Macro Economics Final Sample 3 Answers

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 bookletDo 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 QUESTIONSPlace 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 60,000Retained Earnings (Undistributed Corporate Profits) 30,000Net Income of Unincorporated Businesses (Farm and non-Farm) 30,000Net Investment Income of Non-Residents 20,000Government Spending 130,000Government Transfer Payments 55,000Depreciation (Capital Consumption Allowances) 70,000Exports 160,000Consumption 350,000Personal Taxes 25,000Imports 155,000Corporate Profits (before Taxes) 65,000Corporate Taxes 20,000Wages and Salaries and Supplementary Labour Income 330,000Interest and Miscellaneous Investment Income 45,000Gross Investment 120,000Rent (Rental Income) 5,000Calculate (Show your work) a) Net Domestic Income from Factor Cost (2 marks)1 mark: correct numbers except for one mistake1 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 piece1 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 item1 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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2. Prices Indices (10 marks)

2002 2007Price/unit Quantity Price/unit Quantity

Apples (per apple) $0.75 30 $0.50 40Milk (per litre) $0.80 35 $1.10 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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3. MacroModel (10 marks)

An economy has the following set of macroeconomic equations.

Consumption: C = 230 + 0.9Yd Exports: X = 160Investment: I = 70 + 0.12Y Imports: IM = 80 + 0.05YGovernment Spending G = 220 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 + 0.7Yfrom something like 230 + 0.9(Y – (-50 + 0.3Y) + 70 + 0.12Y + 220 + 160 – (80 + 0.05Y)

1 mark: correct second part = 0.7YSOME 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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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 Canada’s 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 (don’t 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 +60/0.1f) 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 changeii) the change in money supply is? (1 mark)

1 mark: = -60 (b) from 30/0.125 – 30/0.1

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5. Monetary Policy: Linear Equations (10 marks)

The following equations describe an economyMoney Demand: MD = 0.05Y – 1200r Investment: I = 395 – 2500rAggregate Expenditure: AE = 640 + I + 0.6YAmounts 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)/12001 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 similar1 mark: Y = 2,4201 mark: r =0.055 from (0.05*2420 – 55)/1200SOME 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 + 0.5/0.11 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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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)

r r

M (or M/P) real I

r0

Io

MEI

SMo

DMo

real Y (or GDP)Yo

AEoreal AE

AE1

DMS

IS

r1

AES

YS

rS rS

SM1

a) 1 mark: equilibrium Y0 at AE0 intersect 450 line with axes AE and Y1 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 MD

S

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 MD

S at r0 (r1)

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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 5,580AE = 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 + 20P1 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 fashion1 mark: P = 108.75 from 11,700 – 60P = 3,000 + 20P1 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 – 60P1 mark: P = 102THEY MIGHT MESS THIS UP BUT NO MERCY SINCE I THINK THE QUESTION IS CLEAR

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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)

real Y

real Y

real AE

PYo

SRASo

ADo

Po

AEo

Y*

LRAS

ADs

Ps

Ys

SRAS1

AE1

AE1

P1

Y1

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 SRAS1 mark: shift up of AE to intersect 450 line at LRAS (don’t worry what they call it)1 mark: AD shifts to the right1 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 SRAS1 mark: P1 from wherever ADs intersect LRAS (Y*)(doesn’t have to be at Po)1 mark: SRAS shifts to intersect AD where AD intersects LRAS (i.e., at P1)

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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 (P1, Y1) effects of a decrease in government spending. (5 marks)

P

Po

ADo

SRASoLRAS

AD1

Ys

P1

Yo

SRAS1

Ps

Y21 mark: Po and Yo from intersection of Ado and SRASo but Ys < LRAS1 mark: shift left of AD 1 mark: Ps < Po and Ys < Yo from AD1 Intersect SRAS11 mark: P1 < Ps and Y1 from AD1 intersect LRAS1 mark: SRAS increases (shifts down) to intersect AD1 and LRAS at LRASBE A LITTLE MERCIFUL HERE SINCE THE FALL IN G GIVEN A RECESSION MIGHT

CONFUSEb) 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

Po

ADo

SRASoLRASo

AD1

Ys

P1

Y*

SRAS1

Ps

LRAS1

SRAS2

Y*1

1 mark: SRAS shifts to the right 1 mark: Ps < Po and Ys > Yo at SRASs (SRAS1 in my diagram) intersect Ado1 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 SRAS1 (SRAS2 in my diagram) to intersect AD at LRAS1

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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 $79bCapital Exports $17b Capital Imports $14bService Exports $19b Service Imports $18bInterest and Dividend Payments $12b Interest and Dividend Receipts $9bi) 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)

1 mark: Decrease in D$C (Demand shift left)1 mark: Increase in S$C (Supply shift right)

c) Canadian real GDP increases by -1% and US real GDP increases by 2%. (2 marks)

1 mark: Decrease in S$C (Supply shifts left)1 mark: Increase in D$C (Demand shift right)

d) Assume a fixed exchange rate for EC/US. In the diagram, show the immediate impact of an increase in the U.S. interest rate the on Demand and Supply of the $Canadian. (2 marks)

1 mark: increase (shift right) in Supply of $C1 mark: decrease (shift left) in Demand of $C

e) How does the Bank of Canada maintain the fixed exchange rate in d)? Show the Bank’s 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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Q $C

S $C

D $C

Eo

$Co

E US/C

Q $C

S $C

D $C

Eo

$Co

E US/C

Q $C

S $C

D $C

Eo

$Co

E US/C


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 crisisc) 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 year’s National Accounts?a) goods produced last year that are exported this year b) government transfer payments to individuals, such as unemployment insurancec) machinery imported from the United Statesd) government investment expenditures on roadse) government taxesf) 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 – 0.7YWhich 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 + 0.66Yd) C = 365 + 0.528Y e) C = 365 + 0.64Y f) C = 365 + 0.66Yg) C = 381 + 0.528Y h) C = 381 + 0.64Y i) C = 381 + 0.66Yj) 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 levelc) a rise in the proportion of income held as money (k) d) a fall in the interest ratee) Bank of Canada purchases of bonds f) all of the aboveg) 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 GDPb) decrease in Government Deficit, decrease in Money Supply, and increase in GDPc) decrease in Government Deficit, increase in Money Supply, and decrease in GDPd) decrease in Government Deficit, increase in Money Supply, and increase in GDPe) increase in Government Deficit, decrease in Money Supply, and decrease in GDPf) increase in Government Deficit, decrease in Money Supply, and increase in GDPg) increase in Government Deficit, increase in Money Supply, and decrease in GDPh) increase in Government Deficit, increase in Money Supply, and increase in GDPi) none of the above

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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 Ic) decrease in Y, increase in r, decrease in I d) decrease in Y, increase in r, increase in Ie) increase in Y, decrease in r, decrease in I f) increase in Y, decrease in r, increase in Ig) increase in Y, increase in r, decrease in I h) increase in Y, increase in r, increase in Ii) 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 riseb) Aggregate Expenditure doesn’t change because the interest rate and Prices risec) Aggregate Expenditure doesn’t change because the interest rate risesd) Aggregate Expenditure doesn’t change because Prices risee) Aggregate Expenditure increases because government spending increasesf) 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 long-run?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 decreasesf) Aggregate Demand increasesg) 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-runb) decrease in P and decrease in Y in the short-run and no change in Y in the long-runc) decrease in P and increase in Y in the short-run and decrease in Y in the long-rund) decrease in P and increase in Y in the short-run and no change in Y in the long-rune) increase in P and decrease in Y in the short-run and decrease in Y in the long-runf) increase in P and decrease in Y in the short-run and no change in Y in the long-rung) increase in P and increase in Y in the short-run and decrease in Y in the long-h) increase in P and increase in Y in the short-run and no change in Y in the long-runi) none of the above

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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 depreciatesc) fall in Y because r falls and E appreciates d) fall in Y because r rises and E appreciatese) rise in Y because r falls and E depreciates f) rise in Y because r rises and E depreciatesg) rise in Y because r falls and E appreciates h) rise in Y because r rises and E appreciatesi) none of the above

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Macro Economics Final Sample 3 Answers

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