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Macroeconomics Final Review
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9/12/24, 3:36 Macroeconomics FinalPM Review
Macroeconomics Final Exam Review
For the final exam, there will be twenty multiple-choice questions and twenty true and
false questions worth a total of 40%. These questions will be drawn from the material
after the midterm. There will be four additional questions drawn from this list:
1. Answer the following:
a. What are the four functions of money? Explain.
● A medium of exchange or means of payment
● A store of value
● A unit of account
● A standard of deferred payment.
The medium of exchange function distinguishes money from other assets. In a
barter economy, trading is costly because there must be a double coincidence of
wants. Money, a medium of exchange, reduces the costs of exchange and allows
resources to be used for other things.
b. Explain the demand for money. What is the slope of the curve and why.
The demand for money (L) is a demand for real money balances measured in
terms of purchasing power over goods and services. It arises from the portfolio
decisions people make about the form in which to hold their wealth. Holding
money reduces the costs of making both routine and unexpected transactions. It
also provides a safe asset, with a fixed nominal price, as a store of wealth. The
cost of holding money is the interest income and potential capital gain sacrificed
by not holding bonds.
2. Answer the following:
a. Explain the concepts of fractional reserve system and deposit money.
Fractional Reserve Banking - a system in which banks only hold a fraction of the
money their customers deposit as reserves.
● This allows them to use the rest of it to make loans and thereby
essentially create new money. This gives commercial banks the
power to directly affect
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, 9/12/24, 3:36 Macroeconomics Final
PM Review
money supply.
b. What is the Bank of Canada and explain the functions it performs?
The Bank of Canada is the nation’s central bank. It’s principal role is “to
promote the economic and financial welfare of Canada". The Bank’s four
main areas of responsibility are:
● Monetary Policy - the Bank influences the supply of money circulating
in the economy, using its monetary policy framework to keep
inflation low and stable.
● Financial System - the Bank promotes safe, sound and efficient
financial systems, within Canada and internationally, and
conducts transactions in financial markets in support of these
objectives.
● Currency - the bank designs, issues and distributes Canada’s bank notes.
● Funds Management - the Bank is the “fiscal agent” for the
Government of Canada, managing its public debt programs ad
foreign exchange reserves.
3. Explain and how the government would use fiscal policy to close a recessionary
gap and how this would affect the budget function)?
Fiscal policy makes changes in tax rates and government spending that are
intended to change aggregate expenditure and demand, and stabilize
equilibrium output at potential output. These changes change the
government's budget function and budget balance.
Since AE=C+I+G+Ex-Im, and increase in government expenditure (G)
increases AE. However, this increase in (G) causes a reduction in Budget
Balance since BB=tY-G, where tY is Net Tax Revenue. If Government
expenditures increase, the Budget Balance must decrease. If the Budget
Balance decreases then the deficit becomes larger (D1-
>D2). However at the same time AE will increase and create and maintain a
new deficit (D3) so that D1<D2<D3.
4. Explain the limitations of GDP as a measure of economic well being.
● The changes of GDP could reflect the trend of economic development
and most of the countries consider the increase of GDP as the targets of
economic growth.
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