True or False

1. A rational investor will always purchase the bond that pays the highest real interest rate.

2. Net capital outflow is the purchase of domestic assets purchased by foreign residents minus the purchase of foreign assets by domestic residents.

3. If the purchasing power of the dollar is always the same at home and abroad, then the nominal exchange rate defined as foreign goods per unit of Canadian goods decreases if the Canadian price level rises more than the price level in foreign countries.

4. From 1970 to 1998, the Canadian dollar depreciated against the German mark and appreciated against the Italian lira because Canada experienced more inflation than Germany but less inflation than Italy.

5. Aggregate demand shifts to the left if the money supply decreases.

6. In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in aggregate supply.

7. Because we understand what things change GDP, we can predict recessions with a fair amount of accuracy.

8. Increased uncertainty and pessimism about the future of the economy decreases investment spending shifting aggregate demand to the left.

9. In principle, the government could increase the money supply or government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

10. Stock prices often rise when the Bank of Canada raises interest rates.

11. Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Written

12. Assume the money-demand curve is MD=155 - 11 r + Y, the price level depends on r according to the equation P = 80 - 9 r, and the money supply is MS = 125. Find a relationship between the price level P and output Y and show that the relation that you have found is an aggregate demand function. Y=__________-___________P

13. The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $110 billion. The marginal propensity to consume is MPC = 0.4 and the marginal propensity to import is MPI = 0.06. Assuming no crowding out effect,what is the increase in output caused by the stimulus package of$110 billion in a closed economy?

14. The next table shows PPP exchange rates (the price of 1 U.S. dollar in units of the foreign currency) for several countries, determined based on the Big Mac Index. According to this data, what are the predicted exchange rates between the following countries?

	PPP exchange rate (1US dollar)
United States (US)	---
Argentina (Peso)	4.25
Australia (Aus dollar)	3.4
Brazil (Real)	3.75
Britain ()	1.04
Canada (Cn dollar)	2.95
Chile (Peso)	495
China (Yuan)	3.15

a. Argentina and Australia

b. Brazil and Canada

c. Chile and China

d. China and Canada

15. The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $80 billion. The marginal propensity to consume is MPC = 0.35 and the marginal propensity to import is MPI = 0.05. Assuming no crowding out effect, what is the increase in output caused by the stimulus package of $80 billion in an open economy?

16. The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by 110 billion. The marginal propensity to consume is MPC = 0.25 and the marginal propensity to import is MPI = 0.01. Suppose the crowding-out effect is twice the amount of government spending,what is the change in output caused by the stimulus package of 110 billion in a closed economy?