Economics 248 Assignment 2 (version B)
This assignment has a maximum total of 100 marks and is worth 10 percent of your total
grade for this course. You should complete it after completing your coursework for units
4, 5, and 6. Answer each question clearly and concisely.
1. The Canadian consumer confidence rebounded sharply in September 2012. This
is a significant rebound since the plunge in October 2008. According to some
analysts, the good news from Europe and the jump in the stock market appear to
have had an effect on Canadian consumer confidence.
(10 marks)
a. Explain the various factors that buoyed Canadian consumer confidence in
2012.
(2 marks)
b. Explain and draw a graph to illustrate how a rise in consumer confidence can
change real GDP and the price level in the short run.
(2 marks)
c. If the economy was operating at full-employment equilibrium, describe the
state of equilibrium after the increase in consumer confidence. In what way
might consumer expectations have a self-fulfilling prophecy?
(2 marks)
d. Why do changes in consumer spending play such a large role in the business
cycle?
(2 marks)
e. Explain how the economy can adjust in the long run to restore fullemployment equilibrium. Draw a graph to illustrate this adjustment process.
(2 marks)
2. a. Differentiate between monetary policy instruments and monetary policy tools.
(5 marks)
b. Describe the two key tools of monetary policy, and describe how they would
be used by the Bank of Canada to implement a contractionary monetary
policy.
(5 marks)
3. The economy of Kenya is in recession, and the recessionary gap is large. The
World Bank hires you as its economist and asks you to do the following:
(10 marks)
a. Describe the discretionary and automatic fiscal policy actions that might
occur.
(2.5 marks)
b. Describe a discretionary fiscal stimulation package that could be used that
would not bring a budget deficit.
(2.5 marks)
ECON 248v9
Assignment 2B
November 1, 2016
c. Describe the risks of discretionary fiscal policy in this situation.
(2.5 marks)
d. Explain the argument that lower corporate tax rates can increase tax revenue
in Kenya. Consider the Laffer curve in your explanation.
(2.5 marks)
4. a. Explain the concept of the multiplier, and explain the role of the marginal
propensity to save (MPS) in determining the size of the multiplier.
(4 marks)
b. Explain how the size of the multiplier will change when the role of the
marginal tax rate is brought in.
(2 marks)
c. Using the concepts in parts a and b above, calculate the slope of the AE curve
and the size of the multiplier if MPS = 0.28. Then calculate the revised slope
of the AE curve and the multiplier when you know that the imports and the
marginal tax rate will reduce the slope of the AE curve by another 0.15.
(4 marks)
5. The economy has seen the unemployment rate decrease from 8.56 percent to 6.15
percent and the inflation rate increase from 1.4 percent to 3.2 percent. There has
also been a 17 percent increase in consumer spending and a 22.5 percent increase
in investment spending in the same time period.
(10 marks)
a. Given the above, what would you predict about the overall direction of the
economy? Explain your answer by referring to each of the indicators cited.
(5 marks)
b. Describe the fiscal policy that will already be automatically operating, as well
as the appropriate discretionary fiscal policy that the government should
adopt, given the above situation.
(3 marks)
c. Describe the appropriate monetary policy that the Bank of Canada should be
operating, given the above situation.
(2 marks)
6. Describe the contrasting views of the Keynesians and the monetarists with regard
to an appropriate expansionary policy to bring an economy out of a period of high
unemployment caused by a weak aggregate demand.
(10 marks)
7. Suppose Canada can produce 1,500 tons of wheat or 500 tons of steel, and Brazil
can produce 1,000 tons of wheat or 1,500 tons of steel.
(10 marks)
a. What is the opportunity cost of one ton of wheat in Canada? Show your work.
(2.5 marks)
ECON 248v9
Assignment 2B
November 1, 2016
b. What is the opportunity cost of one ton of steel in Brazil? Show your work.
(2.5 marks)
c. Which country has a comparative advantage in producing steel? Explain why.
(2.5 marks)
d. Suppose that trade takes place between Canada and Brazil. Which good will
Brazil import from Canada? Explain why.
(2.5 marks)
8. a.
Describe an export subsidy, and explain the gains and losses that might arise
from such a practice.
(5 marks)
b. Why are developing countries in Africa especially affected by export
subsidies in industrial countries?
(5 marks)
9. In 2012, the Canadian dollar appreciated against the US dollar. Explain the effects
of this appreciation on each of the following.
(10 marks)
a. Canadian importers of goods from the United States
(2.5 marks)
b. Canadian firms that sold commodities to US buyers
(2.5 marks)
c. American tourists who came to Canada
(2.5 marks)
d. US investors who had purchased Canadian securities prior to this currency
appreciation
(2.5 marks)
10. The Global Insight (GI) forecasting firm predicted that the Canadian economy
would bounce back by a stronger-than-expected 1.0 percent on an annualized
basis in the third quarter of 2012 and with a further 0.1 percent in the fourth
quarter of 2012. The firm also expected moderate growth overall in 2013.
(10 marks)
a. What evidence did GI present to support the view that Canada had entered a
recovery?
(2 marks)
b. Use a short-run Phillips curve to explain why the inflation rate may have
increased over the course of 2012.
(4 marks)
c. Under what circumstances might the inflation rate not have increased during
2012?
(4 marks)
ECON 248v9
Assignment 2B
November 1, 2016