ECON 1002 E. Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work.

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1 It is most beneficial to you to write this mock midterm UNDER EXAM CONDITIONS. This means: Complete the midterm in 2.5 hour(s). Work on your own. Keep your notes and textbook closed. Attempt every question. After the time limit, go back over your work with a different colour or on a separate piece of paper and try to do the questions you are unsure of. Record your ideas in the margins to remind yourself of what you were thinking when you take it up at PASS. The purpose of this mock exam is to give you practice answering questions in a timed setting and to help you to gauge which aspects of the course content you know well and which are in need of further development and review. Use this mock exam as a learning tool in preparing for the actual exam. Please note: Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work. Often, there is not enough time to review the entire exam in the PASS workshop. Decide which questions you most want to review the Facilitator may ask students to vote on which questions they want to discuss in detail. Facilitators do not bring copies of the mock exam to the session. Please print out and complete the exam before you attend. Facilitators do not produce or distribute an answer key for mock exams. Facilitators help students to work together to compare and assess the answers they have. If you are not able to attend the PASS workshop, you can work alone or with others in the class. Good Luck writing the Mock Exam!! Dates and locations of mock exam take-up: Friday, December 14 th, 2018: PA 201 5:00 7:00 p.m. Saturday, December 15 th, 2018: PA 201 5:00 7:00 p.m.

2 PART A Multiple Choice (60 Marks, 1.5 Each) 1. Define medium of exchange as a function of money a. The transfer of money from buyer to seller when they purchase goods and services b. The act of withdrawing money from bank accounts to have physical cash c. Transferring purchasing power from the present to the future d. The yardstick people use to post prices and record debts 2. Which of the following items is the LEAST liquid? a. Bonds b. Cash c. Real Estate d. Stocks 3. Which of the following is an example of fiat money? a. Gold b. Canadian paper bills c. Credit Cards d. Stocks 4. What makes up the M1+ measure of the money stock? a. Notice deposits + Chequable deposits b. Currency + Chequable deposits c. Currency + Notice deposits d. Demand deposits + Everything in M2

3 5. Which of the following would decrease the money supply? a. Decreasing the reserve requirements b. Decreasing the overnight rate c. Buying government bonds d. Selling foreign currency to support the domestic dollar s exchange rate 6. If the supply of money in the economy decreases, what happens to money and prices? a. Dollar appreciates; prices rise b. Dollar appreciates; prices fall c. Dollar depreciates; prices rise d. Dollar depreciates; prices fall 7. Define money demand a. The amount of wealth people want to hold in liquid form b. The amount of money people wish to accumulate c. The amount of money needed to purchase a basket of goods as determined by the country s Consumer Price Index d. The theory that interest rates rise when there is an increase in cash withdrawals from bank accounts 8. According to the Classical Dichotomy, what would happen if the money supply increased? a. Nominal and real variables would increase by the same amount b. Nominal and real variables would both increase, but nominal variables by a higher amount c. Nominal variables would increase but real variables would remain unchanged

4 d. Nominal and real variables would both remain unchanged 9. Which of the following is the conclusion of the quantity theory of money? a. An increase in the money supply causes a proportional increase in velocity b. An increase in the money supply causes a proportional increase in real output c. An increase in the money supply causes a proportional decrease in velocity d. An increase in the money supply causes a proportional increase in prices 10. If inflation was expected to be 8% but ended up being 10%, who in the economy does this hurt? a. Someone who borrowed money from their friend with the promise of paying back with expected inflation b. Someone who prefers to hold less of their wealth as currency c. Someone in their second year of a contract that had accounted for the expected rate of inflation d. Having higher than expected inflation does not benefit anybody in the economy 11. How do we find net exports? a. Exports + Imports b. Imports Exports c. Exports Imports 12. If Canada saves $200 billion and Canadian net capital outflow is $35 billion, what is the value of Canadian domestic investment? a. $35 billion b. $35 billion

5 c. $165 billion d. $235 billion 13. If Tim Hortons opens a store in Germany, what is this an example of? a. Foreign Portfolio Investment b. Foreign Direct Investment c. Offshore Domestic Expansion d. Domestic Corporation Capital 14. If NCO increases in the Market for Loanable Funds, what happens in the Market for Foreign- Currency Exchange? a. Real exchange rate depreciates b. Real exchange rate appreciates c. Real interest rate appreciates d. Real interest rate depreciates 15. If Y < C + I + G, what do we label the economy? a. Trade Deficit b. Trade Surplus c. Balanced Trade d. Non-existent Trade (Closed Economy) 16. Suppose the nominal exchange rate between the Mexican peso and the Canadian dollar is 10 pesos per dollar. If a bag of apples costs $2 in Canada and 25 pesos in Mexico, what would be the real exchange rate? a. 0.5 kg of Mexican apples per 1 kg of Canadian apples

6 b. 0.8 kg of Mexican apples per 1 kg of Canadian apples c kg of Mexican apples per 1 kg of Canadian apples d. 2.5 kg of Mexican apples per 1 kg of Canadian apples 17. If Americans suddenly choose to invest in Canadian assets instead of American assets because of political instability, which of the following would occur? a. Canadian net capital outflow remains unchanged because only Canadian residents can affect it b. Canadian net capital outflow rises c. Canadian net capital outflow falls 18. If Canada imposes a quota on the importing of textiles produced in South Africa, what happens in the market for foreign-currency exchange? a. The supply of dollars increases, and the dollar depreciates b. The supply of dollars decreases, and the dollar appreciates c. The supply of dollars increases, and the dollar depreciates d. The supply of dollars decreases, and the dollar appreciates 19. In the Market for Loanable Funds, what do the supply and demand curves mean? a. Supply = Net Capital Outflow; Demand = Net Exports b. Supply = Net Exports; Demand = Net Capital Outflow c. Supply = Domestic Investment; Demand = National Saving d. Supply = National Saving; Demand = Domestic Investment 20. If imports are greater than exports, which of the following statements are correct? a. Net capital outflow is equal to zero

7 b. Saving is greater than investment c. Net capital outflow is greater than zero d. Investment is greater than saving 21. Which of the following is the natural level of output? a. The amount of real GDP produced when there is no unemployment b. The amount of real GDP produced when the economy is at the natural rate of investment c. The amount of real GDP produced when the economy is at the natural rate of unemployment d. The amount of real GDP produced when the economy is at the natural rate of aggregate demand 22. Define stagflation a. When there are falling prices and falling output b. When there are falling prices and rising output c. When there are rising prices and rising output d. When there are rising prices and fall output 23. Which of the following is NOT a reason why the Short-Run Aggregate Supply Curve slopes upward? a. Expectations Theory b. Misconceptions Theory c. Sticky-Wage Theory d. Sticky-Price Theory

8 24. If policymakers want to move output to its long-run natural level because the economy is in a recession, what should they try to do? a. Shift aggregate demand to the right b. Shift aggregate demand to the left c. Shift short-run aggregate supply to the right d. Shift short-run aggregate supply to the left 25. If we saw a boom in the stock market, which of the following would occur? a. Aggregate demand curve shift to the left b. Aggregate demand curve shift to the right c. Aggregate supply curve shift to the left d. Aggregate supply curve shift to the right 26. Which of the following statements is incorrect regarding why the aggregate-demand curve slopes downward? a. Lower price levels reduce the interest rate which encourage spending on investment b. Lower price levels increase real wealth which encourage spending on consumption c. Lower price levels cause the real exchange rate to appreciate, which encourages spending on net exports d. Lower price levels cause the real exchange to depreciate, which encourages spending on net exports 27. If the price level increases, what happens in the Money Market? a. The demand for money decreases

9 b. The demand for money increases c. The supply of money deceases d. The supply of money increases 28. If consumer pessimism results in reduced spending, what would the Bank of Canada do if they decide to engage in active stabilization policy? a. Decrease government spending and increase taxes b. Increase government spending and decrease taxes c. Decrease the money supply and increase interest rates d. Increase the money supply and decrease interest rates 29. If the Marginal Propensity to Consume is 4/5, what is the government purchases multiplier? a. 1/5 b. 4/5 c. 5/4 d Which of the following is an example of how automatic stabilizers help the economy during a recession? a. The amount of taxes collected automatically falls which stimulates aggregate demand b. Taxes rise so that government can spend on socio-economic supports c. Government spending decreases to stimulate aggregate supply d. Government spending decreases to stimulate aggregate demand

10 31. If policymakers choose an expansionary fiscal policy to lower the rate of unemployment, what would happen according to the Phillips curve? a. The economy will experience a decrease in inflation b. The economy will experience an increase in inflation c. Inflation will be unaffected 32. Which of the following would shift the long-run Phillips curve to the left? a. Expected inflation rises b. Expected inflation decreases c. A reduction in Employment Insurance benefits d. A decrease in aggregate demand 33. What does the Phillips Curve show? a. The negative relationship between inflation and unemployment b. The positive relationship between inflation and unemployment c. The negative relationship between output and expectations d. The positive relationship between expectations and output 34. If the sacrifice ratio is 3, what would be required to reduce inflation from 5 percent to 2 percent? a. output reduction of 3 percent b. output reduction of 6 percent c. output reduction of 9 percent d. output reduction of 15 percent

11 35. According to time inconsistency of policy, what might policymakers do after the public forms expectations about inflation? a. Policymakers will take a hands-off approach to solidify public confidence in the central bank b. They will then try to pursue zero-inflation targets c. Policymakers might exploit public expectations to for political gain and to get re-elected. d. They might go back on their promise of price stability to achieve lower unemployment 36. Define rational expectations a. The theory that people optimally use all information given to them when forecasting the future of the economy, adjusting their expectations accordingly b. The theory that announcements from the central bank are essential in establishing how effective policies are by influencing public expectations c. The theory that politicians cannot exploit monetary policy for political gain as the public has come to expect it d. The theory that when people see prices rise due to high inflation, they start to expect a rise in unemployment 37. What is the general difference in outcome between automatic and active stabilization policy? a. Active stabilization has longer lags which allow policymakers to better fine-tune the economy b. Automatic stabilization has a shorter lag than active stabilization policy c. Economists tend to prefer active stabilizers d. In the short run, the decision to pursue active stabilization is the same as the decision to increase interest rate

12 38. What is the political business cycle? a. The use of fiscal policy to influence price levels b. The dissonance between what policymakers say they will do and what they actually do c. The pattern of economic fluctuations mirroring the electoral calendar d. The re-election of officials working in the central bank 39. What is the main argument for having zero-inflation targets? a. It is an easy way to quickly reach full employment b. Inflation has no benefits and its costs are only temporary c. The costs of inflation cannot be reduced, only completely eradicated once inflation reaches zero d. Zero inflation makes the economy more competitive in the foreign market, which is increasingly important now with trade deals 40. Which of the following is an argument in favour of government debt financing? a. If the debt is consistent, expectations will adjust, and the country will have a low default risk in the world market b. Running in a deficit fosters economic prosperity c. If the government spends its money on investments, future generations will be better equipped to handle the debt d. If the government is in debt, it means that they are investing in social programs for the good of their citizens

13 PART B Short Answer (40 Marks, 8 Marks Each; Answer 5/9) 1. Assuming that the reserve ratio is 15%, use the table below to answer the following questions. Assets Liabilities Reserves:? Deposits: $ Loans:? a) What is the initial level of reserves and loans? b) If the central bank buys $ worth of bonds and deposits the funds into this bank, what happens to the new level of deposits and reserves? c) What is the value of the money multiplier and what is the potential value of the money supply? 2. What is the quantity equation? Describe the relationship between the variables. b) What must the central bank do to achieve a 4% rate of annual inflation if GDP is growing 6% per year? 3. Explain the concept of Shoeleather Costs. Briefly outline the other four costs of inflation. 4. Explain the logic behind purchasing power parity and the reasons why it does not perfectly hold in reality. b) If a croissant costs 3.6 euros in France and $1.49 in Canada, calculate what the nominal exchange rate would be (per CAD) if purchasing power parity holds 5. Using diagrams, outline the effects of capital flight on the Market for Loanable Funds and the Market for Foreign Currency. Make sure to describe what would happen to Net Capital Outflow, Real Exchange Rate, and Net Exports

14 6. Considering how fiscal policy influences aggregate demand, explain the theory behind the multiplier effect b) Assuming the economy has a MPC of 0.8, use the multiplier effect to explain what would happen if the government spends $3 billion on construction. c) Explain the crowding-out effect on investment 7. What are the five main debates in Macroeconomics? Choose one and outline the pros and cons of the issue. 8. Using graphs and explanations, outline the effects of fiscal expansion with a fixed exchange rate in an open economy. Make sure to focus on what happens to Money Supply, Money Demand, and the value of money. 9. Using diagrams, examine the effects of an adverse shift in aggregate supply and how the government could accommodate it. b) Outline the pros and cons of having an active stabilization policy.