Test 3: April 4, Multiple Choice 30 points (1 each) Select the best answer for each question. Answer the questions on the Scantron sheet.

Transcription

1 Test 3: April 4, 2002 Multiple Choice 30 points (1 each) Select the best answer for each question. Answer the questions on the Scantron sheet. 1. Suzanne, a Canadian resident, purchases stock in a Thai corporation. The purchase represents for Suzanne and for Canada. a. investment, net foreign invasion b. saving, domestic investment c. investment, net foreign investment d. saving, foreign portfolio investment e. saving, foreign direct investment 2. Arthur, a Canadian resident, builds a steel mill in Lithuania. The purchase represents for Arthur and for Canada. a. investment, foreign portfolio investment b. saving, foreign portfolio investment c. investment, foreign direct investment d. saving, foreign direct investment e. saving, net foreign investment 3. In an open economy, a. Saving = Foreign Saving + Net Foreign Investment. b. Saving = Domestic Saving + Foreign Saving. c. Saving = Domestic Investment + Net Foreign Investment. d. Saving = Domestic Saving + Net Foreign Investment. 4. According to the text, given the fact that Canadian citizens are not saving much, a. it is better to reduce Canadian domestic investment. b. it is better to have foreigners invest in the Canadian economy than no one at all. c. it is better to prevent foreigners from investing in the Canadian economy. d. it is better to force Canadian citizens to save more. 1

2 5. If the nominal exchange rate is e, the domestic price is P, and the foreign price is P*, the real exchange rate is defined as a. e(p/p*). b. e(p*/p). c. e + P/P. d. e - P/P*. 6. A depreciation of the dollar implies a. Canadian consumers will buy more domestic goods and fewer foreign goods. b. Canadian consumers will buy fewer domestic goods and more foreign goods. c. Canadian consumers will buy more domestic goods and more foreign goods. d. Canadian consumers will buy fewer domestic goods and fewer foreign goods. 7. Depreciation of a currency will lead to a. an increase in net exports. b. a reduction in net exports. c. no change in net exports. d. any of the above is equally likely 8. A tax on imported goods is called a(n) a. excise tax. b. tariff. c. import quota. d. sin tax. 9. Net foreign investment equal to net exports implies that a. the supply of dollars equals the demand for dollars in the foreign-currency exchange market. b. the volume of imports equals the volume of imports. c. the amount of assets purchased abroad by Canadians equals the amount of Canadian assets purchased by foreigners. d. all of the above 10. The real exchange rate is determined by the equality of a. saving and the demand for net exports. b. investment and the demand for net exports. c. net foreign investment and the demand for net exports. d. both a and c are correct 2

3 11. If the real exchange rate were above the equilibrium level, the quantity of dollars supplied in the foreign-currency exchange market would be the quantity of dollars demanded, and the dollar would. a. greater than, depreciate b. less than, depreciate c. greater than, appreciate d. less than, depreciate 12. If the Canada imposes an import quota on beef, Canadian imports will, Canadian exports will, and Canadian net exports will. a. decrease, decrease, increase b. decrease, decrease, be unaffected c. decrease, increase, increase d. decrease, be unaffected, increase e. none of the above 13. Trade policies do not alter the trade balance because a. they cannot alter exports. b. they cannot alter imports c. they cannot alter the real exchange rate. d. they cannot alter national saving or domestic investment. e. trade policies can, in fact, alter the trade balance. 3

4 Use the information below answer questions The figures below represent the market for loanable funds and the market for foreigncurrency exchange in Canada. They show the effect of an announcement that Quebec will hold another referendum on separation. 14. In the figure shown, if the result of the vote on Quebec separation resulted in a 90% vote in favour of Quebec remaining part of Canada, we would expect a. the real interest rate to fall, the real exchange rate to appreciate, and domestic investment to increase. b. the real interest rate to fall, the real exchange rate to depreciate, and domestic investment to increase. c. the real interest rate to fall, the real exchange rate to appreciate, and domestic investment to decrease. d. the real interest rate to rise, the real exchange rate to appreciate, and domestic investment to fall. 15. In the figure shown, if the result of the vote on Quebec separation resulted in a 90% vote in favour of Quebec staying a part of Canada, we would expect a. national saving to increase and net exports to decrease. b. national saving to decrease and net exports to increase. c. national saving to remain constant and net exports to decrease. d. national saving to remain constant and net exports to increase. 4

5 16. If Canadian firms decide to invest more domestically at every interest rate, net foreign investment would and net exports would. a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease Use the figure below to answer questions Starting with AD 1 and AS 1, if personal income taxes increase, the new short-run equilibrium is at point a. a. b. b. c. c. d. d. e. none of the above. 18. Starting with AD 1 and AS 1, if personal income taxes increase, the new long-run equilibrium is at point a. a. b. b. c. c. d. d. e. none of the above 5

6 19. Starting with AD 1 and AS 1, if personal income taxes increase, in the short run a. output stays the same and prices fall. b. output decreases and prices fall. c. output increases and prices fall. d. output decreases and prices rise. e. output increases and prices rise. 20. Starting with AD 1 and AS 1, if personal income taxes increase, in the long run a. output and unemployment stay the same. b. output decreases and unemployment falls. c. output increases and unemployment rises. d. output decreases and unemployment rises. e. output stays the same and unemployment rises. 21. Stagflation is a combination of a. depression and recession. b. deflation and recession. c. inflation and recession. d. inflation and deflation. e. depression and deflation. 22. In a closed economy, an will the money supply, interest rates, and shift the AD curve to the. a. open market sale, decrease, increase, left b. open market purchase, decrease, decrease, right c. open market purchase, increase, decrease, left d. open market sale, increase, increase, left 23. When tax rates are cut, workers get to keep of each dollar they earn, so they have a incentive to work, and as a result, the curve shifts to the. a. more, greater, aggregate supply, right b. more, greater, aggregate demand, right c. less, smaller, aggregate supply, left d. less, smaller, aggregate demand, left e. more, smaller, aggregate supply, left 6

7 For questions 24-26, use the diagram below: 24. Which of the following would cause the AD curve to shift from AD 1 to AD 2? a. an increase in government expenditures when the exchange rate is fixed. b. an increase in government expenditures when the exchange rate is flexible. c. an expansion of the money supply when the exchange rate is fixed. d. a contraction of the money supply when the exchange rate is flexible. 25. If the economy was at point B, a government policy to restore full employment would be a. an increase in government expenditures when the exchange rate is fixed. b. an increase in government expenditures when the exchange rate is flexible. c. an expansion of the money supply when the exchange rate is fixed. d. a contraction of the money supply when the exchange rate is flexible. 26. If the economy was at point Z, an appropriate government policy would be a. a decrease in government expenditures when the exchange rate is fixed. b. a decrease in government expenditures when the exchange rate is flexible. c. an expansion of the money supply when the exchange rate is fixed. d. a contraction of the money supply when the exchange rate is flexible. 7

8 27. In a closed economy, a reduction in the size of the government deficit would a. shift the AD curve to the right. b. shift the AD curve to the left. c. shift the AD curve to the right if the deficit reduction was the result of a tax increase. d. shift the AD curve to the right if the deficit reduction was the result of a cut in government expenditures. 28. In a small open economy with perfect capital mobility, efforts to reduce the size of government deficits a. cause unemployment to increase because to reduce deficits governments must increase taxes of cut expenditures. b. need not cause unemployment to increase if the central bank allows the exchange rate to vary freely. c. need not cause unemployment to increase if the central bank maintains a fixed exchange rate. d. need not cause unemployment to increase if tax increases are used to reduce the deficit. 29. Economists agree that a. fiscal policy can be used to shift the AD curve. b. monetary policy should actively be used to stabilize the economy. c. fiscal policy should actively be used to stabilize the economy. d. all of the above are correct 30. The primary argument against monetary and fiscal policy is that a. these policies have an unpredictable effect on AD. b. these policies have too small an effect on AD. c. these policies affect AD with a substantial lag. d. both b and c are correct 8

9 PART TWO: Answer ONE of the following questions. (30 points) (Note that if you answer both questions, only the first answer will be marked.) 1. An economy that has real GDP (or total outputs) less than the full employment level, and needs an expansionary policy. Using a carefully labeled diagrams, evaluate the impact of an expansionary fiscal policy on aggregate demand caused by the multiple effect and crowding out effect. Then analyze the impact of the policy on price level, rate of interest in money market, and the equilibrium real exchange rate in foreign exchange market under the fixed exchange rate regime. 2. Suppose that the world interest rate rises. A. Use a carefully labeled diagrams analyze what would happen to Canada's net foreign investment and the real exchange rate? B. How would your answer in A. change if the elasticity of national saving with respect to the world interest rate is very high? C. How would your answer in A. change if the elasticity of Canada's exports with respect to the real exchange rate is very low? 9