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Final

ECON 1000 Study Guide - Final Guide: Money Multiplier, Open Market Operation, Money SupplyExam


Department
Economics
Course Code
ECON 1000
Professor
All
Study Guide
Final

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1
CARLETON UNIVERSITY
Economics 1000 Section B,
Answer Sheets
2009 April (Winter) Macro Final - ANS
George Kowalski

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PART A. MULTIPLE CHOICE ANSWER SHEET
NAME___________________________________________________________
[SURNAME, GIVEN NAME]
STUDENT NUMBER_______________________________________________
USE UPPER CASE LETTERS TO ANSWER.
1. __________B
2. __________B
3. __________D
4. __________D
5. __________C
6. __________A
7. __________A
8. __________B
9. __________B
10. __________C
11. __________A
12. __________B
13. __________B
14. __________D
15. __________C
16. __________B
17. __________B
18. __________B
19. __________B
20. __________C

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3
PART B: SHORT ANSWERS. DO 5 OUT OF 8. 8 MARKS EACH
1. Suppose that there was a bad harvest in Brazil, and as a result coffee prices went up
this year at coffee shops all over Canada. What do you expect would happen to coffee
consumption? In what direction would the CPI move, ceteris paribus? Would that
change correctly reflect the impact on consumers’ welfare? Explain briefly.
ANS.
Consumption of coffee would fall.
The CPI would rise, ceteris paribus.
Regarding impact on consumers’ welfare:
First, since coffee would represent only a very small portion of the market basket used
to calculate the CPI, the impact on consumers’ welfare would be small. Secondly, the
CPI does not account for: (1) consumers’ ability to substitute towards goods that
become cheaper over time; (2) the increased purchasing power due to the introduction
of new goods; and (3) unmeasured changes in quality of goods. Therefore, consumers
could switch to cheaper substitutes for coffee, such as tea, thereby further mitigating
any fall in welfare.
2. Suppose that Canadian citizens start saving more as a result of changes to tax laws
(i.e., tax incentives provided to encourage saving). Assume that Canada is a small open
economy with perfect capital mobility. What does this imply about the supply of loanable
funds, the real interest rate and net capital outflow? What is the impact on the real
exchange rate and net exports? Use diagrams to illustrate your answer.
ANS.
The supply of loanable funds increases, and initially the equilibrium domestic real
interest rate falls. Because of the lower domestic interest rate, Canadian net capital
outflow rises (see diagram (a) below). Or alternatively, net capital outflow rises because
national saving has increased but domestic demand for loanable funds for domestic
investment remains the same. Hence, the additional surplus is invested abroad.
This increase in NCO makes the supply of dollars in the foreign-currency market shift to
the right, and the real exchange rate of the dollar depreciates (diagram b). The lower
dollar results in higher net exports.
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