SECTION A: FOR EACH OF THE FOLLOWING STATEMENTS CHOOSE THE

CORRECT ANSWER AND PROVIDE AN EXPLANATION FOR YOUR CHOICE IN

NO MORE THAN TWO LINES.

1. Which of the following is a cause of frictional unemployment?

i) the minimum wage
ii) a worker leaving a job to find one with better benefits
iii) labor unions

2. If price of oil decreases, there could be a shift to the right of the AD curve.
i) True
ii) False

3. Which of the following events can cause the Long-run aggregate supply curve to shift:
i) Increase in consumption
ii) Increase in Government spending
iii) Introduction of a new technology that increases the productivity of workers

SECTION B: SHORT ANSWER QUESTIONS

1. The table below contains data for the country of Batterland, which produces only waffles and
pancakes. The base year is 2009.

Prices and Quantities

Quantity Quantity
Price of Price of Nominal Real GDP
Year of of Inflation
Waffles Pancakes GDP GDP deflator
Waffles Pancakes
2008 $2.00 100 $1.00 100
2009 $2.00 120 $2.00 150
2010 $2.00 150 $3.00 200
2011 $4.00 180 $3.00 220

a. Calculate the country’s nominal GDP

b. Calculate the country’s real GDP

c. Calculate the country’s GDP deflator

d. Calculate the country’s inflation

2. Suppose an economy with only one good: corn. The economy has enough labor, capital, and
land to produce Y = 2000 bushels of corn.
V is constant. I
In 2020, MS = $2500, P = 5$/bushel.
a. Compute nominal GDP and velocity in 2020.
For 2021, FED increases MS by 20%. Use this information to answer question b and c.
b. Compute the 2021 values of nominal GDP and P. Compute the inflation rate for 2020-2021.
c. Suppose that in 2021 technology progress causes ouput Y to increase to 2200 bushels of corn.
Compute the inflation rate for 2020-2021
(2,5 marks)

3. The banking system currently has $300 billion of reserve, none of which are excess. People
hold only deposits and no currency, and the reserve requirement is 20%.
a. How much is the money multiplier and the money supply?
If the Central Bank changes the reserve requirement to 10%, then:
b. How much is the new money multiplier and the new money supply?
c. By how much does the money supply change?
(2,5 marks)

SECTION C: SHORT ESSAY QUESTIONS (word limit:150 words)

Suppose that consumers become pessimistic about the future health of the economy and so
they increase their consumption spending.

1. Which curve(s) is (are) affected: AD? AS? Or both AD and AS?

2. What will happen to output, price level and unemployment in short run?

3. Explain the change with appropriate graphs.