ECMA06 Final Version A Winter 2012 Page 1 of 12

ECMA06 Introduction to Macroeconomics: A Mathematical Approach

Final Exam, Winter 2012
Version A

Date & Time: Tuesday, April 17, 2012, 9:00am 12:00noon
Instructor: Iris Au

Aids Allowed: Non-programmable calculator
** Calculators that can be stored information will be confiscated. If the confiscated calculator is
found to contain notes of any kind, academic consequences will ensue.
Time Allowed: 180 minutes
Total number of pages (including the cover page): 11
Total Points: 100

Instructions please read carefully
1) On the scantron answer sheet, you must:
PRINT your family name and first name.
Enter your student number as the identification number.
FILL IN THE BUBBLES under you name and student number.
FILL IN THE BUBBLE ASSOCIATED WITH YOUR TEST VERSION (VERSION A).
2) If you fail to carry out all tasks indicated in part 1, 2 marks will be deducted from your final score.
3) On the answer booklet, you must fill in your name and student number. DO NOT REMOVE THE
STAPLE FROM THE ANSWER BOOKLET. If you do so, 2 marks will be deducted from your
final score.
4) There are 35 multiple-choice questions (and a 36
th
question which will confirm your exam version).
For each question, choose the correct answer. If two multiple-choice answers both seem to be
approximately correct, choose the best of the two answers. Put your answers on the scantron
sheet provided by filling in the appropriate bubble. If answers are not written on the scantron
sheet, there will be no marks given for answers. Each correct answer is worth 2 marks (except for
Question 36, where the correct answer simply confirms your exam version); incorrect answers
receive 0 mark (there is no deduction for wrong answers).
5) When entering your answers on the scantron sheet:
Use a medium (HB) pencil and fill in the bubble neatly and completely.
Erase any changes as completely as possible.
Be very careful to place each answer in the correct place.
6) Questions 37 39 are short-answer questions and are to be answered in the ANSWER BOOKLET.
Make sure you provide sufficient explanation in order to receive credit for these questions.
7) At the end of the exam, make sure you submit the scantron sheet and the answer booklet. You
may take the rest of the exam away with you, so you can use the front and back of these pages for
your rough work. If you wish to keep a record of your answers, make a note of them on the exam.
8) Questions related to the content of the exam will NOT be answered.

Good luck & have a great summer!
ECMA06 Final Version A Winter 2012 Page 2 of 12
PART I MULTIPLE CHOICE QUESTIONS (70 MARKS 2 MARKS PER QUESTION)

Question 1
Which of the following transaction(s) would affect consumption?

A) A family buys a second-hand refrigerator.
B) A family buys a used car.
C) A family buys a new house.
D) A & B.
E) A & C.
F) B & C.
G) A, B, & C.
H) None of the above.


Question 2 Question 4: Utopia consumes 4 goods (CDs, food, monitors, and printers). Table 1
shows the quantities of goods exchanged and their prices in 2010 and 2011. The Statistics Department
chooses 2010 as the base year. The quantities of goods are measured in hundreds.

Utopia produced all the goods with the exception of 40% of food (which is purchased abroad).
Households consumed 3 goods, and they are all the food, 40% of the CDs, and 60% of the monitors.
Printers are the only good consumed by the government of Utopia, and the government bought half of
them. The country sold 30% of CDs to foreigners. The remaining goods are bought by firms.

Table 1
2010 2011
Goods Price Quantity (in hundreds) Price Quantity (in hundreds)
CDs $40 30 $50 20
Food $60 12 $60 12
Monitors $100 20 $120 22
Printers $70 10 $75 12

Question 2
What is the GDP deflator in 2011 (rounded to 2 decimal places)?

A) 85.51 B) 86.96 C) 114 D) 115 E) 116.39
F) 86.69 G) 100 H) 114.77 I) 115.35 J) 117.31

Question 3
Find the consumer price index in 2011 (rounded to 2 decimal places).

A) 117.05 B) 116.39 C) 115 D) 100 E) 85.51
F) 116.95 G) 116.24 H) 114 I) 86.96 J) 85.44


ECMA06 Final Version A Winter 2012 Page 3 of 12
Question 4
Based on the information given in Table 1, which of the following statement(s) is(are) true?

I) The countrys trade balance rises by 60 (hundreds).
II) The set of prices used to compute the GDP deflator and the CPI are not the same.
III) Change in the price of printers has a larger impact on the GDP deflator than on the CPI.

A) Only I B) Only II C) Only III D) I & II E) I & III
F) II & III G) I, II, & III H) None of the above.


Question 5
The labour market statistics of an economy are given as follows: 17045 adults have full-time jobs; 2585
adults are employed on part-time basis; 1610 adults are actively looking for job; and 5110 adults are
retired people, full-time housewives, and full-time students. Based on the information given, the labour
force participation rate and the unemployment rate are:

Answer Labour force participation rate, % unemployment rate, %
A 74.5% 6.1%
B 74.5% 7.6%
C 74.5% 8.6%
D 80.6% 6.1%
E 80.6% 7.6%
F 80.6% 8.6%
G 92.4% 6.1%
H 92.4% 7.6%
I 92.4% 8.6%
J Insufficient information to tell Insufficient information to tell


Question 6
Between 1998 and 2011, the consumer price changed from 76.8 to 119.4 while Sophias (nominal)
income changed from 13400 to 23470. What is the average annual rate of change in Sophias real
income in these 13 years (rounded to 1 decimal place)?

A) 1% B) 3.5% C) 4.3% D) 4.4% E) 5.8%
F) 0% G) 0.9% H) 3.3% I) 4.2% J) 0.9%


ECMA06 Final Version A Winter 2012 Page 4 of 12
Question 7 Question 11: The economy in question has flexible prices and can be described by the
AD-AS model. Suppose you are given the following information:

Aggregate expenditure: AE = 2000 4P + 0.2Y
Aggregate supply (AS): P = (140 + 0.1Y)

125
w
, where w = wage rate
Full-employment level of output: YFE = 1200

Initially, this economy is in its long-run equilibrium, and the equilibrium price level is 260 while the
equilibrium wage is 125.

Suppose there is a change in consumption preference such that the new AE becomes:
Aggregate expenditure: AE = 1850 4P + 0.2Y

Question 7
Which of the following statement is true (after the change in consumption)?

A) AD curve shifts horizontally to the left by 187.5.
B) AD curve shifts horizontally to the left by 150.
C) AD curve shifts horizontally to the left by 120.
D) AD curve shifts horizontally to the left by 37.5.
E) AD curve shifts horizontally to the left by 30.
F) AD curve shifts horizontally to the right by 187.5.
G) AD curve shifts horizontally to the right by 150.
H) AD curve shifts horizontally to the right by 120.
I) AD curve shifts horizontally to the right by 37.5.
J) AD curve shifts horizontally to the right by 30.

Question 8
When the economy reaches its short-run equilibrium, the equilibrium level of output would change by:

A) 234.375 B) 187.5 C) 125 D) 46.875 E) 37.5
F) + 234.375 G) + 187.5 H) + 125 I) + 46.875 J) + 37.5

Question 9
When the economy reaches its short-run equilibrium, the change in the price level is:

A) 9.375 B) 12.5 C) 28.125 D) 30 E) 0
F) + 9.375 G) + 12.5 H) + 28.125 I) + 30 J) Cant tell

Question 10
Find the wage rate when the economy reaches its long-run equilibrium (rounded to 2 decimal places).

A) 154.15 B) 134.72 C) 118.99 D) 113.53 E) 112.20
F) 143.94 G) 125 H) 115.28 I) 112.37 J) 106.97

ECMA06 Final Version A Winter 2012 Page 5 of 12
Question 11
Now, suppose the government finds the change in output level in Question 8 undesirable and wants to
keep it at its initial level by changing government spending. Find the change in government spending
that would achieve this goal.

A) 37.5 B) 100 C) 125 D) 150 E) 187.5
F) + 37.5 G) + 100 H) + 125 I) + 150 J) + 187.5


Question 12
An investment project costs $870 today and $400 a year from now. The project will generate an income
of $410 in year 1; $475 in year 2; $540 in year 3; and after that there is nothing left. Which of the
following statement(s) is(are) true?

I) If the current interest rate is 5%, then this investment project is profitable.
II) If the current interest rate is 7%, then this investment project is profitable.
III) If the current interest rate is 5%, then this investment project is not profitable.
IV) If the current interest rate is 7%, then this investment project is not profitable.

A) I only B) II only C) III only D) IV only E) I & II
F) I & IV G) II & III H) III & IV I) None of the above.


Question 13
You hold a bond that has a face value of $1000 and a coupon rate of 2%, and the bond matures in 3
years. If you sell your bond today, how much will you receive if the current interest rate is 1.5%
(rounded to 2 decimal places)?

A) $703.18 B) $894.68 C) $975.44 D) $985.58 E) $995.43
F) $1000 G) $1014.56 H) $1029.78 I) $1060 J) $1114.16


Question 14
Suppose you pay $983.80 today for a 2-year bond that has a face value of $1000 and a coupon rate of
2.5%, what is the yield (return) of holding this bond (rounded to 2 decimal places)?

A) 26.14% B) 4.12% C) 3.74% D) 3.35% E) 3.31%
F) 2.50% G) 2.44% H) 2.07% I) 0.85% J) 0.81%


ECMA06 Final Version A Winter 2012 Page 6 of 12
Question 15 Question 18: Omega has a very simple banking system, in which there is only one
chartered bank (The First Bank). The government of Omega imposes a minimum required reserve ratio
of 4%. Individuals in Omega hold a fixed amount of $350 in the form cash to facilitate their daily
transactions and will deposit any excess amount of money into their bank accounts. The initial balance
sheet of the First Bank is as follow:

Assets Liabilities
Reserves $200 Demand deposits $4000
Loans $3950 Shareholder equity $150

Note: Unless otherwise stated, the First Bank will hold the excess reserves fixed at the current level as
shown in the initial balance sheet and will lend out any surplus of reserves beyond this.

Question 15
Suppose the central bank of Omega conducts an open market sale of $75. When equilibrium in the
banking sector has been restored, the new level of MS is:

A) $6300 B) $6225 C) $5875 D) $5475 E) $3225
F) $2475 G) $2400 H) $2125 I) $1875 J) $1800


Questions 16 17: Return to the initial situation. Suppose there is a change in preference of holding
money such that people reduce their cash holdings by $90 by depositing the cash in their bank accounts.

Question 16
When the banking system is back to equilibrium, the ultimate change in the demand deposits is:

A) $3000 B) $2910 C) $2560 D) $2250 E) $2160
F) + $3000 G) + $2910 H) + $2560 I) + $2250 J) + $2160

Question 17
When the banking system is back to equilibrium, the overall change in money supply is:

A) $3000 B) $2910 C) $2560 D) $2250 E) $2160
F) + $3000 G) + $2910 H) + $2560 I) + $2250 J) + $2160

Question 18
Return to the initial situation. In wake of recent banking problems in other countries, the government of
Omega raises the required reserve ratio to 5%. After the increase in the required reserve ratio, the First
Bank decides not to hold any excess reserves. When the banking system is back to equilibrium, the
overall change in money supply is:

A) $1800 B) $1000 C) $800 D) $200 E) $0
F) + $1800 G) + $1000 H) + $800 I) + $200 J) Cant tell

ECMA06 Final Version A Winter 2012 Page 7 of 12
Question 19 Question 28: An economy with fixed prices can be described by the following equations.

Consumption: C = 500 + 0.8DI; where DI = disposable income
Investment: I = 375 500(r 0.03)
Government spending: G = 200
Taxes: T = 0.25Y 85
Transfers: TR = 340 0.1Y
Exports: X = 400 250(E 1.2); E = # of foreign currency per domestic currency
Imports: IM = 120 + 0.12Y + 400(E 1.2)

NOTE: Unless otherwise stated, r is held constant at 0.03 (3%) and E is held constant at 1.2.

Question 19
Find the equilibrium level of output (rounded to the nearest unit).

A) 8475 B) 3852 C) 3781 D) 3531 E) 3225
F) 3025 G) 2825 H) 2598 I) 1918 J) 1348

Question 20
What is the equilibrium level of trade balance (rounded to nearest unit)?

A) 737 B) 59 C) + 37 D) + 118 E) + 280
F) 182 G) 32 H) + 50 I) + 133 J) + 400

Question 21
Find the equilibrium level of national saving (rounded to the nearest unit).

A) 193 B) 316 C) 343 D) 364 E) 412
F) 425 G) 455 H) 508 I) 655 J) 775


Questions 22 26: Suppose there are rumours that the government may increase the corporate profit
tax in the near future. As a result, autonomous investment falls by 12%.

Question 22
The change in the equilibrium level of output after this change in autonomous investment is (rounded to
the nearest unit):

A) 75 B) 102 C) 125 D) 225 E) 550
F) + 75 G) + 102 H) + 125 I) + 225 J) + 550


ECMA06 Final Version A Winter 2012 Page 8 of 12
Question 23
What is the change in the budget balance as a result of this change in autonomous investment (rounded
to 2 decimal places)?

A) + 43.72 B) + 33.75 C) + 26.25 D) + 18 E) + 15.34
F) 43.72 G) 33.75 H) 26.25 I) 18 J) 15.34


Question 24
Now take the change in interest rate into account while holding the exchange rate constant. If the
change in autonomous investment causes the interest rate, r, to fall by 0.6 percentage point (i.e., interest
rate decreases by 0.006), find the decrease in the equilibrium level of output (compare your answer to
the initial equilibrium, i.e., the one in Question 19 & rounded your answer to the nearest unit).

A) 545 B) 210 C) 100 D) 95 E) 80
F) 71 G) 70 H) 57 I) 55 J) 5


Question 25 Question 26: Now take the changes in interest rate and exchange rate into consideration.
Suppose the change in autonomous investment leads to a reduction in interest rate, r, by 0.6 percentage
point (i.e., interest rate decreases by 0.006) and a depreciation of domestic currency by 0.03 (i.e., E falls
by 0.03).

Question 25
Compare to the equilibrium prior to any change (i.e., the equilibrium in Question 19), the change in the
equilibrium level of output is (rounded to 1 decimal place):

A) + 37.5 B) + 32.5 C) 22.5 D) 24.9 E) 37.5
F) 38.1 G) 87.5 H) 89.9 I) 102.5 J) 512.5

Question 26
Compare to the equilibrium prior to any change (i.e., the equilibrium in Question 19), what is the change
in the equilibrium level of trade balance (rounded to the nearest unit)?

A) 44 B) 24 C) + 15 D) + 22 E) + 25
F) 35 G) 7 H) + 20 I) + 24 J) + 81


ECMA06 Final Version A Winter 2012 Page 9 of 12
Question 27 Question 28: Return to the initial equilibrium prior to the change in autonomous
investment (i.e., return to the initial situation dealt with in Questions 19 21).

The government is running a budget surplus initially. Worrying about the possibility of a slowdown in
the economy, the government decides to run expansionary fiscal policy to stimulate the economy. At
the same time, it worries about the potential negative impact of running a budget deficit. Thus, the
government decides to run an expansionary fiscal policy (via a change in G while keeping taxes and
transfer payments structures constant) and simultaneously to keep the budget in balance.

Question 27
Find the level of output that would achieve these goals, i.e., stimulating the economy while keeping the
budget in balance (rounded to the nearest unit).

A) 1126 B) 4100 C) 4190 D) 4416 E) 4824
F) 1783 G) 4112 H) 4280 I) 4760 J) 4960

Question 28
What is the level of government spending that will keep the budget in balance (rounded in 1 decimal
place)?

A) 30.8 B) 119.2 C) 1010 D) 1014.2 E) 1041.5
F) 1073 G) 1120.6 H) 1241 I) 1263.4 J) 1311


Question 29 Question 31: The country is an open economy. The following table provides entries of
its balance of payment accounts (assume there are no other international transactions).

Items in the balance of payments accounts Dollars
Exports of goods $370
Imports of goods $290
Payments for services received from foreigners $430
Receipts for services provided to foreigners $455
Interests & dividends paid to foreigners $104
Interests & dividends received from foreigners $97
Sales of domestic assets to foreigners $218
Purchases of foreign assets by domestic residents $235
Sales of foreign assets by the central bank $123
Purchases of foreign assets by the central bank $204

Question 29
Find the current account balance.

A) 112 B) 98 C) 73 D) 48 E) 17
F) 105 G) 80 H) 62 I) 25 J) 98

ECMA06 Final Version A Winter 2012 Page 10 of 12
Question 30
Ignoring the transactions carried by the central bank, the countrys balance on capital account is:

A) 98 B) 64 C) 24 D) 17 E) 10
F) + 98 G) + 64 H) + 24 I) + 17 J) + 10

Question 31
Based on the information given, which of the following statement(s) is(are) true?

I) Ignoring the transactions carried by the central bank, the country experiences capital
outflows.
II) The countrys stock of official reserves increases.
III) The country runs a current account deficit.

A) Only I B) Only II C) Only III D) I & II E) I & III
F) II & III G) I, II, & III H) None of the above.


Question 32
Which of the following statement(s) is(are) true about the banking system?

I) Commercial banks can affect the money supply even if they hold 100% reserves.
II) To offset the effect of an increase in currency-demand deposit ratio on loans, the central bank
should carry open market sales.
III) Holding all else constant, there will be a reduction in money supply when the overnight rate
increases.

A) Only I B) Only II C) Only III D) I & II E) I & III
F) II & III G) I, II, & III H) None of the above.


Question 33
Which of the following statement(s) is(are) true about fiscal policy?

I) A reduction of the deficit that is achieved by lowering spending on infrastructure may harm
the economy in the long term.
II) The crowding out effect associates with an expansionary fiscal policy will be smaller if
investment is sensitive/responsive to change in the interest rate.
III) An equal reduction in government spending and (autonomous) taxes will have no impact on
output and unemployment rate.

A) Only I B) Only II C) Only III D) I & II E) I & III
F) II & III G) I, II, & III H) None of the above.



ECMA06 Final Version A Winter 2012 Page 11 of 12
Question 34
Which of the following statement(s) is(are) true about an open economy with a flexible exchange rate?

I) Change in the exchange rate will enlarge the shift in aggregate expenditure when there is a
fall in (autonomous) consumption.
II) An increase in the demand for money will lead to an appreciation of the currency.
III) When a Canadian resident builds a steel mill in Lithuania, this purchase represents
investment for the Canadian resident and imports of goods for Canada.

A) Only I B) Only II C) Only III D) I & II E) I & III
F) II & III G) I, II, & III H) None of the above.


Question 35
Which of the following statement(s) is(are) true about the central bank?

I) The central bank has the ability to shift the aggregate demand curve leftwards when it
switches government deposits from a chartered bank into the central bank.
II) The central bank can offset the effect of a purchase of foreign currency in the foreign
exchange market on money supply by carrying an open market sale of the same amount.
III) The central bank can help to avoid a wage-price spiral by having an inflation target.

A) Only I B) Only II C) Only III D) I & II E) I & III
F) II & III G) I, II, & III H) None of the above.


Question 36 (no mark)
What is the version of the exam which you have just written? Hint: Correct answer is A.
A) Version A B) Version B C) Version C D) Version D



ECMA06 Final Version A Winter 2012 Page 12 of 12
PART II SHORT-ANSWER QUESTIONS (30 MARKS)

Questions 37 (10 marks)
A closed economy with flexible prices is currently in its long-run equilibrium. Suppose the country
discovers a large oil reserve. As a result, the oil price falls significantly.
a) Use words and the linked diagram to explain the effect of this change in oil price in the short run
(assume there is no crowding out/feedback effect). (5 points)
b) Use words and the (same) linked diagram to describe what happens to the economy if the
government wants to keep output at YFE in the short run by changing government spending. (5
points)
Be sure to identify which part of your answer belongs to part (a) and part (b) respectively.

Question 38 (10 points)
a) A closed economy with flexible prices is initially in its long-run equilibrium. Now, suppose there is
an increase in autonomous consumption. What happens to output and price in the short run? In the
long run? Explain in words and ONE AS-AD diagram. (7 points)
b) (Not related to part a) The Bank of Canada acts as the lender of last resort. Explain, in 30 words or
less, how this could help to stabilize the Canadian banking system. (3 points)


Question 39 (10 points)
Canada has a flexible exchange rate. Suppose the Government of Canada raises taxes.
a) Briefly explain (in words only) how this change in taxes would affect AE and output. (8 marks)
b) What happens to Canadas trade balance? Explain. (2 points).