Part 2: Attempt any two of the following exercises.

Exercise 1

This exercise consists of a certain number of questions. Attempt all of them.  Justify your answer using the concepts developed in the lecture notes. 

1. What are four of the main sources of economic growth? What is the role of the financial sector in economic growth? Could economic growth result in economic instability? Why or why not?
2. Should government economic policy aim at achieving a zero frictional unemployment rate, a zero structural unemployment rate, and a zero cyclical unemployment rate? Why or why not
3. Do the Canadian data show that young males and females have the same unemployment rates as mature males and females? Why are they the same or why are they different?

Suppose that the interest rate in the US remains equal to 4.5% while the interest rate in the European Union decreases to 3%. Assume that the exchange rate between the US dollar and the Euro, the money of the European Union, is flexible.  Answer the following questions. Justify your answer using the demand and supply model

1. What happens to net capital inflows into the US and net capital outflows out of the US?
2. What should happen to the equilibrium exchange rate of the US dollar in terms of the Euro? 
3. What happens to US exports, imports, and trade account balance?

Exercise 2

This exercise consists of a certain number of questions. Attempt all of them. Justify your answer using the concepts developed in the lecture notes.

1. Who loses from an unexpected negative inflation rate and who gains? Who loses from a positive expected inflation and who can protect themselves?
2. Suppose that the nominal interest rate is 5% and the expected inflation rate is 10%.  What is the expected real interest rate? Is it better to borrow or to lend?
3. Suppose that the velocity of money is a constant, the growth rate of money supply is 10% and the growth rate of real GDP is 4%. What is the inflation rate?
4. Why during the most recent 2007-2009 financial crisis and recession the governments of every country tried to prevent the inflation rate from becoming negative? How could they have possibly achieved their goal?
5. True, False or uncertain? Draw a diagram with appropriate shifts of curves on a sheet of paper. You need not submit the paper. Justify your answer using the concepts of quantity demanded, demand curve, quantity supplied, supply curve, shifts of curves, and movement along curves.
   “A study shows that eating a clove of garlic a day can help prevent heart diseases. This causes the price of garlic to increase but the quantity demanded of garlic would then fall causing a fall in the price of garlic. Thus, the effect of the study on the price of garlic is uncertain”

Exercise 3

Attempt the following questions. Justify your answer.

1. According to the Canadian data as given in chapter 16 of the lecture notes, do young workers aged 18 to 25 years have a higher or lower unemployment rate than mature workers aged 25 years and over? Why they do or they do not?
2. Do the Canadian data and the quantity theory justify the use of the Phillips curve to generate a higher inflation rate in order to make the unemployment rate of the young workers equal to that of the mature workers? Define the Phillips curve.

1. Calculate GDP and National Income using the expenditure approach.
2. Calculate National Income using the income approach. Do the two approaches to calculate national income yield the same result?
3. Calculate the government budget surplus or deficit and calculate Personal income and Savings.