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# econ1010a_2011s_may_27_ans.doc

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Economics
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ECON 1010
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YORK UNIVERSITY Department of Economics ECON1010A: Principles of Macroeconomics Midterm #2: May 27, 2011 Duration - 1 hour Aids Allowed Non-programmable calculators only Time Allowed: 60 Minutes The total marks for this test are 50. The test is divided into two parts: Part I - Problem format - is worth 37 marks (37 of the total mark of 50) Part II – Explanations (8 marks) and Multiple choice (5 marks) (13 of the total mark of 50) Show your work where applicable. Please use pen instead of pencil. Print your name and student number clearlyon the front of the exam and on any loose pages. Name: . (FamilyName) (Given Name) Student #: . There are 6 pages to the exam. - 1/6 - ECON1010A: Midterm Test #2: May 27, 2011 Name: _______________________ Part I: Place your answers (and work where necessary) in the space provided. Clearlylabel all axes, curves, and points. 1. MacroModel (12 Marks) An economy has the following set of macroeconomic equations. Consumption: C = 230 + 0.84Yd Net Taxes T = 0.25Y Investment: I = 50 + 0.2Y Exports X = 570 Government Spending: G = 520 Imports IM = 20 + 0.08Y a) What is the Consumption equation as a function of Y (not Yd)? (1 mark) 1 mark: C = 230 + 0.63Y from something like 230 + 0.84(Y – 0.25Y) b) What is the Aggregate Expenditure equation? (2 marks) 1 mark: correct Autonomous part = 1,350 from AE as sum of above C + I + G + X - IM 1 mark: correct Marginal part = 0.75 from AE = 1,350 + 0.75Y c) Calculate the value of Autonomous Spending Multiplier. (1 mark) 1 mark: = 4 from something like 1/(1 – 0.75) d) Calculate the value of Equilibrium Income. (1 mark) 1 mark: Y = 5,400 from AE = Y or 1,350/(1 – 0.75) e)Calculate Consumption at equilibrium. (1 mark) 1 mark: C =3,632 from 230 + 0.63*5,400 or 180 + 0.84*Yd (they’d have to calculate, see below) f) Calculate Net Exports at Equilibrium. (1 mark) 1 mark: X – IM = 118 from 570 – (20 + 0.08*5,400), must be positive g) Calculate the government budget surplus (+)/deficit (-) at equilibrium? 1 mark: = +830 from something like 0.25*5,400 – 520 h)Prove that your equilibrium income is correct. (1 mark) 1 mark: Show C + I + G + X – IM = Y, i.e. 3,632 + 1,130 + 520 + 118 = 5,400 i) Draw a diagram showing equilibrium Y given the AE function. Be sure to label numerically Autonomous Expenditure, the slope of AE, and equilibrium Y. (3 marks) 1 mark: AE as a straight line intersecting the vertical axis above 0. Must designate AE and Y (or better, real AE and real Y) as the axes 1 mark: Equilibrium Y at intersection of AE and 45 (equality) line 1 mark: AE intercept = 1,350, and equilibrium Y = 5,400 - 2/6 - ECON1010A: Midterm Test #2: May 27, 2011 Name: _______________________ 2. AE/Y and Fiscal Policy (12 marks) The following are a country’s equations for Consumption, Taxes, and Aggregate Expenditure (C, I, G, X and IM are included in the AE function). C = 350 + 0.8Yd T = -30 + 0.2Y AE = 1,600 + 0.6Y a) What is equilibriumGDP? (1 mark) 1 mark Y = 4,000 from Y = 1,600 + 0.6Y or 1,600/(1 – 0.6) b) What is Disposable Income at equilibrium GDP? (1 mark) 1 mark = 3,230 from 4,000 – (-30 + 0.2*4,000) or something for Y - T c) What are Personal Savings at equilibriumGDP? (1 mark) 1 mark: 296 from 3,230 – (350 + 0.8*3,230) or some numbers indicating Yd - C d) What is the change in Y caused by an increase in Exports of 12 (+12)? (1 mark) 1 mark: = +30 from +12/(1 – 0.6) or 12*2.5 (must be positive) e) What is the change in inventories at Y = 3,600? (2 marks) 1 mark: calculate AE = 3,760 from 1,600 + 0.6*3,600 1 mark: Change Inventories = 3,600 – 3,760 = -160 from Yo – Aeo (must be negative) f) What is the amount of the fixed tax multiplier? (1 mark) 1 mark: = -2 from –0.8*2.5 or –0.8/(1 – 0.6) (must be negative) g) What is the change in Government Spending necessary to increase equilibriumGDP by 30 ceteris paribus? (1 mark) 1 mark: = +12 from 30/(1/(1-0.6)) or 30/2.5 h) What is the change in Taxes given an increase in equilibriumGDP of 30? (1 mark) 1 mark: +6 from 0.2*Change Y (or they could do this as difference between two Y’s) i) What is the change in the Government budget (surplus (+)/deficit (-) given an increase in Government Spending = +30? (1 mark) 1 mark: = -6 from 0.2 (30) – 12 (must be negative) j)What is the change in equilibriumGDP given an increase in Fixed taxes of 15 (+15) ceteris paribus? (1 mark) 1 mark: =-30 from –2* (+15) or –0.8*(15)*2.5(must be negative) k) What is the change in equilibriumGDP given an increase in Fixed Transfer Payments of 15 (+15) ceteris paribus? (1 mark) 1 mark: =+30 from –2* (-15) or –0.8*(-15)*2.5(must be negative) - 3/6 - ECON1010A: Midterm Test #2: May 27, 2011 Name: _______________________ 3. Money Supply (13 marks) The following conditions hold in Canada’s banking system for all parts of this question: deposits are demand deposits; banks are chartered banks; there are neither excess reserves nor excess circulation; and banks loan, rather than buy securities with, excess reserves. A) Assume that the only items on the
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