Room:
MGEA06 – Introduction to Macroeconomics: A Mathematical Approach
Final Exam, Winter 2016
Last name/Family name: ________________________________________________
First name: ___________________________________________________________
ID#: _________________________________________________________________
Date & Time: Tuesday, April 12, 2016, 7:00pm – 10:00pm
Instructor: Iris Au
Aids Allowed: Non-programmable calculator
Time Allowed: 180 minutes
Total number of pages (including the cover page): 16
Question(s)
Marks
1–2
(out of 4)
3–5
(out of 6)
6–8
(out of 6)
9 – 12
(out of 8)
13 – 14
(out of 4)
15 – 17
(out of 6)
Question(s)
18 – 21
(out of 8)
22 – 23
(out of 4)
24 – 26
(out of 6)
27 – 28
(out of 4)
29 – 30
(out of 4)
31 – 32
(out of 4)
Marks
Question(s)
Marks
33 – 35
(out of 6)
36
(out of 10)
37
(out of 10)
38
(out of 10)
Total
(out of 100)
The University of Toronto's Code of Behaviour on Academic Matters applies to all University of Toronto Scarborough
students. The Code prohibits all forms of academic dishonesty including, but not limited to, cheating, plagiarism, and the
use of unauthorized aids. Students violating the Code may be subject to penalties up to and including suspension or
expulsion from the University.
MGEA06 Final Exam – Winter 2016
© Iris Au
1
Instructions – please read carefully
1) Questions related to the content of the exam will NOT be answered.
2) On the cover page of this booklet
 PRINT your family name and first name.
 Enter your student number.
 Write down your assigned room.
If you fail to do one of the above tasks, 4 marks will be deducted from your final
score.
3) If you DO NOT write in your assigned room, 5 marks will be deducted from your
final score.
4) DO NOT UNSTAPLE the booklet. If you do it, 10 marks will be deducted from
your final score.
5) This exam consists of TWO parts.
 Part 1 consists of 35 questions which required you to put your answers in the
designated boxes. If answers are not written in the designated boxes, no
marks will be given for that question. For questions that required you to
show work, you must do so in order to receive full credit. We will ONLY grade
your work in the white space between the question and the designated answer
box. If you do not show your work, you will not receive full credit even your
answer is correct. However, you may receive partial credit for showing your
work even your final exam is incorrect. Each question is worth 2 marks, and there
is no deduction for wrong answers.
 Part 2 consists of 3 questions which required you to provide detailed explanation.
Be sure to label your diagrams as clearly and completely as possible and to
explain why the curves shift and to which direction. You can write your written
explanation beside (and below if necessary) the diagram. When providing written
explanation, you can use point form, use / to represent increase/decrease and
symbols for variables that we used in class (say, Y = output). Also, the flow of
your answer matters. A clear, well-organized answer is worth more than a long
rumbling paragraph.
6) DO NOT put your answer on the blank pages of the left-hand sided of the booklet,
we WILL NOT grade any answers on those pages. However, you can use those
pages as rough/draft paper.
Good luck & have a great summer break! 
MGEA06 Final Exam – Winter 2016
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PART I –70 MARKS (2 MARKS PER QUESTION)
Questions 1 – Question 2: An open economy consumes four goods only. The following table shows
the prices and the quantities exchanged in 2014 and 2015. The year of 2014 is the base year.
2014
Quantity exchanged
9
5
5
8
2015
Quantity exchanged
10
6
4
7
Goods
Price
Price
$5.5
$6
1
$3
$2.5
2
$4
$4
3
$3
$2
4
Additional information:
 Households purchased 60% of good 1, and the remaining shares of good 1 were split equally
between firms and government.
 Firms purchased 20% of good 2 exchanged, and the remaining was purchased by households. In
addition, 25% of good 2 exchanged were imported goods and they were all bought by households.
 The consumption of good 3 was equally split among households, (domestic) government, and
foreigners.
 Government purchased 30% of good 4 and the remaining was bought by firms. In addition, 15% of
good 4 was purchased abroad.
 Unless otherwise stated, the goods are produced within the economy in this question.
Question 1
Find the GDP deflator in 2015. Show your work and keep your answer to 2 decimal places if needed.
GDP deflator:
Question 2
Find the share of (nominal) consumption in nominal GDP in 2015. Show your work and keep your
answer to 2 decimal places if needed.
Share of consumption (in % terms):
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Question 3
During 2015, the country of Sildavia recorded a GDP of $65 billion, interest payments of $15 billion,
imports of $13 billion, profits of $7 billion, exports of $15 billion, and rent of $7 billion, wages during
2015 in Sildavia were:
Wages:
Question 4
Determine each of the following statements is true or false.
__________ In a period of unexpected deflation, lenders benefit because there are more people eager
to borrow as prices are falling.
__________ Unexpected/unanticipated inflation increases the uncertainty about the future.
Question 5
Suppose that a bank wishes to make a 5% rate of return on a one-year loan but expects that inflation
over the course of the loan will be roughly 3%. Determine each of the following statements is true or
false.
__________ If the bank charges an interest rate of 8% or higher, this will guarantee it to earn the
expected return.
__________ If the bank charges 8% and the inflation rate is less than 3%, then the bank will have
earned a larger rate of return than expected.
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Question 6 – Question 7: In the initial period, a city has an adult population of 15000. Among those
who are above 15 years old, 9400 people have full-time jobs; 1800 people have part-time jobs, 3000
people are not available for work; and the remaining people are actively looking for jobs.
Question 6
Find the unemployment rate and the labour force participation rate in the initial period. Be sure to
show your work and rounded your answer to 2 decimal places.
Unemployment rate (in % terms)
Labour force participation rate (in % terms)
Question 7
In a later period, the economy accepts 500 refugees and all refugees are above 15 years old. Of the 500
refugees, 40% of them enter the labour force. Of those who enter the labour market, 40 of them secure
full-time employment and 100 of them obtain part-time. Assuming these are the only changes in the
labour market, what is the employment rate in the later period? Show your work and rounded your
answer to 2 decimal places.
Employment rate (in % terms):
Question 8
Alvin’s current income is $600. If the annual increase of his income is 8.75%, use the rule of 70 to find
his income 24 years from now.
Income 24 years from now:
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Question 9
Determine each of the following statements about diminishing marginal product is true or false.
__________ Diminishing marginal product of capital implies an economy should not allocate any
resources to accumulate physical capital.
__________ Diminishing marginal product of capital implies there will be a slowdown in
productivity if the only source of economic growth comes from capital accumulation.
Question 10
Determine each of the following statements about long-run economic growth is true or false.
__________ All else equal, countries with more natural resources have a higher GDP per capita than
those with few natural resources.
__________ Over the past two hundred years, improvements in productivity have offset lost
productivity reduction due to less land being available.
Question 11
Suppose you own a 3-year bond that has a face value of $1000 with a coupon rate of 3.6%, what is the
minimum price received in order for you to sell the bond if the current/market interest rate is 1.8%?
Show your work and keep your answer to 2 decimal places if necessary.
Minimum price received:
Question 12
Determine each of the following statements about the loanable funds market of a closed economy is
true or false.
__________ A fall in expected inflation will have no effect on the equilibrium level of investment.
__________ A fall in expected inflation will lower both the nominal and real interest rates when the
loanable funds market reaches its new equilibrium.
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Question 13
Use the diagram below to answer Question 13.
Interest rate

SF
If the interest rate is higher than 8%, the
quantity supplied of loanable funds will less
than
the
quantity
of
loanable
funds
demanded. ____________ (True/False)
8%

A fall in perceived business opportunities
will cause the equilibrium interest rate to fall
below 8% and the equilibrium level of
DF
$5 million
national savings to fall below $5 million.
Qty of funds
____________ (True/False)
Question 14
Suppose the economy consists of 10 people; there are 4 Type A people and 6 Type B people. The
following table shows how their consumption behaviour for a Type A person and a Type B person.
Level of Consumption
Type A
Type B
$860
$750
$1660
$1400
Current disposable income (YD)
$0
$1000
Find the aggregate marginal propensity to consume for this economy. Show your work and keep your
answer to 2 decimal places if necessary.
Aggregate marginal propensity to consume:
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Question 15 – Question 17: A closed economy can be described by the AD-AS model.
Planned aggregate expenditure:
Short-run aggregate supply (SRAS):
Long-run equilibrium level of output:
AEPlanned = 500 – 2P + 0.6Y
W
P = (0.2Y – 90)   , where W = wage rate
 50 
Y = 850
Initially, the economy is in its long-run equilibrium, and the equilibrium levels of price and wage rate
are 80 and 50 respectively.
Question 15
Now, suppose there was a fall in the housing prices and autonomous expenditure falls by 40.
The AD curve has shifted horizontally to the __________________ by _________________.
Left/Right
How much.
Question 16
When the economy reaches its short-run equilibrium, how much will the price level change? Show
your work and keep your answer to 2 decimal places if necessary.
Change in price:
Question 17
Compare to the initial long-run equilibrium, find the change in the equilibrium levels of price and wage
when the economy reaches its (new) long-run equilibrium. Show your work and keep your answer to 2
decimal places if necessary.
Change in price:
MGEA06 Final Exam – Winter 2016
Change in wage:
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Question 18
Determine each of the following statements about the AS-AD model is true or false.
__________ After a negative supply shock, policy makers need to determine which is more
detrimental, high inflation or high unemployment, to the overall economy since there is
no way for policy makers to reduce both high inflation and high unemployment at the
same time.
__________ A manufacturing boom during the late 1990s has created an oversupply of tractors, a
necessary implement in agricultural production. As a result, the short-run equilibrium
level of price falls.
Question 19
Uplandia is concerned about the projection of its debt-to-GDP ratio over the next two years. The
budget deficit is projected to be growing at 3% over the next two years. Complete the following table
and keep your answer to 2 decimal places if necessary.
Year
1
Real GDP
$800 millions
2
$824 millions
3
$848.72 millions
Debt
$200 millions
Budget deficit
$20 millions
Debt-to-GDP ratio
25%
$20.6 millions
28.49%
Question 20
Determine each of the following statements about fiscal policy is true or false.
__________ The theory of Ricardian equivalence argues that expansionary fiscal policy is not
effective because it causes higher interest rates and crowds out investment spending.
__________ Government borrowing will not crowd out private investment spending if
unemployment is high and the fiscal expansion causes an increase in incomes and a
decrease in saving at each interest rate.
Question 21
Classify the following actions as either discretionary fiscal policy or an automatic stabilizer.
Discretionary fiscal policy or Action
Automatic stabilizer
The government increases tax rates to prevent inflation.
A reduction in tax revenue that results from a recession reducing
personal income and corporate profits.
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Question 22 – Question 24: Econland has a very simple banking system, in which there is only one
chartered bank (The ABC Bank). The central bank of Econland imposes a minimum required reserve
ratio of 6%. Households in Econland hold a fixed amount of $1400 in the form cash to facilitate their
daily transactions and will deposit any excess amount into their bank accounts. The initial balance
sheet of the ABC Bank is as follow:
Assets
Liabilities & Equity
Loans
$7050
Demand deposits
$7500
Bank reserves
$550
Equity
$100
Note: Unless otherwise stated, the excess reserves held by the ABC Bank will remain fixed at the
current level as shown in the initial balance sheet and will lend out any surplus of reserves beyond this.
Question 22
Suppose households in Econland increase their money holding by $210, find the changes in loans made
by the ABC Bank and the money supply. Be sure to show your work.
Change in loans:
Change in money supply:
Question 23
Return to the initial situation. Suppose the ABC Bank reduces its excess reserves to $40. Complete the
balance sheet of the ABC Bank when the banking system is back to equilibrium.
Assets
Loans
Liabilities & Equity
Demand deposits
Bank reserves
Equity
MGEA06 Final Exam – Winter 2016
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Question 24
Return to the initial situation. Suppose that the central bank of Econland transfers $60 of government
deposit from the ABC Bank to the central bank. What is the new equilibrium level of money supply?
Be sure to show your work.
Level of money supply:
Question 25
Determine each of the following statements is accurate description about the Bank of Canada (BOC).
Yes/No.
__________
The BOC belongs to the federal government, but it is not a government department.
__________ The BOC is in charge of deterring the counterfeiting of Canadian bank notes.
Question 26
Determine the following events in the money market on the equilibrium interest rate and aggregate
demand.
Interest rate
(increase or decrease)
Aggregate demand
(increase or decrease)
Events
There is an increase in pick-pocketing.
An increase in the voluntary reserve ratio.
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Question 27 – Question 31: Use the income-expenditure model to answer the questions. Suppose a
small open economy with fixed prices can be described by the following equations:
Consumption:
Planned investment:
Exports:
Imports:
C = 500 + 0.8YD;
IPlanned = 340 – 500i
X = 820 – 40EFC/DC
IM = 265 + 0.14Y + 10EFC/DC
Government spending: G = 400
Taxes:
T = 0.14Y – 70
Transfers:
TR = 280 – 0.06Y
NOTE: YD = disposable income. In addition, unless otherwise stated, interest rate, i, is held constant
at 0.05 (5%) and exchange rate, EFC/DC, is held constant at 2 (FC per DC). For each question, keep
your answer to 2 decimal places if necessary and be sure to show your work.
Question 27
Find the equilibrium level of output.
Output:
Question 28 – Question 31
The economy is initially in its long-run equilibrium as shown in Question 27.
government spending and lump-sum transfer rise by 50.
Suppose both
Question 28
When the economy reaches its new equilibrium, find the change in output level and the budget balance.
Change in output:
MGEA06 Final Exam – Winter 2016
Change in budget balance:
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Question 29
Suppose the changes in fiscal policy causes the interest rate to change by 0.5 percentage points and the
exchange rate to change by 0.15 FC per DC. Compare to the initial equilibrium as shown in Question
27, find the change in equilibrium level of output.
Hint: You need to determine whether interest rate increases or decreases, and whether DC appreciates
or depreciates as a result of the changes in fiscal policy.
Change in output:
Question 30
Based on your answer in Question 29, find the equilibrium level of private savings.
Private savings:
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Question 31
(Continued from Question 29) Suppose the central bank wants to keep the level of output fixed at its
initial level (the one in Question 27). Determine whether the following actions are appropriate actions
taken by the central bank. Yes/No.
__________
Increase the bank rate.
__________ Increase income taxes.
Question 32
Suppose the balance of payments accounts of an open economy can be summarized by the following
equations (assume there are no other international transactions):
Exports of goods and services = 0.17YF – 170EFC/DC,
where F = Foreign
Imports of goods and services = 0.12Y + 80EFC/DC
Sales of assets to foreign investors = 270 + 60(i – iF),
i & iF are expressed in decimal points
Sales of foreign assets to domestic investors = 100 – 240(i – iF)
Suppose the levels of domestic and foreign output are equal to 3900 and 4800 respectively. Find the
level of domestic current account if foreign interest rate is 3% (i.e. rF = 0.03), which is 4 percentage
points lower than domestic interest rate. Keep your answer to 2 decimal places and show your work.
Domestic current account:
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Question 33
Categorize each of the following transactions to the Canadian balance of payments accounts.
Current account or
Financial account
Payment to foreigners or
Receipts from foreigners
Transactions
A Canadian company purchases a Spanish mining
company stock.
The Bank of Canada sells Canadian dollars in the
foreign exchange market.
Questions 34 – Question 35
Suppose the world consists of two countries, Beta and Celta, only. The market for loanable funds in
Beta and Celta can be described by the following equations:
Country
Demand for loanable funds
Supply of loanable funds
DFB = 250 – 6iB
SFB = 150 + 14iB
Beta
DFC = 240 – 7iC
SFC = 70 + 3iC
Celta
Note: Interest rates are expressed in percentage points (i.e., if i = 5, then i = 5%).
Question 34
Now, suppose the international flows of (financial) capital are allowed. Find the equilibrium world
interest rate.
Interest rate:
Question 35
Based on your answer in Question 34, answer the following questions.
Beta or Celta
Which country runs a current account deficit?
Size of the account balance
Which country runs a financial account surplus?
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PART II – 30 MARKS (10 MARKS PER QUESTION)
Questions 36 (10 marks)
Initially, a closed economy is in a recession. In the past few months, firms in the oil-producing sector
postpone/delay the purchase of new refinery equipment.
Note: Use the AS-AD model to ansewr the question and be sure to identify the new equilibriums in the diagram.
a) What happens to the short-run equilibrium levels of output and price? Explain. (5 points)
b) Suppose the government finds the change in output in part (a) undesirable and wants to keep it at
the long-run level via a change in lump-sum taxes, what should it do? What happens to the price
level? (5 points)
Question 37 (10 points)
The Bank of Canada believes that a change in the target of the overnight rate will affect the Canadian
economy through 4 different channels.
a) Name the four channels. (4 points)
b) Suppose the Canadian economy is currently in a recessionary gap. To eliminate the recessionary
gap, what should the Bank of Canada pursue do? (2 points)
c) Choose any of two of the four channels mentioned in part (a). Explain the effect of the change in
monetary policy mentioned in part (b) on aggregate demand. Only the first TWO explanations will
be graded. (4 points)
Question 38 (10 points)
“When there is a fall in money demand in a small open economy with a flexible exchange rate, this
economy will find its currency to depreciate and its output to increase in the short run.” True/False,
explain in words only.
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