Economics 210 Money and Banking

ECON 210 - 4

Coquitlam College

ECON 210 – Assignment 2 (25 points)

Full name: Student Number:

Please write down your Multiple-choice answers below

Part 1: Multiple Choice Questions 1 point each

1. How does income taxes affect desired aggregate demand?

   1. directly

   2. through consumption

   3. through investment

   4. through government purchases

1. Consider the basic AD/AS model with an upward-sloping AS curve. A negative aggregate demand shock will result in

   1. an increase in prices but not output.

   2. an increase in output but not prices.

   3. an increase in both output and prices.

   4. a decrease in both output and prices.

1. Consider the following two headlines appearing in the same day: "Federal government announces major new infrastructure investments" and "New technology drives down transport costs." Choose the statement below that best describes the likely macroeconomic effects.

   1. The AS curve shifts to the left; the price level rises and real GDP falls.

   2. The AS curve shifts to the right; the price level falls and real GDP rises..

   3. The AD curve shifts to the right; the price level rises and real GDP rises.

   4. The AD and AS curves both shift to the right; the effect on the price level is uncertain

2. Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate increases and the price level decreases. We can conclude that ________ has decreased and there is now a(n) ________ gap.

   1. aggregate supply; inflationary

   2. aggregate demand; recessionary

   3. aggregate supply; recessionary

   4. aggregate demand; inflationary

1. Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $55, and a required rate of return of 5 percent, the current price of the stock would be ________.

1. 1. $110.00

   2. $53.33

   3. $100.00

   4. $96.19

1. You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor________.

1. 1. may or may not be better than the other forecasts. Past performance is no guarantee of the future

   2. will always be the best of the group

   3. will definitely be worse in the future What goes up must come down

   4. will be worse in the near future, but improve over time

1. The Bank of Canada ultimate objective is ________.

1. price stability

2. to keep interest rates low

3. economic growth

4. low unemployment

1. The strongest argument for an independent Bank of Canada rests on the view that subjecting the Bank to more political pressures would cause ________.

1. 1. an inflationary bias to monetary policy

   2. an economics growth

   3. a disinflationary bias to monetary policy

   4. no bias to monetary policy

1. A movement along the bond demand or supply curve occurs when ________ changes.

1. 1. bond price

   2. income

   3. wealth

   4. expected return

1. By analyzing aggregate demand through its component parts, we can conclude that, everything else held constant, a decline in the inflation rate causes ________.

1. 1. an increase in real interest rates, an increase in investment spending

   2. a decline in real interest rates, a decrease in investment spending

   3. a decline in real interest rates, an increase in investment spending

   4. an increase in real interest rates, a decline in investment spending

Part 2: Short Answer Questions (show all your work) [15 points]

1. What will happen to the price of bonds, quantity of bonds and interest rate if bonds become riskier than stocks and the government starts spending more than their tax revenue? Show this on a graph. [4 points]

1. The demand curve and supply curve for one-year discount bonds with a face value of $1000 are represented by the following equations: [5 points]

Bd: P = − 0.5 * Q + 1100 Bs: P = 1.5Q + 200

What is the expected equilibrium price and quantity of bonds in this market? what is the expected interest rate in this market? Draw a graph to show all intercepts and the equilibrium points.

1. The current price of a stock is $65. If dividends are expected to be $4 per share for the next four years, and the required return is 5%, then what should the price of the stock be in four years when you sell it? [2 points]

1. Suppose households become more pessimistic about future income. Starting from a long-run equilibrium, use a graph to show what will happen to inflation rate, real GDP and employment in the short-run. [4 points]