Download Multiple Choice 1. Which of the following involves a trade

Multiple Choice
1. Which of the following involves a trade-off:
A)
B)
C)
D)
the decision to further your education.
the choice of which breakfast cereal you eat in the morning.
whether a nation should encourage an increase in spending or saving
all of the above
2. All of the following are illustrated by the production possibilities frontier
except:
A)
B)
C)
D)
the trade-off associated with the problem of scarcity.
the opportunity cost of the chosen activity.
the flow between households and firms.
the maximum combination of goods and services that an economy can produce with
the existing level of technology
3. The purchase of a new microwave oven to assist in the preparation of food in a
cafe would be included in:
A)
B)
C)
D)
the consumption component of GDP adding to GDP.
the investment component of GDP adding to GDP.
the net exports component of GDP reducing GDP.
both a and b.
4. Technological knowledge is:
A)
B)
C)
D)
an understanding of the best ways to produce goods and services.
often protected by patents.
different from human capital.
all of the above.
5. Suppose the government changes the tax laws to encourage greater saving. The
effects on the money market are as follows:
A) (1) decrease in supply of loanable funds; (2) increase in equilibrium interest rate; (3)
decrease in equilibrium quantity of loanable funds.
B) (1) increase in supply of loanable funds; (2) decrease in equilibrium interest rate; (3)
increase in equilibrium quantity of loanable funds.
C) (1) increase in supply of loanable funds; (2) increase in equilibrium interest rate; (3)
increase in equilibrium quantity of loanable funds.
D) (1) increase in supply of loanable funds; (2) increase in equilibrium interest rate; (3)
increase in equilibrium quantity of loanable funds.
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6. An increase in tax on savings will:
A)
B)
C)
D)
shift the demand for loanable funds curve to the right.
shift the demand for loanable funds curve to the left.
shift the supply of loanable funds curve to the right.
shift the supply of loanable funds curve to the left.
7. The unemployment rate is:
A)
B)
C)
D)
the percentage of the adult population unemployed.
the percentage of the adult population discouraged from actively seeking a job.
the percentage of the adult population looking for work.
the percentage of the labour force that is unemployed.
8. If the RBA purchased government securities, then:
A)
B)
C)
D)
the money supply would decrease.
the money supply would increase.
the money supply would not change.
the money supply would decrease first then increase.
9. According to the quantity theory of money, an increase in the money supply
causes:
A)
B)
C)
D)
prices to fall, lowering inflation.
the value of money to rise.
a reduction in demand for money.
a fall in the value of money and higher inflation.
10. If the nominal exchange rate is 70 yen per dollar, and a tonne of wheat sells for
$100 in Australia and for 14,000 yen in Japan, then the real exchange rate is:
A)
B)
C)
D)
0.5
0.7
140
20,000
11. If the government decides to impose a tariff to protect the local car industry:
A)
B)
C)
D)
net exports will increase.
net foreign investment will increase.
the real exchange rates will depreciate.
the real exchange rates will appreciate.
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12. According to the Keynesian sticky price theory, the short-run AS curve is
upward sloping as:
A)
B)
C)
D)
wages are slow to adjust causing real wages to be higher than nominal wages.
firms see the increase in prices as only an increase in relative prices.
firms are slow to adjust prices due to high menu costs.
firms hire more workers as real wages rise.
13. If the government cuts income taxes the effect on AD depends on:
A)
B)
C)
D)
the multiplier effect.
the crowding-out effect.
whether or not households view the change in taxes as temporary or permanent.
all of the above.
14. There is a _________ trade-off between __________ and ___________.
A)
B)
C)
D)
long-run, inflation, unemployment
short-run, inflation, the money supply
short-run, inflation, unemployment
short-run, prices, interest rates
15. An increase in the price of oil raises the cost of producing goods and services
and in turn:
A)
B)
C)
D)
lowers the inflation-unemployment trade-off.
shifts the short-run AS curve to the right.
causes the short-run Phillips curve to shift to the left.
all of the above.
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Short Answer Questions
Question 1: this question relates to the monetary system
(A) How does the Reserve Bank of Australia (RBA) conduct open market
operations? [2 marks]
(B) Suppose the RBA buys government bonds in the open market. Show the
effects of this on the following with the use of a money market and
aggregate demand diagram: (i) money supply; (ii) equilibrium interest rate;
(iii) aggregate demand. [6 marks]
Answer:
(A) Open-market operations involve the RBA purchasing or selling Australian
government bonds.
(B) To increase the money supply, the RBA buys government bonds to financial
institutions. When the RBA buys government bonds, it injects cash into the
system. The money supply is therefore ↑ and the cash rate ↓.
(b) The aggregate-demand curve
(a) The money market
Interest
rate
r
2. ... the
equilibrium
interest rate
falls ...
Money
supply,
MS
Price
level
MS2
1. When the RBA
increases the
money supply ...
P
r2
AD2
Money demand
at price level P
0
Quantity
of money
Aggregate
demand, AD
0
Y
Y
Quantity
of output
3. ... which increases the quantity of goods
and services demanded at a given price level.
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Copyright © 2004 South-Western
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Question 2: this question is about real exchange rates and purchasing
power parity
Assume the following:
The price of French corn is 45 € (Euro) per bushel (foreign price in foreign currency).
The price of Australian corn is AUD$8 (Australian Dollars) per bushel (domestic
price in domestic currency). The nominal exchange rate is AUD$1 = 9 €
(A) What is the real exchange rate? (bushels of French corn to bushels of
Australian corn) [3 marks]
(B) A can of coca cola costs AUD$1.75 in Australia and 0.65 € in Germany.
What would the Euro-Dollar nominal exchange rate be if purchasing power
parity holds? [2 marks]
(C) If the price of a can of coca cola increases to AUD$1.90 in Australia and
remains unchanged in France, what happens to the Euro-Dollar nominal
exchange rate? [3 marks]
Answer:
(A) Real exchange rate = (9 €/$1) x ($8/bushel of Australian corn)
45 €/bushel of French corn
Real exchange rate = 72 €/45 € or 1.6 bushels of French corn/bushel of Australian
corn.
(B) If purchasing-power parity holds, then 0.65 Euro per can of Pepsi divided by
$1.75 per can of Pepsi equals the exchange rate of 0.37 Euros per dollar.
(C) If the price level rises in Australia relative to France, the Australia dollar
depreciates. The Euro-dollar exchange rate is now: 0.65/1.9 or 0.34 Euros per
dollar.
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Question 3: this question relates to open-economy macroeconomics
(A) Suppose that American investors believe that Australia is a risky place to
keep their savings and move their capital back to America. Illustrate the
effects of this on the open-economy equilibrium diagrams from chapter 15 of
the textbook. [3 marks]
What happens to the following variables in Australia?
(B) Real interest rate [1 mark]
(C) Demand for loanable funds [1 mark]
(D) Net foreign investment [1 mark]
(E) Supply of Australian dollars [1 mark]
(F) Value of the Australian dollar [1 mark]
Answer:
(a) The market for loanable funds in Australia
Real
interest
rate
(b) Australian NFI
Real
Interest
Rate
Supply
r2
1. An increase
in NFI
r2
r1
r1
D2
3. ... which
increases
the interest
rate.
D1
2. ... increases the demand
for loanable funds ...
NFI
Quantity of
loanable funds
NFI2
NFI
Real
exchange
rate
E
5. ... which
causes the
AUD to
depreciate.
S
S2
4. At the same
time, the increase
in NFI increases
the supply of
AUD
E
Demand
Quantity of
AUD
(c) The market for foreign-currency exchange
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Copyright©2003 Southwestern/Thomson Learning
(B) Real interest rate rises
(C) Demand for loanable funds rises
(D) NFI increases
(E) Supply of AUD increases
(F) Value of AUD falls
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Question 4: this question relates to Aggregate Demand & Aggregate
Supply
Suppose that the economy begins in long-run equilibrium, and the aggregate supply
curve does not shift. Suppose investors feel anxious about the economic future.
(A) Using an aggregate demand/aggregate supply diagram, show the effects of
this anxiety on the short-run levels of prices and output.
(B) Suppose the government choose to reverse the effects of this anxiety by
using a fiscal stimulus. What happens to prices and output? Explain.
(A) If people feel anxiety about the future, then for any given price level,
households and firms want to buy a smaller quantity of goods and services. The
economy moves from point A to Point B as aggregate demand shifts to the left:
AD 1 to AD 2. Prices fall and output falls. The economy is in a recession.
(B) If the government acts with sufficient speed, it may increase government
spending &/or cut taxes to offset the initial shift in aggregate demand, return the
aggregate demand curve to AD1, and bring the economy back to point A.
Price
level
LRAS
SRAS 1
A
Equilibrium
price
B
AD 1
AD 2
0
Natural rate
of output
Quantity of
output
Copyright © 2004 South-Western
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Question 5: this question relates to how fiscal policy influences
aggregate demand
(A) Assume that the Australian economy is in recession. How might the
government use fiscal policy to influence aggregate demand? Illustrate with a
diagram. [1 mark]
(B) What role does the multiplier effect play? Illustrate with a diagram. [1
mark]
Suppose the government reduces taxes by $30 million, that there is no crowding out,
and that the marginal propensity to consume is 0.85.
(C) What is the initial effect of the tax reduction on AD? [1 mark]
(D) What is the multiplier? [1 mark]
(E) What is the total effect of the tax cut on AD? [1 mark]
(F) How does the total effect of this $30 million tax cut compare with the total
effect of a $30 million increase in government purchases? [2 marks]
(G) What impact does the ‘crowding out’ effect have on fiscal policy?
Illustrate on a new diagram. [1 mark]
Answer:
(A) Fiscal policy refers to the government’s choices regarding the overall
level of government purchases or taxes. In a recession, this would involve
higher levels of government spending &/or tax cuts.
(B) Government purchases are said to have a multiplier effect on
aggregate demand. Each dollar spent by the government can raise the
aggregate demand for goods and services by more than a dollar. The
multiplier effect refers to the additional shifts in aggregate demand that
result when expansionary fiscal policy increases income and thereby
increases consumer spending.
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Price
level
2. ... but the multiplier
effect can amplify the
shift in aggregate
demand.
$20 billion
AD3
AD2
Aggregate demand, AD1
0
1. An increase in government purchases
of $20 billion initially increases aggregate
demand by $20 billion ...
Quantity of
output
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Copyright © 2004 South-Western
(C) The initial effect of the tax reduction of $30 million is to increase
aggregate demand by $30 million x 0.85 (the MPC) = $25.5 million.
(D) With an MPC of 0.85, the multiplier is 1/(1 – 0.85) = 6.67
(E) So the total effect is $25.5 million x 6.67 = $170.09 million.
(F) Government purchases have an initial effect of the full $30 million,
since they increase aggregate demand directly by that amount. The total
effect of an increase in government purchases is thus $30 million x 6.67 =
$200.1 million. So government purchases lead to a bigger effect on output
than a tax cut does.
(G) This reduction in demand that results when a fiscal expansion raises
the interest rate is called the crowding-out effect. The crowding-out effect
tends to dampen the effects of fiscal policy on aggregate demand. The
crowding-out effect works in the opposite direction to the multiplier.
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(a) The mone y market
Interest
rate
(b) The shift in aggregate de mand
Price
level
Money
supply
2. ... the increase in
spending increases
money demand ...
$20 billion
4. ... which in turn
partly offsets the
initial increase in
aggregate demand.
r2
3. ... which
increases
the
equilibrium
interest
rate ...
AD2
r
AD3
M D2
Aggregate demand, AD1
Money demand, MD
0
Quantity fixed
by the RBA
Quantity
of mone y
0
1. When an increase in government
purchases increases aggregate
demand ...
Quantity
of output
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Copyright © 2004 South-Western
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