Macroeconomics Questions

1. GM announced that it will close its Oshawa truck plant in 2009 and a Windsor transmission plant in 2010. Ford also plans a 10 percent cut in white-collar, salaried positions. In total, over 4000 direct jobs will be lost. This is chilling news for Ontario because for every job in an assembly plant, there are 7.5 jobs with auto-parts suppliers and other companies. Using appropriate diagrams, answer the following questions.

a. Is there a trade-off between the unemployment rate and the inflation rate in the short run? How can the Phillips curve be used to answer this question?

b. What is the relationship between the Phillips curve, aggregate demand, and aggregate supply?

c. If the unemployment rate and inflation are both rising, can this be explained by a movement along a given Phillips curve? What must be happening to aggregate demand and aggregate supply? What must be happening to the Phillips curve?

d. If the Bank of Canada continues to take expansionary monetary policy, how are the unemployment rate and inflation affected? (Use both Phillips curve and AS-AD graphs in your explanation.)

e. Is there a trade-off between the unemployment rate and inflation in the long run? How is the long-run aggregate supply curve related to the long run Phillips curve?

2. a. Distinguish between monetary policy instruments and monetary policy tools.

b. Describe any two key tools of monetary policy, and describe how they would be used to implement expansionary monetary policy.

3. If the Bank of Canada sells $100 million worth of bonds to the public in an open market operation, what is the change in quantity of money that will eventually result? Assume that the currency drain is 0.15 and the desired reserve ratio is 0.05, and show your calculations.

4. a. Explain the concept of the multiplier, and explain the role of the marginal propensity to consume in determining the size of the multiplier.

b. Explain how the size of the multiplier will change when one brings in the role of the marginal tax rate.

c. Using the concepts in parts a and b above, calculate the slope of the AE curve and the size of the multiplier if MPC = 0.75. Then, calculate the revised slope of the AE curve and the multiplier when you know that the imports and the marginal tax rate will reduce the slope of the AE curve by another 0.30.

5. The economy has seen the unemployment rate increase from 6 percent to 9.5 percent, the inflation rate decrease from 2.8 percent to 1.2 percent, and there has been a 24 percent decline in consumer spending and a 45 percent decline in investment spending in the same time period.

a. Given the above, what would you predict about the overall direction of the economy? Explain your answer.

b. Describe the fiscal policy that will already be automatically operating, as well as the appropriate discretionary fiscal policy that the government should adopt, given the above situation.

c. Describe the appropriate monetary policy that the Bank of Canada should be operating, given the above situation.

6. Describe the contrasting views of the Keynesians and the monetarists with regard to an appropriate contractionary (tightening) policy to bring an economy out of a period of high inflation caused by excess aggregate demand.

7. Suppose that Kiribati can produce 1000 tons of breadfruit or 500 tons of fish, and that Tuvalu can produce 750 tons of breadfruit or 1875 tons of fish.

a. What is the opportunity cost of 1 unit of fish in Kiribati? Show your work.

b. What is the opportunity cost of 1 unit of fish in Tuvalu? Show your work.

c. Which country has a comparative advantage in producing fish? Explain why.

d. Suppose that trade takes place between Kiribati and Tuvalu. Which good will Kiribati import from Tuvalu? Explain why.

8. a. Discuss three tools government can use to influence imports.

b. Discuss and evaluate the two classical arguments for trade protection and restriction.

9. In 2003 to 2004, the Canadian dollar appreciated against the US dollar. Explain the effects of this appreciation on each of the following.

a. Canadian exporters of goods to the US

b. Canadian firms that buy machinery and equipment from US suppliers

c. cross border shoppers from Canada who shop for goods in the US

d. retired Canadians who live in Arizona and Florida during the winter months.

10. Consider Republic of Netflex’s Balance of Payments in 2009:

Organize the above data into the appropriate categories for the current and capital accounts; determine the current account balance, the capital account balance, and the official settlements account balance.