Term Test 2: 2019 Version 2
Term Test 2: 2019 Version 2
Term Test 2: 2019 Version 2
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I. [15 Marks] TFU means “True, False or Uncertain?”. All marks are earned for the explanation.
(1) [5 Marks] In 2026, real GDP was equal to potential GDP and inflation was at the target level.
In 2027, real GDP was greater than potential GDP. TFU: The AS-AD model predicts higher
than target inflation in 2027.
(3) [5 Marks] Bob is a resident of Boblandia. He is currently working. He owns bonds. When he
retires, he will live off of his pension as well as the money he receives when his bonds mature.
Both his pension and his current earnings are indexed to inflation. TFU: If the government will
pay off its debt at the beginning of Bob’s retirement, he prefers high inflation before that time.
(1) [5 Marks] Assume an economy currently at potential GDP and a central bank committed to
returning the economy to potential GDP as quickly as possible.
i. Explain what can we infer if the yield on one-year government bonds is 3% and the yield on
two-year government bonds is 2%.
ii. Given these yields, are people predicting that next year’s GDP will be above or below
potential GDP? Explain.
(1) [4 Marks] Assume the commercial bank chooses to return to its target reserve ratio by either
buying or selling government bonds. Complete the bank’s resulting T-account.
Assets Liabilities
$ Currency $ Customer Deposits
$ Central Bank Deposits $
$ Government Bonds
$ Loans
$
(2) [5 Marks] Assume the commercial bank refuses to buy or sell government bonds.
• Identify one other action the bank can take to return to its target reserve ratio.
• Explain (make clear) how the action returns to bank to equilibrium.
• Complete the T-account after the bank returns to its target reserve ratio.
Assets Liabilities
$ Currency $ Customer Deposits
$ Central Bank Deposits $
$ Government Bonds
$ Loans
$
• Assume the economy starts at potential GDP and actual inflation equals target inflation.
• Draw any needed new curves, and label the following:
A The AD and SRAS curves resulting the shock identified in the Scenario.
J The AD and SRAS resulting from Janet’s policy response.
P The AD and SRAS resulting from Petr’s policy response.
• Yes, this means that in each graph, each label will be used twice: once for AD, once for SRAS.
• Yes, this means that in each graph, a curve may have multiple labels.
(1) [5 Marks] Scenario 1 Boblandia’s major trading partner has a large decrease in real GDP.
(2) [5 Marks] Scenario 2 Vibranium, a commodity only available by import and used in Boblan-
dia’s production processes, has a large increase in price.
(1) [4 Marks] What are private savings if real GDP equals 400?
(2) [4 Marks] IF autonomous government expenditures increased by $1, what would be the change
in real GDP?