VANCOUVER ISLAND UNIVERSITY

DEPARTMENT OF ECONOMICS
ECON 212: PRINCIPLES OF MACROECONOMICS
SAMPLE FINAL EXAMINATION, APRIL 2013

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THIS EXAM HAS TOTAL 17 PAGES INCLUDING THE COVER PAGE

Instructions:

Total marks 85. Duration: 2 Hours.

Please answer your MCQs on the MCQ answer sheet by filling up required
information fields

YOU MUST SHOW YOUR ALL WORK TO GET FULL MARKS. IF YOU
DO NOT SHOW WORK, YOU MAY NOT GET FULL MARKS EVEN FOR A
CORRECT ANSWER.

Use the marks assigned to each question as a guide to allocating your

time across questions.

Good Luck on Your Exam

ECON 212
Sample Final Examination, April 2013

PART A
(There are 50 MCQs in this section, worth 50 marks)
1. In a competitive financial market, the equilibrium price of an asset will equal the
a. issue price of the asset
b. sum of present value of the asset multiplied by the interest rate
c. present value of the asset
d. future value of the asset
e. future value of the asset multiplied by the interest rate
2. Suppose an economic analyst suggests that investors should now hold cash instead of
stocks or bonds. The analyst is probably encouraging an increase in money balances for
which reason?
a. present value demand
b. precautionary demand
c. speculative demand
d. transaction demand
e. insufficient information
3. When there is an excess supply of money, monetary equilibrium is restored through
a. the price of bonds falling
b. interest rates rising
c. the price of bonds increasing
d. the price level falling
e. individuals attempting to sell bonds

5. The monetary transmission mechanism describes the process by which changes in

a. monetary equilibrium influence the interest rate
b. personal consumption affect real GDP
c. monetary equilibrium influence real GDP through changes in desired
investment
d. interest rate affect the demand for money
e. business investment influence real GDP

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Sample Final Examination, April 2013
6. Other things being equal, a reduction in the money supply will lead to a
a. rise in the rate of interest and no change in investment expenditure
b. fall in the rate of interest and an increase in investment expenditure
c. rise in the rate of interest and a decrease in investment expenditure
d. rise in the rate of interest and in increase in investment expenditure

7. According to the views of the Classical economists, if the money supply doubles
a. real income will double
b. prices will double
c. money prices will be halved
d. there will be no effect on money prices
e. relative prices will double

8. Potential or full-employment output is

a. a goal that can never be achieved by the economy
b. the GDP that would be produced if the economy's resources were fully
employed at a normal intensity of use
c. achieved during periods when all of the labour force is employed
d. the GDP that could be produced if the economy's resources were fully employed at
their maximum intensity of use
9. Total value added in an economy is equal to the value of
a. all inputs and outputs in the economy
b. all profits of all firms in the economy
c. all final goods produced
d. all final and intermediate goods produced
10. In national-income accounting, "depreciation" refers to
a. the amount by which the capital stock is depleted during the accounting period
b. the increase in the economy's stock of capital per year
c. both the amount by which the capital stock is depleted during the
accounting period, and the difference between gross investment and net
investment
d. the difference between gross investment and net investment
11. Which of the following illustrates the use of fiat money?

ECON 212
Sample Final Examination, April 2013

a. bartering goods for services

b. keeping gold as a hedge against inflation
c. exchanging Canadian dollars for a T-shirt
d. exchanging money-market funds for insurance
12. The function of money in an economy is to serve as
a. all of the responses are correct
b. a medium of exchange
c. a unit of account
d. a store of value
13. The currency that is in circulation in Canada today is
a. not officially backed by anything
b. fractionally backed by gold
c. backed by the U.S. dollar
d. fully backed by gold held at the central bank
14. The largest component of the liabilities of the Bank of Canada is
a. Canadian dollars in circulation
b. Government of Canada securities
c. deposits of commercial banks and other financial institutions
d. loans to private individuals
e. Government of Canada deposits
15. Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits
with the central bank). This fraction is known as
a. the excess reserve ratio
b. the required reserve
c. the reserve ratio
d. the target reserve
16. Refer to the table. Assume that Bank North is operating with no excess reserves. What is
their actual reserve ratio?
Bank North's Balance Sheet
a. 15%
b. 13.6%
c. 20%

Assets
Reserves
$300
Loans
$2200

Liabilities
Deposits
$2000
Capital
$500

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Sample Final Examination, April 2013
$2500

d. 12%

$2500

e. 25%
17. A desire by ________ has no effect on the ability of the banking system to expand bank
deposits.
a. banks to maximize profits
b. households to stash money in safety-deposit boxes
c. households to maintain a certain fraction of their money holdings in the form of
currency
d. potential borrowers to be more cautious in their borrowing
18. The concept of "near money" refers to
a. financial assets whose capital values are too unstable for them to be classified as
money
b. assets that fulfill the medium-of-exchange function but not the store of value
function
c. cheques on demand deposits
d. assets that fulfill the temporary store-of-value function but not the
medium-of-exchange function

19. The table below shows total output for an economy over 2 years
2007
Goods

2008

Price

Quantity

Price

Quantity

Coconuts

$1.00

100 units

$2.00

120 units

Bananas

$3.00

200 units

$4.00

200 units

Pineapples

$6.00

100 units

$8.00

90 units

The real GDP in 2008, expressed in 2007 prices, was

a. $1,760.00
b. $1,500.00
c. $1,260.00
d. $410.00
20. A decrease in the marginal propensity to spend out of national income will cause
a. a parallel downward shift in the AE curve
b. a movement to the left along the AE curve
c. an increase in the slope of the AE curve, which rotates it upward
d. a decrease in the slope of the AE curve, which rotates it downward

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Sample Final Examination, April 2013
21. The AD curve relates the price level to
a. equilibrium real GDP if output is demand determined
b. equilibrium nominal GDP if output is demand determine
c. equilibrium savings and wealth
d. desired aggregate expenditure
22. The theory of economic growth concentrates on the ________ over the long run, not on
________.
a. growth of real GDP; growth of potential GDP
b. growth of potential output; fluctuations of output around potential
c. factor utilization rates; growth of real GDP
d. factor utilization rates; growth of the supplies of factors
23. An important social cost of economic growth is
a. the sacrifice of current consumption required for a higher level of future
consumption
b. the increasing inequality of income
c. the associated frictional unemployment
d. the destruction of jobs due to labour skills of certain workers becoming
obsolete
24. Consider the basic AD/AS macro model. A rise in an input price like the price of oil would
be expected to cause a new macroeconomic equilibrium in which the price level
a. is lower and real GDP higher than in the initial equilibrium
b. is higher and real GDP lower than in the initial equilibrium
c. and real GDP are lower than in the initial equilibrium
d. is higher and real GDP remained the same as in the initial equilibrium
25. Which of the following statements about output gaps is true?
a.

When actual GDP is below potential GDP, there is upward pressure on output prices

b. When actual GDP is above potential GDP, there is upward pressure on

wages
c. When actual GDP is above potential GDP, there is downward pressure on output
prices
d. When actual GDP is above potential GDP, there is downward pressure on wages

26. A characteristic of the short run in macroeconomics is that

a. actual GDP is always less than potential GDP

ECON 212
Sample Final Examination, April 2013
b. actual GDP is always growing at the same rate as potential GDP
c. the output gap opens or closes as the economy moves through the phases
of the business cycle
d. actual GDP is always greater than potential GDP
27. Other things being equal, bond prices
a. vary proportionally with interest rates
b. vary inversely with interest rates
c. are unaffected by changes in the demand for money
d. are unaffected by interest-rate changes
28. For a given level of national income, a decrease in private consumption or government
purchases will cause the equilibrium interest rate to
a. increase and the flow of national saving to decrease
b. increase and the flow of investment to decrease
c. increase and the flow of investment to increase
d. decrease and the flow of national saving to increase
29. In order to be considered "money", paper currency must be
a. convertible into a precious metal
b. issued by a government agency
c. generally acceptable as a medium of exchange
d. impossible to counterfeit
30. The functions of the Bank of Canada include
a. setting the exchange rate for the Canadian dollar on world markets
b. providing deposit insurance at Canadian commercial banks
c. acting as banker for the commercial banks
d. acting as the lender of last resort for the largest private corporations
31. A decrease in the money supply is most likely to
a. lower interest rates, investment, and aggregate expenditures
b. raise interest rates, lower investment, and lower aggregate expenditures
c. raise interest rates and investment, and lower aggregate expenditures
d. raise interest rates, investment, and aggregate expenditures

ECON 212
Sample Final Examination, April 2013
32. Refer to the figure. This figure illustrates

a. only the first step of the monetary transmission mechanism

b. the first two steps of the monetary transmission mechanism
c. the entire monetary transmission mechanism
d. the ultimate effect of a change in the money supply on real GDP

33. What is the objective of monetary policy?

a. Maximum employment, stable prices, and moderate long-term interest
rates
b. To keep real GDP growth above 3 percent a year
c. To keep the interest rate below 4 percent a year
d. To keep the unemployment rate below 5 percent

34. A currency drain ___________ bank deposits and ________bank reserves

a. increases; decreases
b. decreases; increases
c. decreases; decreases
d. increases; increases

35. A lower Canadian dollar exchange rate ______exports and _______imports. Aggregate
demand ____

ECON 212
Sample Final Examination, April 2013
a. decreases; increases; decreases
b. increases; decreases; increases
c. increases; decreases; decreases
d. increases; increases; increases

36. Fiscal policy attempts to achieve all of the following objectives except __________
a. a stable money supply
b. full employment
c. sustained economic growth
d. price level stability

37. The relationship between the tax rate and the amount of tax revenue collected is called
_________curve. This curve shows that____.
a. tax revenues; a higher tax rate brings greater tax revenue
b. Reagan; tax cut can increase tax revenue
c. maximum tax rate; taxes can never be too low
d. Laffer curve; tax cuts can increase tax revenue

ECON 212
Sample Final Examination, April 2013
38. The decrease in productivity growth also _____the demand for labour, _______the supply
of labour, _________employment, and _______the real wage rate
a. increases; increases; decreases; does not change
b. decreases; increases; decreases; lowers
c. decreases; decreases; decreases; ;lowers
d. increases; does not change; increases; raises

39. In real business cycle theory, all of the following events can be sources of fluctuation in
productivity except ___
a. changes in the growth rate of money
b. natural disasters
c. climate fluctuations
d. the pace of technological change

40. The best forecast available, which is based on all the relevant information is called
___________
a. a rational forecast
b. a rational expectation
c. a correct forecast
d. a correct expectation

41. At the equilibrium exchange rate ____

a. the quantity of dollars demanded equals the quantity of dollars supplied
b. a shortage may exist but a surplus not exist
c. a surplus may exist but a shortage may not exist
d. the demand for dollars equals supply of dollars

42. As the exchange rate rises, prices of Canadian-produced goods and services to
foreigners ____ and the volume of Canadian exports _______
a. fall; increases

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ECON 212
Sample Final Examination, April 2013
b. fall; decreases
c. rise; decreases
d. rise; increases

43. A decrease in world demand for Canadian exports ___ the demand for Canadian dollars
a. increases
b. does not change
c. decreases
d. improves the quality

44. The Canadian price level is 112. 2, the Japanese price level is 95.4, and the real
exchange rate is 105.4 Japanese real GDP per unit of Canadian real GDP. What is the
nominal exchange rate
a. 90.02 yen per dollar
b. 89.62 yen per dollar
c. 100 yen per dollar
d. 92 yen per dollar

45. Canada is ______

a. a net borrower and a debtor nation
b. a net lender and a debtor nation
c. a net borrower and a creditor nation
d. a net lender and a creditor nation

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ECON 212
Sample Final Examination, April 2013

46. Net export equals ______

a.

( GT ) +(SI )

b.

( T G ) + ( SI )

c.

( GT ) + ( I S )

d.

( T G ) +(I S)

47. If the government sector deficit increases, with no change in the private sector
surplus, nest exports ________
a. change but we cannot predict id they will increase or decrease
b. increase
c. equal zero
d. decrease
48. A current account deficit must be financed by capital inflows
current account deficit is paid by

because the

a. borrowing from rest of the world

b. increased taxes
c. increasing Canadian foreign reserves
d. increasing our investment in capital and increasing real GDP
49. The Bank of Canada cuts the quantity of money and all other things remain the
same. In the short run, AD _____
a. increases
b. increases and longrun AS increases
c. decreases
d. decreases and longrun AS decreases
50. Economic growth results when there are increases in ____
a. longrun aggregate supply
b. the interest rate
c. the nominal wage rate
d. aggregate demand

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ECON 212
Sample Final Examination, April 2013

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ECON 212
Sample Final Examination, April 2013

PART B
(The section contains short answer questions, worth 50 marks. Please note
that answers with necessary explanation will receive full marks only.)
Question 01
How is the equilibrium exchange rate determined? Provide an example of the
exports effect on the demand for Canadian dollars.
A. The equilibrium exchange rate is the exchange rate that sets the quantity of
Canadian dollars demanded equal to the quantity of Canadian dollars supplied.
At equilibrium exchange rate there is neither a shortage nor a surplus of
Canadian dollars.
The exports effect is the result that the larger the value of Canadian exports,
the larger the quantity of Canadian dollars demanded for purchasing those
exports from Canadian firms. Suppose the Canadian exchange rate falls. When
the Canadian exchange rate falls, Canadian exports become cheaper relative
to other countries goods and services. The volume of Canadian exports
increases, which increases the quantity demanded for Canadian dollars needed
to finance their purchases. So if the exchange rate falls, the quantity of
Canadian dollars demanded in the foreign exchange market increases.
Question 02
The diagram below shows the demand for money and the supply of money

Interest Rate

MS
iB
E

i
iA

M D( P , Y )
Quantity of Money

a. Explain why the

function is downward sloping

If other things remain the same, if the interest rate falls the quantity demanded
for money increases, and vice-versa. Interest rate is negatively related to the
quantity demanded for money

b. What is the interpretation of writing the money demand function as

M D (P , Y )

Demand for money depends on price level and the real GDP beside the interest
rate. Here the expression indicates that, when P and Y are kept fixed, quantity
demanded for money and the interest rate are negatively related.

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ECON 212
Sample Final Examination, April 2013

c. Suppose the interest rate is at

i A . Explain how firms and households attempt

to satisfy their excess demand for money. What is the effect of their actions?
At

i A , quantity demanded for money is greater than the quantity supplied of

money an excess demand for money at a lower interest rate. To satisfy this
excess demand, people start to sell off their bonds. When everyone starts to sell
bonds, bonds prices start to fall. As bond price and interest rates are negatively
related, the interest rate will start to increase
d. Now suppose there is an increase in the transactions demand for money.
Beginning at

i , explain what happens in the money market. How is this

shown in the diagram.

If there is an increase in the transaction demand for money, meaning y is
increasing. When y increases, the money demand for money shifts to the right.
With the given supply function, the interest rate increases.
Question 03
The diagram below shows a simple AD/AS diagram. The economy begins in longrun
equilibrium at E0 with real GDP equal to Y*

P
AS
AS
E1
E0
AD
Y*

Real GDP

Economy B

a) At E0, the unemployment rate is 6%. What type of unemployment is this?

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ECON 212
Sample Final Examination, April 2013

A. The unemployment that exists at E0 is only frictional and structural. Since

output equals potential, and there is neither excess demand nor excess supply
in aggregate factor markets, there is no cyclical unemployment. Since the
unemployment rate is 6% when Y = Y*, we know that the natural rate of
unemployment is 6%.
b) A negative AS shock now shifts the AS curve to AS. At E 1 the unemployment
rate is 7.5%. What type of unemployment is there? Explain.
A. Following the negative AS shock, output falls and the unemployment rate
rises to 7.5%. There is cyclical unemployment of 1.5%. In other words, the
unemployment rate has risen above what it would be if labour markets were, in
aggregate, in balance. Factor markets are in a state of excess supply.
Question 04
Suppose that yesterday, the Canadian dollar was trading on the foreign exchange
market at 0.75 euros per Canadian dollar and today the Canadian dollar is trading at
0.78 euros per Canadian dollar. Which of the two currencies has appreciated and which
has depreciated today?
A. The Canadian dollar appreciated because its exchange rate rose. Europeans
are higher prices to buy Canadian dollars. The euro depreciated because its
exchange rate (price in terms of Canadian dollars) fell from 1.33 Canadian
dollars per euro to 1.28 Canadian dollars per euro
Question 05
The Canadian dollar exchange rate increased from $0.94 US in June 2010to $1.04US in
June 2011, and it decreased from 77 euro cents in June 2010 to 71 euro cents in June
2011.
a. Did the Canadian dollar appreciate or depreciate against the US dollar? Did
Canadian dollar appreciate or depreciate against the eurpo?
A. The Canadian dollar appreciated against the US dollar because $1 CAD
bought a larger number of US dollar. The Canadian dollar depreciated against
euro because $1CAD bought a smaller number of euros.
b. What was the value of the US dollar in terms of Canadian dollars in June 2010?
The US dollar exchange rate in June 2011 was 0.96CAD (=1/1.04) per US dollar
c. What was the euro exchange rate against the US dollar in June 2011?
In June 2011,

is

$ 1 CAN = $1.04 US

& $1 CAN= 0.71 Euro

So,
$1.04 US = 0.71 Euro
And the euro exchange rate, that means how many USD is needed to buy 1 euro
=$1.04 US/ 0.71 Euro = = $1.465 USD per euro

Question 06
What are the main features of the unemployment rate in Canada and the USA since
2000?

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ECON 212
Sample Final Examination, April 2013

A. The unemployment rates in Canada and US increased from 2000 to 2004

and then decreased. The Canadian unemployment rate kept falling to 2008 but
the US started to rise in 2007 and by the end of 2008 was higher than the
Canadian rate. The unemployment rate reached a peak in 2009 (around 10% in
US and under 9% in Canada) and then began a gradual fall.
Question 07
What is the distinction between automatic and discretionary fiscal policy (FP)?
A. Automatic FP is triggered by the state of the economy with no need for any
government action. Discretionary FP, however, requires an act of parliament to
either change government spending and/or change tax rates
Question 08
What is the main objective to Canadian monetary policy? To achieve the objective,
which instruments the Bank of Canada are using?
A. The main objective of the Canadian monetary policy is to keep the CPI (core)
inflation rate around 2% level (target rate 2% with a 1% band).
To achieve the objective, the Bank of Canada targets the overnight interest rate,
which eventually affects other interest rates in the market
Question 09
What is overnight interest rate? How does the Bank of Canada influence the overnight
interest rate?
Question 10
The Canadian dollar was down to 98 cents US on news that Chians international trade
growth slowed.
a. How does a lower Canadian dollar exchange rate influence monetary policy
transmission?
A. The fall in the exchange rate makes Canadian exports less expensive to foreigners
and makes imports more expensive to Canadian residents. Net exports increases which
increases AD. Real GDP increases and the price level rises
b. Would a fall in the exchange rate mainly influence unemployment or inflation?
A. The fall in exchange rate increases AD, raising the price level and increasifn real
GDP. The extent to which the price level rises (inflation) or real GDP increases
(unemployment rate falls) depends on shortrun AS. If the shortrun AS curve us steep,
then the fall in exchange rate will mainly inflation and not unemployment rate. On the
other hand, if the AS curve is flat, then the fall in the exchange rate will affect mainly
unemployment and not much to inflation rate.

** END OF EXAM **

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