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EC1001
2013/14 Candidates Only
Midsummer Examinations 2014
DO NOT OPEN THE QUESTION PAPER UNTIL INSTRUCTED TO DO SO BY THE
CHIEF INVIGILATOR
Department
Economics
Module Code
EC1001
Module Title
Macroeconomics
Exam Duration
Two Hours
(in words)
CHECK YOU HAVE THE CORRECT QUESTION PAPER
Number of Pages
9
Number of Questions
35
Instructions to
Candidates
Answer all questions in Section A.
Answer one question from Section B.
Section A carries 80% of the total mark. The marking for this section
is as
follows. A correct answer is awarded 2.5%. An incorrect answer is
awarded
-1.5%. A blank answer is awarded 0%.
Section B carries 20% of the mark.
For this exam you are allowed to use the following
Calculators
The approved calculator (Casio FX-83ES or FX-85ES) may be used.
Books/Statutes
Not Required
Additional Stationery
Not Required
Page 1 of 9
EC1001
Section A
1. Consider an open economy with a government sector. In year 2012, Country X had total output
of $50 billion, aggregate consumption $30 billion, private investment $13 billion and government spending $17 billion. What was the country’s net export that year?
a) $5 billion
b) −$7 billion
c) −$10 billion
d) $10 billion
2. Suppose we experience a 10% rise in gas prices in the UK. What are the consequences on the
consumer price index (CPI) and the GDP (dross domestic product) deflator?
a) Both the CPI and the GDP deflator will rise by 10%.
b) Both the CPI and the GDP deflator will rise by less than 5%.
c) The CPI will rise by less than 10%, and the GDP deflator will rise by even less than the
CPI.
d) The CPI will rise by less than 10%, and the GDP deflator will fall.
3. The main differences between the consumer price index (CPI), the producer price index (PPI)
and the GDP (gross domestic product) deflator are:
a) The CPI and PPI only consider the prices of goods produced domestically, whereas the
GDP deflator considers a much wider range of products.
b) The CPI is the weighted average of the prices of a basket of goods purchased by a representative household, and the PPI is the weighted average of the prices of raw materials
and inputs faced by firms. When CPI rises, PPI also rises in response. The GDP deflator
measures the prices of goods produced domestically.
c) The CPI is the weighted average of the prices of a basket of goods purchased by a representative household, and the PPI is the weighted average of the prices of raw materials
and inputs faced by firms. When PPI rises, CPI also rises in response. The GDP deflator
measures the prices of goods produced domestically.
d) None of the above.
4. The Government has decided to sell bonds to the private sector in order to increase its spending.
What happens in the market for loanable funds as a consequence?
a) The nominal interest rate will rise but the real interest rate will remain the same. Therefore,
private investment also remains the same.
b) The real interest rate will fall and private investment will rise.
c) Both the real interest rate and the nominal interest rate will fall, and private investment
will rise.
d) The real interest rate will rise, and private investment will fall.
Page 2 of 9
Continued. . .
EC1001
5. The Government has decided to sell bonds to the private sector in order to increase its spending.
At the same time, the Central Bank has decided to embark on an expansionary open-market operation to increase the money supply. What is the combined impact on the market for loanable
funds?
a) The real interest rate will rise, and private investment will rise.
b) The nominal interest rate will rise, the real interest rate will remain the same, but private
investment will rise.
c) If the increase in the money supply by the Central Bank is greater than the amount borrowed by the government, the real interest rate will fall, and private investment will rise.
d) If the increase in money supply by the Central Bank is greater than the amount borrowed
by the government, the real interest rate will rise, and private investment will fall.
6. You have invested £100 today. This principal earns interest every quarter (three months). Exactly five years later, the amount has grown to £122.02(to 2 decimal places). The nominal interest rate has remained constant throughout this five-year period. The quarterly nominal interest
rate was:
a) 1%
b) 1.5%
c) 3%
d) 4%
7. You are given a choice between receiving £432 today and £500 in three years. Assume that the
nominal interest rate remains constant for the next three years and that any investment you
make today yields interest annually. For the present value of £500 in three years to be greater
than £432 today, the nominal interest rate needs to be:
a) at least 5%.
b) at least 6%.
c) at least 6.5%.
d) at least 7.5%.
8. Structural unemployment refers to:
a) The cyclical component of unemployment.
b) Unemployment that occurs due to structural shifts in the supply of labour.
c) People who are unemployed temporarily as they are in-between jobs.
d) Unemployment that occurs as a result of rigidity in real wages.
Page 3 of 9
Continued. . .
EC1001
9. Consider two countries X and Y that have the same production function, the same saving rate,
the same depreciation rate, and the same level of technological progress. Suppose that country
X has a lower capital stock per worker than country Y . The Neoclassical growth model predicts
that:
a) Per capital output levels of X and Y initially grow at the same rate.
b) Country X’s saving rate will increase so as to increase its capital stock.
c) Country X initially grows faster than country Y but they will eventually reach the same
level of output per worker.
d) Country X will decrease its depreciation rate to increase its capital stock, and both countries will eventually converge to the same level of output per worker.
10. A country’s population growth rate increases but its level of technological progress remains the
same. The Neoclassical growth model predicts that output per capita will fall because
a) The saving rate will fall in response to the rise in the population growth rate.
b) The depreciation rate will increase in response to the rise in the population growth rate.
c) Consumption will rise as a result of the rise in the population growth rate.
d) The cost of maintaining the same capital stock per worker rises as a result of the rise in the
population growth rate.
11. On Figure 1, Y denotes output and AD denotes aggregate demand.
Figure 1: Aggregate Demand, Output & Equilibrium
AD
Y = AD
AD
AD∗
a
45◦
Y∗
Y1
Y
The distance a represents:
a) A positive planned investment.
b) A positive unplanned investment.
c) A negative unplanned investment.
d) None of the above.
Page 4 of 9
Continued. . .
EC1001
12. Consider a closed economy with no government sector. Assume that aggregate consumption
is proportional to income, with a constant marginal propensity to consume. When a one-off
increase in private investment occurs.
a) The larger the marginal propensity to save, the larger the multiplier effect.
b) The smaller the marginal propensity to save, the larger the multiplier effect.
c) The multiplier effect is not affected by the marginal propensity to save.
d) The overall multiplier effect is unknown without further information.
13. Consider a closed economy with a government sector. Assume that government transfers are
zero, and that taxes, T A, is proportional to income, Y :
T A = tY
0<t<1
(1)
where t is the tax rate. Further assume that aggregate consumption is proportional to disposable
income with a constant marginal propensity to consume, denoted c, 0 < c < 1; and that both the
government’s expenditures and private investment are autonomous. Suppose the government
increases its expenditure.
a) The smaller the tax rate t and the larger the marginal propensity to consume c, the larger
the multiplier effect.
b) The larger the tax rate t and the smaller the marginal propensity to consume c, the larger
the multiplier effect.
c) The larger the marginal propensity to consume, the larger the multiplier. The tax rate t is
inconsequential in this case as there are no government transfers.
d) The effects of tax rate t and the marginal propensity to consume c cancel each other out, so
the multiplier is 1.
14. If the velocity of money decreases while output and the money supply remain the same, the
quantity theory of money predicts that the price level must:
a) Remain unchanged.
b) Decrease.
c) Increase.
d) The quantity theory of money does not predict the change in the price level in this situation.
15. If expected inflation is higher than actual inflation, then aggregate supply will:
a) Be unpredictable.
b) Equal the natural rate of output.
c) Be above the natural rate of output.
d) Be below the natural rate of output.
Page 5 of 9
Continued. . .
EC1001
16. If the money multiplier equals 10, then the reserve ratio must be equal to:
a) 1 %
b) 2 %
c) 5 %
d) 10 %
17. If the Bank of Englad buys gilts from the public, this is referred to as:
a) A lowering of the repo.
b) An open market operation.
c) Contractionary monetary policy.
d) Expansionary fiscal policy.
18. According to the classical dichotomy:
a) Changes in nominal variables have no influence on real variables.
b) Changes in real variables immediately lead to changes in nominal variables.
c) Changes in real variables lead to changes nominal variables in the long run.
d) Changes in nominal variables lead to changes real variables in the long run.
19. According to misperceptions theory:
a) The aggregate demand curve will be downward sloping.
b) The aggregate demand curve will be upward sloping.
c) The aggregate supply curve will be downward sloping.
d) The aggregate supply curve will be upward sloping.
20. Which of the following is not included in the M1 money supply measure:
a) Currency in circulation.
b) Credit card debt.
c) Demand deposits.
d) Checkable deposits.
21. When a government has a very large budget deficit this will normally be accompanied by the
country having:
a) A low level of output per capita
b) A trade deficit.
c) A low rate of inflation.
d) A high rate of unemployment.
Page 6 of 9
Continued. . .
EC1001
22. Net capital outflow (NCO) is defined as:
a) Purchase of foreign assets by domestic residents minus the purchase of domestic assets by
domestic residents.
b) Purchase of domestic assets by foreigners minus the purchase of foreign assets by domestic
residents.
c) Purchase of foreign assets by domestic residents minus the purchase of domestic assets by
foreigners.
d) Purchase of foreign assets by foreigners minus the purchase of domestic assets by domestic
residents.
23. In the long run, an import quota can be expected to:
a) Lower net exports.
b) Raise net exports.
c) Leave net exports unchanged.
d) Raise imports.
24. According to Keynesians we should:
a) Pursue active stabilisation policy.
b) Avoid active stabilisation policy.
c) Focus policy on shifting long-run aggregate supply.
d) Keep inflation rates as high as possible.
25. In an open economy, when national saving is greater than investment:
a) There is a trade surplus.
b) There is a trade deficit.
c) There is balanced trade.
d) None of the above.
26. Which of the following is normally not considered a cost of inflation:
a) Inflation’s distortionary effect on tax incentives.
b) Shoeleather costs.
c) Menu costs.
d) That inflation robs people of the purchasing power of their hard-earned pounds.
27. In the short-run, an adverse shift in aggregate supply will:
a) Lower output as well as the price.
b) Lower output and increase the price.
c) Increase output as well as the price.
d) Increase output and decrease the price.
Page 7 of 9
Continued. . .
EC1001
28. In the long run, the Philips curve will be:
a) Upward sloping.
b) Vertical.
c) Downward sloping.
d) Horizontal.
29. Which of the following is not considered as one of the main causes of the financial crisis:
a) The growth of the CDS market.
b) The growth of the CDO market.
c) The bubble in the housing market.
d) The growth in the interbank lending market.
30. According to the theory of Puchasing Power Parity (PPP), changes in nominal exchange rates
are due to:
a) Changes in countries’ imports and exports.
b) Changes in countries’ price levels.
c) Changes in countries’ levels of productivity.
d) Changes in countries’ levels of unemployment.
31. According to the Fisher effect:
a) There is a one-to-one adjustment of the nominal interest rate to inflation when the central
bank increases the rate of growth in the money supply.
b) There is a one-to-one adjustment of the real interest rate to inflation when the central bank
increases the rate of growth in the money supply.
c) There is a one-to-one adjustment of the nominal interest rate to inflation when the central
bank increases the reserve ratio.
d) There is a one-to-one adjustment of the real interest rate to inflation when the central bank
increases the reserve ratio.
32. The exchange rate effect explains why:
a) The aggregate demand curve will be downward sloping.
b) The aggregate demand curve will be upward sloping.
c) The aggregate supply curve will be downward sloping.
d) The aggregate supply curve will be upward sloping.
Page 8 of 9
Continued. . .
EC1001
Section B
33. Let an economy’s production function be defined as:
Y = AF (K, H, L)
(2)
where Y denotes the output, K capital, H human capital, L labour, and A the labour productivityaugmenting technological level. Let the per capita production function be denoted by
y = Af (k)
(3)
where y denotes the per capita output, and k the amount of capital per worker.
Assume a closed economy, so that y is either consumed or saved. Let s denote the proportion
of y that is saved, 0 < s < 1.
a) With the aid of an illustration, demonstrate that the Solow Growth model (the Neoclassical
Growth model) predicts that there exists a steady-state output level per worker for any
given s.
[40%]
b) In the Solow Growth model (the Neoclassical Growth model) derive the saving rate at
which per capita consumption is maximised. What will capital per worker be equal to at
this rate of saving?
[60%]
34.
a) Consider a closed economy with no government sector. Let the aggregate consumption
function be given by:
C = C + cY
0<c<1
(4)
where C denotes aggregate consumption with C the autonomous level of aggregate consumption, c the marginal propensity to consume, and Y the aggregate output. Assume
that investment is autonomous, denoted I.
Suppose investment increases by ∆I. Show that this lead to an increase in aggregate output, ∆Y given by:
1
∆Y =
∆I
(5)
1−c
[40%]
b) Consider as before a closed economy but now add a government sector with spending
G > 0. Assuming that output is initially at its natural rate Y and that the short-run aggregate supply (AS) curve is upward sloping, illustrate in an AD/AS diagram the short-run
consequences of an increase in government spending G.
[60%]
35.
a) Using diagrams, illustrate how in an open economy the market for loanable funds determines the real interest rate and net capital outflow (NCO). Then, taking as given net
capital outflow (NCO), illustrate how the real exchange rate is determined at the foreign
exchange (FOREX) market.
[70%]
b) Explain, again by use of illustrations, why an increased government budget deficit will
push the trade balance toward deficit.
[30%]
End of Paper
Page 9 of 9
End of Paper