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Midterm One of 390

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WILFRID LAURIER UNIVERSITY
Department of Economics
EC390
Midterm Exam

Dr. Christos Shiamptanis

Fall 2015

Instructions:
This exam is out of 100 points.
You have 90 minutes to complete the exam.
There are 6 problems.
If you use a figure, make sure you label axes and curves.
Show all your calculations and report your answers in two decimal places.
Answers should be clear, concise and devoid of any extraneous material.
Hand in the question paper. Insert the question paper inside the booklet.
Non-programmable calculators are allowed. Dictionaries are not allowed.

1

1. [17 points] Consider a closed economy. Suppose that there is an increase in business confidence. a. Using the IS-LM framework and AD-AS model show graphically the impact of the above event on output, interest rates, unemployment rate, and price level in the short run. Assume that the economy starts at the natural level of output. Please label the initial equilibrium with the letter A, and the short run equilibrium with the letter B.
b. If the Bank of Canada wants to restore full-employment output, will the Bank of
Canada increase or decrease the nominal money supply? Using the IS-LM framework and AD-AS model show graphically the impact of the Bank of Canada’s immediate intervention to restore full-employment on output, interest rates, unemployment rate, and price level in the short run. Please label the equilibrium with the letter C.
c. Now suppose that the Bank of Canada decides not to intervene. However, the
Ministry of Finance wants to restore full-employment output. Will the Ministry of
Finance increase or decrease government spending? Using the IS-LM framework and
AD-AS model show graphically the impact of the Ministry of Finance’s immediate intervention to restore full-employment on equilibrium output, interest rates, unemployment rate, and price level in the

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