ECON 1000 V assignment 6

| February 14, 2018

CARLETON UNIVERSITY
Department of Economics
ECON 1000 V – Introduction to Economics
2015 Summer

ASSIGNMENT 6: Covers
MACROECONOMICS Chapters 13-17. Topics:A
Macroeconomic theory of the small open economy; Aggregate demand and aggregate
supply; The influence of monetary and fiscal policy on aggregate demand; The
short run trade-off between inflation and unemployment; five debates over
macroeconomics policy.
(Sixth edition)
There are THREE
sections: MCQs (Section A, 30 marks), short free response questions (Section B,
20 marks) and longer free response questions (Section C, 50 marks). TOTAL
MARKS: 100
The deadline to
submit the answersonline(through
cuLearn) is Aug 14 at 11:55 pm. This deadline will be strictly enforced.

GOOD LUCK!

PLEASE NOTE THE FOLLOWING

ALL TECHNICAL
ISSUES REGARDING POSTING OF COMPLETED ASSIGNMENT MUST

BE RESOLVED BY
THE STUDENTS BY CONSULTING CCS.

or a reason what
appears to
ssignment will
be posted very soon. So even now if you are not

Some of the students in this course could
not submit the assignment 1 f
be associated with some technical
issues. But I assume that you have
learnt by this time how the system works. So be very sure next time to adhere
to the deadline and also know how to post your work on the cuLearn. The
second a sure about how to submit your work in one file and on the cuLearn,
immediately seek help from the CCS or CUOL.

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One of the TAs observed the following:
Would you please take these comments/observations into

consideration as you complete the
assignment 2, please??

-Some students took pictures of
their assignments (or graphs), however some pictures were blurry and hard to
read. It would be great if you could mention to the students that they need
to be sure the TA can read it.

Would you also be able to remind people to
put all their answers in 1 file (some people used a zip file, with several
files in that folder).

Would you also be able to ask people to
put their name either in the title of the document or at the top of the
document – this would avoid having a possible mix up

Yet another TA
observed that some students did not read the questions properly as they
answered all

questions in a
section where they were supposed to answer only a few of them, not all. I
also personally

feel that some
students are missing the instructions as in the assignment two, some MCQs
were not there

(MCQ 5, 12 and
37) and I mentioned it at the beginning of section 1. In spite of that, at
least 20 students

E-mailed about
that they are not finding questions 5, 12 and 34. SO, Read instructions real well

SECTION A: Multiple Choice. 30 marks, each question
is worth 1 mark.

Identify the choice
that best completes the statement or answers the question.

1.
In 2002, it looked like the Argentinean government
might default on its debt (which eventually it did). Which of the following is
consistent with what the open-economy macroeconomic model predicts? a. This
event should have raised Argentinean interest rates and caused the Argentinean
currency to appreciate.
b.
This event should have raised Argentinean interest
rates and caused the Argentinean currency to depreciate.
c.
This event should have lowered Argentinean interest
rates and caused the Argentinean currency to appreciate.
d.
This event should have lowered Argentinean interest
rates and caused the Argentinean currency to depreciate.

2.
What is classical dichotomy?
a. It
is the separation of variables that move with the business cycle and variables
that do not.
b. It
is the separation of changes in money and changes in government expenditures.
c. It
is the separation of endogenous and exogenous variables.
d. It
is the separation of real and nominal variables.

3.
Which of the following best describes the aggregate
demand and aggregate supply model?
a. Aggregate
supply adjusts to equate aggregate demand at the prevailing market prices.
b. The
price level adjusts to equate aggregate demand to aggregate supply.
c. Aggregate
demand adjusts to equate aggregate supply at the prevailing market prices.
d. Both
aggregate demand and supply adjust to become equal at the prevailing market
prices.

4.
Which of the following adjusts to bring aggregate
supply and demand into balance? a. the price level
b. the
real rate of interest
c. the
money supply
d. technology

5.
Which of the following best describes the effects of an
increase in real interest rates in Canada?
a. It
discourages both Canadian and foreign residents from buying Canadian assets.
b. It
encourages both Canadian and foreign residents to buy Canadian assets.
c. It
encourages Canadian residents to buy Canadian assets, but discourages foreign
residents from buying Canadian assets.
d. It
encourages foreign residents to buy Canadian assets, but discourages Canadian
residents from buying Canadian assets.

6.
In the market for foreign-currency exchange in the
open-economy macroeconomic model, which of the following does the amount of net
capital outflow represent?
a. the
quantity of dollars supplied for the purpose of selling assets domestically
b. the
quantity of dollars supplied for the purpose of buying assets abroad
c. the
quantity of dollars demanded for the purpose of buying Canadian net exports of
goods and services
d. the
quantity of dollars demanded for the purpose of importing foreign goods and
services

7.
If a government increases its budget deficit, which of
the following best predicts the effects?
a. Interest
rates rise, and the trade balance moves toward surplus.
b. Interest
rates rise, and the trade balance moves toward deficit.
c. Interest
rates fall, and the trade balance moves toward surplus.
d. Interest
rates fall, and the trade balance moves toward deficit.

8.
If a government started with a deficit and moved to a
surplus, which of the following best describes the effects of these changes?
a. Domestic
investment and the real exchange rate would rise.
b. Domestic
investment and the real exchange rate would fall.
c. Domestic
investment would rise, and the real exchange rate would fall.
d. Domestic
investment would fall, and the real exchange rate would rise.

9.
Which of the following is NOT included in aggregate
demand?
a. purchases
of stock and bonds
b. purchases
of services such as visits to the doctor
c. purchases
of capital goods such as equipment in a factory
d. purchases
by foreigners of consumer goods produced in Canada

10.
What happens when the price level rises?
a. The
value of money rises, and exchange rates and interest rates also rise.
b. The
value of money rises, while exchange rates and interest rates fall.
c. The
value of money falls while exchange rates and interest rates rise.
d. The
value of money falls, and exchange rates and interest rates also fall.

11.
Which of the following best describes what happens when
the price level rises?
a. Households
increase foreign bond purchases, and the supply of dollars increases.
b. Households
increase foreign bond purchases, and the supply of dollars decreases.
c. Households
decrease foreign bond purchases, and the supply of dollars increases.
d. Households
decrease foreign bond purchases, and the supply of dollars decreases.

12.
In which of the following situations does investment
spending increase?
a. when
the price level rises, causing interest rates to rise
b. when
the price level rises, causing interest rates to fall
c. when
the price level falls, causing interest rates to rise
d. when
the price level falls, causing interest rates to fall

13.
Suppose the economy is in long-run equilibrium. In a
short span of time, there is a sharp increase in the minimum wage. In the short
run, what would we expect to happen? a. the price level to rise, and real GDP
to fall
b. the
price level to fall, and real GDP to remain unchanged
c. the
price level to remain unchanged, and real GDP to fall
d. the
price level to fall, and the real GDP to rise the same

14.
Which of the following reasons for the downward slope
of the aggregate demand curve would likely be more important for a small closed
economy? a. the wealth effect
b. the
interest-rate effect
c. the
exchange-rate effect
d. the
real-wage effect

15.
What is the variable that balances the money demand and
supply in the liquidity-preference and the classical theories?
a. the
interest rate in both theories
b. the
price level in both theories
c. the
interest rate in the liquidity-preference theory and the price level in the
classical theory
d. the
price level in the liquidity-preference theory and the interest rate in the
classical theory

16.
Suppose a stock market crash makes people feel poorer.
What are the effects of this decrease in wealth?
a. a
decrease in consumption, which shifts aggregate supply left
b. a
decrease in consumption, which shifts aggregate demand left
c. an
increase in consumption, which shifts aggregate supply right
d. an
increase in consumption, which shifts aggregate demand right

17.
Which of the following does NOT determine the long-run
level of real GDP? a. the price level
b. the
supply of labour
c. available
natural resources
d. available
technology

18.
Which of the following shifts the short-run, but not
the long-run, aggregate supply right? a. a decrease in the price level
b. a
decrease in the expected price level
c. a
decrease in the capital stock
d. a
decrease in the savings rate

19.
Which of the following shifts the short-run aggregate
supply to the right?
a. an
increase in the minimum wage
b. an
increase in immigration from abroad
c. an
increase in the price of oil
d. an
increase in the actual price level

20.
How does an economic contraction that is caused by a
shift in aggregate demand remedy itself over time?
a. The
expected price level rises, shifting aggregate demand right.
b. The
expected price level rises, shifting aggregate demand left.
c. The
expected price level falls, shifting aggregate supply right.
d. The
expected price level falls, shifting aggregate supply left.

21.
What is the effect of bad weather for farming or some
other temporary decrease in the availability of raw materials?
a. Aggregate
supply shifts right.
b. Output
falls in the short run.
c. Prices
fall in the short run.
d. Long-run
aggregate supply shifts to the left.

22.
Which of the following is most likely to happen in the
short run?
a. The
price level alone adjusts to balance the supply and demand for money.
b. Output
responds to changes in the aggregate demand for goods and services.
c. Changes
in the money supply cause a proportional change in the price level.
d. Changes
in the money supply shift the aggregate-supply curve, causing output to rise.

23.
In the long run, which of the following do changes in
the money supply affect? a. prices
b. output

c. unemployment
rates
d. nothing

24.
Which of the following did Phillips discover?
a. a
positive relation between unemployment and inflation in the United Kingdom
b. a
positive relation between unemployment and inflation in Canada
c. a
negative relation between unemployment and inflation in Canada
d. a
negative relation between unemployment and inflation in the United Kingdom

Figure 16-1

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25.
Refer to the Figure 16-1. If the economy starts at c
and 1, then in the short run, where does a decrease in the money supply growth
rate move the economy? a. e and 1
b. d
and 2
c. d
and 3
d. a
and 3

26.
The position of the long-run Phillips curve depends on
what?
a. the
natural rate of unemployment
b. the
actual rate of unemployment
c. the
actual inflation rate
d. the
expected inflation rate

27.
How does an increase in the expected rate of inflation
shift the Phillips curves?
a. It
shifts only the short-run Phillips curve to the right.
b. It
shifts only the short-run Phillips curve to the left.
c. It
shifts both the short-run and long-run Phillips curves to the right.
d. It
shifts both the short-run and long-run Phillips curves to the left.

28.
Which of the following would NOT be associated with a
favourable supply shock?
a. The
short-run Phillips curve shifts left.
b. Unemployment
falls.
c. The
price level rises.
d. Output
rises.

29.
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

30.
Which of the following terms refers to the positive
feedback from aggregate demand to investment? a. the investment multiplier
b. the
stock-market effect
c. the
investment accelerator
d. the
crowding-in multiplier

Figure 15-2

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SECTION B: SHORT FREE RESPONSE QUESTIONS.
ANSWER ANY FOUR OF THE FOLLOWING

QUESTIONS. EACH QUESTION IS WORTH 5 MARKS. TOTAL MARKS: 20 MARKS

INSTRUCTIONS: Your
answers to the following questions should take advantage of the relevant
economic tools, principles and perspectives. Your answers must be precise.

B1. How are the identities S = NCO +
I and NCO = NX related to the foreign-currency exchange market and the loanable
funds market?

B2.
Suppose that consumers become pessimistic about the future health of the
economy, and so cut back on their consumption spending. What will happen to
aggregate demand and to output? What might the government have to do to keep
output stable?

B3.
Why and in what way are fiscal policy lags different from monetary policy lags?

B4. Explain the connection between the
vertical long-run aggregate supply curve and the vertical long-run Phillips
curve.

B5.
Suppose that the economy is at an inflation rate such that unemployment is
above the natural rate. How does the economy return to the natural rate of
unemployment if this lower inflation rate persists?

SECTION C: LONGER FREE RESPONSE
QUESTIONS. TOTAL MARKS: 50 MARKS.

INSTRUCTION: Take a few minutes to plan
and outline each answer. In answering the questions, you should

emphasize the line of reasoning that
generated your results; it is not enough to list the results of your
analysis.

Include diagrams, if useful, in
explaining your answers. All diagrams should be correctly labeled.

ANSWER ANY ONE OF THE FOLLOWING TWO QUESTIONS (QUESTION C1 OR C2): 20
MARKS
QUESTION
C1. Q4 CH 14. PP. 373.
Suppose an economy is in long run equilibrium.
a. Use the
model of aggregate demand and aggregate supply to illustrate the initial
equilibrium (call it point A). Be sure to include both short-run and long-run
aggregate supply (4 marks)
b. The Central
Bank raises the money supply by 5 percent. Use your diagram to show what
happens to output and the price level as the economy moves from initial to the
new short run equilibrium (call it point B) 4 marks
c. Now show
the new long run equilibrium (call it point C). What causes the economy to move
from B to point C? 4 marks
d. According
to the sticky wages theory of aggregate supply, how do the nominal wages at
point A compare to the nominal wages at point B? How do nominal wages at point
A compare to the nominal wages at point C? 4 marks
e. According
to the sticky wages theory of aggregate supply, how do real wages at point A
compare to real wages at point B? How do real wages at point A compare to the
real wages at point C? 4 marks
QUESTION C2
Q1. CH15. PP. 415. 20 marks
Explain how each of the following developments would affect
the supply of money, the demand for money, and the interest rate. For each
case, show what happens in a closed economy and in a small open economy.
Illustrate your answers with diagrams.
a. The bank of
Canada’s bond traders buy bonds in open-market operations.
b. An increase
in credit card availability reduces the cash people hold.
c. Households
decide to hold more money to use for holiday shopping
d. A wave of
optimism boosts business investments and expands aggregate demand.
e. An increase
in oil prices shifts the short run aggregate supply curve to the left.

(ANSWER ANY 3 OF THE FOLLOWING QUESTIONS (FROM C3 TO

QUESTION C6). 30 MARKS

QUESTION
C3. Q5. CH15. PP. 416. 10 marks
Suppose that the government of a closed economy reduces taxes
by $20billion, that there is no crowding out of investment, and that the
marginal propensity to consume is ¾.
a. What is the
initial effect of the tax cut on aggregate demand? 2 marks
b. What
additional effects follow this initial effect? What is the total effect of the
tax cut on aggregate demand? 4 marks
c. How does
the total effect of this $20 billion tax cut compare with the total effect of a
20$ billion in-crease in government purchase?
4 marks
QUESTION
C4. Q4-C16-PP 447. 10 marks
Suppose the economy is in long run equilibrium.
a. Draw the
economy’s short and long run Phillips curve 2 marks
b. Suppose a
wave of business pessimism reduces aggregate demand. Show the effect of this
shock on your diagram from part a. If Bank of Canada undertakes expansionary
monetary policy, can it return the economy to its original inflation rate and
original unemployment rate? 4 marks
c. Now suppose
the economy is back in long run equilibrium, and then the price of imported oil
rises. Show the effect of this shock with a new diagram like that in part a. If
the Bank of Canada undertakes expansionary monetary policy, can it return the
economy to its original inflation rate and original unemployment rate? If the Bank of Canada undertakes
contractionary monetary policy, can it return the economy to its original
inflation rate and original unemployment rate?
Explain why this situation differs from that in part b. 4 marks

QUESTIONC5
Q 1, CH 17, PP 469. 10 marks

The economy like the human body,
has ‘natural restorative powers,.

A.
Illustrate the short-run effect of a fall in aggregate
demand using an aggregate-demand/aggregate supply diagram. What happens to
total output, income and employment? 4 marks
B.
If the government does not use stabilization policy,
what happens to the economy over time? Illustrate this on your diagram. Does
this adjustment generally occur in a matter of months or a matter of years?
4marks
C.
Do you think the ‘natural restorative powers’ of the
economy mean that policy makers should be passive in response to the business
cycle? 2 marks

QUESTIONC6
Q5, CH 17, PP. 470. 10 marks

The problem of time
inconsistency applies to fiscal policy as well as to monetary policy. Suppose
the government announced a reduction in taxes on income from capital
investments, like new factories.

a.
If investors believed that capital taxes would remain
low, how would the government’s action affect the level of investment? 2 marks
b.
After investor’s have responded to the announced tax
reduction, does the government have an incentive to renege on its policy?
Explain. 4 marks
c.
Given your answer to part b, would investors believe
the government’s announcement? What can the government do to incredibility of
the announced policy changes? 4 marks

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