ECON (RATNA FINAL EXAM REVIEW SESSION

ECON102(RATNA)FINALEXAMREVIEWSESSION

BYPHUONGVU

TABLEOFCONTENT

I. Chapter19&20II. Chapter21&22III. Chapter23,24&25.IV. Chapter26V. Chapter27,28&29.VI. Chapter27,28&29(cont.)VII. Chapter30VIII. Chapter34IX. PracticeProblems:IntroductionX. PracticeProblem1XI. PracticeProblem2XII. PracticeProblem3XIII. PracticeProblem4XIV. PracticeProblem5

Introduction:

• ThankyouforcomingtoCommerceMentorshipProgram’sReviewSessionforECON102–customizedforProfessorRatnaK.Shrestha’ssession.ThesematerialswerepreparedbyCMP’ssecond-yearAcademicConsultantPhuongVu,basedonProfessorShrestha’scurriculumandRaganMacroeconomicstextbook.

• ThisfinalexamisCUMULATIVE,coverschapters19-30and34.ThetermreviewandpracticequestionsareheretohelpyoutosolidifyyourunderstandingaboutECON102.Formatontheactualexamsmightinclude:True/False,MultipleChoiceandLongAnswersquestions(bothquantitativeandqualitative).

• Besidestoday’ssession,I’llholdofficehoursonTuesday,April25th,from1-3PMatHA194.ComefindmewithanyquestionsyouhaveandI’llbeveryhappytohelpout!

CHAPTER19&20:IntroductiontoMacroeconomicsandtheMeasurementofNationalIncome

1. OutputGap=

2. Thereistwowaystomeasurechangesinpricelevel:

RateofInflation=

GDPDeflator=

3. Unemploymentratemeasures_________________________________________________________________________.

Unemploymentrate=____________________________________

4. (*)Interestrateis____________________________________,couldbemeasuredby_____________________________________.

5. Tomeasurethecontributionofafirmtoitstotaloutput,wecanusetheconceptofValueAdded.

ValueAdded=____________________________________

6. GDPmeasures_______________________________________________________________________________________________.

GDP(Expenditure)=____________________________________PleasenotethatonlypurchasesactivitiesareincludedinGDPExpenditure,becauseGDPExpenditureisanestimationofthevalueofgoodsandservicesproducedintheeconomy.Forthatreason,____________________________________isnotincludedinGDPExpenditure.GDP(Income)=_______________________________________________

=____________________________________________________________________________________________________________________________________________________________________

CHAPTER21&22:Short-runMacroModel

1. ConsumptionFunction:ConsumptionFunctiondeterminestherelationshipbetween____________________________,______________________,______________________,______________________,______________________.

2. AggregateExpenditureformula:WithoutGovernmentandTradez=

Simplemultiplier=

AE=

WithGovernmentandTradez=

Simplemultiplier=

AE=Notes:cstandsfor_______________________.mstandsfor______________________________.tstandsfor_______________________________.

3. TheEquilibriumNationalIncomeconditionoccurredwhere________________________,andisoccurredattheintersectionof___________________________andthe____________________________.

Chapter23&24:

AggregateDemand&Supply

TheAD/ASmodelexplains________________________and_______________________throughtherelationshipofADandAS.

AggregateDemand

AggregateSupply

ExpansionaryADShock:

Example:NegativeASshock.

ContradictionaryADShock:

CHAPTER25:GDPAccounting

Given:F=_________________________________________________.

Fe=_________________________________________________.

TheGDPAccountingEquationcanbewrittenas:

GDP=_______*_______*_______

1. Short-runChangeinGDP 2. Long-runChangeinGDP-Factorutilizationrate:

-Supplyoffactors:-Factorproductivity:

CHAPTER26:Long-runEconomicGrowth

EconomicGrowth:_________________________________________increasesinthelevelof________GDP.

TheoriesofInvestment,SavingsandGrowth.

Inlong-runanalysis:RealGDP=______,and_______________________variestodetermineequilibrium.

Inthelongrun,savingequalsinvestment.(S=I).

NationalSavings=____________________________+______________________________

=____________________________+______________________________

=____________________________________________________________

-Ifnationalsavingssupplyincreases:-Ifinvestmentdemandincreases:

Econom

icGrowth LabourForce

HumanCapital

PhysicalCapitalTechnologyImprovement

Interest

rate(%

)

Qtyof.I&S

NS=Y*-C-G

I

I*=NS*

Neoclassicaltheoryofgrowth:

Neoclassicaltheoryofgrowthisbasedontheideathat4forcesofeconomicgrowthcanbeconnectedbyTheAggregateProductionfunction.

GDP=FT(L,K,H)Where:FT=_________________________________________L=________________________________________K=________________________________________H=________________________________________

Thisfunctionsuggests:

1. Diminishingmarginalreturns.

2. Constantreturnstoscale

Newergrowththeories:

1. Newknowledgeis__________________________________________________________________________________.2. Embodyingnewtechnology_______________________________________________________________________.3. Endogenoustechnologychanges__________________________________________________________________.

CHAPTER27,28&29:Money,InterestandEconomicActivity.

Expansionofmoneyfromasinglenewdeposit:

Supposethatthebankhasatargetreserveratioofv(%),whichmeansthattheywanttokeepv%fromalldepositsonthebank’sreserveandloantherest:

Dindeposit=_________________________

Inthecaseofcashdrain,ifpeoplewanttomaintainc(%)ofthecashtheydepositedintotheaccount,andthebankstillhasatargetreserveratioofv(%):

Dindeposit=_________________________

Functionsof

Money

MediumofExchange

Store ofValue

UnitofAccount

PresentValueandInterestRate:

CottontheCatisbuyingaGovernmentBond.

• FaceValue=1000• Term=1year• Couponrate=8%• Marketrate=9%

PV=________________=

Whatifthetermis2years?

PV=________________=

Mr.GrumpyisalsobuyingGovernmentBond.• FaceValue=1000• Term=1year• Couponrate=8%• Marketrate=9%

PV=________________=

Whatifthetermis2years?

PV=________________=

-Ifmarketrate>couponratethen____________________________and__________________________________.

-Ifmarketrate<couponratethen____________________________and__________________________________.

MoneyMarket:

• Expansionarymonetarypolicies:

• Contractionarymonetarypolicies:

FactorsthatinfluenceMd:

Md=Md(i-;Y+;P+)Themonetarytransmissionmechanism:1.∆Interestrate:2.∆DesiredInvestmentandConsumption:3.ChangeinAggregatedemand:

Ms

Md

InterestRate

InterestRate

QuantityofMoney

MoneyEquilibrium

CHAPTER30:Inflation&Disinflation

Overallinflationeffectsonwages:

ChangeinNominalWages=___________________________+____________________________

ActualInflation=__________________________+____________________________+__________________________

Wheninflationistoohigh,thereisDisinflation.Disinflationistheprocessof_______________________________________________.

DisinflationPhase1:Removingmonetaryvalidation.

DisinflationPhase2:Stagflation.

ThecostofDisinflationisthelossofoutputthatwasgeneratedintheprocessandismeasuredbysacrificeratio.

Sacrificeratio=________________________________

CHAPTER34:

ExchangeRatesandBalanceofPayments

TheBalanceofPayments:

ExchangeRates:

• WhenCanadiandollarsappreciate,exchangerate_____________________.Soittakes__________unitsofdomesticcurrencytopurchaseforeigncurrency.

• WhenCanadiandollarsdepreciate,exchangerate_____________________.Soittakes__________unitsofdomesticcurrencytopurchaseforeigncurrency.

TheForeign-ExchangeMarket

Shiftsintheforeign-exchangemarket:

• WhentheworldpricesofaCanadianexportincreases,itis_______________tobuyfromCanada,hence________________________________________willshifttothe____________________,andeventually,Canadiandollars_______________________.

• Whentheforeignpriceofimportsdecreases,itis_______________tobuyfromCanada,hence________________________________________willshifttothe____________________,andeventually,Canadiandollars_______________________.

CurrentAccountDeficit:_____________________________fromtherestiftheworldor________________________capitalassetstotherestoftheworld.

InChapter34,welearntthefollowingequation:

CA=(S-I)+(T-G)

Meaningthatchangesin_________________________________,_______________________________andgovernmentbudgetdeficitcouldcauseAccountDeficit.

However,currentaccountdeficitisnotundesirableatalltimes.

PRACTICEPROBLEMSNotes:

Theproblemsbelowareaimedtopreparestudentsforlonganswers/calculationquestioninECON102exam.Inthesecondhalfoftoday’ssessionwillgooversomesampleMultipleChoicequestionsonagame-basedplatformnamedKahoot!,andgooverthepracticeproblemsafterthat.

Kahootcanbeaccessedthroughhttps://kahoot.it/#/,andtheGamePINwillbeprovidedduringthesession.

1. MeasurementofNationalIncomeandPriceLevel.

Thevastmajority(99.9%)ofCountryofManyPenguin’spopulationarePenguinsStudents,sothecountryconsumes4goods:Candy,CoffeeandBagels.Detailsaboutthegoodisenclosedinthefollowingtable:

2012 2013 2014 Qty Price Qty Price Qty PriceCandy 10 1 12 2 7 2.5Coffee 7 2 19 2 15 2Bagels 19 1 21 2 17 2

Requirements:

A. Ifweuse2012asthebaseyear,what’stheCPIin2014?Howaboutweset2013asthebaseyear?ComparethetwoCPIsandinterpretthedifferenceinthetwofigures.

B. Using2013asthebaseyear,calculatethe2014GDPdeflatorandinterpretthemeaningofthiscalculation.

C. Continuetouse2013asthebaseyear,calculatetheinflationratefortheyear2014andinterpretthisanswer.Howdoesinflationrate(obtainedfromCPI)differfromGDPDeflator?

2. Expansionofmoneyfromdeposit.Recently,theBOP(BankofPenguins)havereleasedtheseinformation:

ASSETS LIABILITIESLoans $220000 Deposits $270000Reserve $50000

Requirements:A. IftheBankofPenguinshaslentoutallthemoneythatitcan,whatisitsreserve

ratio?

B. Iftheminimumreserveratiois4%,howmuchinexcessreservedoestheBankofPenguinsnowhold?Ifthebankdoesthenotholdanyexcessreserve,howwillitsassetsandliabilitieschanges?

C. Outofthe$270000deposited,nowpeoplewanttoholdontoanother$15000incash,andholdanother$20000inexcessreserve.Theminimumreserveratiois4%.Whatisthechangeindepositinthissituation?

3. Bonds&PresentValue.

LindaisconsideringbuyingabondissuedbyGovernmentofCanada.Theinformationincludes:(1) Facevalue=$3500(2) Couponrate=7%(3) Marketrate=10%(4) Term=2years

Requirements:

A. Calculatethecurrentpriceofthebond.ComparethePresentValueofthebondtoitsfacevalue.UsingwhatyoulearntfromECON102,explainwhyisthatthecase?

B. Calculatetheyieldonthisbond.Whydobondyieldandmarketinterestnormallygoonthesamedirection?

C. Lindadecidedtogoandpurchasethebondsyesterday.Thismorning,whilereadingthenews,Lindafoundoutthatcurrentmarketratejumpedto6%,andshebecameconfused.HelpLindatocalculatethecurrentpriceofasimilarbond,andexplaintoherwhetherifsheshouldbeupset.

4. Moneydemandandsupply:

Thediagrambelowshowsthedemandformoneyandthesupplyofmoney.

A. IsitpossiblefortheeconomytooperateatpointAandB?Explain.B. Describetheprocesstobringaneconomywithexcessmoneysupplybackto

equilibrium.Whatabouttheprocessforexcessmoneydemand?

5. InflationandDisinflation.PartA-ConsiderthefollowingAD/ASgraph.Recently,acontractionaryASShockoccursinCountryofManyPenguins,shiftingaggregatedemandtoAS1,

A. ExplaintheinitialeffectofthiscontractionaryASshocktotheeconomy.Illustrateyouransweronthediagramabove.

B. WhatkindofactionscantheBankofPenguinstaketomaintaintheeconomy’sDesiredOutput?Explaininwordsandillustrateitonthediagramabove.

C. 1yearaftertheASshock,PresidentofBankofPenguinsannouncedaplantoendthesustaininflation.Whatisthemeasureofthecostofthisprocessandhowisitcalculated,giventhatthePresidentofBoPwantstoreduceinflationby12%withanOutputLossof$120m,andpotentialoutputof$720m?