1. In the country of Pannonia, economists measured inflation rates, growth rates of real income, and growth rates of the money supply, and found the following decade averages (in percentages):

	(Change in M) /M	(Change in Y) /Y	Inflation Rate
1970's	14.0	3.0	11.0
1980's	7.0	2.0	4.0

(a) Does the quantity theory of money hold in Pannonia over this period?
(b) Did velocity change, and if so, what was the most likely cause?

2. The early 1970s saw a slowdown in productivity and in output, and also an increase in inflation. This question examines how those might have been related. Suppose that Canadian money demand is described by: (M^d/P) = Y^0.8.

(a) What is the income elasticity of money demand?
(b) On the inside back cover of the textbook, you will find values for Canadian Y and M. Tabulate (Change in Y) / Y and (Change in M) / M for 1971, 1972, 1973, 1974, and 1975. What are the predicted inflation rates?
[Note: Growth rate of X = (Change in X) / X = (X_t - X_t-1) / X_t-1]
(c) Tabulate the actual inflation rates. Is the theory a useful guide?

3. (a) How much more severe was the Great Depression than the most recent recession? Provide some statistical evidence on duration and amplitude.
(b) What might have prevented a recurrence of a depression since the 1930s?

4. In this question we examine whether the index of leading indicators (D99947) provided advance warning of the onset of the last recession. We shall measure the recession using employment (D767608) and the unemployment rate (D767611).

(a) Retrieve and tabulate these series for 1990.
(b) Statistics Canada dates the beginning of the recession at April 1990. Did the index of leading indicators forecast this? Did it forecast changes in employment and the unemployment rate? Were these labour-market measures leading, coincident, or lagging?

5. Use the IS-LM-FE model to analyze the following statement, and show what would happen in the long run if such advice were followed by the Bank of Canada: "The increase in values in the stock market has increased people's wealth. As a result, their consumption now is increasing, increasing aggregate demand and output. The Bank of Canada should increase the money supply, because with higher income, people's demand for real money balances will be higher."

6. Consider the following model of a closed economy:

C^d = 1000 + 0.9(Y - T) - 500r
I^d = 500 - 225r
(M^d/P) = Y - 30i

The expected inflation rate is 3 percent, and r and i are in percentage points. Government purchases are G = 250 and the money supply is M = 2400. Full employment output is given by Y^eq = 750. The government balances its budget every year, so T = G.

(a) Find the equilibrium values of the real interest rate, consumption, investment, and the price level.
(b) Suppose that a new government reduces spending to G = 150. What happens to the values in part (a)?
Find both the short-run and the long-run results. [Hint: Use 2 or 3 decimal places.]
(c) Draw a diagram illustrating your results.

7. Suppose that the nominal exchange rate for Canada is 74 U.S. cents. The domestic price level is 100, and the U.S. price level is 80.

(a) What is the real exchange rate?
(b) A forecasting firm predicts that the Canadian inflation rate will be 1 percent, while the U.S. inflation rate will be 4 percent. If the nominal exchange rate does not change (as in a fixed exchange-rate system) then what will happen to the real exchange rate?
(c) What would be the likely consequences for Canadian net exports and employment of the change in the real exchange rate that you found in part (b)?
(d) Suppose instead that the real exchange rate is constant (because of purchasing power parity). What forecast for the nominal exchange rate now is implied by the two inflation forecasts? [If you wish you can compare this to the forecasts of Canadian bank economists, via our web site.]

8. It is widely expected that the Fed will soon tighten U.S. monetary policy, raising short-term interest rates. Make predictions for the effects on Canada under three different scenarios:

(a) prices in both countries are perfectly flexible;
(b) prices in both countries are slow to adjust;
(c) prices in both countries are slow to adjust, and the Bank of Canada maintains a fixed exchange rate with the U.S.