ec140 final cheat (1)

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Wilfrid Laurier University *

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EC140

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Economics

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Feb 20, 2024

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Part 1 - 15 questions (ch. 4-7) Chapter 4 Output gap and potential GDP If canada’s nominal gdp in 2021 was $2.5 trillion and Canada is experiencing an inflationary gap, then Canada’s potential GDP in 2021 is most likely: Answer: $2.4 trillion Chapter 5 BRUH NO LC???? Chapter 6 Inflation rate In dec 2021, the CPI for ON was 146.0. In dec 2022, the CPI was 154.8. What was the annual inflation rate for ON in the past year? Answer: (154.8-146.0)/146.0 = 6.03% Participation In ON, among core age women (age 25-54) we have the following data: pop. 7600700 employed 6214900 unemployed 232400 What is labour force part. Rate? Answer: LF/pop = (232.4+6214.9)/7600.7 = 84.83 Average propensity to consume If C=50+0.5Yd and Y=Yd=200 what is the APC Answer: C=50+0.5(200) = 150 APC=C/Yd = 150/200 = 0.75 Consumption At an income level where the consumption function lies below the 45° line, households Answer: have positive savings Solving for equilibrium If C=50+0.6Yd and I 0 =50, what is equilibrium income Y? Answer: AE=50+0.6Y+50=Y, 100+0.6Y=Y, 100=0.4Y, Y=250 Savings If C=50+0.6Yd and I 0 =50, what is equilibrium savings? Answer: AE=Y=250, Y=C+S, 250=50+0.6(250)+S, 250=50+150+5 S=50 Thrift People decide to save more, and the consumption function shifts down, and savings function shifts up. Now C=20+0.6Yd and I=50. in new equilibrium what is equilibrium savings? Answer: AE=70+0.6Y=Y, 70=0.4Y, Y=175, S=I=50 Multiplier If C=50+0.6Yd and I=50 what is the SM? Answer: 1/(1-0.6) = 2.5 Unemployment and employment Part. rate M: 94.7% W: 89.2% Emp. rate M: 91.4% W: 85.6% What is the unemployment rate for women? Answer: ((part. Rate-emp. rate)/part. rate) x100, ((89.2-85.6)/89.2)x100 = 4.04 Investment In a simple macro model without government or trade, C=100+0.75Yd, and equilibrium national income is 1000. All investment is autonomous. What is the level of investment in the economy? Answer: AE=C+I=Y, 100+0.75(1000)+I=1000 100+750+I+1000, I=150 Chapter 7 Income change Refer to the figure. Which of the following would shift AE such that equilibrium real GDP would be equal to Y a ? Answer: autonomous investment decreases Government Total tax revenue is $200 billion. The government spends $75 billion on government purchases, and $100 billion on transfer payments. Which of the following statements is true? Answer: the government has a budget surplus of $25 billion T=200-100=100, T-G=100-75= 25>0 = surplus Net exports The US economy improves, leading to higher US national income. Which of the following is true for the Canadian economy? Answer: net exports increase because canadian exports increase Marginal propensity to spend An economy is characterized by the following info. C=50+0.6Yd, I=100, G=50, T=0.2Y, X=100, and IM=0.1Y. What is the marginal propensity to spend? Answer: z = MPC(1-t)-m, MPC=0.6, t=0.2, m=0.1, z=0.6(1-0.2)-0.1 = 0.38 Income In an economy with no government and no trade, if C=150+0.8Yd and I=150, what is equilibrium income? Answer: 150+0.8Yd+150=Y, 300+0.8Yd=Y, 300=0.2Y, 1500=Y Shift in AE The figure represents the CDN economy. What could cause the shift from AE 1 to AE 2 ? Answer: rise in US income National income An economy is characterized by the following information C=50+0.6Yd, I=100, G=50, T=0.2Y, X=100, IM = 0.1Y. What is equilibrium national income? Answer: AE=C+I+G+X-IM, =50+100+500+100(0.6(1-0.2)-0.1), Y=300+0.38Y, Y=484 (rounded) Government An economy is characterized by the same variables above^. What is the government budget surplus or deficit? Answer: T=0.2(484) = 96.8, 96.8-50=46.8=surplus Business cycle The trough of a business cycle is associated with: Answer: high cyclical unemployment Interest rates An increase in the interest rate in Canada will have what effect on desired AE? Answer: reduction, as it reduces both C and I Parallel shifts The figure up there^^ represents the CDN economy. Which of the following would cause a shift from AE1 to AE2? Answer: rise in business confidence OR increase in government purchases, G Consumption An economy is characterized by a consumption function. C=300+0.8Yd and a government net tax rate, t=0.25. If national income is Y=1000 what is the level of private savings, S, in the economy? Answer: C=300+0.8(1-0.25)x1000 = 900 S=Yd-C=(1-0.25)x1000-900 = -150 Government A government has government spending, G=2000, and net tax revenue of T=0.15Y. What is the value of national income for which the government budget is balanced? Answer: G=T, 2000=0.15Y, 13 333.33=Y Exports and income In the simple macro model, an increase in Canadian exports Answer: causes an increase in Canadian income Simple multiplier In an economy, the MPC is 0.6, the marginal propensity to import is 0.1 and the net tax rate is 0.25. The government increases government spending by $100 million. What is the effect on equilibrium national income? Answer: z=0.6(1-0.25)-0.10 = 0.35, SM=1/(1-0.35) = 1.54, 100 x 1.54 = 154 000 000 Part 2 - 15 questions (ch8-12) Chapter 8 Reduction in AE Which of the following events would cause the AE line to shift or rotate downwards? Answer: Increase in interest rates. Simple Multiplier Current estimates are that Canada has a marginal propensity to consume of 0.8, a net tax rate of 0.25, and a marginal propensity to import of 0.35. What is the simple multiplier in Canada? (Two decimal points.) Answer: z = 0.8(1-0.25)-0.35 = 0.25 SM = (1 / 1-0.25) = 1.33 Multiplier Effect Current estimates are that Canada has a marginal propensity to consume of 0.8, a net tax rate of 0.25, and a marginal propensity to import of 0.35. In a demand determined macro model with constant prices, a $10 billion increase in government spending would lead to an increase of $ ..... Billion in real GDP. (eg. $47.3 billion = 47.3) Answer: ΔY/ΔA = SM = 1.33 13.3 / 10 = 1.33

Wealth and Consumption An exogenous fall in the domestic price level has what effect? Answer: An increase in real wealth and consumption. AE Shifts Which of the following functions would cause the AE function to shift upwards in a parallel way? Answer: A decrease in the aggregate price level. Government The government increases government spending, while also reducing taxes. What change do we see in aggregate demand? Answer: A right shift of the AD curve. Canadian Prices Prices in Canada rise. What effect would this have on the aggregate demand (AD) curve in Canada? Answer: A movement up and left along the AD curve. U.S Prices Prices in the United States rise. What effect would this have on the aggregate demand (AD) curve in Canada? Answer: A right shift of the AD curve. Business Optimism If business optimism increases, what happens in the AD/AS model? Answer: Aggregate expenditure shifts up and aggregate demand shifts right. Supply Firms face falling input costs and improving technology. What happens to aggregate supply (AS)? Answer: AS Increases (shifts right) Input Costs Firms face rising input costs. In the AD/AS model, what is the effect on equilibrium price level and output? Answer: Price level rises, output falls. Chapter 9 Exchange Rates The Canadian exchange rate with the United States increases from $1.24 to $1.35. What is the short run effect in Canada? Answer: Aggregate demand shifts right. Equilibrium In the short-run, changes in government policy causes an increase in prices with no change in GDP. Which of the following changes is consistent with these effects? Answer: Minimum wage increases, tax rates decrease. Short Run Before the 2007/2008 financial crisis, the Canadian economy was functioning near its peak. The financial crisis led to a significant reduction in personal wealth in Canada and in other countries. In the short run, this would cause: Answer: Real GDP and the price level to decrease. Fiscal Response After the financial crisis, the Canadian government responded by increasing government spending. In an AD/AS model, the short term effect of this spending would be to: Answer: Shift the AD curve to the right. Output Gap In macroeconomics, the output gap is the difference between: Answer: Actual real income and potential real income. Tax Rates - Short Run In the short term, how does the economy respond to a decrease in net tax rates? Answer: The price level and output increase. Tax Rates - Long Term Assuming potential GDP does not change, what is the long run effect of a reduction in the net rate? Answer: Price level increases. Technology What is the long run effect of a permanent improvement in technology? Answer: Aggregate supply shifts right and potential GDP shifts right. Exports What is the long run effect of a permanent decrease in autonomous exports? Answer: Lower price level, no change in GDP. Hysteresis A lengthy recession may cause potential GDP to fall, due to hysteresis effects. In this case, what is the effect of a permanent decrease in autonomous exports? Answer: Lower price level, lower GDP. Aggregate Expenditure Consider the demand-determined model with constant prices. What effect would an appreciation of the Canadian dollar have on aggregate expenditure (AE)? Answer: Aggregate expenditure shifts/rotates down. Prices, Consumption, and Exports An exogenous increase in the domestic price level has what effect? Answer: A decrease in consumption and exports. AD Shifts Which of the following events would cause the AD function to shift to the left? Answer: A decrease in foreign incomes. Simple Multiplier The Canadian Government decides to spend $15 billion on a new rail line between Quebec City and Windsor. Consider our AD/AS model - if this increase in government spending shifts the AD-curve to the right by $25 billion, what must the marginal propensity to spend, z, in the Canadian economy? Answer: ΔY/ΔA = 25/15 = (1 / (1-z)) => 1-z = 15/25 => 1-z = 0.6 Z = 0.4 Tax Rates The government reduces the net tax rate. What change do we see in aggregate demand? Answer: Shifts right and becomes flatter. Supply Firms face rising input costs and improving technology. What happens to aggregate supply (AS)? Answer: The effect is uncertain. Equilibrium Consider the equilibrium of the AD/AS model. If both real output and the price level rise, this would likely be due to a: Answer: Rightward shift of the aggregate demand curve. Interest Rates In the equilibrium of the AD/AS model, an increase in interest rates in Canada would lead to: Answer: Price level falls, output falls. Equilibrium The price level falls and real GDP increases. Which of the following could lead to this outcome? Answer: Input prices fall. Production Technology Production technology improves and there is a reduction in the net tax rate. What is the effect on the price level and real GDP in Canada? Answer: Real GDP increases, uncertain effect on prices. Multiplier If the AS curve is upward sloping, the multiplier is: Answer: Positive and less than the simple multiplier. Chapter 10 Short run Which of the following would cause a decrease in the price level in the short run? Answer: an increase in desired savings (reduces consumption and shifts AD left) Long run Which of the following changes would cause a reduction in the price level in the long run? Answer: a reduction in aggregate demand Input prices If input prices for CDN firms decrease, what are the long-term consequences on the price level and GDP? Answer: no change in price level or real output Exchange rates - short run The CDN dollar depreciates with respect to the US dollar. What is the short-run impact on the price level and real GDP Answer: price level and real GDP increase Exchange rates - long run The CDN dollar depreciates with respect to the US dollar. What is the long-run impact on the price level and real GDP? Answer: price level increases, no change in real GDP Expansionary policy 1 Starting from long-run equilibrium, in which of the following situations would expansionary fiscal policy be an appropriate government response Answer: decrease in investment expenditure 2 if the CDN economy is operating with actual GDP lower than potential, which policy should the CDN government adopt to eliminate this gap? Answer: increase government spending on infrastructure OR reduce corporate taxes OR increase employment insurance transfers Growth

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