1. Jack recently took a loan from Diane at an interest rate of 8 percent. Diane expected this year's inflation rate to be 6 percent and the real interest rate to be 2 percent. The loan is due at the end of this year. Complete the table below by computing the real interest rate for each possible inflation rate. For each situation, determine whether the unexpected inflation level benefits Jack or Diane.

Instructions: Enter your answers as whole numbers.

Actual inflation rate (%)	Actual real interest rate (%)	Who benefits?
1		(Click to select) Diane Jack
4		(Click to select) Diane Jack
-1		(Click to select) Diane Jack
3		(Click to select) Jack Diane

2.)The average individual in a country earns an annual salary of $60,000, of which $24,000 is spent on housing, $10,800 on food, $10,800 on transportation, and $14,400 on other goods and services. Suppose the government in this country mandates that all salaries and the prices of all goods and services be reduced by 40 percent.

a. How much does the average individual now earn?

b. How much does the average individual now spend on housing, food, transportation, and other goods and services?

Housing $ Food $ Transportation $ Other goods $

c. What happened to the average individual's real salary?

multiple choice

It has not changed.

It has decreased.

It has increased.

3.)"Monetary policy is incredible," your friend says. "Just a little manipulation of the money supply and interest rates, and we end up at just the right price level and amount of output." Is your friend overstating the central bank's control over price levels and output?

multiple choice

• Your friend is understating the effectiveness of monetary policy by not distinguishing between the short run and the long run.
• Your friend is overstating the effectiveness of monetary policy by not distinguishing between the short run and the long run.
• Your friend is overstating the effectiveness of monetary policy by focusing on the long run.
• Your friend is understating the effectiveness of monetary policy by focusing on the short run.

4.)Cookie Monster has decided to channel his love of cookies into a new business, "Me Want Cookies, Inc.," a new partnership he has formed with Ms. Piggy. They are considering different countries in which to start their venture and would like to rank the countries based on the inflationary environment. They decide to give a country 10 "menu-cost" points for each percent of actual inflation in the last year, since inflation will cause their menu costs to increase. They also dislike unstable inflation, so they will give a country 20 "uncertainty" points for each percent difference in the actual inflation rate when compared to the projected inflation rate. Countries with the least total points will receive the highest rankings.

Complete the table below for Cookie Monster.

Instructions: Enter your answers as whole numbers. Rank Countries from 1 (best) to 5 (worst), starting with the lowest total points.

Country	Projected inflation (%)	Actual inflation (%)	Uncertainty points	Menu-cost points	Total points	Rank
Kermikopia	2	4
Gonzoland	4	5
Elmostan	7	8
Oscaria	10	13
Bertico	14	14

5.)Which of the following can be affected by the money supply in the long run?

Instructions: You may select more than one answer, select the right answers

check all that apply

• Nominal GDP
• Real GDP
• Inflation
• Unemployment

6.)The price index values used to calculate headline and core inflation for 2018 through 2022 are found in the table below:

Year	Series 1	Annual Inflation Rate	Series 2	Annual Inflation Rate
2018	132.00	n/a	122.00	n/a
2019	136.22	%	124.56	%
2020	138.26	%	126.68	%
2021	143.24	%	129.72	%
2022	144.81	%	131.79	%

a. Calculate the annual inflation rates for each series and enter the numbers in the table above.

Instructions: Round your answers to one decimal place.

b. Which series represents core inflation?

multiple choice

• Core inflation includes food and energy prices so we expect less fluctuation from year to yearSeries 2.
• Core inflation includes food and energy prices so we expect more fluctuation from year to yearSeries 1.
• Core inflation removes food and energy prices so we expect more fluctuation from year to yearSeries 1.
• Core inflation removes food and energy prices so we expect less fluctuation from year to yearSeries 2.

7.)Jack recently took a loan from Diane at an interest rate of 5 percent. Diane expected this year's inflation rate to be 2 percent and the real interest rate to be 3 percent. The loan is due at the end of this year. Complete the table below, showing the real interest rate for each possible inflation rate. For each situation, determine whether the unexpected inflation level benefits Jack or Diane.

Instructions: Enter your answers as whole numbers.

This year's actual inflation rate (%)	Actual real interest rate (%)	Who benefits?
1		(Click to select) Jack Diane
4		(Click to select) Diane Jack
0		(Click to select) Diane Jack
-2		(Click to select) Jack Diane

8.)Your dormitory Griffingate has appointed you as the central banker of its economy, which deals in the currency of wizcoins. Assume that the velocity of wizcoins in Griffingate is constant at 10,000 transactions per year. Right now real GDP is 1,000 wizcoins, and there are 2,000 wizcoins in existence.

a. What will be the value of each of the variables that make up the quantity equation?

Instructions: Enter your answers as whole numbers.

M = wizcoins

V = wizcoins

P = wizcoins

b. Now indicate how the other variables will respond to each of the following scenarios, taking each case separately and assuming that velocity remains constant.

Instructions: Enter your answers as whole numbers.

(i) You increase the money supply to 4,000, and prices increase twofold.

Real GDP = wizcoins

(ii) Start with the initial values. Real GDP drops to 500 wizcoins, and the money supply remains constant.

Price level = wizcoins

(iii) Start with the initial values. Prices increase threefold because of a sudden scarcity of soft drinks, and you decide to keep the supply of wizcoins constant.

Real GDP = wizcoins

(iv) Start with the initial values.You increase the money supply to 5,000 wizcoins, and prices rise by 350 percent.

Real GDP = wizcoins

9.)Suppose total Canadian exports in the month of June were $123.0 billion and total imports from foreign countries were $192.3 billion. What was the balance of trade?

Instructions: Round your answer to one decimal place and include a negative sign, if necessary.

$ billion.

10.)Suppose a country has total GDP (Y) = $12 trillion, consumption (C) = $8 trillion, government spending (G) = $2 trillion, investment (I) = $3 trillion, and taxes (T) = $1.7 trillion.

Instructions: Round your answers to one decimal place and include a negative sign, if necessary.

a. What is the level of net exports or balance of trade?

$ trillion

b. What is the level of public savings?

$ trillion

c. What is the level of private savings?

$ trillion

d. What is the level of net capital outflow?

$ trillion

11.)In 2019, Canadian investors purchased $50 billion in foreign assets, and foreigners purchased $120 billion in Canadian assets such as stocks and Treasury bills. In addition, Canadian businesses invested $150 billion in foreign factories and operations, while foreign companies invested $120 billion in Canadian factories and operations. What was the net capital outflow for Canada?

Instructions: Enter your answer as a whole number and include a negative sign, if necessary.

The net capital outflow for canada was $ billion.

12.)In Windsor, Ontario, a Big Mac from McDonald's costs C$4.17 (Canadian dollars), and across the border in Detroit it costs $3.56 (U.S. dollars).

a. Suppose the nominal U.S. exchange rate with Canada is US$0.70 per Canadian dollar. Does purchasing power parity hold between the two countries?

multiple choice

• Yes, it holds because the Canadian Big Mac costs more in terms of U.S. dollars.
• No, it does not hold because the Canadian Big Mac costs less in terms of U.S. dollars.
• Yes, it holds because the Canadian Big Mac costs less in terms of U.S. dollars.
• No, it does not hold because the Canadian Big Mac costs more in terms of U.S. dollars.

b. What is the exchange rate for the U.S. if purchasing power parity holds.

Instructions: Round your answer to three decimal places.

$ U.S. dollar per Canadian dollar

13.)Suppose the current CanadaUK exchange rate is 0.64 pounds (the pound is the UK currency) per dollar, and the aggregate price level is 175 for Canada and 138 for the UK.

a. What is the real exchange rate?

Instructions: Round your answer to three decimal places.

pounds per dollar

b. What does this real exchange rate mean in terms of the relative purchasing power of the dollar and the pound?

multiple choice

• The Canadian dollar buys more "goods" in the UK than it would in the Canada.
• The Canadian dollar buys the same amount of "goods" in the UK as it would in the Canada.
• The Canadian dollar buys less "goods" in the UK than it would in the Canada.

14.)Suppose total Canadian exports in the month of June were $122.9 billion and total imports from foreign countries were $192.4 billion. What was the balance of trade?

Instructions: Round your answer to one decimal place and include a negative sign, if necessary.

$ billion.

15.)In 2019, Canadian investors purchased $50 billion in foreign assets, and foreigners purchased $100 billion in Canadian assets such as stocks and Treasury bills. In addition, Canadian businesses invested $150 billion in foreign factories and operations, while foreign companies invested $100 billion in Canadian factories and operations. What was the net capital outflow for Canada?

Instructions: Enter your answer as a whole number and include a negative sign, if necessary.

The net capital outflow for Canada was $ billion.

16.)Describe what happens to the supply and/or demand curves for Canadian dollars under the following scenarios. In each scenario, does the Canadian exchange rate appreciate or depreciate, and what happens to the Canadian balance of trade?

a. A drought in Russia destroys the wheat crop, resulting in increased purchases of wheat from Canada.

multiple choice 1

• The supply curve shifts to the right.
• The supply curve shifts to the left.
• The demand curve shifts to the right.
• The demand curve shifts to the left.

b. Bollywood movies become extremely popular in Canada, thereby increasing demand for foreign movies.

multiple choice 2

• The demand curve shifts to the left.
• The demand curve shifts to the right.
• The supply curve shifts to the right.
• The supply curve shifts to the left.

c. The Canadian government forces all government offices to purchase Canadian-made computer products, instead of importing them.

multiple choice 3

• The demand curve shifts to the left.
• The demand curve shifts to the right.
• The supply curve shifts to the right.
• The supply curve shifts to the left.

17.)Suppose the new CEO of Lululemon Inc. decides to produce all the company's products in Canada instead of China.

a. The supply of Canadian dollars will shift

(Click to select) to the left to the right .

b. The demand for Canadian dollars will shift

(Click to select) to the right to the left .

c. The value of the Canadian dollar will

(Click to select) appreciate depreciate .

18.)In March 2019, the Canadian dollar was worth $0.78 U.S. dollars. In April 2021, the Canadian dollar was worth $1.06 U.S. dollars. What effect would this increase have on the trade balance between the United States and Canada?

multiple choice

• Canadian imports will rise and Canadian exports will fall, so the Canadian trade balance will fall and the U.S. trade balance will rise.
• Canadian imports will rise and Canadian exports will fall, so the Canadian trade balance will rise and the U.S. trade balance will fall.
• Canadian imports will fall and Canadian exports will rise, so the Canadian trade balance will fall and the U.S. trade balance will rise.
• Canadian imports will fall and Canadian exports will rise, so the Canadian trade balance will rise and the U.S. trade balance will fall.

19.)Some politicians argue for imposing trade restrictions in the hope that doing so will reduce the trade deficit of Canada. Assuming Canada has a floating exchange rate, answer the following questions regarding the impact of the trade restrictions.

a. What is the impact in the foreign exchange market for dollars?

multiple choice 1

• The demand for dollars decreases.
• The supply of dollars increases.
• The supply of dollars decreases.
• The demand for dollars increases.

b. What is the impact in the market for the foreign currency (euros, yen, etc.)?

multiple choice 2

• The demand for foreign currency decreases.
• The supply of foreign currency increases.
• The demand for foreign currency increases.
• The supply of foreign currency decreases.

c. What happens to the exchange rate value of the dollar?

multiple choice 3

• The value of the currency does not change.
• The dollar appreciates.
• The dollar depreciates.

d. What happens to net exports?

multiple choice 4

• Net exports can go either way.
• Net exports will increase.
• Net exports will decrease.

20.)Suppose the current CanadaUK exchange rate is 0.63 pounds (the pound is the UK currency) per dollar, and the aggregate price level is 170 for Canada and 140 for the UK.

a. What is the real exchange rate?

Instructions: Round your answer to three decimal places.

pounds per dollar.

b. What does this real exchange rate mean in terms of the relative purchasing power of the dollar and the pound?

multiple choice

• The Canadian dollar buys less "goods" in the UK than it would in the Canada.
• The Canadian dollar buys more "goods" in the UK than it would in the Canada.
• The Canadian dollar buys the same amount of "goods" in the UK as it would in the Canada.

.