1 Multiple Choice. Answer the following 5 multiple choice questions by CLEARLY indicating which response you believe to be MOST CORRECT. (2 marks each) 1) In an economy with banks and chequable deposits the money multiplier implies that a) increases in money demand lead to large increases in GDP. b) increases in money supply lead to large increases in GDP. c) a change in Central Bank money has a greater than one-for-one effect on money supply. d) chartered Banks are able to earn monopoly profits on loans. 2) The demand for Central Bank money is equal to a) the demand for currency plus the demand for reserves. b) the supply of currency. c) the amount of money required for transactions in the economy. d) the amount of wealth held in nominal assets in the economy. 3) An expansionary open market operation is a) the opening of a large number of markets across the country. b) an action whereby the central bank increases the supply of money. c) a policy of trading operations on open markets. d) an action by the central bank intended to expand the rate of inflation. 4) To increase the interest rate the Central Bank would a) buy bonds and thus bid the price of the bonds upwards. b) sell bonds and thus drive the price of bonds downwards. c) announce to the public that interest rates will be higher. d) agree to finance government purchases by printing money. 2 5) Variables which influence a model’s results but which are not explained by the model are called a) endogenous variables. b) exogenous variables. c) equilibrium variables. d) policy variables. 6) The choices of taxes and government spending by policy makers is called a) financial policy. b) regulatory policy. c) monetary policy. d) fiscal policy. 7) Interest payments on government debt are considered a) purchases of goods and services by governments. b) government transfers. c) corporate profits. d) consumer expenditures. 8) The main assumption of Classical Market Clearing models of the macroecon- omy is that a) consumers maximize their consumption. b) producers maximize profits. c) governments are a burden to the private sector. d) all prices are fully flexible. 9) Keynesian models differ from Classical models of the macroeconomy because a) they assume that all markets are perfectly competitive. b) they assume that there is no monopoly power in the economy. c) they predict that aggregate demand matters for equilibrium GDP. d) they assume that the labour market is always in equilibrium. 3 10) The unemployment rate can be a poor measure of macroeconomic perfor- mance because a) it can fall when people without jobs give up looking for jobs. b) it does not include part time employment. c) it does not account for seasonal unemployment. d) it does not measure the effects of environmental degradation. 2 Short-Answer. Answer the following four (4) questions in the spaces below by providing a Brief Clear Explanation. (5 marks each). Answers with no explanation will not be graded. 1) Explain the difference between Nominal and Real GDP. 4 2) Using the basic “income-expenditure” model of equilibrium in goods markets, illustrate the effects of an increase in taxation on equilibrium income. Carefully label your diagram. 3) Explain how the aggregate price-level and aggregate income are thought to influence money demand in theory. 5 4) Illustrate the effects of a contractionary monetary policy on equilibrium in- terest rates. Carefully label your diagram. 6 3 Problems. 1) Consider a model economy with the following features, C =c0 +c1(Y −T), I =i0 +i1(Y −T) G = g0, T = t1Y i) Solve for equilibrium income in the goods market. (3 marks) ii) What would the balanced-budget multiplier be in this economy? (2 marks) 7 2) Consider a model economy where money demand is given by, Md =30+0.1$Y −2i i) If nominal income is 50($Y = 50), and the money supply is 25 (Ms = 25) what would the equilibrium interest rate be in this economy? (3 marks). ii) Show that bond-demand in this economy would be positively related to the interest rate. (2 marks) 8