EC290 Mock Midterm 2

Intermediate Macroeconomics I
Name: ____________________________
Date: ____________________________

Part 1: Multiple Choice Questions

1) An increase in minimum wage will tend to do which of the following?
a. An upward shift in the WS curve
b. A downward shift in the WS curve
c. An upward shift in the PS curve
d. A downward shift in the PS curve
e. None of the above
2) Suppose the actual unemployment rate decreases. This will cause
a. An upward shift in the WS curve
b. An upward shift in the PS curve
c. A downward shift in the WS curve
d. A downward shift in the PS curve
e. None of the above
3) Which of the following events will cause the smallest change in the real exchange rate?
a. A 6% drop in E and a 6% increase in the foreign price level (P*)
b. A 6% increase in the domestic price level (P) and a 6% reduction in foreign price level P*
c. A 3% increase in E
d. A 6% drop in E and a 6% reduction in foreign price level (P*)
e. A 2% increase in E and a 2% increase in domestic price level P
4) Assume that the interest rate in a foreign country is 7% and that the foreign currency is expected to depreciate
by 3% during the year. For each dollar that a domestic resident invests in foreign bonds, they can expect to get
back an approximate total of
a. $1.04
b. $1.10
c. $0.96
d. $1.07
e. $0.93
5) If the exchange rate between the dollar and the pound (the pound price of the dollar) is currently 1.50, and is
expected to be 1.35 in one year, then the expected rate of
a. Appreciation of the dollar is 10%
b. Appreciation of the dollar is 15%
c. Depreciation of the dollar is 15%
d. Depreciation of the dollar is 10%
e. None of the above

6) Suppose there is a real appreciation. This real appreciation is more likely to cause a reduction
in net exports when
a. Imports are not at all sensitive to price changes
b. Domestic output is relatively low
c. Exports and imports are relatively sensitive to price changes
d. Foreign output is relatively high
e. The Marshall-Lerner condition does not hold
7) The natural level of employment (N) will increase when which of the following occurs?
a. An increase in the markup of prices over costs
b. An increase in the actual unemployment rate
c. A reduction in unemployment benefits
d. All of the above
e. None of the above
8) For this question, assume that Y=N. Based on our understanding of the labour market model presented in
Chapter 6, we know that an increase in the minimum wage will cause
a. An increase in the natural level of employment
b. A reduction in the natural level of output
c. No change in the natural level of output
d. An increase in the natural level of output
9) For this question, assume that the J-curve exists. Which of the following will occur after a real appreciation?
a. The trade deficit will improve temporarily before it worsens
b. The trade deficit will worsen before it improves
c. The real exchange rate will rise temporarily before it falls
d. The real exchange rate will fall temporarily before it rises
e. None of the above
10) Based on price setting behaviour, we know that a reduction in the unemployment rate will cause
a. A reduction in the real wage
b. An upward shift of the PS curve
c. No change in the real wage
d. An increase in the real wage
11) Which of the following conditions will occur when two countries are engaged in a credible, fixed exchange rate
regime?
a. > 1
b. =
c. < 1
d. = 1

12) The Nominal Exchange Rate is:

a. The price of foreign goods in terms of domestic goods
b. The price of foreign currency in terms of domestic currency
c. The price of domestic currency before correcting for inflation
d. The price that foreign people pay for domestic currency
13) The Current Account Balance is comprised of:
a. Government Spending, Exports plus Imports, Net Transfers
b. Trade Balance, Primary Income Balance, Secondary Income Balance
c. National Consumption, National Investment, Trade Balance
d. Total foreign holdings of domestic assets, Total domestic holdings of foreign assets
14) The concept of Interest Parity Condition holds based on the assumption that:
a. There is no assumption, Interest Parity holds no matter what
b. Both countries have the same expected return
c. The domestic currency is pegged to the foreign currency
d. The domestic currency is always weaker than the foreign currency
15) If an Open Economy decides to increase Money Supply, the numerical value of the nominal exchange rate will:
a. Decrease
b. Increase
c. Not change because Money Supply is ineffective in an Open Economy
d. Increase only if the exchange rate is fixed
16) If a countrys trade balance is 0, this means that:
a. The country was previously running a trade surplus
b. Aggregate demand is equal to domestic demand
c. The goods market is in equilibrium
d. The nominal exchange rate is equal to 1

Part 2: Fill in the Blanks/Circle the Correct Answer

1. If the Bank of Canada attempts to talk down the dollar, they will (increase/decrease/not change) money
supply and the numerical value of the exchange rate will (increase/decrease/not change).
2. In an open economy, the IS curve is (negatively/positively) sloped because net exports are
(negatively/positively) related to the interest rate.
3. When an economy has a pegged exchange rate, money supply is (more effective than a flexible exchange
rate/entirely ineffective).
4. In an open economy, the Aggregate Demand Curve has a (steeper/flatter) slope compared to a closed economy.
5. A sudden decrease in Aggregate demand will have a larger negative impact on an economy with a
(flexible/fixed) exchange rate.

6. If inflation in the American Economy rises, in other words prices increase, then the Canadian
Real Exchange Rate faces a (real depreciation/real appreciation/stays the same).

Part 3 Short Answer

1. Canadian Balance of Payments in 2012
a) Fill in the missing values in the table below.
Items in Balance of Payments
Value ($ in Billions)
CURRENT ACCOUNT
Exports of Goods and Services
554.8
Imports of Goods and Services
582.3
Trade Balance
Primary Income Received
69.5
Primary Income Paid
Primary Income Balance
-26.8
Secondary Income Balance
-3.7
Current Account Balance
-67
FINANCIAL ACCOUNT
Increase in foreign holdings of Canadian
182.7
assets
Increase in Canadian holdings of foreign
assets

119

Statistical Discrepancy

b) The largest component of Primary Income paid is

c) The amount of foreign aid given by Canadians is part of

2. Goods Market in the open economy

C = c0 + c1(Y T)
I = do + d1Y
X = x1Y*
T = t1Y
G
Q = q1Y

C: consumption, Y: real output

I: investments
X: exports, Y*: foreign income (exogenous)
T: taxes net of transfers
G: government spending
Q: imports

a) Explain why the level of taxes net of transfers is an ENDOGENOUS variable in this model

b) Solve algebraically for the expression of the equilibrium level of output in this economy

c) What is the algebraic expression for the effect of a one unit change in foreign income (Y*) on the level of
equilibrium domestic income in this economy?

3. In the global policy response to the 2008-2009 world economic recession, it was successfully
argued that all major economies should undertake an expansionary fiscal policy at the same
time:
a) What are the elements of an expansionary fiscal policy?

b) In response, it was successfully argues that all major economies should undertake an expansionary fiscal policy
at the same time:
Explain why it was important that all economies shoulder undertake this policy at the same time

4. Consider the following scenario. An open economy has a fixed exchange rate, but has a trade deficit.
a) With the use of fiscal policy and monetary policy, propose what they may do to reduce their trade deficit.
You may also use graphs (IS-LM and NX) to compliment your answer.

b) Suppose the economy no longer wants to have a fixed exchange rate because they want to have monetary
policy at their disposal. Discuss the effects of an increase in money supply in an open economy on
investment and net exports (you do not need to address the effects on trade balance).

5. Refer to the following graph:

Identify two periods of approximately 5 years where the real exchange rate and net exports moved in sync
(either up or down), and explain the relationship that exists between them.