ECON 1202 Saint Mary’s University Principles of Macroeconomics Excel Exercise

Description

Instructions:

Download a copy of the exam and save using your last name as the file name. Type your answers under each question and save.
Drop the completed exam (as a pdf file) in the Dropbox folder “final exams” in Brightspace.
The exam is due at precisely noon on April 14th. The Dropbox folder will no longer be available after 12:10 pm. I will not accept email submissions.
There are two parts to this exam:

The first part consists of 8 short answer questions: Answer all. Questions 1 -7 are worth five marks each. Question 8 is worth 15 marks.
Part 2 consists of a bonus question. You may or may not respond to this part: it is at your discretion

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NAME:
A NUMBER:
Final Exam
Principles of Macroeconomics
ECON 1202.2A
Due April 14 by email or Brightspace Dropbox
This take-home exam contains a mixture of numerical and short answer questions. The
questions are arranged in the sequence that subjects were covered in class.
Given that you have four days to complete this exam and have access to resources such as the
textbook and slides, the questions are more analytical in nature than the in-class tests were.
1. [6 points] The table below contains Labour Force Survey data for New Brunswick in two
different years:
2014
2017
POPULATION
621,700
624,700
LABOUR FORCE
393,000
383,900
EMPLOYMENT
353,900
352,900
UNEMPLOYMENT
39,100
31,000
a. [2] Calculate the unemployment rate for both years.
b. [2] Calculate the participation rate for both years. =
???????????? ??????????
????????????????????
c. [1] In 2017, was the unemployment rate higher or lower than in 2014? Did
employment go up or down during this period?
d. [1] Based on your answer to question c, can the unemployment rate always
provide an accurate sense of how the labour market is performing?
2. [3 points] Recall from question 1 that employment in New Brunswick was 352,900 in
2017. Suppose that GDP was $35,800,000,000 and the average number of hours
worked was 1,770 per worker.
a. [1] What was the productivity per worker?
b. [1] What was the productivity per hour worked?
c. [1] Suppose that between 2017 and 2020, real GDP in New Brunswick increased
by a total of 4%. The population and employment also increased by 4%. What
would happen to GDP per capita, GDP per worker, and the standard of
living?
3. [4 points] Recall from question 2 that actual GDP in New Brunswick was $35.8B in 2017.
Suppose that the potential GDP is estimated to be $36.2B.
a. [1] What kind of output gap did New Brunswick have?
b. [1] Given your answer to part a, do you think that employment in 2017 was
above or below full employment?
c. [1] Given your answer to part b, do you think the unemployment rate was
above or below the non-accelerating inflation rate of unemployment
(NAIRU)?
d. [1] Given your answer to part c, list the types of unemployment that would
have existed in 2017.
4. [10 points] Suppose that a fictional country has the following economic characteristics:
Consumers pay a tax rate ?? on 25% of income ??. They have a marginal
propensity to consume ?????? of 0.8 and their autonomous consumption amount ??
is $5B.
Investment ?? is $5B.
Government spending ?? is $6B.
Exports ?? are worth $8.5B.
The marginal propensity to import, ??, is 0.3.
a. [1] Open the Excel file that accompanies the exam.
In sheet Q4, fill in the yellow boxes in columns C, E, and G using the
information above. The table will autofill and plot the line AE0 on the graph.
b. [1] What is the equilibrium GDP of AE0?
c. [1] If ?????? = 0.8, ?? = 0.25, and ?? = 0.3, calculate the marginal propensity to
spend, ??.
d. [1] What is the value of the simple multiplier?
e. [1] Suppose that there is a global recession. Exports ?? decline by $4B,
investment ?? declines by $2B, and the government reduces spending ?? by $1B.
What are the new values of ??, ??, and ???
f.
[1] What is the total decline in AE as a result of these changes?
g. [1] Based on the multiplier from part d and the decline from part f, how much do
you expect equilibrium GDP to decline by? What is the new equilibrium
GDP?
h. [1] Enter your new values of ??, ??, and ?? into the blue boxes of the Excel sheet.
The dashed line for AE1 will plot on the chart.
i.
[1] Does the new equilibrium at the intersection point of AE1 and the 45° line
match your answer from question g?
j.
[1] Copy and paste the chart below.
5. [11 points] Recall that aggregate demand ???? is
determined by all of the components of desired
aggregate expenditure.
COVID-19 has caused the global economic landscape to
change very quickly. Furthermore, an oil price war
involving Saudi Arabia and Russia has resulted in a
dramatic decline in oil prices.
Price Level (P)
AS
AD
a. [1 point per row] For each of the events below,
Real GDP
state which component(s) of aggregate
demand is affected, provide a brief
explanation, and whether the effect is an increase or decrease. The first is
done as an example.
EVENT
COMP.
The government forbids non-essential
travel and closes certain types of
businesses.
C
Due to the uncertain economic
environment, businesses decide not to
purchase new equipment.
The Bank of Canada lowers the
interest rate three times in one month.
Household wealth decreases when the
value of stocks plunge.
Many workers anticipate that they will
eventually be laid off and their income
will fall by 45% when they start
collecting employment insurance (EI).
EXPLANATION
Households are prevented from
consuming non-essential goods.
EFFECT
Decrease
The government announces it wants
to purchase a large amount of medical
supplies from Canadian
manufacturers.
Families which were planning on
building a new home decide not to.
As oil is a major Canadian export, the
low price of oil results in less demand
for Canadian dollars, and the value of
the Canadian dollar goes down
relative to other currencies.
Other countries are also severely
affected by COVID-19. Many of
Canada’s trading partners also have a
recession.
b. Bonus: can you think of any changes to a component of aggregate expenditure
not included here? If so, add a row to the table and fill it out in the same way.
c. [2] Based on the size and direction of the effects above, do you think that
overall desired aggregate expenditure has increased or decreased? Would
this result in a leftward or rightward shift in the AD curve?
[1] Governments have introduced transfers to individuals who have been laid off
or self-isolated. Are these considered to be part of government spending, G?
6. [3 points] Imagine that you are a government advisor during the COVID-19 crisis when
there is a large recessionary gap. You are working on the governments fiscal
stabilization policy that will be implemented as the crisis subsides.
What are the government’s options in terms of government spending ??? What are
the pros and cons of each option? (Hint: consider whether you expect private
aggregate demand to rebound quickly after restrictions are lifted.)
7. [7 points] Recall that in chapter 25 we learned about the aggregate production function,
in which the factors of production were labour ??, capital ??, and technology ??. Answer the
following questions according to the Neoclassical growth model.
a. [1] Imagine that the amount of capital ?? increases by 10% (from 50 to 55 units)
while labour and technology stay the same. How much does total GDP and
GDP per worker change by? (A specific percentage is not needed, just ‘more
than’ / ‘less than’ 10%.)
.
b. [1] Imagine that capital increases by 5 units again, from 55 to 60. How big is the
resulting change in GDP and GDP per worker compared to the change that
occurred in part a?
c. [1] What is the term (hint: law) used to describe the relationship between ??
and GDP in parts a and b?
d. [1] Based on your answers to parts a through c, is it possible to have
sustained economic growth due to capital increases alone?
e. [1] Now imagine that the amount of labour ?? and capital ?? both increase by 10%.
By how much do total GDP and GDP per worker change by?
f.
[1] What is the term used to describe this relationship?
g. [1] What is required to have sustained increases in per-worker GDP (which,
in turn, results in improving living standards)?
8. [2 points] Briefly describe what embodied technical change is.
9. [1 point] Briefly describe a situation in which increasing marginal returns could
occur.
10. [2 points] Suppose that an elderly relative dies and you discover a suitcase under their
floorboards containing $40,000 in cash. You decide to deposit the cash at a commercial
bank. The target reserve ratio ?? is 2% and the cash drain ?? is 5%.
a. [1] What is eventual total change in deposits?
b. [1] Suppose that in the context of global economic uncertainty, the commercial
banks considers lending to be riskier, and they hold an extra 3% as excess
reserves. What is the total change in deposits?
11. [3 points] List and briefly explain the three reasons why individuals hold money.
12. [9 points] Suppose that the money supply
increases substantially. Explain what happens
throughout the following steps.
a. [2] At the existing interest rate, there is
now an excess supply of money (similar
to i2 on the graph to the right). What
happens to the demand for bonds,
bond prices, and the interest rate?
b. [1] What effect does the change in
interest rate have on consumption
and investment?
c. [1] Explain how the change in the interest rate affects international demand
for Canadian financial assets. How does this then affect the exchange rate?
d. [1] What effect does the change of the exchange rate have on net exports?
e. [1.5] How do the combined changes in consumption, investment, and net
exports affect the AE curve and the AD curve?
f.
[1.5] Suppose that prior to the increase in the money supply, equilibrium GDP
was equal to potential GDP. What type of output gap now exists? If potential
GDP does not increase, what will happen to equilibrium GDP in the long
run?
g. [1] Based on your answers above, can expanding the money supply drive
long-run growth? What is this relationship called?
13. [2 points] Given that the interest rate can be determined by the equilibrium of the
demand and supply of money, the central bank could raise or lower the interest rate
indirectly by increasing or decreasing the money supply.
Does the Bank of Canada take this approach? Why or why not?
14. [4 points] In March 2020, the Bank of Canada decided to lower the overnight interest
rate from 1.75% to 0.25%.
a. [2] While the bank has a target for the overnight rate, the rate itself is marketdetermined. What is the bank rate and how does the Bank of Canada use it
to influence the overnight rate?
b. [2] Briefly explain how a decrease in the overnight interest rates eventually
results in a change in the money supply. Is the Bank of Canada active or
passive in the money supply change?
15. [2 points] Suppose you are in charge of monetary policy at the Bank of Canada. Due to a
natural disaster in Ontario, there is a recessionary output gap and inflation has dropped
below the target. You believe that in about 18 months, cleanup from the disaster will be
complete and GDP will return to potential output.
Given the low inflation rate, many people expect you to lower the overnight interest rate
target (expansionary monetary policy). Should you lower it? Why or why not?
16. [5 points] Suppose that from 2020 to 2025, the price level rises at a rate of 3% per year.
a. [1] In 2025, real GDP is equal to potential, so there is no output gap. Workers
and employers are bargaining the wage for the next year.
If they are backward-looking, are wages likely to increase? If so, by how
much?
b. [1] Given your answer in a, will there also be an increase in the price level
next year (inflation)? If so, by how much?
c. [1.5] Suppose that in 2026, an inflationary output gap opens. Workers and
employers once again bargain the wage increase for the next year.
Compared to the past year (in part b), do you think that inflation will be
higher or lower than in 2025?
d. [1.5] In 2027, there is still an output gap. The price of energy—an important
input—increases.
Will this affect inflation? If so, will the inflation rate be higher or lower than
in 2026?
17. [2 points] Imagine that there is an inflationary output gap. Instead of allowing the
economy to return to potential output, the central bank continuously expands the money
supply to try to keep the output gap open.
In this situation, what will happen to the rate of inflation?
18. [7 points] Suppose that for several years
inflation has been 10% per year, entirely due
to expectations. The money supply has been
allowed to expand to accommodate this rate
of inflation. There is no output gap and no
supply shocks. In this scenario, we can
imagine that the AD curve is shifting right and
the AS curve is shifting left at similar rates,
such that the equilibrium moves upward along
potential output.
The government orders the central bank to
reduce inflation to 2%.
a. [2] Explain what the central bank
can do to slow the movement of the AD curve.
b. [1.5] If the population is very backward-looking, will the leftward movement
of the AS curve take a little or a lot of time to slow down?
.
c. [1.5] How can the central bank try to influence expectations to be less
backward-looking and more forward-looking?
d. [2] Eventually, inflation falls to the target rate but the economy is in a
recessionary gap. What are the central bank’s two options? What is one pro
and con of each?
19. [4 points] The graph to the right shows
the demand for labour (DL) as an
orange line and the supply of labour
(SL) as a blue line.
Initially, there is no output gap. The
level of employment and wage are
determined by the intersection of DL0
and SL.
a. [1] If the labour force has
100,000 people, what is the
NAIRU?
Suppose that a recession occurs and
the demand for labour falls. It is now
the dotted line, DL1. However, due to
the downward stickiness of wages, the wage only declines to $19/hr.
b. [2] At $19/hr, what is the quantity of labour demanded and the quantity of
labour supplied? What is the amount of involuntary unemployment?
c. [1] Is the unemployment rate now higher or lower than the NAIRU?
20. [3 points] Identify whether the following situations are cyclical, structural, or
frictional unemployment.
a. [1] A factory which employs half of a town shuts down. The laid-off workers have
skills which are only suitable for employment in that factory, leading to a large
increase in unemployment which lasts for a long time.
b. [1] In a growing city, at any given time there are a few thousand young
professionals who have quit their jobs because they are confident that they can
find a better job more suited to their education in a short amount of time.
c. [1] A large number of people are laid off due to a country-wide recession, but will
likely be able to find jobs when the economy improves.
21. [3 points] Canada has employment insurance which pays people a portion of their former
wage (a maximum of 55%) if they are laid off. What is a pro and con of a higher
payment for unemployed job seekers?
22. [3 points] If a government collects $11B in tax revenue ??, spends $11.5B on goods and
services ??, and pays 5% interest on $20B of debt.
a. [1] What is the government’s primary deficit?
b. [1] What is the government’s overall deficit?
c. [1] If the government wants to eliminate its overall deficit, what are its two
options?
23. [2 points] If the province of Ontario…

has a primary deficit-to-GDP ratio ?? of 1%

pays an interest rate ?? of 3.6% on its existing debt

is expected to have real GDP growth ?? of 0.5%

has a debt-to-GDP ratio ?? of 37%
What will the total change in its debt-to-GDP ratio ???? be?
Refer to the formula in chapter 31.
24. [2 points] Prior to the recession of 2008-09, Ontario had a balanced budget. By the
2009-10 fiscal year, the deficit had increased to nearly $20B. As the province returned to
economic health over the next decade, it continued to run multi-billion dollar deficits.
a. [1] What type(s) of budget deficit does the province have?
b. [1] What type of fiscal policy would be required to balance the budget?
25. [2.5 points] The current government of Nova Scotia has made balanced operating
budgets a key part of its policy. However, the debt continues to grow due to a large
capital budget as the province builds hospitals, schools, and highways. Do you think
this type of deficit is harmful to future generations? Why or why not?
.
c
+ MPC × Y (1 – t)
+
× Y (1 –
I0 =
I1 =
G0 =
G1 =
X0 =
X1 =
IM =
IM =
m ×Y
×Y
Y
AE0
C
I0
G0
0
5
0.0
0.0
0
0
0
0
0
0
10
15
20
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
25
30
35
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
40
45
50
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
50
0.6
Desired Aggregate Expenditure ($B)
C=
C=
45
40
35
30
25
20
15
10
5
0
0
5
10
15
20
25
30
35
40
45
Real GDP ($B)
AE=Y (45° line)
AE0
AE1
50
AE1
I1
G1
X1
AE=Y (45° line)
X0
IM
0
0
0.0
0.0
0
0
0
0
0
0
0
5
0
0
0
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
10
15
20
0
0
0
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
25
30
35
0
0
0
0.0
0.0
0.0
0
0
0
0
0
0
0
0
0
40
45
50
1.428571429

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Principles of Macroeconomics

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