Name:

FIC Student Number:

Total: 100 Points
Fraser International College
Econ 105
Summer 2020
Final Exam
Instructor: Jiamin Liu
Instructions:
1. This exam contains 5 questions and is 100 minutes long. You are required to answer all
questions in the exam.
2. You are required to put down the steps and explanations for each question. No
explanations no points.
3. Please note that the 100 minutes include your uploading time. Please use your time
wisely.
4. If you write the answers on another paper, please make sure that you label ALL questions
or it will not be graded.
5. Please write neatly, words that I cannot read are considered to be wrong answers.
6. You are required to turn on the camera and have the mic ready for the exam.
Good luck!
7. I will not accept late exams, for each minute that you are late 1% will be deducted.
8. Please upload your file in either PDF or Word format. Other formats will not be
accepted.
9. Your upload must be clear and in sequential orders. If it is not in sequential orders I will
assume that you skip the question and thus will result in zero for that question.
10. If you submitted the same question twice, the lower graded one will be counted.
11. You can only submit ONE file.
12. Good luck!

Econ 105 Final Exam (Summer 2020) Page 1

 1. Suppose currently the Canadian economy is at its long-run equilibrium with output equals
to its natural rate of output and unemployment equals the natural rate of unemployment.
[23 points in total]

a) Draw the AS-AD diagram to show the current situation for Canada. Make sure to label
the long-run equilibrium as point A, current output as Y1, and price level as P1. (3 points)

b) Suppose the housing market crush decreases household wealth. Please show the short-run
effect of this event on your part a) diagram. Label the short-run equilibrium as point B,
price level as P2, and output as Y2. Please explain your reasons. (5 points)

c) Suppose that policymakers do not use policy to intervene in the market, please explain
how the economy goes back from the short-run equilibrium to the long-run equilibrium
and label it as point C on your part a) diagram. Label this long-run output as Y3 and price
level as P3. (5 points)

d) Now suppose the government would like to use policy to intervene in the market, what
kind of policy will you recommend the government to implement? (this part is
independent of part c) (2 points)

Econ 105 Final Exam (Summer 2020) Page 2

 e) Base on the policy you suggested in part d), please show the effect of the policy on your
part a) diagram. Label the long-run equilibrium as point D, output as Y4, and price level
as P4. (5 points)

f) If you are concerned about unemployment in the economy, will you suggest the
government intervene in the market? Why yes why no, please explain. (3 points)

2. Suppose the Canadian economy is currently in its long-run equilibrium with inflation rate
equals π1 and the unemployment rate equals its natural rate of unemployment. [23 points in total]
a) Please draw the long-run and short-run Phillips curves to show the current equilibrium
for Canada and label it as A on your diagram. (2 points)

b) Suppose the Bank of Canada announces a sudden monetary contraction to fight inflation
in the economy. Show the new short-run equilibrium on your part a) diagram. Label this
equilibrium as point B; label the unemployment rate as U2, and inflation rate as π2. Please
explain your answers. (4 points)

Econ 105 Final Exam (Summer 2020) Page 3

 c) Suppose that the Bank of Canada’s announcement is not believed, what will happen on
your part a) diagram, please show and explain. (4 points)

d) Suppose that the Bank of Canada’s announcement is believed, and the expectation of
inflation is adjusted quickly. What will happen in your part a) diagram? Please explain
and show. (4 points)

e) Suppose the Bank of Canada’s announcement is believed, but all workers have long-term
wage contracts that cannot be renegotiated. What will happen in your part a) diagram?
Please show and explain. (4 points)

f) Which of the above cases (c, d, or e) BEST describes what would happen if, in the past,
the Bank of Canada had repeatedly announced that low inflation is its number one
priority, but the Bank failed to actually engage in the threatened monetary contraction?
Why? (5 points)

Econ 105 Final Exam (Summer 2020) Page 4

3. In the economy of Pizzania, bread and cheese produced are sold both to the pizza company for
inputs in the production of pizzas and to consumers as final goods. The accompanying table
summarizes the activities of the three companies. [15 points in total]

Bread Company Cheese Company Pizza Company

Cost of inputs $0 $0 $65 (bread)

$30 (cheese)

Wages 34 45 97

Value of output 100 88 236

a) Calculate the GDP as the value-added in production. (6 points)

b) Calculate the GDP using the expenditure approach. (6 points)

c) Explain why total output equals total expenditure. (3 points)

Econ 105 Final Exam (Summer 2020) Page 5

4. Suppose the Bank of Canada purchases a Government of Canada bond from Jiamin for $800.
[23 points in total]
a) What is the name for the Bank of Canada’s action? (2 points)

b) Suppose Jiamin deposits the $800 in First National Bank. Show this transaction on First
National Bank’s T-account. Make sure that you write down all assets and liabilities. (3
points)

First National Bank

Assets Liabilities

c. Suppose First National Bank decides to keep 15% of its deposits on reserve and to loan
out the rest. Show this transaction on the T-account. (3 points)

First National Bank

Assets Liabilities

d. At this point, how much money has been created from the Bank of Canada’s policy
action? (4 points)

d) What is the value of the money multiplier? (2 points)

Econ 105 Final Exam (Summer 2020) Page 6

 e) After infinite rounds of depositing and lending, how much money could be created from
the Bank of Canada’s policy action? (3 points)

f) If, during the rounds of depositing and lending, some people keep some extra currency
and fail to deposit all their receipts, will there be more or less money created from the
Bank of Canada’s policy action than you found in part f)? Why? (3 points)

g) If, during the rounds of depositing and lending, some banks choose to hold some of the
money as extra reserves, will there be more or less money created from the Bank of
Canada’s policy action than you found in part f)? Why? (3 points)

5. Imagine a kitchen. It contains a cook, the cook’s diploma, a recipe book, a stove and utensils,
and some venison harvested from the open range. [16 points in total]
a) Link each object in the kitchen to a general category within the factors of production. (12
points)

b) While the different factors of production exhibit different levels of durability, which one
is special in that it does not wear out? (4 points)

Econ 105 Final Exam (Summer 2020) Page 7