ec140 final cheat (1)

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Wilfrid Laurier University *

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EC140

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Economics

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Feb 20, 2024

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Part 1 - 15 questions (ch. 4-7) Chapter 4 Output gap and potential GDP If canada’s nominal gdp in 2021 was $2.5 trillion and Canada is experiencing an inflationary gap, then Canada’s potential GDP in 2021 is most likely: Answer: $2.4 trillion Chapter 5 BRUH NO LC???? Chapter 6 Inflation rate In dec 2021, the CPI for ON was 146.0. In dec 2022, the CPI was 154.8. What was the annual inflation rate for ON in the past year? Answer: (154.8-146.0)/146.0 = 6.03% Participation In ON, among core age women (age 25-54) we have the following data: pop. 7600700 employed 6214900 unemployed 232400 What is labour force part. Rate? Answer: LF/pop = (232.4+6214.9)/7600.7 = 84.83 Average propensity to consume If C=50+0.5Yd and Y=Yd=200 what is the APC Answer: C=50+0.5(200) = 150 APC=C/Yd = 150/200 = 0.75 Consumption At an income level where the consumption function lies below the 45° line, households Answer: have positive savings Solving for equilibrium If C=50+0.6Yd and I 0 =50, what is equilibrium income Y? Answer: AE=50+0.6Y+50=Y, 100+0.6Y=Y, 100=0.4Y, Y=250 Savings If C=50+0.6Yd and I 0 =50, what is equilibrium savings? Answer: AE=Y=250, Y=C+S, 250=50+0.6(250)+S, 250=50+150+5 S=50 Thrift People decide to save more, and the consumption function shifts down, and savings function shifts up. Now C=20+0.6Yd and I=50. in new equilibrium what is equilibrium savings? Answer: AE=70+0.6Y=Y, 70=0.4Y, Y=175, S=I=50 Multiplier If C=50+0.6Yd and I=50 what is the SM? Answer: 1/(1-0.6) = 2.5 Unemployment and employment Part. rate M: 94.7% W: 89.2% Emp. rate M: 91.4% W: 85.6% What is the unemployment rate for women? Answer: ((part. Rate-emp. rate)/part. rate) x100, ((89.2-85.6)/89.2)x100 = 4.04 Investment In a simple macro model without government or trade, C=100+0.75Yd, and equilibrium national income is 1000. All investment is autonomous. What is the level of investment in the economy? Answer: AE=C+I=Y, 100+0.75(1000)+I=1000 100+750+I+1000, I=150 Chapter 7 Income change Refer to the figure. Which of the following would shift AE such that equilibrium real GDP would be equal to Y a ? Answer: autonomous investment decreases Government Total tax revenue is $200 billion. The government spends $75 billion on government purchases, and $100 billion on transfer payments. Which of the following statements is true? Answer: the government has a budget surplus of $25 billion T=200-100=100, T-G=100-75= 25>0 = surplus Net exports The US economy improves, leading to higher US national income. Which of the following is true for the Canadian economy? Answer: net exports increase because canadian exports increase Marginal propensity to spend An economy is characterized by the following info. C=50+0.6Yd, I=100, G=50, T=0.2Y, X=100, and IM=0.1Y. What is the marginal propensity to spend? Answer: z = MPC(1-t)-m, MPC=0.6, t=0.2, m=0.1, z=0.6(1-0.2)-0.1 = 0.38 Income In an economy with no government and no trade, if C=150+0.8Yd and I=150, what is equilibrium income? Answer: 150+0.8Yd+150=Y, 300+0.8Yd=Y, 300=0.2Y, 1500=Y Shift in AE The figure represents the CDN economy. What could cause the shift from AE 1 to AE 2 ? Answer: rise in US income National income An economy is characterized by the following information C=50+0.6Yd, I=100, G=50, T=0.2Y, X=100, IM = 0.1Y. What is equilibrium national income? Answer: AE=C+I+G+X-IM, =50+100+500+100(0.6(1-0.2)-0.1), Y=300+0.38Y, Y=484 (rounded) Government An economy is characterized by the same variables above^. What is the government budget surplus or deficit? Answer: T=0.2(484) = 96.8, 96.8-50=46.8=surplus Business cycle The trough of a business cycle is associated with: Answer: high cyclical unemployment Interest rates An increase in the interest rate in Canada will have what effect on desired AE? Answer: reduction, as it reduces both C and I Parallel shifts The figure up there^^ represents the CDN economy. Which of the following would cause a shift from AE1 to AE2? Answer: rise in business confidence OR increase in government purchases, G Consumption An economy is characterized by a consumption function. C=300+0.8Yd and a government net tax rate, t=0.25. If national income is Y=1000 what is the level of private savings, S, in the economy? Answer: C=300+0.8(1-0.25)x1000 = 900 S=Yd-C=(1-0.25)x1000-900 = -150 Government A government has government spending, G=2000, and net tax revenue of T=0.15Y. What is the value of national income for which the government budget is balanced? Answer: G=T, 2000=0.15Y, 13 333.33=Y Exports and income In the simple macro model, an increase in Canadian exports Answer: causes an increase in Canadian income Simple multiplier In an economy, the MPC is 0.6, the marginal propensity to import is 0.1 and the net tax rate is 0.25. The government increases government spending by $100 million. What is the effect on equilibrium national income? Answer: z=0.6(1-0.25)-0.10 = 0.35, SM=1/(1-0.35) = 1.54, 100 x 1.54 = 154 000 000 Part 2 - 15 questions (ch8-12) Chapter 8 Reduction in AE Which of the following events would cause the AE line to shift or rotate downwards? Answer: Increase in interest rates. Simple Multiplier Current estimates are that Canada has a marginal propensity to consume of 0.8, a net tax rate of 0.25, and a marginal propensity to import of 0.35. What is the simple multiplier in Canada? (Two decimal points.) Answer: z = 0.8(1-0.25)-0.35 = 0.25 SM = (1 / 1-0.25) = 1.33 Multiplier Effect Current estimates are that Canada has a marginal propensity to consume of 0.8, a net tax rate of 0.25, and a marginal propensity to import of 0.35. In a demand determined macro model with constant prices, a $10 billion increase in government spending would lead to an increase of $ ..... Billion in real GDP. (eg. $47.3 billion = 47.3) Answer: ΔY/ΔA = SM = 1.33 13.3 / 10 = 1.33

Wealth and Consumption An exogenous fall in the domestic price level has what effect? Answer: An increase in real wealth and consumption. AE Shifts Which of the following functions would cause the AE function to shift upwards in a parallel way? Answer: A decrease in the aggregate price level. Government The government increases government spending, while also reducing taxes. What change do we see in aggregate demand? Answer: A right shift of the AD curve. Canadian Prices Prices in Canada rise. What effect would this have on the aggregate demand (AD) curve in Canada? Answer: A movement up and left along the AD curve. U.S Prices Prices in the United States rise. What effect would this have on the aggregate demand (AD) curve in Canada? Answer: A right shift of the AD curve. Business Optimism If business optimism increases, what happens in the AD/AS model? Answer: Aggregate expenditure shifts up and aggregate demand shifts right. Supply Firms face falling input costs and improving technology. What happens to aggregate supply (AS)? Answer: AS Increases (shifts right) Input Costs Firms face rising input costs. In the AD/AS model, what is the effect on equilibrium price level and output? Answer: Price level rises, output falls. Chapter 9 Exchange Rates The Canadian exchange rate with the United States increases from $1.24 to $1.35. What is the short run effect in Canada? Answer: Aggregate demand shifts right. Equilibrium In the short-run, changes in government policy causes an increase in prices with no change in GDP. Which of the following changes is consistent with these effects? Answer: Minimum wage increases, tax rates decrease. Short Run Before the 2007/2008 financial crisis, the Canadian economy was functioning near its peak. The financial crisis led to a significant reduction in personal wealth in Canada and in other countries. In the short run, this would cause: Answer: Real GDP and the price level to decrease. Fiscal Response After the financial crisis, the Canadian government responded by increasing government spending. In an AD/AS model, the short term effect of this spending would be to: Answer: Shift the AD curve to the right. Output Gap In macroeconomics, the output gap is the difference between: Answer: Actual real income and potential real income. Tax Rates - Short Run In the short term, how does the economy respond to a decrease in net tax rates? Answer: The price level and output increase. Tax Rates - Long Term Assuming potential GDP does not change, what is the long run effect of a reduction in the net rate? Answer: Price level increases. Technology What is the long run effect of a permanent improvement in technology? Answer: Aggregate supply shifts right and potential GDP shifts right. Exports What is the long run effect of a permanent decrease in autonomous exports? Answer: Lower price level, no change in GDP. Hysteresis A lengthy recession may cause potential GDP to fall, due to hysteresis effects. In this case, what is the effect of a permanent decrease in autonomous exports? Answer: Lower price level, lower GDP. Aggregate Expenditure Consider the demand-determined model with constant prices. What effect would an appreciation of the Canadian dollar have on aggregate expenditure (AE)? Answer: Aggregate expenditure shifts/rotates down. Prices, Consumption, and Exports An exogenous increase in the domestic price level has what effect? Answer: A decrease in consumption and exports. AD Shifts Which of the following events would cause the AD function to shift to the left? Answer: A decrease in foreign incomes. Simple Multiplier The Canadian Government decides to spend $15 billion on a new rail line between Quebec City and Windsor. Consider our AD/AS model - if this increase in government spending shifts the AD-curve to the right by $25 billion, what must the marginal propensity to spend, z, in the Canadian economy? Answer: ΔY/ΔA = 25/15 = (1 / (1-z)) => 1-z = 15/25 => 1-z = 0.6 Z = 0.4 Tax Rates The government reduces the net tax rate. What change do we see in aggregate demand? Answer: Shifts right and becomes flatter. Supply Firms face rising input costs and improving technology. What happens to aggregate supply (AS)? Answer: The effect is uncertain. Equilibrium Consider the equilibrium of the AD/AS model. If both real output and the price level rise, this would likely be due to a: Answer: Rightward shift of the aggregate demand curve. Interest Rates In the equilibrium of the AD/AS model, an increase in interest rates in Canada would lead to: Answer: Price level falls, output falls. Equilibrium The price level falls and real GDP increases. Which of the following could lead to this outcome? Answer: Input prices fall. Production Technology Production technology improves and there is a reduction in the net tax rate. What is the effect on the price level and real GDP in Canada? Answer: Real GDP increases, uncertain effect on prices. Multiplier If the AS curve is upward sloping, the multiplier is: Answer: Positive and less than the simple multiplier. Chapter 10 Short run Which of the following would cause a decrease in the price level in the short run? Answer: an increase in desired savings (reduces consumption and shifts AD left) Long run Which of the following changes would cause a reduction in the price level in the long run? Answer: a reduction in aggregate demand Input prices If input prices for CDN firms decrease, what are the long-term consequences on the price level and GDP? Answer: no change in price level or real output Exchange rates - short run The CDN dollar depreciates with respect to the US dollar. What is the short-run impact on the price level and real GDP Answer: price level and real GDP increase Exchange rates - long run The CDN dollar depreciates with respect to the US dollar. What is the long-run impact on the price level and real GDP? Answer: price level increases, no change in real GDP Expansionary policy 1 Starting from long-run equilibrium, in which of the following situations would expansionary fiscal policy be an appropriate government response Answer: decrease in investment expenditure 2 if the CDN economy is operating with actual GDP lower than potential, which policy should the CDN government adopt to eliminate this gap? Answer: increase government spending on infrastructure OR reduce corporate taxes OR increase employment insurance transfers Growth

Which of the following policies is most likely to lead to long-term growth? Answer: reducing personal income taxes OR increase gov spending on infrastructure OR decrease EI transfers OR increase EI transfers OR reduce corporate income tax rates Savings - short run What effects does an increase in desired savings have on the economy in the short-run? Answer: reduction in the price level and real GDP (i think) Savings - long run If an increase in desired savings had no effect on potential GDP, what would be the effect on the economy in the long-run Answer: decrease in the price level, no effect on real GDP Savings Businesses become more optimistic about future economic performance - what is the effect on the equilibrium level of national savings in the long-run? Answer: equilibrium savings increases Stabilization 1 A global pandemic causes a reduction in aggregate demand. A policy of fiscal stabilization would respond by Answer: increasing gov spending OR increasing transfer payments 2 a global pandemic increases the cost of production for firms. A choice to use expansionary fiscal policy would have what consequence in the long run? Answer: the price level would be higher Savings - short run If canada successfully implemented a policy to increase desired savings, what effect would this have in the AD/AS model in the short-run? Answer: reduction in real GDP and price level Savings - long run If Canada implemented a policy to increase desired savings, what effect would this have on interest rates and investment in the long-run? Answer: reduction in interest rates and an increase in investment Neoclassical growth 1 Consider the neoclassical growth model. If population and the labour force increase by 3% and total capital does not increase, then: Answer: real GDP increases, real GDP per capita decreases 2 consider the neoclassical growth model. If population and the labour force are constant and total capital increases by 5% then: Answer: GDP per capita increases by less than 5% 3 consider the neoclassical growth model. If population and the labour force increase by 6% and total capital increases by 6%, then: Answer: real GDP increases and real GDP per capita is constant GDP per capita - short run In the short run, which of the following is most likely to increase real GDP per capita? Answer: an increase in desired consumption (shifts AD right) GDP per capita - long run In the long run, which of the following is most likely to increase real GDP per capita? Answer: an increase in desired savings Chapter 11 Gresham’s Law Gresham’s law predicts that: Answer: Undebased money will be driven from circulation. Functions of Money Which of the following is NOT a function of money? Answer: Measure of liquidity. Money Money can take the form of any one of the following except: Answer: A credit card New Money A chartered bank creates new money by: Answer: Making new loans New Deposits Banks have desired reserve ratios of 5% and households and people want to hold 5% of their money in cash. If there are new deposits into the banking system of $500, what is the total change in deposits? Answer: ΔDeposits = (New deposits)(1/c+v) = 500 x (1/0.1) =5000 New Deposits Banks have a desired reserve ratios of 2.5% and households and people want to hold 10% of their money in cash. The Bank of Canada sells government bonds for $20,000. What is the net change in the money supply? (Nearest dollar. Positive for increases, negatives for decreases.) Answer: Total Change = -20,000 x (1/10%+2.5%) = -160,000 Forms of Money Which of the following does not count as a form of money? Answer: A government of Canada bond. Chapter 12 Present value A bond pays out $500 in 1 year. The market interest rate is 10%. What is the PV of bond? Answer: PV=500/(1+0.10) = 454.545 Price and yield A decrease in the market interest rate will have what effect on the price and yield of a bond? Answer: price increases, yield decreases Money demand CDN GDP rose by 6.1% in 2021 and inflation was 5.1%. The demand for money has: Answer: increased (i think) Money supply 1 An increase in the money supply will lead to Answer: lower interest rates 2 what effect will a decrease in the money supply have on the AE curve? Answer: it shifts down 3 what effect will an increase in the money supply have on desired consumption? Answer: it increases Investment A decrease in the money supply causes an increase in interest rates. In the short-run, what is the effect on the quantity of investment? Answer: investment decreases Part 3 - 30 questions (ch. 13 - 16,19) Chapter 13 Bond Values/Yields The market price interest rate rises from 2% to 4%. The present value (and market price) of an existing bond …… and the yield …… Answer: Decreases, decreases Bank Rate Last week, the Bank of Canada maintained the target for the overnight rate at 4.5%. What is the current bank rate? Answer: 4.75% Productivity An increase in productivity causes the aggregate supply curve and potential GDP to shift to the right. What is the appropriate monetary policy response? Answer: No change in the interest rate, the money supply could increase or decrease. Depreciation The Bank of Canada observes that the Canadian dollar has depreciated with respect to the U.S dollar. As a response, the Bank of Canada will : Answer: It depends on why the Canadian dollar has depreciated. Monetary Policy The Bank of Canada reduces the target overnight interest rate when inflation is above the 2% target. Which explanation is most likely? Answer: The bank believes past inflation was caused by a negative supply shock. Monetary Policy The economy is experiencing an inflationary gap. Which of the following policies would be the primary monetary policy response by the Bank of Canada? Answer: Increase the target for the overnight interest rate. Open Market Operations The economy is expecting a n inflationary gap and the Bank of Canada responds as expected. If the money demand curve does not shift, we should expect that open market operations would involve the Bank of Canada: Answer: Selling government bonds to reduce the money supply. Chapter 14 Expansionary monetary policy Starting in long-run equilibrium if the bank of Canada chooses to implement expansionary monetary policy, what is the outcome in the short-run? Answer: price level and real GDP increase Expansion Starting in long-run equilibrium, if the Bank of Canada chooses to implement expansionary monetary policy once, what is the outcome in the long run? Answer: price level increases and real GDP doesn’t change Continuous expansion

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Starting in long-run equilibrium, if the Bank of Canada chooses to implement permanent expansionary monetary policy, what is the most likely outcome? Answer: inflation rises at an increasing rate Wage increases If wages rise because companies are having trouble finding new employees, this is general an example of: Answer: output gap inflation Expectations 1 In the case of disinflation, the sacrifice ratio will be: Answer: higher if expectation are backward-looking 2 people currently expect inflation to be 2%. The bank of Canada decided to increase the long-run inflation rate from 2% to 4%. Announcing this as a policy change for the coming year will have what effect on real GDP, relative to the alternative if not announcing the policy change in advance? Answer: GDP is lower if they announce the change Chapter 15 Employment The unemployment rate in Canada is 5%. If frictional unemployment is 2.5% and structural unemployment is 2.5%, then: Answer: we are at full employment (cyclical=0) Recessions Increasing gov spending to reduce the length of a recessionary gap will directly reduce: Answer: cyclical unemployment Retraining Retraining programs are aimed and reducing Answer: structural unemployment Employment insurance Increasing employment insurance benefits will increase: Answer: frictional unemployment Chapter 16 Primary budget deficit The federal government’s “primary budget deficit”: Answer: is the amount of gov spending minus net tax revenue Government spending In the short-run, if the gov responds to a fall in AD with an increase in gov spending: Answer: the actual budget deficit will increase OR the primary budget deficit will increase OR the cyclically adjusted budget deficit will increase Long-run Starting in long-run equilibrium, an increase in gov spending will have what effect on long-run GDP? Answer: long-run GDP will increase if potential GDP increases Debt-to-GDP 1 The government has a positive level of debt. If there is an increase in the primary budget deficit and an increase in the growth rate of the economy: Answer: the debt-to-GDP ratio may increase or decrease 2 the federal gov has stated that the net debt-to-GDP will rise from 42.4% to 43.5% over the next year. If the real interest rate is projected to be 2.9% and the real growth rate of the economy is 0.3%, the primary budget must be: Answer: balanced Δd=x+(r-g)d 1.1%=x+(2.9-0.3)42.4% 1.1%=x+1.1% x=0 Chapter 19 NAIRU The unemployment rate in Canada is 5.0%. if frictional unemployment is 2.5% and structural unemployment is 2.5% then: Answer: We are at full unemployment. EI and NAIRU The federal government increases spending on employment insurance benefits for workers that are unemployed, what is the most likely outcome? Answer: Increase in the NAIRU, as frictional unemployment rises. Deficits A country has an existing stock of debt, a modest government budget deficit, and an inflationary gap. Which of the following is true? Answer: Structural deficit > actual deficit > primary budget deficit Exchange Rates A rise in the Canadian dollar price of foreign currency is: Answer: An appreciation of the Canadian dollar. Exchange Rate The Canadian exchange rate is defined to be the: Answer: Number of Canadian dollars needed to buy one unit of foreign currency. Credit A credit entry in the Canadian balance of payments occurs when: Answer: A transaction involves money moving from a foreign country to Canada. Imports If a Canadian purchases a car from Germany, that is recorded as: Answer: A debit to the current account. FDI A U.S. company buys a Canadian company. This is recorded as: Answer: A credit to the capital account. Balance of Payments In a country’s Balance of Payments, a surplus in the current account: Answer: Is associated with a deficit in the capital account. Dividends A Canadian person earns dividend income from their partial ownership of a U.S. based company. In the Balance of payments for Canada, this is recorded as a: Answer: Credit in the current account. Current Account The Canadian current account moves from a deficit of $40 billion to $20 billion. What could have caused that? Answer: An increase in the net tax rate. U.S. Incomes Starting in long-run equilibrium, the direct, short term effect of a decrease in U.S. real income is: Answer: The Canadian-US exchange rate rises. Foreign Exchange An increase in the supply of foreign exchange will occur when: Answer: Foreign purchases of Canadian assets increase. Imports If Canadian imports of European products decrease, what is the effect in the foreign exchange market? Answer: Demand for foreign exchange falls - cdn dollar appreciates. Fixed Rates If demand for foreign currency rises, what would a central bank do to maintain a fixed exchange rate? Answer: Sell foreign reserves. Choices Because resources are scarce, individuals are required to… Answer: Make choices among alternatives

ec140 final cheat (1)

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