Econ 1102
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ECON 1102 Exam Practice QuestionsProfessor Cyrus1. Suppose the following equations describe the Canadian economy:C = 600 + 0.75 (Y – T) – 400rI = 525 – 600r G = 600NX = 500T = 300 Suppose further that the following table describes the monetary policy rule of the Bank of Canada:Rate of inflation (π)Real interest rate (r)0.000.010.010.020.020.030.030.040.040.05a. Derive planned aggregate expenditure as a function of output and the real interest rate. Construct a table that shows the relationship between the inflation rate and the level of short-run equilibrium output, and graph this aggregate demand curve.b. Based on the aggregate demand curve you constructed for part (a), suppose that when the inflation rate is 2%, the Canadian economy is at both a short-run and a long-run equilibrium. What is the level of potential output? Add the inflation adjustment and long-run aggregate supply curves to your diagram, and show the equilibrium. c. Suppose that net exports fall to 490 due to a recession that reduces exports to the United States. Derive the new PAE equation and calculate short-run equilibrium output at each inflation rate. Show the new aggregate demand curve on your graph. d. What happens to output and inflation in the short run? What type of output gap does this open up in the Canadian economy? Explain the adjustment process that we would expect to occur, and show the adjustment graphically. What are output and inflation equal to in the long run?2. The country of Freedonia uses the zeppo as its currency. The equations representing the demand for and supply of zeppos in the foreign exchange market are: Demand QD = 30,000 – 5000e Supply QS = 15,000 + 2500e
where e is the nominal exchange rate, expressed as dollars per zeppo.a. What is the market equilibrium value of the zeppo? b. The Central Bank fixes the exchange rate at $3 per zeppo. Is the zeppo overvalued or undervalued? To maintain the fixed exchange rate, will the Central Bank need to buy or sell zeppos on the foreign exchange market? Explain. c. At the fixed exchange rate, what is the quantity of zeppos demanded? What is the quantity of zeppos supplied? Will the country experience a balance-of-payments deficit or a balance-of-payments surplus? Calculate the balance-of-payments deficit or balance-of-payments surplus in both zeppos and dollars. 3. Suppose that the following table shows GDP, population, the number of employed workers, and the number of hours worked for countries A, B, C, and D.CountryGDPPopulationEmployed WorkersHours WorkedA$250 billion125 million62.5 million62.5 billionB$100 billion50 million20 million20 billionC$50 billion50 million25 million20 billionD$25 billion25 million12.5 million5 billiona. Calculate the standard of living (GDP per capita) for the four countries.b. Calculate output per hour worked, hours per employed worker, and the percentage of the population that is employed.c. Compare the standard of living between A and B, and between C and D. Note that the standard of living can be shown as Y/POP = Y/N × H/N × N/POP, where Y is output, POP is population, N is the number of employed workers, and H is the number of hours worked. To what extent do these pairs of countries have differences in output per hour worked, differences in hours per employed worker, or differences in the percentage of the population that is employed?4. Assume the small economy of Crossica has the following demand and supply for MP3 players.