Download QUESTION : B.5 (3 + 7 = 10 marks)

FACULTY OF COMMERCE
SAMPLE EXAMINATION
ECO120 MACROECONOMICS
LECTURERS:
DAY & DATE:
TIME:
WRITING TIME: 3 Hours
READING TIME: 10 Minutes
MATERIALS SUPPLIED BY UNIVERSITY:
1 x 24 Page Answer Booklet
General Purpose Answer Sheer
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NUMBER OF QUESTIONS:
Part A: 30; Part B: 3 out of 5;
Part C: 2 out of 4
INSTRUCTIONS TO CANDIDATES:
1.
Enter your name and student number and sign in the space provided at the bottom of
this page.
2.
This is a closed book examination; therefore no written material, reference books or
notes will be permitted into the examination room.
3.
Write your answers in the answer booklets provided except for Part A which is to be
answered on the General Purpose Answer Sheet. Number each question clearly.
Part A (multiple choice): Answer all questions (30 marks)
Part B (short answer ): Answer 3 only of the 5 questions (30 marks)
Part C (essay questions): Answer 2 only of the 4 questions (40 marks)
INSTRUCTIONS TO INVIGILATORS:
THE EXAMINATION PAPER MUST NOT BE RETAINED BY THE CANDIDATE.
STUDENT NAME: ............................................
STUDENT NO.: ........................
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ECO120 Macroeconomics
Page 1 of 11
PART A
Multiple Choice Questions
(30 marks)
Answer all thirty (30) questions.
1. The marginal propensity to consume represents:
A)
B)
C)
D)
the level of consumption that occurs if disposable income is zero.
the ratio of total consumption to disposable income.
total income minus total taxes.
the change in consumption caused by a one-unit change in disposable income.
2. The marginal propensity to consume and the marginal propensity to save must:
A)
B)
C)
D)
be equal to each other.
sum to exactly one.
sum to less than one.
sum to more than one.
3. The demand for money:
A)
B)
C)
D)
decreases as the interest rate increases.
increases as the interest rate increases.
decreases as income decreases.
none of the above
4. Suppose a bond offers to pay $1000 in one year and currently sells for $900. Given
this information, we know that the interest rate on the bond is:
A)
B)
C)
D)
9%.
10%.
11.1%.
90%.
5. Which of the following events would cause a reduction in the size of the multiplier?
A)
B)
C)
D)
an increase in the marginal propensity to consume
an increase in the marginal propensity to save
a reduction in taxes
a reduction in government spending
6. Which of the following helps explain why the AD curve is downward sloping?
A) If the exchange rate falls and the price level does not change, exports increase
and imports decrease.
B) When the price level falls, the real value of wealth rises, so people save less
and consume more.
ECO120 Macroeconomics
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C) If consumers and businesses expect higher prices in the future, they will
purchase more today, increasing investment and consumption expenditure.
D) None of the above answers are correct.
7. Suppose that the economy begins at a long-run equilibrium. Which of the following
would cause the price level to rise and real GDP to decrease in the short run?
A)
B)
C)
D)
A decrease in the quantity of money.
An increase in the price of oil that decreases aggregate supply.
An increase in the stock of capital that increases aggregate supply.
An increase in the value of real wealth.
8. Which of the following equals aggregate expenditure in a closed economy?
A)
B)
C)
D)
C+I+G+X
C + I + G + X - IM
C + I + G + IM - X
none of the above
9. The CPI tells us
A) changes in prices of a group of goods and services bought by a typical urban
household.
B) the increase in prices of those goods that are rising fastest.
C) the rate at which wages are rising.
D) the increase in the prices of those goods that are rising slowest.
10. Fiscal policy involves
A)
B)
C)
D)
the use of interest rates to influence the level of GDP.
the use of tax and spending policies by the government.
decreasing the role of the Federal Reserve in the everyday life of the economy.
the use of tax and money policies by government to influence the level of
interest rates.
11. Double counting (counting the same thing twice) in GDP accounting is avoided by
not including
A)
B)
C)
D)
net exports.
intermediate goods.
illegal activities.
depreciation.
12. The Phillips curve illustrates the relationship between:
A)
B)
C)
D)
the unemployment rate and GDP growth.
changes in the unemployment rate and GDP growth.
changes in the inflation rate and the unemployment rate.
changes in inflation and GDP growth.
ECO120 Macroeconomics
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13. The consumption function
A) shows how much all households plan to consume at each level of real
disposable income.
B) shows how much all households plan to consume at each possible interest rate.
C) shows how much real disposable income people will earn at each income tax
bracket.
D) shows how much all households plan to consume at each level of savings.
14. The consumption function shifts upward when
A)
B)
C)
D)
disposable income increases.
saving increases.
the purchasing power of households’ net assets increase.
the population decreases.
15. Sarah’s income rises from $1000 to $1400 per week, while her spending rises
from $800 to $940 per week. What is Sarah’s marginal propensity to save?
A)
B)
C)
D)
0.55
0.60
0.65
0.70.
16. The consumption function is given by C = 100 + 0.75YD and investment is I=50.
What is the value of the multiplier?
A)
B)
C)
D)
0.75
1
2
4
17. Full employment occurs
A) only if the unemployment rate is zero.
B) only if the unemployment rate is equal to the natural rate of unemployment.
C) only if unemployment is equal to structural unemployment plus cyclical
unemployment.
D) None of the above answers are correct.
18. Mike has just been laid off from his construction job because consumers are not
purchasing new homes because of the recession. Mike would be considered to be part
of
A)
B)
C)
D)
structural unemployment.
cyclical unemployment.
seasonal unemployment.
frictional unemployment.
19. When the unemployment rate is below the natural rate of unemployment,
ECO120 Macroeconomics
Page 4 of 11
A)
B)
C)
D)
real GDP is greater than potential GDP.
real GDP is less than potential GDP.
real GDP equals potential GDP.
None of the above is possible because it is impossible for the unemployment
rate to be less than the natural rate.
20. In the short run, firms expand their production when the price level rises because
A) the money wage rate remains constant so the higher prices for their product
makes it profitable for firms to expand production.
B) each firm must keep its production level up to the level of its rivals, and some
firms will expand production as the price level increases.
C) the higher prices allow the firm to hire more workers by offering higher
wages, thereby increasing productivity and profits.
D) firms can increase their profits by increasing their maintenance.
21. A major technological advance causes
A) the long-run aggregate supply curve to shift rightward and the short-run
aggregate supply curve to shift leftward.
B) the long-run aggregate supply curve to shift rightward and the short-run
aggregate supply curve to remain where it is.
C) the short-run aggregate supply curve to shift rightward and the long-run
aggregate supply curve to remain where it is.
D) both the long-run and the short-run aggregate supply curves to shift rightward.
22. The Australian dollar depreciates relative to the Japanese yen. We would expect
to see
A)
B)
C)
D)
an increase in imports from Japan and an increase in Australian exports.
a decrease in imports from Japan and a decrease in Australian exports.
an increase in imports from Japan and a decrease in Australian exports.
a decrease in imports from Japan and an increase in Australian exports.
23. US movie companies are building studios on the Gold Coast in Queensland to
produce television shows for sale back in the US. This will lead to
A) an increase in the supply of Australian dollars and a decrease in the demand
for US dollars.
B) a decrease in the supply of Australian dollars and an increase in the demand
for US dollars.
C) an increase in the demand for Australian dollars and an increase in the supply
of US dollars.
D) a decrease in the demand for Australian dollars and a decrease in the supply of
US dollars.
24. Frictional unemployment includes
ECO120 Macroeconomics
Page 5 of 11
A) unemployment caused by normal labor turnover associated with people
leaving and entering the labor force.
B) unemployment caused by industries moving overseas to better meet foreign
competition.
C) unemployment caused by a lack of education so that workers do not possess
necessary job skills.
D) unemployment caused by automation of the workplace that displaces unskilled
workers.
25. The labor force is defined as
A)
B)
C)
D)
people who have a job or are looking for a job.
people in the working-age population who have a job.
people in the working-age population who have a full time job.
people who are 16 years of age or older.
26. Which of the following people would be considered unemployed?
A) A part-time worker who wishes to work full-time.
B) A person who gave up looking for jobs because he or she was discouraged
about his or her job prospects.
C) A person who has been searching for work, but turns down a job paying a
lower wage rate than desired.
D) A person who is working but expects to be laid off at the end of the month.
27. You borrow $100 today and will repay the loan in one year’s time. If the nominal
interest rate is 12%, how much will you pay back next year?
A)
B)
C)
D)
$120
$112
$100
$89.28
28. Suppose the bank’s reserve ratio is 0.25. The simple money multiplier in this case
is:
A)
B)
C)
D)
1.33
2.5
4
5
29. If the Reserve Bank of Australia adopts an easier monetary policy, this will lead to
(in the short run):
A)
B)
C)
D)
a decrease in both the price level and real GDP
an increase in both the price level and real GDP
a decrease in the price level and an increase in real GDP
an increase in the price level and a decrease in real GDP
ECO120 Macroeconomics
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30. Gross domestic product (GDP) is
A) the value of all final goods and services produced in a country during a year.
B) the sum of consumption expenditure, investment, government purchases of
goods and services, and net exports.
C) the sum of compensation of employees, proprietors’ income, net interest,
rental income, corporate profits, depreciation, and indirect business taxes
minus subsidies.
D) All of the above.
ECO120 Macroeconomics
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PART B
(30 marks – 10 marks each)
Answer three (3) only of the five (5) questions
Draw diagrams when applicable
QUESTION : B.1
(5 + 5 = 10 marks)
The last 50 years have seen a large increase in the proportion of women who work
outside the home.
a) What effect would this change have on the measurement of GDP?
b) What effect would this change have on our measurement of unemployment?
QUESTION : B.2
(2.5 x 4 = 10 marks)
The government wants to spend money reducing unemployment. What effect on
official unemployment statistics would the following policies have:
a) Increasing the unemployment benefit,
b) Lengthening the period during which people can get the unemployment benefit,
c) Funding more job-training programs, and
d) Increasing the funding for university enrolments.
QUESTION : B.3
(3 + 3 + 4 = 10 marks)
Using the models from our subject, carefully explain the consequences if the
government reduces the supply of paper money (or “cash”) by an amount, m.
a) What are the consequences on the total level of money?
b) What are the consequences in the money market?
c) What are the consequences in the AD-AS model for the economy as a whole?
QUESTION : B.4
(2.5 x 4 = 10 marks)
Explain the effect, holding all other things constant, of the following on the price of
shares in LittleGreenDot internet company
a) A rise in the rate of interest.
b) An increase in expected future dividends from LittleGreenDot.
c) The announcement of the creation of a rival company in LittleGreenDot’s market.
d) An increase in expected future inflation.
ECO120 Macroeconomics
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QUESTION : B.5
(3 + 7 = 10 marks)
a) What is Australian foreign debt? How do we calculate it?
b) Why does it matter to economists that most of Australian foreign debt is held by
firms and households (the private sector) rather than the government (the public
sector)?
ECO120 Macroeconomics
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PART C
(40 marks – 20 marks each)
Answer two (2) only of the four (4) questions
Draw diagrams when applicable
QUESTION : C.1
(6 + 6 + 8 = 20 marks)
World oil prices rise and are likely to stay high for the future. Assuming all else held
constant:
(a) Explain the effects of a rise in the price of oil on Australia using the aggregate
demand-aggregate supply (AD-AS) framework.
(b) Explain the effect of higher world oil prices on the Australian external accounts
and the exchange rate.
(c) How would your answers to (a) and (b) change if the world’s second-largest
oilfield was discovered southwest of Perth? Explain carefully.
QUESTION : C.2
(5 + 10 + 5 = 20 marks)
A balanced budget fiscal policy would require the government to spend more when
the economy is in a boom (and taxes are high) and require the government to spend
less when the economy is in a recession (and taxes are low).
(a) Explain the business cycle using the AD-AS model, assuming that it is changes to
the AD curve that makes the cycle happen. Assume here that government spending is
held constant over the business cycle.
(b) Explain the effect of a balanced budget fiscal policy on the business cycle using
the AD-AS model.
(c) Is the balanced budget fiscal policy helping or hindering the economy?
QUESTION : C.3
(15 + 5 = 20 marks)
The monetarists believe that the aggregate supply (AS) curve is very steep, while the
Keynesians believe the AS curve is flat.
(a) Explain how fiscal policy would work in each case in the aggregate demandaggregate supply (AD-AS) model.
(b) What would you expect that the two camps have to say about the effectiveness of
fiscal or monetary policy?
ECO120 Macroeconomics
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QUESTION : C.4
(5 + 10 + 5 = 20 marks)
(a) Carefully explain what the Phillips curve shows.
(b) Why did the experiences of the Australian economy in the 1970s seem to
contradict the Phillips curve?
(c) How could the rise in oil prices in the early 1970s explain what we were observing
with the Phillips curve?
ECO120 Macroeconomics
Page 11 of 11