Download Final Exam Review Questions and Answers. Lecture Week 4 (6

Final Exam Review Questions and Answers.
Lecture Week 4 (6 Marks)
(JOBS (EMPLOYMENT) versus UNEMPLOYMENT)
Q. What is unemployment rate and how to calculate it?
Unemployment rate refers the percentage of those in the labor force who are unemployed.
It is equals the number unemployed divided by the number in the labor force.
Unem ploymnt
e Rate 
Num berof poeple unem ployed
100
Labor force
Q. What is labour force?
Labor Force refers all citizens 16 years of age and older who are working or looking for
work.
Labor force = employed + unemployed population
Q. What is labor-force participation rate and how to calculate it?
Labor Force Participation Rate refers the percentage of those in the working age
population who is 16 years and older, working, and seeking for job.
Labour force participation Rate 
labourForce
100
Working age population
Q. The unemployment rate is 6 percent. If the population is 300 million, and
the number unemployed is 6 million and the number employed is 90
million.
a. Calculate that is the size of the labor force.
b. Calculate employment rate.
c. Calculate unemployment rate.
a. Labor force = employed + unemployed population = 90 + 6 = 96 million
b. Em ploym entRate 
c.
Num berof poeple em ployed
100
Labor force
Unem ploym nt
e Rate 
90
= ------ X 100 = 93.75%
96
Num berof poeple unem ployed
 100
Labor force
6
= --------- X100 = 6.25%
96
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Q.
In Saudi Arabia, suppose the current unemployment rate is 5 percent
and the labor force is 400 million people. What number of people is
unemployed? How many peoples are employed?
Unemployed peoples = Unemployment rate × Labor force=0.05 X 400 = 20 million
Employed peoples = Labour force – unemployed peoples = 400 – 20 = 380million.
Q.
What are the sources of unemployment?
There are 3 sources of unemployment. These are as follows:
1. Job losers
2. Job leavers
3. Entrants and reentrants
Q.
Define job losers, job leavers, and entrants and reentrants.
Job losers: A job looser is someone who is laid off from a job, either permanently or
temporarily.
Job leavers: A job leaver is someone who want to spend time looking for better one.
Entrants: An entrant is someone who has just finish school and is looking for a job.
Reentrants: A reentrant is someone who has previously had a job, has been quiet and left
the labor force, and has now decided to look for a job again.
.Q.
What are the types of unemployment?
There are four types of unemployment. These are as follows:
1. Frictional unemployment.
2. Structural unemployment.
3. Seasonal unemployment.
4. Cyclical unemployment.
Q.
Define each type of unemployment.
Frictional unemployment: It is the unemployment that arises from normal labor turnoverfrom people entering and leaving the labor force, from quitting jobs to find better ones.
Structural unemployment: It is the unemployment that arises when there is a mismatch of
skills or geographic location.
Seasonal unemployment: Unemployment caused by seasonal changes in labor demand
during the year.
Cyclical unemployment: It occurs because of business cycle fluctuations in output that
occurs during recessions.
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Q.
What is full employment?
Full employment occurs when unemployment arises from frictional, seasonal, and
structural change exist but there is no cyclical unemployment. It is also called natural
unemployment.
Q.
What is GDP (Output) gap?
The GDP gap or the output gap is the difference between Real GDP (actual output)
and Potential GDP i.e. output gap = Real GDP - potential GDP.
Q.
What is the relationship between GDP gap and unemployment?
When unemployment rate is more than full employment rate (the natural unemployment
rate), the real GDP is below potential GDP and the Output Gap is negative.
When Unemployment rate is below full employment rate (the natural unemployment rate),
the real GDP is above potential GDP and the Output Gap is positive.
Lecture Week 5 (6 Marks)
(Economic Growth)
Q.
What is economic growth? How to calculate economic growth rate?
Economic growth is a sustained expansion of production possibilities. It is also refers the
difference between two years real GDPs.
EconomicGrowth Rate 
Q.
Current year Real GDP - Previous year Real GDP
 100
Previous year Real GDP
In Saudi Arabia, the real GDP in the current year is $ 8.4 trillion and
real GDP in the previous year was $ 8.0 trillion. Calculate the economic
growth rate in Saudi Arabia.
EconomicGrowth Rate 
Q.
8.4 - 8.0
 100  5%
8.0
What are the two main sources of economic growth (Real GDP growth)
in short run?
The two main sources of economic growth in short run are
1. increase the quality of labor and
2. increase the quantity of labor (labor productivity)
Q.
What are the factors that increase the quantity of labor?
There are three factors that increase the quantity of labor. These are as follows:
1. Increase Working age Population
2. Increase Labor force participation
3. Increase Average hours per worker
3
Q.
What are the factors that increase the quality of labor?
There are three factors that increase the quality of labor. These are as follows:
1. Increase physical capital
2. Increase human capital
3. Increase technology
Q.
What is labor productivity? How to calculate labor productivity?
Labor productivity refers the output (real GDP) per unit of labor.
Labor productivity 
Q.
Total Output(real GDP)
Total hours of labor
Write two examples for each physical capital and human capital.
Human Capital: knowledge and skill (come from education and training)
Physical Capital: machines and buildings.
Q.
What is the best measure of living standard? How to calculate living
standard?
The Real GDP (Output) per capita is the best measure of economy’s standard of living.
Because it indicates how much an economy produces on average per person. Real GDP
per person grows only if real GDP grows faster than the population grows.
Living Standard (Real GDP per person) = Real GDP/ population .
Q.
What are the preconditions for economic growth?
The main preconditions are as follows:
1. Economic freedom
2. Political Stability
3. property rights
4. Free market
Q.
What are the policies to achieve faster economic growth?
To achieve faster economic growth we must increase:
1. The growth rate of capital per hour of labor or
2. The pace of technological change.
Q.
How to increase growth rate of capital per hour of labor and The pace of
technological change ?
The main suggestions for achieving these objectives are:
a) Encourage (Stimulate) Saving
b) Encourage (Stimulate) Research and Development
c) Encourage International Trade
d) Improve the Quality of Education
e) Create incentive mechanisms
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Lecture week 6 & 7 (12 Marks)
(Aggregate Demand and Aggregate Supply)
Q.
What does reflect by Aggregate Demand (AD) curve? Explain briefly.
AD shows the inverse relationship between price levels and quantity of real GDP
demanded when other things are constant. It means
Q.
What is the relationship between price levels and quantity of real GDP?
1. The higher the price level , the smaller is the quantity of real GDP demanded.
2. The lower the price level, the greater is the quantity of real GDP demanded.
Q.
Why quantity of real GDP decrease with the increase in price levels?
Because
a. As prices increase, the buying power of money decrease and the quantity of real
GDP demanded decrease.
b. As prices increase, the interest rate increase and the quantity of real GDP
demanded decrease.
c. As prices increase, export buyers will tend to buy less products and local buyers
will buy more foreign products, so the quantity of real GDP demanded
decrease.
Q.
Why quantity of real GDP increase with the decrease in price levels?
because
a. As prices decrease, the buying power of money increase and the quantity of
real GDP demanded increase.
b. As prices decrease, the interest rate decrease and the quantity of real GDP
demanded increase.
c. As prices decrease, export buyers will tend to buy more and local buyers will
buy less foreign products, so the quantity of real GDP demanded increase.
Q.
What are the factors that causes Aggregate Demand (AD) curve shifts?
There are 4 factors that changes aggregate demand (AD)
1. Expectations about the future
2. Government Economic Policies
3. The state of the world economy
4. Exchange Rate
Q.
What is the relationships between Aggregate Demand (AD) and
expectations of future?
If expected future income higher, aggregate demand will be larger and AD curve
shifts Rightward and Expected lower future income-lower aggregate demand and
AD curve shifts Leftward.
Expected higher future inflation-larger aggregate demand and AD curve shifts
Rightward and Expected lower future inflation-lower aggregate demand and AD
curve shifts Leftward.
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Expected higher future profits-larger aggregate demand and AD curve shifts
Rightward and Expected lower future profits-lower aggregate demand and AD
curve shifts Leftward.
Q.
What is the relationships between Aggregate Demand (AD) and
government policies?
When government expenditure, investment, and consumption expenditure, or net
exports increases or taxes decrease, aggregate demand increase and AD curve
shifts rightward.
When government expenditure, investment, and consumption expenditure, or net
exports decreases or taxes increase, aggregate demand decrease and AD curve
shifts leftward.
Q.
What is the relationships between Aggregate Demand (AD) and state of
the world?
If world economy become better, aggregate demand increase and AD shifts to
Rightward.
If world economy become worse, aggregate demand decrease and AD shifts to
Leftward.
Q.
What is the relationships between Aggregate Demand (AD) and exchange
rate?
Due to lower exchange rate, aggregate demand increase and AD shifts to
Rightward.
Due to higher exchange rate, aggregate demand decrease and AD shifts to
Leftward.
Q.
What is macroeconomic equilibrium?
Macroeconomic equilibrium occurs when the quantity of real GDP demanded
equals the quantity of real GDP supplied at the point of intersection of the AD
curve and the AS(SAS) curve.
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Q.
What will happen in market equilibrium price and real GDP if new
technology discover?
If new technology discover, total products will increase and aggregate supply will
increase. AS curve will shift rightward. The market equilibrium price will decrease
and equilibrium real GDP will increase.
AS
AS1
AD
Q.
What will happen in market equilibrium price and real GDP if the
consumers’ confidence increase?
If consumer’s confidence increase, aggregate demand will increase. AD curve will
shift rightward. The market equilibrium price will increase as well as equilibrium
real GDP will increase.
AS
AD
AD1
Lecture Week 8 (10 Marks)
(Expenditure multipliers: The Keynesian model)
Q.
What is consumption function?
Consumption function is the relationship between consumption expenditure and
disposable income when other things remaining the same.
Q.
What is disposable income (DI)?
Disposable income is aggregate income (GDP) minus net taxes.
Q.
What is Marginal propensity to consume (MPC)? How to calculate it?
Marginal propensity to consume (MPC) is the fraction of a change in disposable
income that is spent on consumption.
Change in consumption (C)
MPC = --------------------------------------------------Change in disposable income (DI)
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Q.
What are the factors that shifts consumption function curve?
If anyone of the following occurred, the consumption expenditure increases and
the consumption function curve shifts upward
• The real interest rate falls
• Wealth increases
• Expected future income increases
Consumption
If anyone of the following occurred, the consumption expenditure decreases and
the consumption function curve shifts downward
• The real interest rate rises
450
• Wealth decreases
• Expected future income decreases
C1
C
C2
Disposable Income
Q.
What is equilibrium expenditure?
Equilibrium expenditure is the level of aggregate expenditure when aggregate
planned expenditure equals real GDP.
Q.
Fill in the gaps of the table. Find what point is the equilibrium point and
how much the equilibrium expenditure in the following table?
Points
A
B
C
D
E
F
Answer:
Y (Real GDP)
0
100
150
200
220
250
C
5
10
30
40
?
60
I
10
30
40
?
40
60
Planned Expenditures
G
X
M
AE (C+I+G+X-M)
15
20
18
?
30
?
10
90
60
40
?
160
60
70
30
170
70
80
10
220
?
60
20
260
Points
A
B
C
D
E
F
Y (Real GDP)
0
100
150
200
220
250
C
5
10
30
40
40
60
I
10
30
40
30
40
60
Planned Expenditures
G
X
M
AE (C+I+G+X-M)
15
20
18
32
30
30
10
90
60
40
10
160
60
70
30
170
70
80
10
220
100 60
20
260
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The equilibrium point is E because at this point the planned aggregate
expenditures (AE) is equal to real GDP. So the equilibrium expenditure is $220.
Q.
What is expenditure multiplier?
The expenditure multiplier is the ratio of the change in
expenditure to the change in the autonomous expenditure.
the equilibrium
 AE(equilibrium expenditure)
Expenditure Multiplier = -------------------------------------------------------------------------------------A (autonomous expenditure) (change in C or I or G or X or M)
OR Expenditure Multiplier = 1/MPS (MPS means marginal propensity to savings)
OR Expenditure Multiplier = 1/(1-MPC) (MPC means marginal propensity to consume)
(Because MPC+MPS = 1)
Q.
What would be the value of expenditure multiplier? And why?
The value of expenditure multiplier always be more than 1. Because an increase
in autonomous expenditure (C or I or G or NX) causes further increases in
aggregate expenditure.
Q.
What is inflationary gap? What policy should take to eliminate this gap?
a. The amount by which real GDP exceeds potential GDP is called a
inflationary gap.
To eliminate inflationary gap, government usually takes contractionary
fiscal policies such as decrease government expenditure (G), increase tax
(T), and decrease transfer payment (TP).
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There is no more gap between real GDP and potential GDP at point C
where real GDP and potential GDP are equal 13 trillions.
Q.
What is recessionary gaps? What policy should take to eliminate this
gap?
b. The amount by which real GDP is less than potential GDP is called a
recessionary gap.
To eliminate recessionary gap, government usually takes expantinnary
(stimulus) fiscal policies such as increase government expenditure (G),
decrease tax (T), and increase transfer payment (TP).
There is no more gap between real GDP and potential GDP at point C
where real GDP and potential GDP are equal 13 trillions.
10
Q.
If due to increased of G (government expenditure) by 0.5 trillion Riyals,
AE (equilibrium aggregate expenditures) increased by 2 trillion Riyals.
What is the expenditure multiplier?
We can calculate expenditure multiplier as folows:
Changed in equilibrium aggregate expenditures AE
Expenditure Multiplier = --------------------------------------------------------------------- = ---Change in Government expenditure
G
2
= ---------- = 4
0.5
Q.
If consumption expenditures increased by 50 million Riyals when MPC is
given equal 0.8, How much the real GDP will be increased?
 GDP =  C x multiplier
Here,  C = 50 millions,
Multiplier =
1
1
1
------------- = ---------- = -------------- = 5
(1-MPC)
(1 - 0.8)
0.2
So  GDP = 50 x 5 = 250 millions.
Lecture Week 10 (6 Marks)
(Fiscal Policy)
Q.
What is fiscal policy? What are the tools of fiscal policy?
Fiscal policy is the policy that use by the government for revenue collection
(taxation) and expenditure (spending) to achieve the macroeconomic goals
namely sustained economic growth and full employment.
The tools of fiscal policy are as follows
a) Changing the government expenditure (G).
b) Changing the transfer payment (government benefits).
c) Changing the tax rate.
d) Combination of all three.
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Q.
What is budget?
The budget is an annual statement of the revenues, outlays (expenses), and
surplus or deficit.
Q.
What is expansionary fiscal policy? When government can apply this
policy?
Expansionary fiscal policy is the policy that use by the government to reduce
recessionary gap such as increasing government expenditures (G), increasing
transfer payment (government benefits), and decreasing tax (T) or combining all
together.
If real GDP is below potential GDP that means when there is recessionary gap
exist in the economy then the government might practice the expansionary fiscal
policy.
Q.
What is contractionary fiscal policy? When government can apply this
policy?
Contractionary fiscal policy is the policy that use by the government to reduce
inflationary gap such as decreasing government expenditures (G), decreasing
transfer payment (government benefits), and increasing tax (T) or combining all
together.
If real GDP is above potential GDP that means when there is inflationary gap
exist in the economy then the government might practice the contractionary fiscal
policy.
Q.
What is government expenditure multiplier, tax multiplier and transfer
payment multiplier?
Government expenditure multiplier shows the effect of a change in
government expenditure (G)
on aggregate demand (AD). The value of
government expenditure multiplier is always positive and more than 1.
Tax multiplier shows the effect of a change in taxes (T) on aggregate demand
(AD). The value of tax multiplier is always negative and smaller than government
expenditure multiplier.
Transfer payment multiplier shows the effect of a change in transfer payment
(TP) on aggregate demand (AD). The value of transfer payment multiplier is
always positive and smaller than government expenditure multiplier.
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