Take-home Exam
ECON 2103A (Due date: April 24, at 11:35 am)
It has to be done individually, and you must submit your exam via Culearn.
Assume the Canadian economy is at the equilibrium with output ?? and price ?? and then the COVID-19
shock hits the economy. Study the possible impacts of this shock on the following cases of the economy:
Demand Side (AD): (1.5 points)
a) What is the effect of COVID-19 shock on the IS curve (Note: start with the impacts on the Keynesian
cross and then explain the impact of the shock on the IS curve.) Support your analysis with
corresponding graphs.
b) Assuming the price is still ??, what will be the impact of the shock on the AD curve? Briefly explain
your answer using a corresponding graph.
c) How can the government alleviate the negative effects of the shock on the AD curve? Briefly explain
your answer by using just one example.
Supply Side (SRAS): (2 points)
d) What is the impact of the shock on the SRAS curve? Draw the graph. Support your answer using a real
example.
e) What kind of policy can the government implement to alleviate the negative impact of the shock on
SRAS?
f) What are some side-effects of these policies (parts c and e ) on the economy? Briefly explain.
g) What will be the new equilibrium of the economy if the government does not intervene? Draw AD
and SRAS curves for before and after the shock in one graph.
Money: (1.5 points)
h) According to the portfolio theories of money, what are the factors that affect the demand for money?
How they affect the demand for money? Briefly explain.
m) Considering the portfolio theories and given Figure 1 that shows the stock price in Canada. Do you
think that the demand for money will decrease or increase? Why?
n) Following the COVID-19 shock, the Bank of Canada announced that they want to purchase the
governments bonds in the secondary market. Given the function of the supply of money (M= cr + 1
cr + rr
B)
and considering your answer for part h, do you think that the supply of money will increase/decrease/or
uncertain? How? Explain your answer briefly.
Investment: (1.5 points)
p) Define Tobin’s q and explain how it will determine the investment in an economy?
q) Considering the definition of Tobins q and given Figure 1, what will be the impact of COVID 19 shock
on the investment. Briefly explain.
Figure 1. Stock Price
r) Following the COVID 19 shock, the Bank of Canada declined the overnight interest rate to almost zero
( 0.25%). What will be the impact of this policy on the business fixed investment (Briefly explain it using
the classical investment theory that we discussed in the class). Draw the graph.
s) Lots of firms laid off their employees temporarily; however, assume that the government of Canada
will pay more than half of the salary of those employees if the firms call them back for work. What is the
impact of the governments policy on the investment? Briefly discuss it using the classical investment
theory that we discussed in the class. Draw the related graph as well.
Inflation and Philips Curve: ( 1 point)
t) Following the COVID-19 shock, lots of people lost their job. What are the impact of that on inflation in
the short-run and in the long-run? Draw the related graphs.
u) What will be the effect of expected inflation following the shock? What will be the impact of this
expected inflation on the realized inflation in the economy? Explain briefly.
Consumption (1.5 points)
v) Following the shock, the value of your primary house that you are living there decreased and also you
laid off for one month. What will be the impact of these changes on your consumption according to
v1) Keynes? Explain it briefly.
v2) Modigliani? Explain it briefly.
v3) Friedman? Explain it briefly.
Short Essay (6 points)
Using 250 words, explain the money helicopter (around 50 words) and then discuss the impacts of this
policy (about 200 words) on the economy following the COVID-19 shock. You can discuss both the
pros (about 100 words) and the cons (about 100 words) of this policy.
(The references or any graphs will NOT count as part of the 250 words. Your essay cannot be less than
225 or more than 275 words)
Please note that every single sentence of the essay must be your own work and plagiarism is a very
serious offence at Carleton. Your essay may be checked with some online tools for Plagiarism.
You can submit your essay either in Word or PDF.
3 points for the analysis and 3 points for the quality of writing.
Some suggested resources for the short essay:
https://voxeu.org/article/helicopter-money-today-s-best-policy-option
https://voxeu.org/article/helicopter-money-time-now
https://www.ft.com/content/abd6bbd0-6a9f-11ea-800d-da70cff6e4d3
https://www.opendemocracy.net/en/oureconomy/helicopter-money-answer-looming-economic-crisis/
https://www.cbc.ca/news/business/covid-19-economy-helicopter-money-friedman-1.5507417