CARLETON UNIVERSITY

Final
EXAMINATION
April 2015

DURATION: 2.5 HOURS No. of Students: 1265

Department Name & Course Number: ECON 1000/1002 A, B, C, D, V
Course Instructor(s): N. Rowe, C. Ayoo, P. Haddow, E.K. Lim, S. Ahmed
Authorized Memoranda
None.

Students MUST count the number of pages in this examination question paper before beginning to write, and
report any discrepancy immediately to a proctor. This question paper has 7 pages.

This examination paper MAY be taken from the examination room.

In addition to this question paper, students require: TWO (2) examination booklet s yes x no
a Scantron sheet yes no x

PLEASE READ ALL INSTRUCTIONS CAREFULLY

Note: This examination has three (3) sections.

PART A: MULTIPLE CHOICE (20 questions, 2 marks each). Answer ALL questions. Detach
answer sheet from examination paper and hand in answer sheet with exam booklets. USE
BLOCK CAPITAL LETTERS. (Total 40 Marks).

PART B: SHORTER QUESTIONS: Answer any FIVE (5) of the questions. Each
question is worth 8 marks. Answer in main exam booklet. (Total 40 Marks)

PART C: LONGER QUESTIONS: Answer any ONE (1) of the questions. Each
question is worth 20 marks. Answer in extra exam booklet (Total 20 Marks)

Please note: Answer parts B & C in separate exam booklets!

 RECORD ANSWERS ON LAST PAGE/ANSWER SHEET

1. Suppose that 25 years ago a country had nominal GDP of 1000, a GDP deflator of 100, and a
population of 100. Today, that country has a nominal GDP of 3000, a GDP deflator of 200, and a
population of 150. What happened to the real GDP per person?
a. It more than doubled.
b. It rose, but less than doubled.
c. It fell.
d. It did not change.

2. If the production function for an economy had constant returns to scale, the labour force doubled,
and all other inputs stayed the same, what would happen to real GDP?
a. It would stay the same.
b. It would increase by 50 percent.
c. It would increase, but by something less than double.
d. It would double.

3. In computing GDP, what is investment?

a. Spending on stocks, bonds, and other financial assets
b. spending on real estate and financial assets
c. spending on new capital equipment, inventories, and structures, including new housing
d. spending on capital equipment, inventories, and structures, excluding household purchases of
new housing

4. How does the supply of loanable funds curve slope?

a. upward because an increase in the interest rate induces people to save more
b. downward because an increase in the interest rate induces people to save less
c. downward because an increase in the interest rate induces people to invest less
d. upward because an increase in the interest rate induces people to invest more

5. What is the effect of anything that makes the efficiency wage rise relative to the market-clearing
wage?
a. It increases both the quantity demanded and the quantity supplied of labour.
b. It decreases both the quantity demanded and the quantity supplied of labour.
c. It increases the quantity demanded and decreases the quantity supplied of labour.
d. It decreases the quantity demanded and increases the quantity supplied of labour.

6. How can the Bank of Canada increase the money supply?

a. by conducting open-market sales and raising the bank rate
b. by conducting open-market sales and lowering the bank rate
c. by conducting open-market purchases and raising the bank rate
d. by conducting open-market purchases and lowering the bank rate
 7. How can the Bank of Canada directly protect a bank during a bank run?
a. by increasing reserve requirements
b. by selling government bonds to the bank
c. by lending reserves to the bank
d. by penalizing the bank in trouble

8. When the money market is depicted in a graph with the value of money on the vertical axis, as the
price level increases, how does the quantity of money demanded or supplied change?
a. The quantity of money demanded increases.
b. The quantity of money demanded decreases.
c. The quantity of money supplied increases.
d. The quantity of money supplied decreases.

9. Which of the following best characterizes the effects of monetary policy?

a. Monetary policy is neutral in both the short run and the long run; therefore, it does not affect real
variables.
b. Monetary policy is neutral in the long run, but it has big effects on real variables in the short run.
c. Monetary policy has big effects on real variables in both the short run and the long run.
d. Monetary policy has big effects on real variables in the long run, but is neutral in the short run.

10. According to the theory of purchasing-power parity, what must the nominal exchange rate between
two countries reflect?
a. the different price levels in those countries
b. the different resource endowments in those countries
c. the different income levels in those countries
d. the different standards of living between those countries

11. When a countrys central bank decreases the money supply, which of the following best predicts the
consequences?
a. Its price level rises, and its currency appreciates relative to other currencies in the world.
b. Its price level falls, and its currency appreciates relative to other currencies in the world.
c. Its price level rises, and its currency depreciates relative to other currencies in the world.
d. Its price level falls, and its currency depreciates relative to other currencies in the world.

12. In an open economy, which of the following does the market for loanable funds take as given?
a. saving
b. investment
c. exchange rate
d. real interest rate

13. What is net capital outflow equal to?

a. national saving minus the trade balance
b. domestic investment plus national saving
c. national saving minus domestic investment
d. domestic investment minus national saving
14. When taxes increase, consumption decreases. How is this situation represented in the aggregate
demand and aggregate supply model?
a. by a movement to the left along a given aggregate-demand curve
b. by shifting aggregate demand to the left
c. by shifting aggregate supply to the left
d. by a movement to the right along a given aggregate-supply curve

15. Which of the following would cause prices to fall and output to rise in the short run?
a. Short-run aggregate supply shifts right.
b. Short-run aggregate supply shifts left.
c. Aggregate demand shifts right.
d. Aggregate demand shifts left.

16. When the interest rate increases, how do the opportunity cost of holding money and the quantity of
money demanded change?
a. The opportunity cost of holding money increases, so the quantity of money demanded increases.
b. The opportunity cost of holding money increases, so the quantity of money demanded decreases.
c. The opportunity cost of holding money decreases, so the quantity of money demanded increases.
d. The opportunity cost of holding money decreases, so the quantity of money demanded
decreases.

17. Which of the following tends to make aggregate demand shift right farther than the amount that
government expenditures increase?
a. the crowding-out effect
b. the multiplier effect
c. the wealth effect
d. the interest-rate effect

18. In which of the following situations would the long-run aggregate-supply curve shift right?
a. if the government were to increase the minimum-wage
b. if the government were to make unemployment benefits more generous
c. if the government were to raise taxes on investment spending
d. if the government were to increase immigration

19. If policymakers expand aggregate demand, what happens to inflation and unemployment?
a. Inflation falls, but unemployment rises.
b. Inflation and unemployment fall.
c. Inflation and unemployment rise.
d. Inflation rises, but unemployment falls.

20. Suppose the economy goes into recession. Which of the following is a list of things policymakers
could do to try to end the recession?
a. increase the money supply, increase taxes, and increase government spending
b. increase the money supply, increase taxes, and decrease government spending
c. increase the money supply, decrease taxes, and increase government spending
d. decrease the money supply, increase taxes, and decrease government spending
 PART B (Use the MAIN BOOKLET) ANSWER ANY 5 QUESTIONS

1. A) Explain the difference between gross investment and net investment

B) Explain the difference between saving and investment
C) Explain the difference between Gross Domestic Product and Gross National Product
D) Explain the difference between nominal GDP and real GDP

2. A) How does the Consumer Price Index differ from the GDP deflator?
B) Explain what is meant by the substitution bias in the CPI.
C) If food prices increase by 10%, and people always spend 25% of their total consumption
expenditure on food, how much will the CPI increase (all other prices stay the same)?

3. The Bank of Canada currently targets 2% inflation. If the Bank of Canada instead targets 5%
inflation, explain how the increased rate of inflation from 2% to 5% would affect: nominal
interest rates, real interest rates, saving, and investment.

4. A) Explain what is meant by Purchasing Power Parity.

B) If a haircut costs $20 in Canada and the same haircut costs 300 Yen in Japan, what does
PPP predict the exchange rate will be?
C) Will PPP usually work better or worse for goods like cars than for goods like haircuts?
Explain why.

5. Suppose the Canadian government puts restrictions on imports. Explain, with the aid of
diagrams, how this policy would affect Net Exports and the real exchange rate.

6. A) Explain what each of the four terms in MV=PY mean.

B) If V is constant, and real GDP grows at 2.5% per year, what does the Bank of Canada
need to do to hit its 2% inflation target?
C) Explain how your answer might change if there were a growing use of credit cards.

7. Country A has a permanently lower unemployment rate than country B. Use two different
theories that might explain this difference.

8. A) Explain what would happen to the money supply, and to bank loans, if a change in the law
meant that commercial banks were required to keep 100% reserves.
B) If the central bank wanted to keep the money supply constant when the law changed, what
sort of Open Market Operation should it do?

9. A new invention creates a new investment opportunity. Using a diagram, explain how this
will affect saving, investment, Net Capital Outflow, and the rate of interest
A) in a closed economy,
B) in a small open economy.
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 PART C (Use the ADDITIONAL BOOKLET) ANSWER ANY ONE QUESTION

1. A) Explain the Sticky Wage theory of the Short Run Aggregate Supply curve.
B) For a closed economy in which the Sticky Wage theory is true, the central bank reduces
the level of the money supply by 10%. Explain, with the aid of diagrams, how this will
affect the price level, real wages, and employment, BOTH in the short run AND in the
long run.

2. Suppose Canada is initially on the Long Run Aggregate Supply curve, but the national debt is
increasing over time because the government is running a budget deficit. The government
decides to cut spending to eliminate the deficit to stop the debt rising. Critics say that this
policy will cause a recession. Explain, with the aid of diagrams, whether the critics are right
or wrong, assuming a flexible exchange rate. Explain whether your answer would be
different if the Bank of Canada had a fixed exchange rate policy.

3. With the aid of a diagram, explain the trade-off between unemployment and inflation, both
for the Long Run and for the Short Run. The Bank of Canada currently targets 2% inflation.
Explain the advantages and disadvantages of lowering the inflation target to 0%.

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 PART A. MULTIPLE CHOICE ANSWER SHEET

NAME___________________________________________________________
[SURNAME, GIVEN NAME]

STUDENT NUMBER_______________________________________________

USE UPPER CASE LETTERS TO ANSWER. (BLOCK CAPITALS)

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*Detach page and hand in with booklets*