1. [8 points] (a) .(4 points) Some workers in the economy are paid a flat salary and some are paid by commission. Which compensation scheme would require more monitoring by supervisors? In which case do flrms have an incentive to pay efficiency wages? (b) (4 points) "The latest employment data suggest that number of employed increased by 30,000, and number of unemployed decreased by 40,000.'(#xplain why the increase in employment does not match the decrease in unemployment~at happened to the labour force? Did the unemployment rate increase or decrease? <t> Wh€t1 Workers (/Ire pe:.l'ol ber (CA.) Com rYII'JJ;'Ot1..j chOOSe +he.,'r 'Z.~f: opi1fftll!'l/~ cb) So CD ~1YIe.. ~ fA-€.. +~~ decre~ tAe1- F/t::'tf- ~/aYJ I....ri'l( Ye11t(1Ye5;. lM\('rYlq'loy.Rot' ~ /f'ctl){ in Un £~ p/o ymp~ .7"~ Cj r"e~r fA tPil1. +1]<. 2 2. [8 points1 (a) '(5 points) The Bank of Canada conducts a $5 million open market purchase of government bonds.3ll!at will happen to money supply? If people hold all money as currency, what is the change in money supply? If people hold all money as deposits and banks maintain a reserve ratio of 25%, what is the change in money supply? (b) (3 points) Assume that the quantity theory of money and the Fisher effect both hold. What happens to inflation, real interest rate, and nominal interest rate when the money supply growth rate decreases from 8 percent to 5 percent? i(\Ore~ ~ ~ ~f\~~ 1-11 n1 OYlEW] ~~r 14' people h.Avt i"'S ~5 Ii? rll.b" -Ifo/O{ a/( fl'{(J'1~ ~ c;{-epof'*'~ ~'1ti( r"6jeyV't. r-e;tj'o ~ 2.J..-.(' ) ,'V\. h1011~ ~Wffl;r TS (4'~) CLr) :::: ~ eb} ~ . Wkv1 -Me ~io to s To rrcne; J ~ 2-0 nt<Y1€4J -'~j tj'Ow+h YAk de(rf!'~S ~~ ~Vt1./~cJ'1. Y-e-,k w/i' (3 peJ'Ce"'~e (16.rrfs) d.ec r-eet4( ":r .3To. • 3 3. [8 points] (a) '(4 points) Suppose that the money supply is $320 million, nominal GDP is $800 million, and real GDP is $400 million. Calculate the price level and the velocity of money. Suppose the quantity equation holds, and money supply increases by 5%, calculate the new price level and percentage change in the price level. Explain. (b) (4 points) If the tax rate is 20%, compute the before·tax real interest rate and the after-tax real interest rate in each of the following two cases: (1) The nominal interest rate is 5% and the inflation rate is 2%. (2) The nominal interest rate is 8% and the inflation rate is 5%. (~) M V=- PY ~ (320) \I == '600 goo V= 3 20 2 2-00:;:. PY =: 800 CI pf ') == 2·5 400 Ct f.f) ( \ 2<1 -2 -0/ - :::..£ /u '2-. '2fk \ 11"'\ m al1e, J.f$V-eC4.l \ b;r S atrle feyc't'~+eL (6). ('I; ge-t~-{C$( (."2.) r ( >\-!PP q- fi'e>.1 ~-k~} 11 on'\ IfVq ( After- 'Y-ee\ ( Be fe -~)( Atle --t.c,,-x After --~?( r 'ye", ( ,'.-1 . I a", ,n (t"""t""~U ~ f(·~(e.. {If. ~, ,-e. . A.per-- t'\ X tl'l x -(-e j&<tIl,s t"c;-/e. =- 5X - ;-;"./f J.#J1 m.fe ;--"k J.H-I rt:; -= 7-% -;:3,% '5;t (1- 0, 2.) ~ '+ t +e -= t..;-;:<- 2 J{ -= 1....10 + rcd-e ::::::- 'i:;t -5?{ :::- 3 Z' ,-;-Ie~ t v~ = 1(-£ (1- 2.) :::: (4-% ~ie ~ flom.;7led 0._ y~ ( ,,,,~~t f~ -= {4- 10 -.5% =--/.4-% 4 4. [8 points] (a) (4 points) Henry Ford, the founder of the Ford Motor Cq~pany, paid his worker $5 a day (dollars in early 1900s) which was about twice the going'tige at that time. Explain why Henry Ford called the $5-a-day wage "one of the finest cost cutting moves". (b) (4 points) If prices change in a way that leaves the overall price level unchanged, then no one is better or worse off ". Explain why this statement is wrong. II (4{) \ $S~~ -d6tj Wa:1 ~ £-(f"~"e~() Wtit~. Bj P~~i'A'j W(JV~er> 'E1f\~CI'-el1c::r tV.::t5€J mor-e (ffrrt-. 'I t-Jo*€(~_ As 01'17'\ t:t j Wi'I( -tf,eJ< W 1'1( les.~ be,- C1/~o ortf-f(A d be-f:kr fu,.I"fo(l.e;.... 9/tle;{ i"'J re.H{I-I.., erodut-f"v?1-J 7'l')cr~ ( hJ. Relt1+:~ pr,Ye chv,nles. &Cawu '" +h-e Chlinj€- I iIr Y'e ~+\'~ Pri'(es .,) 5 5. [9 points] (a) (3 points) Suppose that government eliminates the investment tax credit. Use the market for loanable funds diagram to show the effects on interest rate and quantity of funds. (b) (3 points) Suppose GDP is $450 billion, taxes are $150 billion, private saving is $50 billion, and national saving is $30 billion. Assuming that this economy is closed. Calculate consumption, government purchases, and investment. (c) (3 points) Why is frictional unemployment inevitable? ~ltIJJ- rQ\~ ~ f fl>. C1 ~ r ~ q'l{til1t" ry CbJ. S == c1 fwt7c6 J , 30 SP=~o ~ sq -=- ~-~ p~ -20 (b). ~ ~ =-/~o ""I -:::: S =- 30 (b). -, - /" p 5 -- y - 170 Cb) - (-20) \..... -~ C =- 'r!>o - (~o -So ==- 2l;o Ch) ... (c> l3e ~ ~ ~c.foYCt ( $hclfl-~" the.. CAM~e~ Omol'l'J tAl ffe,..e" I- • ;nJWJIr,'-e. ~ ~re.. ,~~Jy.'~ pre $ee r.. . .' /I ew ii1JG0Ir,'-e! e defHOlld Hrm<;. f~ explil\dj'''j "Jcfl~(r> -' ~~4 vJ(jY((~r1 I~ I Od r:.""'j fl-.so b~ , -Pr (abov,r dec/."'n(j;""'] 6. [9 points) (a) (3 points) Suppose the population over age 15 is 100 million, the labour force participation rate is 60 percent, and the unemployment rate is 9 percent. If the number of discouraged searchers increases by 1 million, what does the unemployment rate become? (b) (3 points) Explain why the central bank does not have perfect control over the amount of money circulating in the economy. (c) (3 points) Suppose that the Bank of Canada sells foreign exchange reserve. Use a graph of the money market to show the effects on the value of money and the price level. Ca) LtAbc')LU #1]. ~(e.. -= 100 ({(J~ J :::: (o vV\~uy-e,* -= (iJ (~~) :::: ~4-(m1 :J..f tt,e. nVl~r ut us f l1ewt {o..b()Hf p.,.-c~ ='/11 \.A. r"\C~ l vy n'\e'.n-\- re:,-k -=::.. C b) (v.J() ('~on ~: OM6u,,4- ~ G) Gl'1?n'fet'CM ( fl1 o,,~ ) .,1 ol.:'j'cu~~ (,= • '= ~rclte~ Ir'\ ( r2'tJAl btf /"'/ S"-9 C~) q..,cr . ~; ::::.7- f.o X' -cD The.. Cei't~ I ~"'k.. cioe"l (1oi; ttt II/le(f Th-e... f 6rJ - ( =- S,lf- - fleJ'# e,..,ptaye.c{ ar.,t; em) thAt lr()W,J(h()(d~ Centro! {b;rrl"l(c. c/.,()oStL -to hf:J(c1 cioeJ Cb"11r-o J a..1 -r/Ie, dep01.~1J -;'" noE:- Cu,.,!rol -I,e amoltl"r '#'at" bAn {CS cltocJ.e -to (Q/td • ~(AP(Jla-- -fa.({ S f ~(i.ff 1"10 7 1. [8 points] (a) (4 points) Suppose that the money supply is $380 million, nominal GDP is $760 million, and real GDP is $304 million. Calculate the price level and the velocity of money. Suppose the quantity equation holds, and money supply.increases by 5%, calculate the new price level and percentage change in the price leveL Explain. (b) (4 points) If the tax rate is 30%, compute the before-tax real interest rate and the after-tax real interest rate in each of the following two cases: (1) The nominal interest rate is 6% and the inflation rate is 2%. (2) The nominal interest rate is 8% and the inflation rate is 4%. (a.). M V ~ (~R-<J) Pi" v= 2. ~ V::: ,60 Mv= P'( pe((-el"\~~ (t'\(ye-~ 1(\ f'-l'L e (-eve -:::2n.0"e0( ,"";, b;r SAI"Y\e. ~,6~--z..5' (_ - "1oYl~ S"f(Jt'7 r-eju l-li ~l ~ 4 -=-5 t, a>n /'ncve""K ", pate' (e-1 pel'Ct'n~~1 (eJ1. ( Cb) . ClJ (l, ef«--.{....x" ",4< l#l- r"t = AAer-~X (loffil'rv,( ;+{+er- ~X ",~t- ,,-e~ ( 'ih-f.et.-bJ \- (i) (S€~r€- ..f:::tAx. '(t:/I I A{¥r- ~~ Veil. y--",+e. -=.. YCi+e I'YI-J.e W') I- M~-{-t1I7< "1{)rl"\~\ 6% - -z. % = l(- % rp!+e ;;,-{4>u-jf =. <::::= 6i( (-0.3) =- £f., '-~ ~ 7..J{ - l?{ -= 8' ~ - 4- ~ r"~.{...( -= I ",,-/-e u--:J +- (",,-/-e -=- 2.,7.. Z = 4- Tv g-ro ((-O,~) =- s: 6 % £;-·6% .- <t-% : 1·6 fa. 2 3. [9 points] (a) (3 points) Suppose that government eliminates the investment tax credit. Use the market for loanable funds diagram to show the effects on interest rate and quantity of funds. (b) (3 points) Suppose GDP is $550 billion, taxes are $180 billion, private saving is $60 billion, and national saving is $50 billion. Assuming that this economy is closed. Calculate consumption, government purchases, and investment. (c) (3 points) Why is frictional unemployment inevitable? 5=50 sP :=60 -=) ~ 6r -=- S- S P -y- T- C s p -::::.. £'0 - 6() -=- -I 0 l b) 4 4. [9 points] (a) (3 points) Suppose the population over age 15 is 120 million, the labour force participation rate is 70 percent, and the unemployment rate is 8 percent. If the number of discouraged searchers increases by 1 million, what does the unemployment rate become? (b) (3 points) Explain why the central bank does not have perfect control over the amount of money circulating in the economy. (c) (3 points) Suppose that the Bank of Canada sells foreign exchange reserve. Use a graph of the money market to show the effects on the value of money and the price level. &-) . LOt. hcv£ ~~ =~ vi It +h uf\ Q.. A (2.0 ('10 % ).:::. R£r (#1 ) ~n1('(QyeA =- gtr- ( ~%) =- ~ 12- {I'tl} tAmloe t' ~ . J ~5(oVlt'o.Sj~d.. u",rtf,..f>r<; j)1C"'~5 b::r (~ 5