may be used for rough work. Show your work where applicable.

Print your name and student number clearly on the front of the exam and on any loose pages.
Student Name: ______________________________________________________
(Family Name)
(Given Name)
Student Number: ______________________________

There are 14 pages to the exam.

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Principles of Macroeconomics: Final Exam, Sample #3

PART I: ANSWER ONLY 8 OF 10 QUESTIONS
Place your answers (and work where necessary) in the space provided.
1.

National Accounts (10 marks)

The following data are from the National Accounts of Canada for 1980 ($Billions)
Indirect Taxes Less Subsidies
60,000
Retained Earnings (Undistributed Corporate Profits)
30,000
Net Income of Unincorporated Businesses (Farm and non-Farm)
30,000
Net Investment Income of Non-Residents
20,000
Government Spending
130,000
Government Transfer Payments
55,000
Depreciation (Capital Consumption Allowances)
70,000
Exports
160,000
Consumption
350,000
Personal Taxes
25,000
Imports
155,000
Corporate Profits (before Taxes)
65,000
Corporate Taxes
20,000
Wages and Salaries and Supplementary Labour Income
330,000
Interest and Miscellaneous Investment Income
45,000
Gross Investment
120,000
Rent (Rental Income)
5,000
Calculate (Show your work)
a) Net Domestic Income from Factor Cost (2 marks)
1 mark: correct numbers except for one mistake
1 mark: correct answer: = 330 + 65 + 30 + 5 + 45 = 475,000
(Many will miss the 5 for Rent and get 470,000. Give only one mark here)
b) Gross Domestic Product from Net Domestic Income (2 marks)
1 mark: NDP (475) plus one of CCA (70) or Indirect Taxes (60)
1 mark: = 475 + 70 + 60 = 605,000
(Give marks for consistency but take one mark off here before doing so. For example, those who
got 470,000 for a) and have 600,000 here should get 1 mark only here)
c) Gross Domestic Product (2 marks)
1 mark: one missing piece
1 mark: correct answer: 350 + 120 + 130 + 160 155) = 605,000
(Give full marks if consistent with mistaken b)
d) Personal Income (2 marks)
1 mark: missing one item
1 marks: 475 20 30 + 55 = 480,000 (no consistency marks)
(Give full marks if consistent with mistaken a)
e) Gross National Product (1 mark)
1 mark: 605 20 = 585,000 (no consistency marks)
(Give full marks if consistent with mistaken b)
f) Government Budget Surplus(+)/Deficit(-) (1 mark)
1 mark: = -80 from 60 + 25 + 20 130 - 55

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Principles of Macroeconomics: Final Exam, Sample #3

2.

Prices Indices (10 marks)

2002
Apples (per apple)
Milk (per litre)

Price/unit
$0.75
$0.80

2007
Quantity
30
35

Price/unit
$0.50
$1.10

Quantity
40
25

The above table gives data for the price/unit ($)and quantity of Apples and Milk consumed
per month on average by the typical Canadian student in 2002 and 2007. Assuming that 2002
is the base year, calculate the following values.
a) Nominal family consumption in 2007 (1 mark)
1 mark: = $47.50 from $0.50*40 + $1.10*25
b) The consumer price index for 2007 to two decimals (3 marks)
1 mark: correct numerator of 100*(0.50*30 + $1.10*35)/($0.75*30 + $0.80*35)
1 mark: correct denominator of 100*(0.50*30 + $1.10*35)/($0.75*30 + $0.80*35)
1 mark: = 105.94 (accept something close if setup is correct)
c) Real consumption in 2007 relative to 2002 according to the consumer price index (to one
decimal) (1 mark)
1 mark: = $44.8 from something like 100*$47.50/105.94
d) Total inflation (%) between 2002 and 2007 relative to 2002 (to two decimals) (1 mark)
1 mark: = 5.94% (or consistent with their answer in b)
e) Real consumption in 2007 according to the GDP deflator measure (to one decimal) (1 mark)
1 mark: = $50 from $0.75*40 + $0.80*25
f) The GDP deflator for 2007 given 2002 as the base year to one decimal (2 marks)
1 mark: correct numerator and denominator = 100*($0.50*40+$1.10*25)/($0.75*40+
$0.80*25)
1 mark: correct answer = 95
g) Ignore the previous information. Suppose that the GDP deflator for Canada was 100 in 1997
(base year), 106 in 2001, and 117 in 2008. What was the total amount of inflation (percent)
between 2001 and 2008 to two decimals? (1 mark)
1 mark: = 10.38% from 100% * (117 106)/106

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Principles of Macroeconomics: Final Exam, Sample #3

3.

MacroModel (10 marks)

An economy has the following set of macroeconomic equations.

Consumption:
Investment:
Government Spending

C = 230 + 0.9Yd
I = 70 + 0.12Y
G = 220

Exports:
X = 160
Imports:
IM = 80 + 0.05Y
Net Taxes (Taxes Transfers) T = -50 + 0.3Y

a) Calculate the Aggregate Expenditure equation. (2 marks)

1 mark: correct autonomous part = 645 of AE = 645 + 0.7Y
from something like 230 + 0.9(Y (-50 + 0.3Y) + 70 + 0.12Y + 220 + 160 (80 + 0.05Y)
1 mark: correct second part = 0.7Y
SOME STUDENTS WILL BOMB THIS. TAKE MARKS OFF HERE AND FOR b) BUT THEN
GIVE THEM SOME CONSISTENCY MARKS for c, d, and e EVEN THOUGH MY INTENT
WAS TO HAVE THE COMFIRM CORRECTNESS BY CALCULATING AE from c, d, and e.
b) Calculate the value of Equilibrium Income (1 mark)
1 mark: = 2,150 from something like Y = 645/(1 0.7)
c) What is the government budget surplus(+)/deficit(-) at equilibrium? (1 mark)
1 mark: = +375 from something like 50 + 0.3(2150) 220 = +375
d) What is Consumption at equilibrium? (1 mark)
1 mark: = 1,629.5 from something like 230 + 0.63(2150) + 0.9*50 (or C out of calculated Yd)
e) What are Net Exports at equilibrium? (1 mark)
1 mark: = -27.5 from 160 (80 + 0.05*2150)
f) What is the fixed tax multiplier? (1 mark)
1 mark: = -3 from 0.9/(1-0.7) (must be negative)
g) What is the change in GDP due to an increase of 12 in Fixed Transfers (+12)? (1 mark)
1 mark: = +36 from 3 (-12) or something (must be positive)
h) Suppose there is a recessionary gap of 30.
i) What is the change in government spending required to reach full employment? (1 mark)
1 mark: = +9 from 30/(1/(1-0.7) or 30/(10/3) (must not be negative)
ii) What is the change in fixed taxes required to reach full employment? (1 mark)
1 mark: = -10 from something like 30/-3 (must be negative)

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Principles of Macroeconomics: Final Exam, Sample #3

4.

Money Supply (10 marks)

Assume that the following conditions for the Canada's banking system: deposits are all
demand deposits, there are neither excess reserves nor excess circulation, and banks hold all
interest bearing assets as loans.
A) Suppose that the private banks have reserves of $20 billion in cash (legal tender) and a
further $2 billion in deposits at the Bank of Canada. Deposits at the private banks are $148
billion. The Bank of Canadas currency (legal tender) issue is $65 billion and the required
reserve ratio for deposits is 15.625% (0.15625).
a) What is the amount of deposits at equilibrium for the banking system? (1 mark)
1 mark: = $140.8 billion from 22/0.15625 or 22*6.4
b) What is currency in circulation at equilibrium? (1 mark)
1 mark: = $45 billion from $65b 20b
B) The following questions refer to a banking system with a required reserve ratio of 10%
(0.10). (Ignore the information in A). Calculate the change in equilibrium reserves and in
equilibrium money supply for each of the following circumstances.
c) The Bank of Canada sells $50 million Canadian in the foreign exchange market and
simultaneously sells $32 million in Federal Government bonds to the Royal Bank.
i) the change in reserves is? (1 mark)
1 mark: = +18 million (+$50 $32) (no mark if negative)
ii) the change in money supply is? (1 mark)
1 mark: = +180 billion from +18/0.1 (dont worry about the sign)
d) Panic about the subprime mortgage scandal causes the public to increase currency in
circulation by $75 million.
i) the change in reserves is? (1 mark)
1 mark: = -$75 million (must be negative)
ii) the change in money supply is? (1 mark)
1 mark: = -$675 from +$75 - $75/0.1
e) The Federal government finances an expenditure of $230 million on weapons produced in
Canada by increasing taxs by $170 million and selling $60 million in bonds to the Bank of
Canada.
i) the change in reserves is? (1 mark)
1 mark: = +60 million (must be positive)
ii) the change in money supply is? (1 mark)
1 mark: = +$600m from something like +60/0.1
f) Suppose that the reserves of the banking system are $30 billion and the required reserve ratio
is 10% (0.10). What is the equilibrium effect of a rise in the reserve ratio to 12.5% (0.125)?.
i) the change in reserves is? (1 mark)
1 mark: no change
ii) the change in money supply is? (1 mark)
1 mark: = -60 (b) from 30/0.125 30/0.1

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Principles of Macroeconomics: Final Exam, Sample #3

5.

Monetary Policy: Linear Equations (10 marks)

The following equations describe an economy
Money Demand:
MD = 0.05Y 1200r
Investment: I = 395 2500r
Aggregate Expenditure:
AE = 640 + I + 0.6Y
Amounts are in $billions (e.g., 395 = $395 billion) and r (interest rate) is in decimal form.
a) Given Money Supply (MS) = 84 ($billion) and Y/GDP = 2,400 ($billion), what is equilibrium
r? (2 marks)

1 mark: setup: 84 = 0.05(2400) 1200 or r = (0.05*2400 84)/1200

1 mark: r = 0.03 (3%)
b) What is equilibrium I? (1 mark)
1 mark: I =320 from 395 2500*0.03
c) Assume that the initial equations still hold and that I = 270 and MS = 55. (Disregard the
information in a)). What is the effect on equilibrium Y and r (before crowding out) of an
increase in G equal to 58 (G = +58)? (3 marks)
1 mark: setup of Y = (640 + 270 + 58 + 0.6Y)/(1 0.6) or something similar
1 mark: Y = 2,420
1 mark: r =0.055 from (0.05*2420 55)/1200
SOME MAY CALCULATE CHANGE IN Y = 58/(1-0.6) = 145. GIVE ONE MARK FOR THIS.
THEY WILL HAVE DIFFICULTY GETTING r and I FROM THIS SO GIVE THEM
ANOTHER MARK FOR EFFORT.
d) What is the initial crowding out of investment caused by the increase in Government
Spending of 58? (1 mark)
1 mark: = -12.5 from 270 ( 395 2500*0.055)

e) Assume that the initial equations still hold and that I = 260 and MS = 42.7. (Disregard the
information in a) and c)). What is the equilibrium interest rate and GDP if the Bank of
Canada buys $0.5 billion in bonds and the required reserve ratio if 10%? (3 marks)
1 mark: Money Supply = 45.7 from 42.7 + 0.5/0.1
1 mark: Y = 2,250 from (640 + 260)/(1 0.6)
1 mark: r = 0.054 from (0.05*2250 45.7)/1200

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Principles of Macroeconomics: Final Exam, Sample #3

6.

Money and Spending Equilibrium (10 marks)

Suppose that a government wants to reduce government spending but does not want
investment to change. Show how the government can do this using AE/Y, MS/MD, and MEI
diagrams. Ignore price level and exchange rate effects. The following will help you do this.
a) Draw diagrams to show an initial equilibrium GDP, interest rate, and Investment. Use the
subscript 0 to designate the initial functions and equilibria. (3 marks)
b) Show the effect of a reduction in government spending on equilibrium GDP, the interest rate,
and Investment. Designate these changes with S. (5 marks)
c) Now show the government action that would prevent a change in Investment. Use the
subscript 1 for these changes. (2 marks)
AEo

real AE

AES

YS

r
SM1

Yo
r

SMo

r1 r0
rS

AE1

real Y (or GDP)

rS
DMo

MEI

DMS
IS

M (or M/P)

Io

real I

a) 1 mark: equilibrium Y0 at AE0 intersect 450 line with axes AE and Y

1 mark: equilibrium r0 at intersection of downward MD and vertical MS
1 mark: I0 from downward sloping MEI at r0
b) 1 mark: Fall in AE to AES
1 mark: Fall in Y to YS at intersection of AEs and 450 line
1 mark: Decrease in Money Demand to MDS
1 mark: Decrease in r to rS at intersection of MSo and MDS
1 mark: Increase in I to IS from MEI at rS
c) 1 mark: decrease in MS to MS1
1 mark: MS1 intersecting new money demand MDS at r0 (r1)

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Principles of Macroeconomics: Final Exam, Sample #3

7.

Aggregate Demand and Aggregate Supply Equations (10 marks)

An economy is presently in long-run equilibrium with the following Aggregate Expenditure
and Short Run Aggregate Supply equations. Potential GDP is 5,580
AE = 2,850 + 0.75Y 15P
SRAS: Y = 3,000 + 20P
a) What is the Aggregate Demand function? (2 marks)

1 mark: setup: Y = 2,850 + 0.75Y 15P or Y = (2,850 15P)/(1 0.75)

1 mark: Y = 11,400 60P (or P = 190 - 0.0166Y)

b) What is short-run equilibrium price and Y/GDP? (2 marks)

1 mark: P = 105 from 11,400 60P = 3,000 + 20P
1 mark: Y = 5,100 from 11,400 60*105 or 3,000 + 20*105

c) What is Autonomous Expenditure at equilibrium? (1 mark)

1 mark: AE = 1,275 + 0.75Y from 2,850 + 0.75Y 15*105

d) What is short-run equilibrium price and Y/GDP given an increase in Exports = +75?
(3 marks)
1 mark: recognition that AD = 11,700 60P derived in some fashion
1 mark: P = 108.75 from 11,700 60P = 3,000 + 20P
1 mark: Y = 5,175 from 11,700 60*108.75 or 3000 + 20*108.75

e) What is long-run equilibrium GDP and Price given the increase in Exports = +75? (2 marks)
1 mark: setup 5580 = 11,700 60P
1 mark: P = 102
THEY MIGHT MESS THIS UP BUT NO MERCY SINCE I THINK THE QUESTION IS CLEAR

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Principles of Macroeconomics: Final Exam, Sample #3

8.

Aggregate Demand/Supply: Diagrams (10 marks)

Suppose that the Canadian economy is at long-run price and GDP (Y) equilibrium. Show
the effect of an increase in government spending on Aggregate Expenditure, equilibrium real
GDP, and the equilibrium Price level by using Aggregate Expenditure/GDP and Aggregate
Demand/Supply diagrams. The following subsections help you do this.
a) Draw an Aggregate Expenditure/Income diagram and Aggregate Demand/Supply diagram to
show the initial equilibrium Price (Po) and real GDP (Yo) if the economy is presently at
potential GDP (Y*). Be sure to draw both the Long-run (LRAS) and Short-run Aggregate
Supply (SRAS) curves. Use the subscipt o for all curves and equilibria. (3 marks)
b) Now show in your AE/Y diagram and on your AD/AS diagram the new short-run equilibrium
Price (Ps) and GDP (Ys) that results from the increase in government spending. Make sure
that the AE/Y diagram equilibrium accords with the AD/AS equilibrium Ys. Use the subscipt
s for all resultant curves and equilibria. (4 marks)
c) What brings about short-run equilibrium in the AE/Y diagram? (1 mark)
1 mark: AE shifts down (between initial and increase in G AE) due to increase in prices.
NOTE THIS MARK!
c) Now show the long-run equilibrium Price and real GDP. Use the subscript 1 for all changed
curves and equilibria. (2 marks)
AE1
AE1
AEo

real AE

Yo
LRAS

real Y
SRAS1
SRASo

P1
Ps
Po

ADo
Y*Ys
Y1

ADs
real Y

1 mark: vertical LRAS in AD/AS diagram at Yo (or Y*) from intersection of positively sloped
AEo and 45 degree line
1 mark: positively sloped SRAS intersecting ADo at Yo (and Po)
1 mark: Po and Yo at intersection of downward sloping AD and SRAS
1 mark: shift up of AE to intersect 450 line at LRAS (dont worry what they call it)
1 mark: AD shifts to the right
1 mark: AD shifts to the right to pass through Po and Y*
1 mark: equilibrium Ps > Po & Ys > Yo but < Y* (LRAS) from intersection of ADs and SRAS
1 mark: P1 from wherever ADs intersect LRAS (Y*)(doesnt have to be at Po)
1 mark: SRAS shifts to intersect AD where AD intersects LRAS (i.e., at P1)

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Principles of Macroeconomics: Final Exam, Sample #3

9.

Aggregate Demand and Aggregate Supply (10 marks)

a) Assume that an economy is initially in short-run Price (Po) and GDP (Yo) equilibrium with
considerable unemployment due to a recessionary gap. Draw an Aggregate
Demand/Aggregate Supply diagram to show the short-run (Ps, Ys) and long-run (P 1, Y1)
effects of a decrease in government spending. (5 marks)
P

LRAS

SRASo
SRAS1

Po
Ps
P1

ADo
AD1
Ys Yo Y2

1 mark: Po and Yo from intersection of Ado and SRASo but Ys < LRAS
1 mark: shift left of AD
1 mark: Ps < Po and Ys < Yo from AD1 Intersect SRAS1
1 mark: P1 < Ps and Y1 from AD1 intersect LRAS
1 mark: SRAS increases (shifts down) to intersect AD1 and LRAS at LRAS
BE A LITTLE MERCIFUL HERE SINCE THE FALL IN G GIVEN A RECESSION MIGHT
CONFUSE
b) Suppose that an economy is initially in short-run and long-run Price (Po) and GDP (Yo)
equilibrium. Draw an Aggregate Demand/Aggregate Supply diagram to show the short-run
(Ps, Ys) and long-run (P1, Y1) effects of a significant technological improvement. Be sure to
shift all necessary curves. (5 marks)
P

LRAS1 SRASo
LRASo
SRAS1
SRAS2

Po
Ps
P1

ADo
AD1
Y* Ys Y*1

1 mark: SRAS shifts to the right

1 mark: Ps < Po and Ys > Yo at SRASs (SRAS 1 in my diagram) intersect Ado
1 mark: LRAS shifts right (must be beyond Ys)
1 mark: P1 < Ps and Y1 > Ys at AD intersect LRAS1
1 maark: SRAS shifts down to SRAS 1 (SRAS2 in my diagram) to intersect AD at LRAS 1
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Principles of Macroeconomics: Final Exam, Sample #3

10. Exchange Rates (10 marks)
a) Suppose that a country has the following balance of payments data (not including the change
in official reserves)
Merchandise Exports
$85b
Merchandise Imports
$79b
Capital Exports
$17b
Capital Imports
$14b
Service Exports
$19b
Service Imports
$18b
Interest and Dividend Payments
$12b
Interest and Dividend Receipts
$9b
i) What is the current account balance? (1 mark)
1 mark: = +4 from 85 79 + 19 18 + 9 - 12
ii) What is the private balance of payments (i.e., not including change in official reserves)?
(1 mark)
1 mark: = +1 from something like + 4 17 + 14
The following diagrams represent the original equilibrium position in the market for the
Canadian dollar. Show the shift in the demand and/or supply of Canadian dollars and the
new equilibrium exchange rate under the following circumstances each considered separately.
Assume that the exchange rate is flexible unless otherwise advised.
b) Canadian inflation is 2% and U.S. inflation is -1%.
(2 marks)
EUS/C

1 mark: Decrease in D$C (Demand shift left)

1 mark: Increase in S$C (Supply shift right)

S$C

Eo

D$C

c)

Canadian real GDP increases by -1% and US real

increases by 2%. (2 marks)
1 mark: Decrease in S$C (Supply shifts left)
1 mark: Increase in D$C (Demand shift right)

Q$C

$Co

EUS/C

GDP

S$C

Eo

D$C

Q$C

$Co

d) Assume a fixed exchange rate for EC/US. In the

diagram, show the immediate impact of an increase in
U.S. interest rate the on Demand and Supply of the
$Canadian. (2 marks)
1 mark: increase (shift right) in Supply of $C
1 mark: decrease (shift left) in Demand of $C

EUS/C

S$C

the

Eo

D$C

$Co

Q$C

e) How does the Bank of Canada maintain the fixed

exchange rate in d)? Show the Banks actions clearly in the diagram for d). (2 marks)
1 mark: identification of Qs > Qd (from new S$C and D$C). They must identify Qs and Qd but
they need not lable them if they indicate a surplus of $C
1 mark: indication that the BofC buys $C (or sells $US)

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Principles of Macroeconomics: Final Exam, Sample #3

PART II: MULTIPLE CHOICE: DO ALL TEN QUESTIONS
Circle the best answer for each question.Each question is worth 2 marks.
1.

Which of the following is contributing to recession in the United States at the moment?
a) the decline in the housing market
b) the subprime loan crisis
c) the rise in the price of oil
d) a) and b) but not c)
e) a) and c) but not b)
f) b) and c) but not a)
g) all of the above
h) none of the above

2.

Which is part of Aggregate Expenditure in this years National Accounts?

a) goods produced last year that are exported this year
b) government transfer payments to individuals, such as unemployment insurance
c) machinery imported from the United States
d) government investment expenditures on roads
e) government taxes
f) none of the above

3.

Suppose that the following equations describe part of an economy.

C = 365 + 0.8Yd
Taxes = 90 + 0.27Y
Transfer Payments = 70 0.7Y
Which of the following describes Consumption as a function of Y, i.e., C = f(Y)?
a) C = 349 + 0.528Y
b) C = 349 + 0.64Y
c) C = 349 + 0.66Y
d) C = 365 + 0.528Y
e) C = 365 + 0.64Y
f) C = 365 + 0.66Y
g) C = 381 + 0.528Y
h) C = 381 + 0.64Y
i) C = 381 + 0.66Y
j) none of the above

4.

Which of the following increases the Demand for Money function (i.e., shifts it right) ceteris
paribus?
a) a rise in real GDP
b) a rise in the Price level
c) a rise in the proportion of income held as money (k) d) a fall in the interest rate
e) Bank of Canada purchases of bonds
f) all of the above
g) all of the above except for d) and e)
h) all of the above except for e)
i) all of the above except for c), d), and e)
j) none of the above

5.

George Bush has significantly increase government spending on war, cut taxes, and lowered
interest rates during his presidency. What should be the effect of this combination of policies
according to our theory?
a) decrease in Government Deficit, decrease in Money Supply, and decrease in GDP
b) decrease in Government Deficit, decrease in Money Supply, and increase in GDP
c) decrease in Government Deficit, increase in Money Supply, and decrease in GDP
d) decrease in Government Deficit, increase in Money Supply, and increase in GDP
e) increase in Government Deficit, decrease in Money Supply, and decrease in GDP
f) increase in Government Deficit, decrease in Money Supply, and increase in GDP
g) increase in Government Deficit, increase in Money Supply, and decrease in GDP
h) increase in Government Deficit, increase in Money Supply, and increase in GDP
i) none of the above

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Principles of Macroeconomics: Final Exam, Sample #3

6.

What is the effect of a decrease in the tax rate on equilibrium GDP (Y), interest rate (r), and
Investment (I as a function of r not Y)?
a) decrease in Y, decrease in r, decrease in I
b) decrease in Y, decrease in r, increase in I
c) decrease in Y, increase in r, decrease in I
d) decrease in Y, increase in r, increase in I
e) increase in Y, decrease in r, decrease in I
f) increase in Y, decrease in r, increase in I
g) increase in Y, increase in r, decrease in I
h) increase in Y, increase in r, increase in I
i) none of the above

7.

Suppose that an economy is presently at full employment. What is the long-run equilibrium
effect on Aggregate Expenditure of an increase in government spending?
a) Aggregate Expenditure decreases because the interest rate rises and Prices rise
b) Aggregate Expenditure doesnt change because the interest rate and Prices rise
c) Aggregate Expenditure doesnt change because the interest rate rises
d) Aggregate Expenditure doesnt change because Prices rise
e) Aggregate Expenditure increases because government spending increases
f) none of the above

8.

Suppose that an economy is initially in short-run equilibrium with considerable

unemployment. What is the market mechanism that brings about full employment in the longrun?
a) factor prices fall and Short-run Aggregate Supply decreases (shifts up)
b) factor prices fall and Short-run Aggregate Supply increases (shifts down)
c) factor prices rise and Short-run Aggregate Supply decreases (shifts up)
d) factor prices rise and Short-run Aggregate Supply increases (shifts down)
e) Aggregate Demand decreases
f) Aggregate Demand increases
g) none of the above

9.

Suppose that an economy is presently at potental (full employment) income. What is the
short-run and long-run equilibrium effect (relative to initial equilibrium) on the Price level (P)
and real GDP (Y) of a significant decrease in the price of oil?
a) decrease in P and decrease in Y in the short-run and decrease in Y in the long-run
b) decrease in P and decrease in Y in the short-run and no change in Y in the long-run
c) decrease in P and increase in Y in the short-run and decrease in Y in the long-run
d) decrease in P and increase in Y in the short-run and no change in Y in the long-run
e) increase in P and decrease in Y in the short-run and decrease in Y in the long-run
f) increase in P and decrease in Y in the short-run and no change in Y in the long-run
g) increase in P and increase in Y in the short-run and decrease in Y in the longh) increase in P and increase in Y in the short-run and no change in Y in the long-run
i) none of the above

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Principles of Macroeconomics: Final Exam, Sample #3

10. Suppose that Canada has significant unemployment. Which of the following best describes
the effect on GDP (Y), the interest rate (r), and the exchange rate (E) of an increase in the
money supply if the exchange rate is flexible?
a) fall in Y because r falls and E depreciates
b) fall in Y because r rises and E depreciates
c) fall in Y because r falls and E appreciates
d) fall in Y because r rises and E appreciates
e) rise in Y because r falls and E depreciates
f) rise in Y because r rises and E depreciates
g) rise in Y because r falls and E appreciates
h) rise in Y because r rises and E appreciates
i) none of the above

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