Part A (40 marks) Answer 4 of the following 7 questions.

1. Explain why a simple Keynesian consumption function does not display Ricardian equivalence.

2. In Canada there have been periods in which there has been simultaneously a government budget deficit and a current account surplus. Show using a diagram how the introduction of a registered retired savings plan (RRSP) could do this.

3. It has been argued that the only sustainable source of output growth is from total factor productivity growth. Explain precisely the logic behind this statement.

4. For a profit maximizing firm, write the relationship between the growth rates of the marginal product of labour, the nominal wages paid to labour and the price level. According to this relationship, how can real wages grow?

5. Explain exactly how interest paid on the outstanding government debt shows up in private and government income and savings. What happens if government debt is held by foreigners?

6. Explain the difference between (i) stocks and flows and (ii) exogenous and endogenous variables. How would you categorize desired capital (K^d)?

7. Discuss the implications for wages, employment and output from a fall in the participation rate. What would we predict would happen to savings?

Part B (60 marks) Answer 3 of the following 4 questions.

8. Below are some figures for 1995 and 1996 collected from the Labour Force Survey (in millions) for a fictitious country:

	1995	1996
vacationers	.50	.6
full time workers	7.3	7.8
part time workers	5.2	5.8
searching for work	1.5	1.3
pensioners	4.2	5.1
homemakers	5.7	7.1
strikers	.2	.7
students	.8	.5

(a) In a table for both years write-out the number of people employed, unemployed, and out of the labour force and adult population.
(b) What is the unemployment rate, employment ratio and participation rate for each of the 2 years?
(c) Calculate and comment on the net change in employment status (all categories) for 1995-1996.
(d) If the number of unemployed at the full employment rate is 972,000, calculate the full employment unemployment rate in 1996 (assume that the current labour force is the full employment level). Is this economy in a cyclical upturn? Explain.

9. A firm's output and capital input are given in the following table (holding labour fixed):

Capital (K)	Production Level (Y)
40	200
41	209
42	216
43	220
44	222
45	221

(a) Explain how a profit maximizing firm would choose how much capital to employ.
(b) What is the marginal product of capital (MPK) for each of the entries?
(c) Suppose the price of capital is 200, d=0.02, inflation =0.07 and the nominal rate of interest is .08. What is the desired stock of capital for the firm?
(d) Suppose the current stock of capital is 39, what is gross and net investment?
(e) Suppose government wants gross investment to be 5.78, what should the subsidy (or tax) on capital be?

10. Suppose a small open economy is described by the following equations:

Y = 100N - N ²
N ^s = 26 + w
C = 240 + .8Y - 10r _w
G = 10
I = 50 - 5r _w
r _w = 4

(a) How does a firm decide to employ labour?
(b) Calculate equilibrium: w, N, and Y. Draw a picture.
(c) From your answers in (a) what then are the equilibrium C, S, I, and NX? Draw a picture of goods market equilibrium.
(d) Suppose there is a strike in the home country in one of the large industries (like the current GM strike in the automotive industry) so that

N ^s = 20 + w

Redo parts (b) and (c) above. Comment on the relation of falling current real income and $NX$.

11. Suppose that 2 large countries numbered 1 and 2 have savings and investment relations described by:

I ₁ = 24 - r _w
I ₂ = 16 -r _w
S ₁ = 15 + 2r _w
S ₂ = 15 + r _w

(a) Determine world investment, savings and the world interest rate.
(b) Find I ₁ ,S ₁ , CA ₁ ,I₂ ,S ₂ and CA ₂.
(c) Calculate for each country what their respective I's, S's, r's and CA's would be if they were closed economies.
(d) Under the open economy assumption, if country 1 experienced a tax cut financed by a fall in G, describe in a diagram what would happen in the two economies.