ECO102 Final Exam

Prof. Brandt / Vellekoop

April 6, 2020


7:00pm EDT – 9:00pm EDT (Toronto time)


***Instructions***

There are quite a few instructions: please take a few minutes to read them carefully, that will save you time and stress later.


1. **For this test you will need**

- A calculator

- A ruler

- Your T-card

- At least 6-8 sheets of standard format white paper (A4 or legal). Paper may be empty or underlined. You will need one separate sheet for each Crowdmark field. If one page is not enough for your answers, you can upload a second page in Crowdmark for the same question.

- Even if you plan to type in your answers or use a tablet, there are 3 questions that need to be handwritten on paper. There may be a point deduction if you do not follow the instructions.


2. The test is **open book**: you may use your book, lecture slides, and notes.


3. The test is **individual**: you may NOT consult other students, tutors, or any outside help. We are grading your abilities, not your tutor’s or your friend's. You may NOT share your answers with others for 24 hours after the test starts. These are violations of the honor code, as well as (major) violations of the standards for Academic Integrity of the University of Toronto.


4. The test consists of **6 short answer questions**. Most questions have sub-questions (1a, 1b and 1c). Those are to be answered on one sheet of paper. The number of points that can be earned for each question is indicated. A total of a 120 points can be earned.


5. The test is 120 minutes (and we shortened the test compared to in-person so that you have time to complete it). After the 120 minutes, you will have 30 minutes to upload your answers. However, you need to attempt uploading answers in the first 15 minutes, between 9pm and 9:15pm EDT. We can see in Crowdmark the time of your attempt. There will be a penalty (mark deduction) for uploads after the 120+30=150 minutes (after 9:30pm EDT).


6. If you experience technical difficulties with uploading, you need at least try to upload your answers in every field after 120 minutes (=9.00pm EDT). We can see in Crowdmark if you tried. If everything else fails, you have to email your answers as attachments to eco102.2020.make[email protected] before 9:30pm EDT. If you do not try to upload, we may not take your emailed answers into consideration.


7. You may type answers into a word document or write answers on a sheet of paper (or on your tablet).


8. ***If you type answers***

- Note that there are a few questions for which you need to draw a graph. These questions are required to be handwritten on paper (This is indicated in the question).

- You can upload your answers as a .pdf file (Crowdmark does not accept Word). You want to use the “print to pdf” function in Word or export to pdf, because you need to create one pdf for each question. That is, questions 1a, 1b, and 1c are to be answered on ***one single pdf file***, and so on.

- Make sure that the upload is Portrait orientation. If it is Landscape, please do the rotating yourself, we cannot do that in Crowdmark.

- Write (type) your name and student number on top of each page.

- Files that are too large (>2mb per file) might take a long time to upload. See here what to do https://crowdmark.com/help/completing-and-submitting-an-assignment/#collapseCompress

- Uploading from a phone can give trouble. It is better to upload from a laptop or a tablet (see https://crowdmark.com/help/completing-and-submitting-an-assignment/)


9. ***If you write answers***

- Make sure that you take one sheet for each question. That is, questions 1a, 1b, and 1c are to be answered on ***one sheet of paper***, and so on.

- Write your name and student number on the top of each page.

- Take a picture of the entire page, make sure it is visible and upload the .jpg or .pdf file to Crowdmark. Make sure that the picture is Portrait orientation. If it is Landscape, please do the rotating yourself, we cannot do that in Crowdmark.

- Files that are too large (>2mb per file) might take a long time to upload. See here what to do https://crowdmark.com/help/completing-and-submitting-an-assignment/#collapseCompress Uploading from a phone can give trouble. It is better to upload from a laptop or a tablet (see https://crowdmark.com/help/completing-and-submitting-an-assignment/)


***Note: 1a, b, c, d, e and f need to be handwritten on a sheet of paper, and not typed. It is likely that you will need two sheets of paper for your answers. Put in the top-right corner your T-Card showing your face when you make a picture.***


1. (20 points) Countries A and B each produce cars and oil. Currently the two economies do not trade with one another. The table below provides information about the maximum amount of each good they can produce.


Number of Cars (million)
Barrels of Oil (million)
Country A
4 8
Country B
2 2

a. (3 points) Use the information from the table to draw the (linear) Production Possibility Frontiers (PPF) for these two economies. In each graph, measure cars on the horizontal axis and barrels of oil on the vertical axis.

b. (3 points) What is the slope of each PPF and how does it relate to the opportunity cost of production?

c. (4 points) Does either country have an absolute advantage in cars and oil? Explain. Which country has a comparative advantage in producing oil? And which country in cars? Explain.

d. (4) What is the price ratio between cars and oil in the two countries under autarky? Under what terms of trade will the two countries be willing to trade with each other?

e. (4 points) Suppose Country B can now produce 8 million barrels of oil because of a new discovery of oil resources. Redraw the PPFs showing how this changes the PPF(s). What are the implications of the discovery for the patterns of trade? Using the new PPFs, show how each country can specialize completely in one good, trade, and operate on a point outside the PPF.

f. (2 points) Provide two reasons why a country may not want to specialize totally in the production of the good in which it has a comparative advantage.


***Note: 2a, b, c, d, and e need to be handwritten on a sheet of paper, not typed. Put in the top-right corner your T-Card showing your face when you make a picture.***


2. (25 points) Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy.

a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit.

b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s).

c. (5 points) Which two factors determine the magnitude of the effects in the short-run?

d. (6 points) What are the effects in the long-run, assuming no further shocks to the economy? Show in the appropriate graphs.

e. (4 points) How does this example illustrate monetary neutrality? Explain your answer.


3. (25 points) In order to help minimize the impact of COVID-19 on domestic economies, governments and central banks have taken a number of actions to provide liquidity in financial markets; prevent layoffs and job separation between workers and firms; and put cash in the hands of households and firms. Drawing on the models we have discussed this term, please explain the reasons for two of these measures. How exactly are these policies supposed to work? How do they reflect in any way insight and lessons gained from policymaking in the context of the Global Financial Crisis?


4.


Production Prices

Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Good X
100
200
200
$1.00
$1.50
$2.00
Good Y
110
100
150
$2.00
$2.00
$4.00

(15 points) Assume the economy produces only two goods, X and Y. In this economy, Year 1 is the base year. If necessary, round at 1 decimal.

a. (3 points) What is nominal GDP in Year 3?

b. (5 points) What is the price index for Year 2 and Year 3? What is the rate of inflation between Year 1 and Year 2 based on the GDP deflator?

c. (3 points) What is the change in real GDP between Year 2 and 3?

d. (4 points) If the minimum wage in Year 2 was \$ 10/hour, how much would it have to increase in year 3 to maintain its purchasing power?


***Note: 5a, b, c, and d need to be handwritten on a sheet of paper, and not typed. Put in the top-right corner your T-Card showing your face when you make a picture.***


5. (20 points) Brandtlandia is a small closed economy. The demand and supply for tulip bulbs is given in the following table where P is the price in dollars \$ and Q is the quantity of tulip bulbs.

Price →
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
Quantity demanded
200 190 180 170 160 150 140 130 120 110 100
Quantity supplied
10 20 30 40 50 60 70 80 90 100 110

Currently, the international price for a tulip bulb is \$40. Brandtlandia is considering opening its economy to trade, and the government is considering three possibly policies.

Policy 1: Open the economy to trade with no trade protection.

Policy 2: Open the economy to trade but impose a tariff on the import of tulip bulbs that would set the price of tulip bulbs to \$80.

Policy 3: Open the economy to trade but limit imports to a quota of 50 tulip bulbs.

a. (5 points) Under policy 1, how much is demanded? How much is supplied by domestic firms? How much is imported? Show graphically, make sure to label the axes and the lines.

b. (5 points) What is the effect of imposing a tariff of \$40 on a tulip bulb (policy option 2)? Show graphically (make sure to label axes and lines). Compared to policy 1, who wins? Who loses?

c. (5 points) How are domestic consumption and production affected by policy 3? Explain in words and show graphically.

d. (5 points) Graphically, what is the tariff that would have the same effect on prices as the quota in part C? Are there any differences in the effects of the tariff and quota on consumers, firms and the government? Explain.


6. (15 points) Assume now that the world consists of only two countries: Brandtlandia and Hollandia. Every year many tourists visit each other’s countries. The only other good Brandtlandia imports is tulip bulbs. Brandtlandia uses the Thaler as currency, and Hollandia the Guilder.

The policy options in Brandtlandia are copied here for your convenience.

Policy 1: Open the economy to trade with no trade protection.

Policy 2: Open the economy to trade but impose a tariff on the import of tulip bulbs that would set the price of tulip bulbs to 80 Thaler per tulip bulb.

Policy 3: Open the economy to trade but limit imports to a quota of 50 tulip bulbs.

Brandtlandia currently uses policy option 1, and the equilibrium exchange rate (e) is 2 Guilder for 1 Thaler (and this is the exchange rate notation you need to use for this question).

a. (4 points) If Brandtlandia implements policy option 2, what will be the initial effect on the exchange rate if the exchange rate is flexible? Explain your answer.

b. (5 points) Suppose that the central bank of Hollandia wants to offset the effect of policy option 2 on the exchange rate. How would it do so? What might be the reasons for doing so?

c. (6 points) Assume that the exchange rate is flexible and Brandtlandia chooses policy option 1. The price of a tulip bulb in Hollandia is 20 Guilder, and 15 Thaler in Brandtlandia. Also assume that all prices (including the exchange rate) are fixed in the short-run. Is there purchasing power parity here? Explain your answer. Is the Guilder overvalued or undervalued? What will happen in the long run to the exchange rate? Explain your answer.



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