RHCJLIUI I If I. a) b) Contrast the economic views of Keynes and Hayek. In the first half of the course it was mentioned that when economics and common sense conflict, common sense was wrong. There were examples given in the sections on prices, unemployment and economic growth & development. Describe any two of the situations where common sense is wrong. Question # 2 a) b) C) Assume that after you graduate, you move to a simple economy in which only three goods are produced and consumed: fish fruit, and meat. Suppose that on January 1, fish sold for $2.50 per pound, meat was :5 ' r pound. At the end of the year you prices stayed at $1. ually fallen to $2. 00. Can you say what happened to the overall CPI,' In terms of whether it increased, decreased, or stayed the same? Do you have enough information to calculate the inflation rate? What are the consequences of higher than anticipated inflation in the labour and financial markets? What is core inflation and how does it differ from "regular" inflation? Question # 3 a) b) C) Briefly describe the four types of unemployment and the potential solutions to each one. Why does the employment rate and the unemployment rate not equal one? What are the problems of using unemployment as an indication of economic performance? Question # 4 a) b) C) What is the difference between Nominal and Real GDP? Why may GDP not be a good measure of economic well-being? What is the difference between economic growth and economic development? Can you have one without the other? Why is economic growth so slow or non-existent in many developing countries? What policies would you propose to improve the situation? Question # 5 a) On a fully labelled AD/AS diagram, which shows that the economy is experiencing an inflationary gap, demonstrate what would happen if interest rates increase. Was the policy successful? b) On a fully labelled AD/AS diagram, which shows that the economy is experiencing a recessionary gap, demonstrate what would happen if a new technology is introduced that makes workers more efficient.Question # 6 The MPC for a closed economy is 0.75. Autonomous consumption is $500, investment is $300, and government spending is $400. a) What is the equilibrium level of real GDP? b) If business increases planned investment expenditure by 300 to 400, what is the new equilibrium real GDP? c) What is the slope of the AE function in this economy and the value of the multiplier? Question # 7 a) According to Keynes, what three things influenced people's demand for money? HOW has technology changed peoples demand for money? b) How does a sale of securities (open market operations) by the Bank of Canada affect the real GDP and price level? Use either three graphs or a ow chart to demonstrate this. c) Using the quantity theory of money, what would happen if the supply of money increased by 20%? What is the major conclusion of this model? Question 3 8 a) Using Disney World in Orlando as an example, explain the multiplier. What are the three things that influence the multiplier and explain how they impact the number? b) If the MPC is .9 and there are no leakages to the economy, what will the multiplier be? If there is a recessionary gap of $40m, how much money would the government have to inject into the economy to bring it back to long run equilibrium? c) To get rid of the recessionary gap the government decides to cut taxes instead of increasing spending. The amount of the tax cut is the same as what would have been injected in part b). Will the decrease in taxes have the same effect as the increase in government spending? Why or why not? Question 3 9 a) What is scal policy and who sets it? What is meant by cyclically balanced budget scal policy? What problems exist with this type of policy? b) What is monetary policy and who sets it? What is the inflation target? What is the required reserve ratio in Canada? What is "moral suasion\" as it applies to monetary policy? C) What is "America's Extraordinary Gamble"? 'Referring to the Economist magazine article I asked you to read" Question 3 10 Describe the highlights of the movie llInside the Meltdown" and focus on why things happened