Instructions: Answer 4 questions from Part A and 3 questions from Part B. Parts A and B are of equal weight. You have two hours: budget your time carefully. You may use a hand calculator. Do not hand in the question sheet.

Answer 4 of the following 7 questions.

1. What is the main conceptual difference between GDP and GNP? How different are GDP and GNP for Canada? How do they differ for countries with many citizens who work abroad?

2. Suppose oil prices fall temporarily, as oil becomes more plentiful. What impact is this likely to have on the production function, the marginal products of labour and capital, labour demand, employment, and the real wage?

3. What are the macroeconomic consequences within the U.S. of reductions in U.S. defense spending? What happens to national saving, the interest rate, and investment in the U.S.?

4. Suppose the government of a large open economy announces a major expansion of government spending to dig a tunnel to the earth's core, to be financed entirely by borrowing. What effect does this have on the world real interest rate, national saving, investment, and the current account balance in equilibrium?

5. Due to a change in the regulatory structure of a small open economy, the desired capital stock becomes higher for both private investment and public investment. Increased government investment spending is financed by borrowing, not by higher taxes. If both types of investment rise at the same time will there be `twin deficits'?

6. Briefly describe the difficulties that the Bank of Canada encountered with monetary targeting. How did the Bank respond to these problems?

7. What are the leading explanations for the productivity growth slowdown?

Part B
Answer 3 of the following 4 questions.

8. In the past ten years, Patagonia's total output has increased from 2000 to 3000, the capital stock has risen from 4000 to 5200 and the labour force has risen from 400 to 580. Suppose K=0.4 and N=0.6.

(a) How much did capital contribute to economic growth over the decade?

(b) How much did labour contribute to economic growth over the decade?

(c) How much did productivity contribute to economic growth over the decade?

9. Suppose the money demand function is M/P= 1000 + 0.2Y - 1000i

(a) Calculate velocity if Y=2000 and i=0.10.

(b) If the money supply Ms is 2600, what is the price level?

(c) Now suppose the nominal interest rate rises to 0.15, but Y and Ms are unchanged. What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of the year, with Y remaining at 2000, what would the inflation rate be?

10. The government of a small open economy announces a tax cut of 100 this year combined with a tax increase of 110 next year, when the interest rate is 10%.
What are the effects of this change on the world real interest rate, national saving, investment, and the current account balance in equilibrium when

(a) Ricardian equivalence holds?

(b) Ricardian equivalence does not hold?

11. In January, 1994 Canada had a labour force of 14,011, employment of 12,309, and there were 7544 (all in thousands of people) not in the labour force.

(a) Calculate the unemployment rate.

(b) Calculate the particiaption rate.

(c) Calculate the employment ratio.

1. GDP is output produced in a country, while GNP is output produced by domestically-owned factors. The difference is net factor payments. In Canada GNP is less than GDP because of foreign ownership (NFP is negative). For countries with many citizens working abroad GNP is greater than GDP.

2. The production function shifts up, as more ouput can be produced with the same quantities of capital and labour. Both marginal products rise, typically. Thus labour demand rises too, because it is given by the marginal product of labour. With this shift in labour demand, employment and real wages rise.

3. National saving rises so the desired saving curve shifts right. As a result, the real interest rate declines and investment rises along with saving.

4. Desired national saving shifts left, causing the equilibrium world real interest rate to rise, investment to fall, desired national saving to fall, and the current account balance to fall.

5. Yes. Desired saving shifts left, desired investment shifts right so the current account balance declines. There are twin deficits.

6. The Bank tried to control the growth of M1 so as to control inflation. It targeted M1 from 1975 to 1982. Because of financial innovation (the introduction of substitutes for M1) money demand was significantly less than the Bank had anticipated, so policy was too expansionary. The Bank responded by broadening the definition of M1 to include some new types of bank accounts and then eventually abandoned M1 targeting.

7. The leading explanations are (a) measurement problems (including improvements in quality of outputs and declines in input quality) (b) the oil price shock and (c) viewing the fast growth after World War II as an exceptional period of `catch-up.'

8. (a) 12 percent
(b) 27 percent
(c) 11 percent

9. (a) V = 2000/1300 = 1.54
(b) P=2
(c) pi = 4 percent

10. (a) No effect on any of the variables.
(b) Real world interest rate is unchanged, national saving declines (private saving rises, but not as much as government saving falls), investment is unchanged and the current account balance declines.

11. (a) 12.15\%
(b) 65\%
(c) 57\%