ECONOMICS A02Y: A MATHEMATICAL APPROACH
Fourth in-class test: March 20, 2001
1. The following data describes an economy:
C = 6.000 + 0.8Yd – 16P
I = 1,500
G = 2,500
The equation for Aggregate Demand is
T = 0.1Y (note: T = taxes – transfers)
X = 3,000 – 2P
IM = 1,000 + 0.02Y + 3P
A) Y = 20,000 – 30P B) Y = 40,000 – 50P C) Y = 40,000 – 70P D) Y = 48,000 – 50P
E) Y = 48,000 – 70P F) Y = 46,666 – 50P G) Y = 56,000 – 70P H) none of the above
2. If Aggregate Supply is perfectly elastic at P = 100, a decrease in exports of 600 for the
economy of question #1 would, after a price adjustment,
A) shift Aggregate Demand left by 2000 and increase equilibrium Y by 2000
B) shift Aggregate Demand right by 2000 and increase equilibrium Y by 2000
C) shift Aggregate Demand down by 2400 and decrease equilibrium Y by 2000
D) shift Aggregate Demand left by 2400 and decrease equilibrium Y by 2400
E) shift Aggregate Demand right by 2400 and increase equilibrium Y by 2400
F) shift Aggregate Demand down by 2000 and decrease equilibrium Y by 2000
G) shift Aggregate Demand left by 2400 and decrease equilibrium Y by 2000
H) none of the above
3. Suppose that the equation for Aggregate Expenditure is AE = 1500 + 0.75Y – 2.5P and
the equation for Short-run Aggregate Supply is P = (Y – 3000)/20. Then the equilibrium
price level and real GDP ($) in the short-run is:
A) 80 and $4000
E) 100 and $6000
B) 80 and $5000
F) 150 and $4000
C) 100 and $4000
G) 150 and $6000
D) 100 and $5000
H) none of the above
4. Suppose that the equation for Aggregate Expenditure is AE = 1500 + 0.75Y – 2.5P and
the equation for Aggregate Supply is P = (Y – 3000)/20. What is the equilibrium price
level and GDP if government spending increases by 300?
A) 80 and $4000
E) 140 and $5800
B) 100 and $5000
F) 140 and $6000
C) 120 and $5500
G) 150 and $6000
D) 120 and $6000
H) none of the above
5. Which of the following statements is true?
A) Short-run Aggregate Supply is positively sloped because factor prices increase with
increases in output
B) Long-run Aggregate Supply is perfectly inelastic because output prices adjust in the
long-run
C) The difference between the short-run and long-run aggregate supply is due to the time
period for fixed capital to become variable
D) An increase in factor prices decreases equilibrium GDP and increases the price level
in the short-run
E) Fiscal policy will likely increase equilibrium GDP relatively more than the price level
if unemployment is low
F) none of the above
6. Suppose that the price level and real GDP are in short-run and long-run equilibrium at
P0 and Y0 and that Aggregate Demand is negatively sloped and short-run Aggregate
Supply is positively sloped. What is the equilibrium effect relative to P0 and Q0 of a
technological change that increases the productivity of production?
A) Price and GDP will fall in the short-run and long-run
B) Price and GDP will fall in the short-run and price will fall while GDP returns to Y0 in
the long-run.
C) Price falls and GDP increases in the short-run and in the long-run
D) Price falls and GDP increases in the short-run and price falls while GDP returns to Y0
in the long-run
E) Price falls and GDP increases in the short-run and price rises while GDP returns to Y0
in the long-run
F) Price rises and GDP increases in the short-run and price falls while GDP increases in
the long-run
G) none of the above
7. Suppose that the Bank of Canada liabilities (currency and private bank deposits) equal
$25B; currency in circulation equals $21B, and the target reserve ratio equals 6.25%.
Then the money supply will equal
A) $46 billion
E) $89 billion
B) $82 billion
F) $336 billion
C) $85 billion
G) $400 billion
D) $100 billion
H) none of the above
8. Suppose that the price level and real GDP are in short-run and long-run equilibrium P0
and Y0 and that Aggregate Demand is negatively sloped and short-run Aggregate Supply
is positively sloped. What is the equilibrium effect relative to P0 and Q0 of an increase in
taxes?
A) Price and GDP will fall in the short-run and long-run
B) Price and GDP will fall in the short-run and price will fall while GDP returns to Y0 in
the long-run
C) Price falls and GDP rises in the short-run and in the long-run
D) Price falls and GDP falls in the short-run and price falls while GDP returns to Y0 in
the long-run
E) Price rises and GDP falls in the short-run and price falls while GDP returns to Y0 in
the long-run
F) Price rises and GDP falls in the short-run and price rises while GDP returns to Y0 in
the long-run
G) none of the above
9. Suppose that the target reserve ratio is 12.5%. The Bank of Canada sales of $100
million in bonds will (eventually)
A) decrease reserves by $100 million and decrease money supply by $700 million
B) decrease reserves by $100 million and decrease money supply by $800 million
C) decrease reserves by $100 million and decrease money supply by $1250 million
D) increase reserves by $100 million and increase money supply by $700 million
E) increase reserves by $100 million and increase money supply by $800 million
F) increase reserves by $100 million and increase money supply by $1250 million
G) none of the above
10. Suppose that an investment will yield a return of $50,000 at the end of the third year.
What is the present value of this investment if the expected interest rate is 8%?
A) $35,854
E) $42,000
B) $36,752
F) $42,867
C) $39,000
G) $62,896
D) $39,692
H) none of the above
11. Which one of the following is false?
A) Bank of Canada switching Federal Deposits to private banks increases reserves
B) Bank of Canada purchases of Federal Bonds increases the money supply
C) An increase in currency in circulation by the public (ceteris paribus), decreases
reserves
D) Private bank borrowings of reserves increases the money supply
E) An increase in equilibrium GDP increases the speculative demand for money
F) The quantity demanded of money is low when interest rates are high
G) none of the above
12. Suppose that the equation for the demand for money is MD = 400 – 7500i (where i is
the interest rate) and the Marginal Efficiency of Investment (Demand for Investment) is I
= 85 – 250i. If the money supply = 100, then the equilibrium
A) interest rate is 5% and investment is 75
B) interest rate is 5% and investment is 71.25
C) interest rate is 5.5% and investment is 71.25
D) interest rate is 5.5% and investment is 70
E) interest rate is 6% and investment is 75
F) interest rate is 6% and investment is 70
G) none of the above
13. The effect of an increase in government spending on equilibrium, ceteris paribus, is
A) an increase in GDP, the interest rate, and investment
B) an increase in GDP and the interest rate but a decrease in investment
C) an increase in GDP and investment but a decrease in the interest rate
D) an increase in GDP and investment but an increase in the interest rate
E) an increase in GDP but a decrease in the interest rate and investment
F) a decrease in GDP, the interest rate, and investment
G) none of the above
14. Bank of Canada purchases of government bonds has which of the following effects
on equilibrium?
A) decreases money supply, the interest rate, investment and GDP
B) decreases money supply, investment and GDP but increases the interest rate
C) increases money supply, and investment but increases the interest rate and GDP
D) increases money supply, but decreases the interest rate, investment and GDP
E) increases money supply, and the interest rate but decreases investment and GDP
F) increases money supply, and investment but decreases the interest rate and GDP
G) increases money supply, investment and GDP but decreases the interest rate
H) increases money supply, investment, GDP and the interest rate
I) none of the above
15. Which of the following will not increase the multiplier effect of an increase in
government expenditure?
A) higher marginal propensity to consume
B) lower tax rates as a proportion of income
C) more inelastic short-run aggregate supply
D) more inelastic marginal efficiency of investment
E) lower transactions demand response to changes in GDP
F) none of the above