Download QUESTION: B.2

FACULTY OF COMMERCE
SPRING SESSION EXAMINATION ANSWERS 2007
ECO120 MACROECONOMICS
LECTURERS: Rod Duncan
DAY & DATE: 4th September, 2007
TIME: 1:00pm - 1:50 pm
READING AND WRITING TIME: 50 Minutes
MATERIALS SUPPLIED BY UNIVERSITY:
None
MATERIALS PERMITTED IN EXAMINATION: Pen or pencil
Battery/Solar Powered Calculator
(no printer, non-programmable)
NUMBER OF QUESTIONS:
Part A: 20;
Part B: 2
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 for Part A in the boxes provided at the end of Part A. For Part
B, write your answer in the space provided on this exam.
Part A (multiple choice): Answer all questions (60 marks)
Part B (short answer): Answer both of the questions (40 marks)
4.
At the end of the exam, turn in your exam paper.
STUDENT NAME: ............................................
STUDENT NO.: ........................
STUDENT SIGNATURE: .........................................................................................
ECO120 Macroeconomics A
Page 1 of 9
PART A
Multiple Choice Questions
(60 marks – 3 marks each)
Answer all twenty (20) questions. Write your answers in the boxes provided at
the end of Part A.
1. The slope of the aggregate consumption function is the:
A)
B)
C)
D)
Average propensity to consume.
Average propensity to save.
Marginal propensity to consume.
Marginal propensity to save.
2. One reason the AD curve is downward-sloping is because:
A)
B)
C)
D)
Supply of goods and services always exceeds demand for goods and services.
People’s consumption always rises when interest rates rise.
Employees work more when their wages rise.
Demand for goods and services rises when prices fall due to the wealth effect.
3. The short-run AS curve is upward-sloping 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.
For Questions 4-11, use the following model of the economy:
C = 100 + 0.90Y
I = 200
AE = C + I
4. If income rises by $1, by how much does aggregate household consumption rise in
this economy?
A)
B)
C)
D)
$0.10.
$0.90.
$1.
$10.
ECO120 Macroeconomics A
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5. The marginal propensity to save in this economy is:
A)
B)
C)
D)
0.1.
0.9.
1.
10.
6. If income is 1000, how much is household consumption?
A)
B)
C)
D)
1000.
1100.
1200.
1600.
7. What is the equation for the AE curve in this model?
A)
B)
C)
D)
AE = 100 + Y.
AE = 200 + 0.1Y.
AE = 200 + 0.9 Y.
AE = 300 + 0.9Y.
8. Is Y = 1000 an equilibrium in this model of the economy? If not, what is the level
of excess demand (AE – Y) at Y = 1000?
A)
B)
C)
D)
Yes.
No, excess demand is -100.
No, excess demand is -200.
No, excess demand is 200.
9. What is equilibrium level of Y?
A)
B)
C)
D)
1000.
2000.
3000.
4000.
10. What is the value of the multiplier?
A)
B)
C)
D)
0.
1.
2.
10.
ECO120 Macroeconomics A
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11. If investment rises from 200 to 300, how much does equilibrium GDP rise by?
A)
B)
C)
D)
0.
100.
1,000.
10,000.
For Questions 12-18, please refer to the following AD-AS diagram. For each
question we are assumed to start at the initial equilibrium marked with income at Y0
and prices at P0.
P
AS
A
B
P0
C
D
AD
Y0
Y
12. Which of the following would cause the economy to move to a new equilibrium
marked A?
A)
B)
C)
D)
A rise in the price of electricity to businesses.
An increase in exports.
An improvement in production technologies.
An increase in income taxes on households.
13. Which of the following would cause the economy to move to a new equilibrium
marked B?
A)
B)
C)
D)
A decrease in government purchases.
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 of households.
ECO120 Macroeconomics A
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14. Which of the following would cause the economy to move to a new equilibrium
marked C?
A)
B)
C)
D)
A rise in the price of electricity to businesses.
An increase in exports.
An improvement in production technologies.
An increase in income taxes on households.
15. Which of the following would cause the economy to move to a new equilibrium
marked D?
A)
B)
C)
D)
A decrease in government purchases.
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 of households.
16. In the above diagram, the long-run AS curve would be drawn as:
A)
B)
C)
D)
A 45 degree line out of the origin.
A straight line at the level of GDP at Y0.
A straight line at the level of prices at P0.
The same line as the short-run AS curve.
17. If the economy is initially in a boom with unemployment at a record low then the
long-run AS curve would be drawn:
A)
B)
C)
D)
To the right of Y0.
To the left of Y0.
Above P0.
Below P0.
18. If the economy is initially in a recession with unemployment at a record high then
the long-run AS curve would be drawn:
A)
B)
C)
D)
To the right of Y0.
To the left of Y0.
Above P0.
Below P0.
19. Moving along which curve do the nominal wages of workers remain the same
while prices of goods and services rise or fall?
A)
B)
C)
D)
The AD curve.
The short-run AS curve.
The long-run AS curve.
None of the above curves.
ECO120 Macroeconomics A
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20. Which of the following reasons explains why the investment demand function is
sloping downwards?
A)
B)
C)
D)
As price falls, people feel wealthier and so consume more goods.
As incomes rise, people feel wealthier and so consume more goods.
As interest rates fall, the NPV of investments increases, so investments rise.
As interest rates rise, people feel wealthier and so investment increases.
ECO120 Macroeconomics A
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ANSWERS TO PART A
Write your answers to the multiple choice questions here. If the grader can not read
your handwriting, you will be given zero marks.
1
C
2
D
3
A
4
B
5
A
6
A
7
D
8
D
9
C
10 D
11 C
12 A
13 D
14 D
15 C
16 B
17 B
18 A
19 B
20 C
ECO120 Macroeconomics A
Page 7 of 9
PART B
(40 marks – 20 marks each)
Answer both questions in the space provided.
QUESTION: B.1
(10 + 10 = 20 marks)
Australian interest rates rise and investment demand falls in response by $100 million.
(a) Draw the initial equilibrium and the equilibrium after the rise in interest rates in
an AE model for the Australian economy. Carefully label your axes and the
important points.
Answer:
AE
AE0
AE1
$100m
Y1
Y0
Income
If investment falls by $100m, then the AE curve shifts down by $100m (the vertical
intercept drops by $100m). Equilibrium GDP falls from Y0 to Y1.
(b) Show where we would see the change in investment demand as a distance on your
AE diagram. Show where we would see the change in GDP as a distance on your
diagram. What is the multiplier, and how could we see the multiplier as a distance (or
a ratio of two distances) on your diagram?
Answer: The change in investment demand is the change in the vertical intercept on
our AE diagram. The change in equilibrium GDP is the distance between Y0 and Y1.
the multiplier is the ratio of the change in GDP over the change in investment
demand, so the multiplier would be the ratio of those two distances. We could also
say that if the change in the vertical intercept is the demand in investment demand,
then the change in Y is the multiplier times the change in investment demand.
ECO120 Macroeconomics A
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QUESTION: B.2
(5 + 10 + 5 = 20 marks)
The following table lists the nominal GDP and the price level (or CPI) for the years
2004-2007.
Year
Nominal GDP
Growth in
Nominal
GDP (%)
Inflation
(%)
Real GDP (in
Year 2000
Prices)
na
Price
Level
(2000 =
100)
110
2004
$820 billion
na
745
2005
$865 billion
5.49
112
1.82
772
2006
$890 billion
2.89
116
3.57
767
2007
$950 billion
6.74
120
3.45
792
(a) Fill in the entries in the three columns for Growth in Nominal GDP, Inflation and
Real GDP. [Do this on the table itself.]
(b) Show how you calculated the 2007 entry for Growth in Nominal GDP, Inflation
and Real GDP.
Answer: The 2007 entry for growth in Nominal GDP is the difference between the
2007 and 2006 entries for Nominal GDP divided by the 2006 entry for Nominal GDP.
The 2007 entry for Inflation is the difference between the 2007 and 2006 entries for
Price Level divided by the 2006 entry Price Level.
The 2007 entry for Real GDP is the 2007 entry for Nominal GDP multiplied by the
2000 level for price Level (100) divided by the 2007 entry for Price Level.
(c) Calculate a growth rate for real GDP in 2007. Compare the growth of nominal
GDP, inflation and the growth of real GDP in 2007. Do you see a relationship
between the three numbers?
Answer: The 2007 entry for growth in Real GDP is the difference between the 2007
and 2006 entries for Real GDP divided by the 2006 entry for Real GDP. The Growth
in Real GDP in 2007 was 3.18.
The relationship is: 6.74 – 3.45 is close to 3.18. The Growth in Nominal GDP minus
Inflation almost equals the Growth in Real GDP.
ECO120 Macroeconomics A
Page 9 of 9