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ECON 2000 - Sections D and F - Fall 2012 - Study Guide for the Final Exam.pdf

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ECON 2000
Mokhles Hossain

ECON 2000 (Sections D and F) - Study Guide for the Final Exam Instructor: Professor Theodore Tolias December 1, 2012 Topics The basic macroeconomic identity The IS-LM model Fiscal policy and the IS curve Demand and supply of money The Wealth budget constraint The transmission of monetary policy Monetary policy and the LM curve The Quantity theory of money The Money neutrality proposition The loanable funds market The yield curve The Fisher effect (open and closed economy) Monetary Policy under alternative aggregate supply assumptions Labour-market adjustment dynamics and aggregate supply Aggregate supply: short run and long run Inflation, unemployment and the Phillips curve The Canadian disinflation experience (1988-93): facts and lessons Current account, capital account and the balance of payments The balance of payments identity Exchange rates and the foreign exchange market Fixed and flexible exchange-rate regimes The purchasing power parity hypothesis (long-term perspective) The IS-LM-BP model (short-run perspective) Fiscal and monetary policy in a small open economy – The Mundell-Fleming model Interest parity condition Readings Textbook All assigned chapters (related topics only / see course outline) Please note that the basis of your preparation should be your class notes. Everything else should be for reference only. Lecture notes Basic macroeconomic model (lecture notes posted on the CMD) 1 Additional Readings Any additional readings posted on the CMD Cases / Applications All cases / applications discussed in class and/or used as assignments Structure of the Exam The structure of exam will be as follows: Part A: Short-Answer and Application Questions (3 x 5 = 15) Part B: Multiple-Choice Questions (30 marks) The exam will be marked out of 45. The duration of the exam will be 2 hours and 30 minutes. SAMPLE QUESTIONS FOR THE FINAL EXAM Short-Answer / Application Questions Note: You must also consider the sample questions for the midterm exam Question 1 Use the IS-LM-BP model (assuming perfect capital mobility) to show the following: (a) Under fixed exchange rates, monetary policy does not work. (b) Under flexible exchange rates monetary policy is very effective. Question 2 What would be the effects of a monetary policy expansion on output and inflation assuming that both labour and management know everything they need to know regarding the consequences of such a policy and they can adjust quickly and correctly to it? (Use a labour market diagram to illustrate) Question 3 In the second half of the 1990’s, Gordon Thiessen, the Governor of Canada’s Central Bank, was often making the point that if Canada’s inflation rate could remain lower than the U.S. rate then, in time, Canadian interest rates would slide down below U.S. rates. What is the theoretical basis of this? Explain rigorously. Question 4 Use the IS-LM-BP model to illustrate the following statement “The sharp drop in commodity prices has inevitably meant lower incomes and wealth for Canadians. And we have had no choice but to adjust. Because we are on a floating exchange rate, much of the adjustment has taken place through a decline in the external value of the Canadian dollar. Had we been on a fixed exchange rate, we would still have had to adjust. But the adjustment would have been more difficult, since it would have had to come mainly through downward pressure on output, employment, and wages.” 2 Multiple Choice Questions (sample) Note: You must also consider the sample questions for the midterm exam 1. A country's exports may be written as equal to: A) GDP minus consumption minus investment minus government spending. B) GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services. C) imports. D) GDP minus imports. 2. In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to: A) make loans to the government. B) make loans to foreigners. C) repay the national debt. D) repay loans to the Bank of Canada. 3. If a country has a high rate of inflation re
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