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EC1001
EC1001
MIDSUMMER EXAMINATIONS 2009
Subject
ECONOMICS
Title of Paper
EC1001 MACROECONOMICS
Time Allowed
Two hours (2 Hours)
______________________________________________________________________________________________________
Instructions to candidates
This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section
B. The maximum mark awarded for Section A is 75.55 marks. The maximum mark awarded for Section B is
33
marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).
______________________________________________________________________________________________________
SECTION A: Multiple Choice
All questions should be attempted. Use the answer sheet provided to record the one response you believe to
be the most appropriate for each question.
The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each
right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong
answer, and Zero mark if no answer is given.
____
____
____
1. According to a utilitarian, total social utility will be maximized when marginal pounds are distributed to
the people with the
a. greatest need.
b. highest marginal utility of income.
c. highest total utility from their income.
d. most productive labor resources.
2. In a world where people would have no prior information about where they are in an income distribution,
given the choice, Rawls argues that they would prefer
a. an income distribution that is relatively equal.
b. that everyone has the same work opportunities and market determined wage rates.
c. that private property be transformed to government property to safeguard their incomes.
d. less economic assistance to the poor because it distorts the price system.
3. Which price index measures the average price of things purchased by the typical family in an urban area?
a. GDP deflator
b. producer price index
c. consumer price index
d. minimum wage
1
EC1001 - Macroeconomics
____
____
____
____
____
____
____
____
____
ID: A
4. The good that receives the most weight in the CPI is the good that
a. consumers buy most frequently.
b. has experienced the greatest price increase.
c. has the highest price.
d. consumers spend the largest fraction of their income on.
5. When the inflation rate ends up being lower than expected,
a. everyone benefits because money is cheaper.
b. everyone benefits because prices do not increase.
c. lenders of fixed-rate mortgages generally benefit because they will make higher profits
than they had calculated.
d. borrowers with fixed-rate loans will benefit because their purchasing power will not
decline as much.
6. The stock market is an institution that promotes
a. buying and selling of debt financing.
b. the purchase and sale of firm equities.
c. the purchase and sale of mutual funds.
d. bank borrowing and lending.
7. The supply of loanable funds curve is upward sloping because a rise in the interest rate
a. decreases the opportunity cost of firms' investment spending.
b. increases the opportunity cost of firms' investment spending.
c. decreases the opportunity cost to households of consuming.
d. increases the opportunity cost to households of consuming.
8. The amount of money that someone would pay today for the right to receive a future payment is called the
a. present value of the future payment.
b. determinate value of the future payment.
c. market interest rate.
d. principal.
9. The existence of many discouraged workers in an economy may cause us to
a. overstate the employment rate.
b. understate the employment rate.
c. overstate the unemployment rate.
d. understate the unemployment rate.
10. Efficiency wages are
a. lower than market wages paid by employers to increase profitability.
b. higher than market wages paid by employers to increase productivity.
c. government-determined minimum wages set to protect workers from unfair employers.
d. negotiated by unions when officials are interested in trimming work forces.
11. If a bank receives a new demand deposit of £10,000, and the legal reserve requirement is 20 percent, then
the bank can lend out
a. £2,000.
b. £10,000.
c. £40,000.
d. £8,000.
12. If the supply of money is greater than the amount of money people want to hold, then
a. spending will increase and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will increase and the rate of interest will rise.
d. None of the above are correct. The amount of money supplied is never greater than the
amount people want to hold.
2
EC1001 - Macroeconomics
ID: A
____ 13. If a central bank supplies more money than the quantity people want to hold
a. spending will decrease and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will remain constant but the price level will rise.
d. there will be no change in the level of economic activity or prices; money is neutral.
____ 14. Which of the following is a reason why exchange rates may deviate from their purchasing power parity
values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect substitute for a
domestically-produced version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange prices.
d. Both a and b are correct.
____ 15. The link between the loanable funds market and the foreign exchange market is
a. the governments of the countries involved.
b. the International Monetary Fund.
c. net capital outflow.
d. purchasing power parity.
____ 16. Which of the following would not be an appropriate response to a trade deficit for the United Kingdom?
a. increase tariffs
b. appreciate the pound
c. subsidize exports
d. impose import quotas
____ 17. Capital flight is often caused by
a. political stability.
b. shifts away from the industrial sector and towards the service sector.
c. political instability.
d. policies of the International Monetary Fund.
____ 18. If you and your friends are still looking for a job eighteen months after graduation, even after lowering
your wage expectations, you are probably in the business cycle phase of a
a. recession.
b. peak.
c. boom.
d. recovery
____ 19. If we are most interested in short-run changes in economic activity,
a. the classical model is an unreliable guide.
b. total spending can be ignored.
c. labor markets are irrelevant.
d. we should assume that neither expansions nor recessions can occur.
____ 20. Movements along the aggregate supply curve are caused by changes in
a. technology.
b. government regulations.
c. wages and salaries.
d. the price level.
____ 21. Which of the following is not a determinant of long-run aggregate supply?
a. the level of skills in the workforce
b. the price level
c. technology
d. the quantity of capital
____ 22. Which of the following will cause stagflation?
a. an increase in the money supply
b. an increase in oil prices
c. a decrease in the money supply
d. technical progress
3
EC1001 - Macroeconomics
ID: A
____ 23. The short-run Phillips Curve is drawn on the assumption that
a. technology does not affect output in the short run.
b. the skill level of the workforce does not affect output in the short run.
c. prices and wages are sticky in the short run.
d. All of the above are correct.
Figure 35-1
____ 24. Refer to Figure 35-1. Suppose that the government in the economy of this diagram regards 9 percent
unemployment as unacceptable. If the government insists on reducing the unemployment rate from 9
percent to 7 percent, regardless of the consequences, then
a. pressure will build in the economy to continuously reduce the rate of inflation.
b. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and
unemployment.
c. the inflation rate will increase but the unemployment rate will stay at 7 percent.
d. in the long run the rate of unemployment remains unchanged, but inflation will likely
accelerate.
____ 25. The Bank of England will tend to tighten monetary policy when
a. interest rates are rising too rapidly.
b. it thinks the unemployment rate is too high.
c. the growth rate of real GDP is quite sluggish.
d. it thinks inflation is too high today, or will become too high in the future.
____ 26. When economists say that there is a time lag in the effect of monetary policy, they mean that
a. it takes time to observe the effects of fiscal policy on the economy.
b. the Fed takes awhile to figure out what it wants to do.
c. the Congress takes awhile to figure out what it wants to do.
d. it takes time to observe the effects of monetary policy on the economy.
____ 27. In the long run, large and continuing budget surpluses
a. mean higher taxes and a lower standard of living.
b. mean a larger money supply and higher interest rates.
c. are a problem because they crowd out private spending.
d. permit the government to lower taxes and to reduce national debt.
____ 28. The percentage of families with incomes below the poverty line
a. is defined as the lowest 10 percent of households in terms of incomes in the United
Kingdom.
b. is known as the poverty rate.
c. is known as the unemployment rate.
d. rises as the general income level rises.
4
EC1001 - Macroeconomics
ID: A
____ 29. The GDP deflator differs from the CPI because the GDP deflator includes goods we __________, while
the CPI includes goods we __________.
a. import; export
b. export; import
c. buy; sell
d. consume; produce
____ 30. If the CPI increases from 100 to 200 and the nominal wage increases from £100 to £400, what is the
change in the real wage in terms of the beginning year's pounds?
a. £200
b. £400
c. £100
d. -£200
____ 31. When borrowing money to purchase an automobile, Wei has the choice between a fixed nominal interest
rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than
the fixed rate loans. Given that, Wei would most likely want to borrow money at the higher fixed rate
when she expects the
a. inflation rate to rise.
b. inflation rate to fall.
c. inflation rate to remain unchanged.
d. government to take action to lower the inflation rate in the near future.
____ 32. Which of the following changes would increase the present value of a future payment?
a. a decrease in the size of the payment
b. a decrease in the certainty of the payment actually being received
c. an increase in the amount of time that elapses before receiving the payment
d. a decrease in the interest rate
____ 33. To diversify, a homeowner with a variable-rate mortgage should choose investments that
a. pay higher returns when interest rates rise and lower returns when interest rates fall.
b. pay lower returns when interest rates rise and higher returns when interest rates fall.
c. provide a higher return than the market average.
d. provide a lower return than the market average.
____ 34. The irrelevance of monetary changes for real variables is called
a. the classical dichotomy.
b. the equation of exchange.
c. monetary neutrality.
d. hyperinflation.
5
EC1001 - Macroeconomics
ID: A
SECTION B
Answer one and only one of the questions numbered 35 to 38. The maximum number of marks awarded for
this Section is 33.
35. The economy of Elmendyn contains 2,000 £1 coins.
(a) If people hold all money as currency, what is the quantity of money?
(b) If people hold all money as demand deposits, and banks maintain 100 per cent reserves, what
is the quantity of money?
(c) If people hold equal amounts of currency and demand deposits, and banks maintain 100 per
cent reserves, what is the quantity of money?
(d) If people hold all money as demand deposits, and banks maintain a reserve ratio of 10 per
cent, what is the quantity of money?
(e) If people hold equal amounts of currency and demand deposits, and banks maintain a reserve
ratio of 10 per cent, what is the quantity of money?
36. Answer both (a) and (b):
(a) About 400 years ago, native Americans sold the island of Manhattan for $24. If they had
invested this money at an interest rate of 7 per cent per year, how much would they have
today?
(b) Imagine that you intend to buy a portfolio of ten shares with some of your savings. Should
the shares be of companies in the same industry? Should the shares be of companies located
in the same country? Explain.
37. Answer both parts:
(a) What does purchasing power parity imply about the real exchange rate?
(b) Suppose that UK citizens start saving more. What does this imply for the supply of loanable funds and
the equilibrium real interest rate?
38. Answer both parts (a) and (b).
(a) List the three major problems in using the CPI as a measure of the cost of living.
(b) Romeo and Juliet meet Mervin, the banker, to work out the details of a mortgage. They all expect that
inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent.
As it turns out, the inflation rate is 5 percent over the term of the loan.
i. What was the expected real interest rate?
ii. What was the actual real interest rate?
iii. Who benefited and who lost because of the unexpected inflation?
6
ID: A
EC1001
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
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15.
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28.
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30.
31.
32.
33.
34.
ANS:
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B
A
C
D
D
B
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A
D
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B
B
D
C
B
C
A
A
D
B
B
C
D
D
D
D
B
B
C
A
D
A
C
REF:
REF:
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REF:
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REF:
REF:
SECTION: 2
SECTION: 2
SECTION: 1
SECTION: 1
SECTION: 2
SECTION: 1
SECTION: 3
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 3
TYPE: 3
TYPE: 1
TYPE: 1
TYPE: 5
TYPE: 1
TYPE: 4
REF:
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REF:
SECTION: 1
SECTION: 5
SECTION: 3
SECTION: 1
SECTION: 1
SECTION: 3
SECTION: 3
SECTION: 3
SECTION: 3
SECTION: 1
SECTION: 2
SECTION: 4
SECTION: 4
SECTION: 5
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 4
SECTION: 1
SECTION: 1
SECTION: 2
SECTION: 2
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
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OBJ:
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OBJ:
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OBJ:
TYPE: 1
TYPE: 5
TYPE: 3
TYPE: 1
TYPE: 3
TYPE: 6
TYPE: 4
TYPE: 2
TYPE: 4
TYPE: 1
TYPE: 2
TYPE: 3
TYPE: 3
TYPE: 4
TYPE: 1
TYPE: 1
TYPE: 1
TYPE: 1
TYPE: 4
TYPE: 1
TYPE: 3
TYPE: 4
TYPE: 5
REF: SECTION: 1
OBJ: TYPE: 2
SHORT ANSWER
35. ANS:
a. £2,000.
b. £2,000.
c. £2,000.
d. £20,000.
e. £11,000.
1
ID: A
36. ANS:
(a) 24*(1.07)^400 = 1.36057*10^13
(b) Shares should not be of companies in the same industry or country, if you want to diversify your
investment in order to reduce idiosyncratic risk.
37. ANS:
(a) If purchasing power parity holds, the real exchange rate is fixed and equal to one.
(b) The supply of loanable funds increases, and the equilibrium real interest rate falls. Because of the
lower interest rate, UK net capital outflow rises. This increase makes the supply of pounds shift to the
right, and the real exchange rate of sterling depreciates.
38. ANS:
(A)
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become
relatively less expensive. (2) introduction of new goods. Because the CPI uses a fixed basket of goods, it
does not take into account the increased well-being of consumers created when new goods are introduced.
(3) Unmeasured quality change. Not all quality changes can be measured.
(B)
i. The expected real interest rate was 4 percent.
ii. The actual real interest rate was 1 percent.
iii. Mervin, the banker, lost because he receives less real interest income than he expected. Romeo
and Juliet gain because they pay less real interest income than they expected.
2
No. of Pages: ( B )
No. of Questions:
6
38
EC1001
EC1001
MIDSUMMER EXAMINATIONS 2009
Subject
ECONOMICS
Title of Paper
EC1001 MACROECONOMICS
Time Allowed
Two hours (2 Hours)
______________________________________________________________________________________________________
Instructions to candidates
This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section
B. The maximum mark awarded for Section A is 75.55 marks. The maximum mark awarded for Section B is
33
marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).
______________________________________________________________________________________________________
SECTION A: Multiple Choice
All questions should be attempted. Use the answer sheet provided to record the one response you believe to
be the most appropriate for each question.
The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each
right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong
answer, and Zero mark if no answer is given.
____
____
1. In a world where people would have no prior information about where they are in an income distribution,
given the choice, Rawls argues that they would prefer
a. an income distribution that is relatively equal.
b. less economic assistance to the poor because it distorts the price system.
c. that private property be transformed to government property to safeguard their incomes.
d. that everyone has the same work opportunities and market determined wage rates.
2. When borrowing money to purchase an automobile, Wei has the choice between a fixed nominal interest
rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than
the fixed rate loans. Given that, Wei would most likely want to borrow money at the higher fixed rate
when she expects the
a. inflation rate to rise.
b. inflation rate to fall.
c. inflation rate to remain unchanged.
d. government to take action to lower the inflation rate in the near future.
1
EC1001 - Macroeconomics
____
____
____
____
____
____
____
____
____
____
ID: B
3. The Bank of England will tend to tighten monetary policy when
a. it thinks inflation is too high today, or will become too high in the future.
b. the growth rate of real GDP is quite sluggish.
c. interest rates are rising too rapidly.
d. it thinks the unemployment rate is too high.
4. If the CPI increases from 100 to 200 and the nominal wage increases from £100 to £400, what is the
change in the real wage in terms of the beginning year's pounds?
a. £400
b. £100
c. -£200
d. £200
5. According to a utilitarian, total social utility will be maximized when marginal pounds are distributed to
the people with the
a. greatest need.
b. highest total utility from their income.
c. most productive labor resources.
d. highest marginal utility of income.
6. In the long run, large and continuing budget surpluses
a. permit the government to lower taxes and to reduce national debt.
b. mean a larger money supply and higher interest rates.
c. are a problem because they crowd out private spending.
d. mean higher taxes and a lower standard of living.
7. Efficiency wages are
a. government-determined minimum wages set to protect workers from unfair employers.
b. lower than market wages paid by employers to increase profitability.
c. negotiated by unions when officials are interested in trimming work forces.
d. higher than market wages paid by employers to increase productivity.
8. If a central bank supplies more money than the quantity people want to hold
a. spending will decrease and the price level will fall.
b. there will be no change in the level of economic activity or prices; money is neutral.
c. spending will increase and the price level will rise.
d. spending will remain constant but the price level will rise.
9. Which of the following would not be an appropriate response to a trade deficit for the United Kingdom?
a. increase tariffs
b. subsidize exports
c. appreciate the pound
d. impose import quotas
10. The amount of money that someone would pay today for the right to receive a future payment is called the
a. principal.
b. market interest rate.
c. present value of the future payment.
d. determinate value of the future payment.
11. If a bank receives a new demand deposit of £10,000, and the legal reserve requirement is 20 percent, then
the bank can lend out
a. £8,000.
b. £10,000.
c. £2,000.
d. £40,000.
12. When economists say that there is a time lag in the effect of monetary policy, they mean that
a. the Fed takes awhile to figure out what it wants to do.
b. it takes time to observe the effects of monetary policy on the economy.
c. it takes time to observe the effects of fiscal policy on the economy.
d. the Congress takes awhile to figure out what it wants to do.
2
EC1001 - Macroeconomics
ID: B
____ 13. The existence of many discouraged workers in an economy may cause us to
a. overstate the unemployment rate.
b. understate the unemployment rate.
c. overstate the employment rate.
d. understate the employment rate.
____ 14. Which of the following is not a determinant of long-run aggregate supply?
a. technology
b. the price level
c. the level of skills in the workforce
d. the quantity of capital
____ 15. The good that receives the most weight in the CPI is the good that
a. consumers spend the largest fraction of their income on.
b. has the highest price.
c. has experienced the greatest price increase.
d. consumers buy most frequently.
____ 16. Movements along the aggregate supply curve are caused by changes in
a. the price level.
b. wages and salaries.
c. technology.
d. government regulations.
____ 17. To diversify, a homeowner with a variable-rate mortgage should choose investments that
a. pay lower returns when interest rates rise and higher returns when interest rates fall.
b. provide a higher return than the market average.
c. provide a lower return than the market average.
d. pay higher returns when interest rates rise and lower returns when interest rates fall.
____ 18. Which of the following changes would increase the present value of a future payment?
a. an increase in the amount of time that elapses before receiving the payment
b. a decrease in the interest rate
c. a decrease in the size of the payment
d. a decrease in the certainty of the payment actually being received
____ 19. When the inflation rate ends up being lower than expected,
a. everyone benefits because money is cheaper.
b. everyone benefits because prices do not increase.
c. lenders of fixed-rate mortgages generally benefit because they will make higher profits
than they had calculated.
d. borrowers with fixed-rate loans will benefit because their purchasing power will not
decline as much.
3
EC1001 - Macroeconomics
ID: B
Figure 35-1
____ 20. Refer to Figure 35-1. Suppose that the government in the economy of this diagram regards 9 percent
unemployment as unacceptable. If the government insists on reducing the unemployment rate from 9
percent to 7 percent, regardless of the consequences, then
a. the inflation rate will increase but the unemployment rate will stay at 7 percent.
b. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and
unemployment.
c. pressure will build in the economy to continuously reduce the rate of inflation.
d. in the long run the rate of unemployment remains unchanged, but inflation will likely
accelerate.
____ 21. The percentage of families with incomes below the poverty line
a. is defined as the lowest 10 percent of households in terms of incomes in the United
Kingdom.
b. is known as the unemployment rate.
c. rises as the general income level rises.
d. is known as the poverty rate.
____ 22. The supply of loanable funds curve is upward sloping because a rise in the interest rate
a. increases the opportunity cost of firms' investment spending.
b. decreases the opportunity cost of firms' investment spending.
c. increases the opportunity cost to households of consuming.
d. decreases the opportunity cost to households of consuming.
____ 23. If we are most interested in short-run changes in economic activity,
a. we should assume that neither expansions nor recessions can occur.
b. the classical model is an unreliable guide.
c. total spending can be ignored.
d. labor markets are irrelevant.
____ 24. Capital flight is often caused by
a. political stability.
b. shifts away from the industrial sector and towards the service sector.
c. political instability.
d. policies of the International Monetary Fund.
____ 25. Which price index measures the average price of things purchased by the typical family in an urban area?
a. consumer price index
b. producer price index
c. minimum wage
d. GDP deflator
4
EC1001 - Macroeconomics
ID: B
____ 26. Which of the following is a reason why exchange rates may deviate from their purchasing power parity
values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect substitute for a
domestically-produced version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange prices.
d. Both a and b are correct.
____ 27. The irrelevance of monetary changes for real variables is called
a. hyperinflation.
b. the classical dichotomy.
c. monetary neutrality.
d. the equation of exchange.
____ 28. If you and your friends are still looking for a job eighteen months after graduation, even after lowering
your wage expectations, you are probably in the business cycle phase of a
a. boom.
b. peak.
c. recession.
d. recovery
____ 29. The short-run Phillips Curve is drawn on the assumption that
a. prices and wages are sticky in the short run.
b. the skill level of the workforce does not affect output in the short run.
c. technology does not affect output in the short run.
d. All of the above are correct.
____ 30. The link between the loanable funds market and the foreign exchange market is
a. purchasing power parity.
b. net capital outflow.
c. the governments of the countries involved.
d. the International Monetary Fund.
____ 31. The GDP deflator differs from the CPI because the GDP deflator includes goods we __________, while
the CPI includes goods we __________.
a. export; import
b. buy; sell
c. consume; produce
d. import; export
____ 32. The stock market is an institution that promotes
a. the purchase and sale of mutual funds.
b. bank borrowing and lending.
c. the purchase and sale of firm equities.
d. buying and selling of debt financing.
____ 33. Which of the following will cause stagflation?
a. technical progress
b. an increase in oil prices
c. an increase in the money supply
d. a decrease in the money supply
____ 34. If the supply of money is greater than the amount of money people want to hold, then
a. spending will increase and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will increase and the rate of interest will rise.
d. None of the above are correct. The amount of money supplied is never greater than the
amount people want to hold.
5
EC1001 - Macroeconomics
ID: B
SECTION B
Answer one and only one of the questions numbered 35 to 38. The maximum number of marks awarded for
this Section is 33.
35. Answer both (a) and (b):
(a) About 400 years ago, native Americans sold the island of Manhattan for $24. If they had
invested this money at an interest rate of 7 per cent per year, how much would they have
today?
(b) Imagine that you intend to buy a portfolio of ten shares with some of your savings. Should
the shares be of companies in the same industry? Should the shares be of companies located
in the same country? Explain.
36. Answer both parts:
(a) What does purchasing power parity imply about the real exchange rate?
(b) Suppose that UK citizens start saving more. What does this imply for the supply of loanable funds and
the equilibrium real interest rate?
37. The economy of Elmendyn contains 2,000 £1 coins.
(a) If people hold all money as currency, what is the quantity of money?
(b) If people hold all money as demand deposits, and banks maintain 100 per cent reserves, what
is the quantity of money?
(c) If people hold equal amounts of currency and demand deposits, and banks maintain 100 per
cent reserves, what is the quantity of money?
(d) If people hold all money as demand deposits, and banks maintain a reserve ratio of 10 per
cent, what is the quantity of money?
(e) If people hold equal amounts of currency and demand deposits, and banks maintain a reserve
ratio of 10 per cent, what is the quantity of money?
38. Answer both parts (a) and (b).
(a) List the three major problems in using the CPI as a measure of the cost of living.
(b) Romeo and Juliet meet Mervin, the banker, to work out the details of a mortgage. They all expect that
inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent.
As it turns out, the inflation rate is 5 percent over the term of the loan.
i. What was the expected real interest rate?
ii. What was the actual real interest rate?
iii. Who benefited and who lost because of the unexpected inflation?
6
ID: B
EC1001
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
A
A
A
B
D
A
D
C
C
C
A
B
B
B
A
A
D
B
D
D
D
C
B
C
A
D
C
C
A
B
A
C
B
B
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 2
SECTION: 2
SECTION: 1
SECTION: 2
SECTION: 2
SECTION: 4
SECTION: 5
SECTION: 1
SECTION: 3
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 3
TYPE: 5
TYPE: 1
TYPE: 4
TYPE: 3
TYPE: 4
TYPE: 5
TYPE: 3
TYPE: 2
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 3
SECTION: 1
SECTION: 1
SECTION: 4
SECTION: 1
SECTION: 4
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 3
TYPE: 1
TYPE: 1
TYPE: 3
TYPE: 1
TYPE: 3
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 2
SECTION: 1
SECTION: 1
SECTION: 3
SECTION: 2
SECTION: 3
SECTION: 1
SECTION: 3
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 3
SECTION: 1
SECTION: 1
SECTION: 5
SECTION: 1
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 5
TYPE: 1
TYPE: 1
TYPE: 4
TYPE: 2
TYPE: 4
TYPE: 1
TYPE: 6
TYPE: 2
TYPE: 1
TYPE: 1
TYPE: 4
TYPE: 3
TYPE: 1
TYPE: 4
TYPE: 1
SHORT ANSWER
35. ANS:
(a) 24*(1.07)^400 = 1.36057*10^13
(b) Shares should not be of companies in the same industry or country, if you want to diversify your
investment in order to reduce idiosyncratic risk.
1
ID: B
36. ANS:
(a) If purchasing power parity holds, the real exchange rate is fixed and equal to one.
(b) The supply of loanable funds increases, and the equilibrium real interest rate falls. Because of the
lower interest rate, UK net capital outflow rises. This increase makes the supply of pounds shift to the
right, and the real exchange rate of sterling depreciates.
37. ANS:
a. £2,000.
b. £2,000.
c. £2,000.
d. £20,000.
e. £11,000.
38. ANS:
(A)
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become
relatively less expensive. (2) introduction of new goods. Because the CPI uses a fixed basket of goods, it
does not take into account the increased well-being of consumers created when new goods are introduced.
(3) Unmeasured quality change. Not all quality changes can be measured.
(B)
i. The expected real interest rate was 4 percent.
ii. The actual real interest rate was 1 percent.
iii. Mervin, the banker, lost because he receives less real interest income than he expected. Romeo
and Juliet gain because they pay less real interest income than they expected.
2
No. of Pages: ( C )
No. of Questions:
6
38
EC1001
EC1001
MIDSUMMER EXAMINATIONS 2009
Subject
ECONOMICS
Title of Paper
EC1001 MACROECONOMICS
Time Allowed
Two hours (2 Hours)
______________________________________________________________________________________________________
Instructions to candidates
This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section
B. The maximum mark awarded for Section A is 75.55 marks. The maximum mark awarded for Section B is
33
marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).
______________________________________________________________________________________________________
SECTION A: Multiple Choice
All questions should be attempted. Use the answer sheet provided to record the one response you believe to
be the most appropriate for each question.
The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each
right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong
answer, and Zero mark if no answer is given.
____
____
____
1. Efficiency wages are
a. lower than market wages paid by employers to increase profitability.
b. government-determined minimum wages set to protect workers from unfair employers.
c. higher than market wages paid by employers to increase productivity.
d. negotiated by unions when officials are interested in trimming work forces.
2. If a central bank supplies more money than the quantity people want to hold
a. spending will decrease and the price level will fall.
b. spending will remain constant but the price level will rise.
c. there will be no change in the level of economic activity or prices; money is neutral.
d. spending will increase and the price level will rise.
3. Which of the following is not a determinant of long-run aggregate supply?
a. the level of skills in the workforce
b. the price level
c. technology
d. the quantity of capital
1
EC1001 - Macroeconomics
____
____
____
____
____
____
ID: C
4. Which of the following changes would increase the present value of a future payment?
a. a decrease in the certainty of the payment actually being received
b. an increase in the amount of time that elapses before receiving the payment
c. a decrease in the interest rate
d. a decrease in the size of the payment
5. Which of the following would not be an appropriate response to a trade deficit for the United Kingdom?
a. increase tariffs
b. subsidize exports
c. appreciate the pound
d. impose import quotas
6. Which of the following is a reason why exchange rates may deviate from their purchasing power parity
values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect substitute for a
domestically-produced version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange prices.
d. Both a and b are correct.
7. When the inflation rate ends up being lower than expected,
a. borrowers with fixed-rate loans will benefit because their purchasing power will not
decline as much.
b. lenders of fixed-rate mortgages generally benefit because they will make higher profits
than they had calculated.
c. everyone benefits because money is cheaper.
d. everyone benefits because prices do not increase.
8. The GDP deflator differs from the CPI because the GDP deflator includes goods we __________, while
the CPI includes goods we __________.
a. buy; sell
b. import; export
c. consume; produce
d. export; import
9. The Bank of England will tend to tighten monetary policy when
a. it thinks the unemployment rate is too high.
b. interest rates are rising too rapidly.
c. it thinks inflation is too high today, or will become too high in the future.
d. the growth rate of real GDP is quite sluggish.
2
EC1001 - Macroeconomics
ID: C
Figure 35-1
____ 10. Refer to Figure 35-1. Suppose that the government in the economy of this diagram regards 9 percent
unemployment as unacceptable. If the government insists on reducing the unemployment rate from 9
percent to 7 percent, regardless of the consequences, then
a. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and
unemployment.
b. the inflation rate will increase but the unemployment rate will stay at 7 percent.
c. in the long run the rate of unemployment remains unchanged, but inflation will likely
accelerate.
d. pressure will build in the economy to continuously reduce the rate of inflation.
____ 11. If you and your friends are still looking for a job eighteen months after graduation, even after lowering
your wage expectations, you are probably in the business cycle phase of a
a. peak.
b. recovery
c. boom.
d. recession.
____ 12. According to a utilitarian, total social utility will be maximized when marginal pounds are distributed to
the people with the
a. greatest need.
b. highest total utility from their income.
c. highest marginal utility of income.
d. most productive labor resources.
____ 13. If the CPI increases from 100 to 200 and the nominal wage increases from £100 to £400, what is the
change in the real wage in terms of the beginning year's pounds?
a. £400
b. £100
c. £200
d. -£200
____ 14. The existence of many discouraged workers in an economy may cause us to
a. understate the employment rate.
b. overstate the unemployment rate.
c. overstate the employment rate.
d. understate the unemployment rate.
____ 15. The link between the loanable funds market and the foreign exchange market is
a. the governments of the countries involved.
b. net capital outflow.
c. purchasing power parity.
d. the International Monetary Fund.
3
EC1001 - Macroeconomics
ID: C
____ 16. If the supply of money is greater than the amount of money people want to hold, then
a. spending will increase and the price level will fall.
b. spending will increase and the rate of interest will rise.
c. spending will increase and the price level will rise.
d. None of the above are correct. The amount of money supplied is never greater than the
amount people want to hold.
____ 17. To diversify, a homeowner with a variable-rate mortgage should choose investments that
a. pay lower returns when interest rates rise and higher returns when interest rates fall.
b. provide a higher return than the market average.
c. provide a lower return than the market average.
d. pay higher returns when interest rates rise and lower returns when interest rates fall.
____ 18. Movements along the aggregate supply curve are caused by changes in
a. the price level.
b. government regulations.
c. technology.
d. wages and salaries.
____ 19. The short-run Phillips Curve is drawn on the assumption that
a. prices and wages are sticky in the short run.
b. the skill level of the workforce does not affect output in the short run.
c. technology does not affect output in the short run.
d. All of the above are correct.
____ 20. When economists say that there is a time lag in the effect of monetary policy, they mean that
a. it takes time to observe the effects of monetary policy on the economy.
b. the Fed takes awhile to figure out what it wants to do.
c. it takes time to observe the effects of fiscal policy on the economy.
d. the Congress takes awhile to figure out what it wants to do.
____ 21. If we are most interested in short-run changes in economic activity,
a. we should assume that neither expansions nor recessions can occur.
b. the classical model is an unreliable guide.
c. labor markets are irrelevant.
d. total spending can be ignored.
____ 22. When borrowing money to purchase an automobile, Wei has the choice between a fixed nominal interest
rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than
the fixed rate loans. Given that, Wei would most likely want to borrow money at the higher fixed rate
when she expects the
a. inflation rate to rise.
b. inflation rate to remain unchanged.
c. government to take action to lower the inflation rate in the near future.
d. inflation rate to fall.
____ 23. In a world where people would have no prior information about where they are in an income distribution,
given the choice, Rawls argues that they would prefer
a. that everyone has the same work opportunities and market determined wage rates.
b. that private property be transformed to government property to safeguard their incomes.
c. less economic assistance to the poor because it distorts the price system.
d. an income distribution that is relatively equal.
____ 24. The supply of loanable funds curve is upward sloping because a rise in the interest rate
a. increases the opportunity cost to households of consuming.
b. decreases the opportunity cost of firms' investment spending.
c. increases the opportunity cost of firms' investment spending.
d. decreases the opportunity cost to households of consuming.
4
EC1001 - Macroeconomics
ID: C
____ 25. The good that receives the most weight in the CPI is the good that
a. consumers spend the largest fraction of their income on.
b. has experienced the greatest price increase.
c. has the highest price.
d. consumers buy most frequently.
____ 26. The percentage of families with incomes below the poverty line
a. is known as the poverty rate.
b. rises as the general income level rises.
c. is known as the unemployment rate.
d. is defined as the lowest 10 percent of households in terms of incomes in the United
Kingdom.
____ 27. In the long run, large and continuing budget surpluses
a. permit the government to lower taxes and to reduce national debt.
b. mean higher taxes and a lower standard of living.
c. are a problem because they crowd out private spending.
d. mean a larger money supply and higher interest rates.
____ 28. Which price index measures the average price of things purchased by the typical family in an urban area?
a. producer price index
b. consumer price index
c. GDP deflator
d. minimum wage
____ 29. Which of the following will cause stagflation?
a. technical progress
b. an increase in the money supply
c. an increase in oil prices
d. a decrease in the money supply
____ 30. The amount of money that someone would pay today for the right to receive a future payment is called the
a. principal.
b. present value of the future payment.
c. market interest rate.
d. determinate value of the future payment.
____ 31. The stock market is an institution that promotes
a. bank borrowing and lending.
b. buying and selling of debt financing.
c. the purchase and sale of mutual funds.
d. the purchase and sale of firm equities.
____ 32. Capital flight is often caused by
a. shifts away from the industrial sector and towards the service sector.
b. political stability.
c. policies of the International Monetary Fund.
d. political instability.
____ 33. If a bank receives a new demand deposit of £10,000, and the legal reserve requirement is 20 percent, then
the bank can lend out
a. £8,000.
b. £10,000.
c. £40,000.
d. £2,000.
____ 34. The irrelevance of monetary changes for real variables is called
a. the classical dichotomy.
b. hyperinflation.
c. monetary neutrality.
d. the equation of exchange.
5
EC1001 - Macroeconomics
ID: C
SECTION B
Answer one and only one of the questions numbered 35 to 38. The maximum number of marks awarded for
this Section is 33.
35. The economy of Elmendyn contains 2,000 £1 coins.
(a) If people hold all money as currency, what is the quantity of money?
(b) If people hold all money as demand deposits, and banks maintain 100 per cent reserves, what
is the quantity of money?
(c) If people hold equal amounts of currency and demand deposits, and banks maintain 100 per
cent reserves, what is the quantity of money?
(d) If people hold all money as demand deposits, and banks maintain a reserve ratio of 10 per
cent, what is the quantity of money?
(e) If people hold equal amounts of currency and demand deposits, and banks maintain a reserve
ratio of 10 per cent, what is the quantity of money?
36. Answer both parts (a) and (b).
(a) List the three major problems in using the CPI as a measure of the cost of living.
(b) Romeo and Juliet meet Mervin, the banker, to work out the details of a mortgage. They all expect that
inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent.
As it turns out, the inflation rate is 5 percent over the term of the loan.
i. What was the expected real interest rate?
ii. What was the actual real interest rate?
iii. Who benefited and who lost because of the unexpected inflation?
37. Answer both parts:
(a) What does purchasing power parity imply about the real exchange rate?
(b) Suppose that UK citizens start saving more. What does this imply for the supply of loanable funds and
the equilibrium real interest rate?
38. Answer both (a) and (b):
(a) About 400 years ago, native Americans sold the island of Manhattan for $24. If they had
invested this money at an interest rate of 7 per cent per year, how much would they have
today?
(b) Imagine that you intend to buy a portfolio of ten shares with some of your savings. Should
the shares be of companies in the same industry? Should the shares be of companies located
in the same country? Explain.
6
ID: C
EC1001
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
C
D
B
C
C
D
A
D
C
C
D
C
B
D
B
C
D
A
A
A
B
A
D
A
A
A
A
B
C
B
D
D
A
C
REF: SECTION: 5
REF: SECTION: 1
REF: SECTION: 4
OBJ: TYPE: 5
OBJ: TYPE: 3
OBJ: TYPE: 3
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 3
SECTION: 3
SECTION: 2
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 2
SECTION: 2
SECTION: 1
SECTION: 3
SECTION: 1
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 2
TYPE: 6
TYPE: 5
TYPE: 3
TYPE: 1
TYPE: 1
TYPE: 1
TYPE: 3
TYPE: 4
TYPE: 1
TYPE: 4
TYPE: 1
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 4
SECTION: 1
SECTION: 1
SECTION: 2
SECTION: 2
SECTION: 2
SECTION: 3
SECTION: 1
SECTION: 1
SECTION: 4
SECTION: 1
SECTION: 5
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 3
TYPE: 1
TYPE: 1
TYPE: 2
TYPE: 5
TYPE: 3
TYPE: 4
TYPE: 1
TYPE: 1
TYPE: 4
TYPE: 1
TYPE: 4
REF:
REF:
REF:
REF:
SECTION: 1
SECTION: 3
SECTION: 3
SECTION: 1
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 1
TYPE: 4
TYPE: 3
TYPE: 2
SHORT ANSWER
35. ANS:
a. £2,000.
b. £2,000.
c. £2,000.
d. £20,000.
e. £11,000.
1
ID: C
36. ANS:
(A)
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become
relatively less expensive. (2) introduction of new goods. Because the CPI uses a fixed basket of goods, it
does not take into account the increased well-being of consumers created when new goods are introduced.
(3) Unmeasured quality change. Not all quality changes can be measured.
(B)
i. The expected real interest rate was 4 percent.
ii. The actual real interest rate was 1 percent.
iii. Mervin, the banker, lost because he receives less real interest income than he expected. Romeo
and Juliet gain because they pay less real interest income than they expected.
37. ANS:
(a) If purchasing power parity holds, the real exchange rate is fixed and equal to one.
(b) The supply of loanable funds increases, and the equilibrium real interest rate falls. Because of the
lower interest rate, UK net capital outflow rises. This increase makes the supply of pounds shift to the
right, and the real exchange rate of sterling depreciates.
38. ANS:
(a) 24*(1.07)^400 = 1.36057*10^13
(b) Shares should not be of companies in the same industry or country, if you want to diversify your
investment in order to reduce idiosyncratic risk.
2
No. of Pages: ( D )
No. of Questions:
6
38
EC1001
EC1001
MIDSUMMER EXAMINATIONS 2009
Subject
ECONOMICS
Title of Paper
EC1001 MACROECONOMICS
Time Allowed
Two hours (2 Hours)
______________________________________________________________________________________________________
Instructions to candidates
This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section
B. The maximum mark awarded for Section A is 75.55 marks. The maximum mark awarded for Section B is
33
marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).
______________________________________________________________________________________________________
SECTION A: Multiple Choice
All questions should be attempted. Use the answer sheet provided to record the one response you believe to
be the most appropriate for each question.
The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each
right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong
answer, and Zero mark if no answer is given.
____
____
____
1. According to a utilitarian, total social utility will be maximized when marginal pounds are distributed to
the people with the
a. greatest need.
b. highest total utility from their income.
c. highest marginal utility of income.
d. most productive labor resources.
2. The existence of many discouraged workers in an economy may cause us to
a. understate the unemployment rate.
b. understate the employment rate.
c. overstate the unemployment rate.
d. overstate the employment rate.
3. Which of the following is not a determinant of long-run aggregate supply?
a. technology
b. the level of skills in the workforce
c. the price level
d. the quantity of capital
1
EC1001 - Macroeconomics
____
____
____
____
____
____
____
____
____
____
ID: D
4. In the long run, large and continuing budget surpluses
a. mean a larger money supply and higher interest rates.
b. are a problem because they crowd out private spending.
c. permit the government to lower taxes and to reduce national debt.
d. mean higher taxes and a lower standard of living.
5. If you and your friends are still looking for a job eighteen months after graduation, even after lowering
your wage expectations, you are probably in the business cycle phase of a
a. recovery
b. peak.
c. recession.
d. boom.
6. Which of the following will cause stagflation?
a. an increase in the money supply
b. a decrease in the money supply
c. technical progress
d. an increase in oil prices
7. The supply of loanable funds curve is upward sloping because a rise in the interest rate
a. increases the opportunity cost of firms' investment spending.
b. decreases the opportunity cost to households of consuming.
c. decreases the opportunity cost of firms' investment spending.
d. increases the opportunity cost to households of consuming.
8. Which price index measures the average price of things purchased by the typical family in an urban area?
a. minimum wage
b. GDP deflator
c. producer price index
d. consumer price index
9. If we are most interested in short-run changes in economic activity,
a. total spending can be ignored.
b. we should assume that neither expansions nor recessions can occur.
c. labor markets are irrelevant.
d. the classical model is an unreliable guide.
10. The irrelevance of monetary changes for real variables is called
a. monetary neutrality.
b. the equation of exchange.
c. the classical dichotomy.
d. hyperinflation.
11. If a central bank supplies more money than the quantity people want to hold
a. there will be no change in the level of economic activity or prices; money is neutral.
b. spending will decrease and the price level will fall.
c. spending will increase and the price level will rise.
d. spending will remain constant but the price level will rise.
12. The short-run Phillips Curve is drawn on the assumption that
a. technology does not affect output in the short run.
b. prices and wages are sticky in the short run.
c. the skill level of the workforce does not affect output in the short run.
d. All of the above are correct.
13. Capital flight is often caused by
a. political stability.
b. shifts away from the industrial sector and towards the service sector.
c. political instability.
d. policies of the International Monetary Fund.
2
EC1001 - Macroeconomics
ID: D
____ 14. In a world where people would have no prior information about where they are in an income distribution,
given the choice, Rawls argues that they would prefer
a. that private property be transformed to government property to safeguard their incomes.
b. that everyone has the same work opportunities and market determined wage rates.
c. an income distribution that is relatively equal.
d. less economic assistance to the poor because it distorts the price system.
____ 15. When economists say that there is a time lag in the effect of monetary policy, they mean that
a. the Fed takes awhile to figure out what it wants to do.
b. it takes time to observe the effects of fiscal policy on the economy.
c. it takes time to observe the effects of monetary policy on the economy.
d. the Congress takes awhile to figure out what it wants to do.
____ 16. The GDP deflator differs from the CPI because the GDP deflator includes goods we __________, while
the CPI includes goods we __________.
a. import; export
b. export; import
c. consume; produce
d. buy; sell
____ 17. When borrowing money to purchase an automobile, Wei has the choice between a fixed nominal interest
rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than
the fixed rate loans. Given that, Wei would most likely want to borrow money at the higher fixed rate
when she expects the
a. inflation rate to rise.
b. inflation rate to remain unchanged.
c. government to take action to lower the inflation rate in the near future.
d. inflation rate to fall.
Figure 35-1
____ 18. Refer to Figure 35-1. Suppose that the government in the economy of this diagram regards 9 percent
unemployment as unacceptable. If the government insists on reducing the unemployment rate from 9
percent to 7 percent, regardless of the consequences, then
a. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and
unemployment.
b. the inflation rate will increase but the unemployment rate will stay at 7 percent.
c. pressure will build in the economy to continuously reduce the rate of inflation.
d. in the long run the rate of unemployment remains unchanged, but inflation will likely
accelerate.
____ 19. Which of the following changes would increase the present value of a future payment?
a. an increase in the amount of time that elapses before receiving the payment
b. a decrease in the size of the payment
c. a decrease in the certainty of the payment actually being received
d. a decrease in the interest rate
3
EC1001 - Macroeconomics
ID: D
____ 20. If the supply of money is greater than the amount of money people want to hold, then
a. spending will increase and the price level will rise.
b. spending will increase and the price level will fall.
c. spending will increase and the rate of interest will rise.
d. None of the above are correct. The amount of money supplied is never greater than the
amount people want to hold.
____ 21. The percentage of families with incomes below the poverty line
a. is known as the unemployment rate.
b. is defined as the lowest 10 percent of households in terms of incomes in the United
Kingdom.
c. rises as the general income level rises.
d. is known as the poverty rate.
____ 22. To diversify, a homeowner with a variable-rate mortgage should choose investments that
a. provide a lower return than the market average.
b. pay higher returns when interest rates rise and lower returns when interest rates fall.
c. pay lower returns when interest rates rise and higher returns when interest rates fall.
d. provide a higher return than the market average.
____ 23. The stock market is an institution that promotes
a. the purchase and sale of firm equities.
b. bank borrowing and lending.
c. buying and selling of debt financing.
d. the purchase and sale of mutual funds.
____ 24. Which of the following is a reason why exchange rates may deviate from their purchasing power parity
values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect substitute for a
domestically-produced version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange prices.
d. Both a and b are correct.
____ 25. The link between the loanable funds market and the foreign exchange market is
a. purchasing power parity.
b. the International Monetary Fund.
c. the governments of the countries involved.
d. net capital outflow.
____ 26. The amount of money that someone would pay today for the right to receive a future payment is called the
a. determinate value of the future payment.
b. present value of the future payment.
c. market interest rate.
d. principal.
____ 27. Which of the following would not be an appropriate response to a trade deficit for the United Kingdom?
a. impose import quotas
b. increase tariffs
c. subsidize exports
d. appreciate the pound
____ 28. If a bank receives a new demand deposit of £10,000, and the legal reserve requirement is 20 percent, then
the bank can lend out
a. £8,000.
b. £40,000.
c. £10,000.
d. £2,000.
4
EC1001 - Macroeconomics
ID: D
____ 29. When the inflation rate ends up being lower than expected,
a. lenders of fixed-rate mortgages generally benefit because they will make higher profits
than they had calculated.
b. borrowers with fixed-rate loans will benefit because their purchasing power will not
decline as much.
c. everyone benefits because prices do not increase.
d. everyone benefits because money is cheaper.
____ 30. Efficiency wages are
a. higher than market wages paid by employers to increase productivity.
b. negotiated by unions when officials are interested in trimming work forces.
c. lower than market wages paid by employers to increase profitability.
d. government-determined minimum wages set to protect workers from unfair employers.
____ 31. If the CPI increases from 100 to 200 and the nominal wage increases from £100 to £400, what is the
change in the real wage in terms of the beginning year's pounds?
a. £400
b. £200
c. -£200
d. £100
____ 32. The good that receives the most weight in the CPI is the good that
a. consumers buy most frequently.
b. has the highest price.
c. consumers spend the largest fraction of their income on.
d. has experienced the greatest price increase.
____ 33. The Bank of England will tend to tighten monetary policy when
a. interest rates are rising too rapidly.
b. it thinks inflation is too high today, or will become too high in the future.
c. the growth rate of real GDP is quite sluggish.
d. it thinks the unemployment rate is too high.
____ 34. Movements along the aggregate supply curve are caused by changes in
a. technology.
b. wages and salaries.
c. the price level.
d. government regulations.
SECTION B
Answer one and only one of the questions numbered 35 to 38. The maximum number of marks awarded for
this Section is 33.
35. Answer both (a) and (b):
(a) About 400 years ago, native Americans sold the island of Manhattan for $24. If they had
invested this money at an interest rate of 7 per cent per year, how much would they have
today?
(b) Imagine that you intend to buy a portfolio of ten shares with some of your savings. Should
the shares be of companies in the same industry? Should the shares be of companies located
in the same country? Explain.
5
EC1001 - Macroeconomics
ID: D
36. Answer both parts:
(a) What does purchasing power parity imply about the real exchange rate?
(b) Suppose that UK citizens start saving more. What does this imply for the supply of loanable funds and
the equilibrium real interest rate?
37. Answer both parts (a) and (b).
(a) List the three major problems in using the CPI as a measure of the cost of living.
(b) Romeo and Juliet meet Mervin, the banker, to work out the details of a mortgage. They all expect that
inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent.
As it turns out, the inflation rate is 5 percent over the term of the loan.
i. What was the expected real interest rate?
ii. What was the actual real interest rate?
iii. Who benefited and who lost because of the unexpected inflation?
38. The economy of Elmendyn contains 2,000 £1 coins.
(a) If people hold all money as currency, what is the quantity of money?
(b) If people hold all money as demand deposits, and banks maintain 100 per cent reserves, what
is the quantity of money?
(c) If people hold equal amounts of currency and demand deposits, and banks maintain 100 per
cent reserves, what is the quantity of money?
(d) If people hold all money as demand deposits, and banks maintain a reserve ratio of 10 per
cent, what is the quantity of money?
(e) If people hold equal amounts of currency and demand deposits, and banks maintain a reserve
ratio of 10 per cent, what is the quantity of money?
6
ID: D
EC1001
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
C
A
C
C
C
D
D
D
D
A
C
B
C
C
C
B
A
D
D
A
D
B
A
D
D
B
D
A
B
A
D
C
B
C
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 2
SECTION: 1
SECTION: 4
SECTION: 4
SECTION: 1
SECTION: 5
SECTION: 3
SECTION: 1
SECTION: 2
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 3
SECTION: 2
SECTION: 1
SECTION: 1
SECTION: 2
SECTION: 1
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 3
TYPE: 1
TYPE: 3
TYPE: 4
TYPE: 1
TYPE: 4
TYPE: 4
TYPE: 1
TYPE: 2
TYPE: 2
TYPE: 3
TYPE: 1
TYPE: 4
TYPE: 3
TYPE: 1
TYPE: 3
TYPE: 5
TYPE: 1
REF: SECTION: 1
REF: SECTION: 1
OBJ: TYPE: 1
OBJ: TYPE: 1
REF: SECTION: 1
REF: SECTION: 3
REF: SECTION: 3
OBJ: TYPE: 1
OBJ: TYPE: 6
OBJ: TYPE: 4
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
SECTION: 3
SECTION: 3
SECTION: 2
SECTION: 5
SECTION: 2
SECTION: 1
SECTION: 1
SECTION: 4
TYPE: 2
TYPE: 3
TYPE: 5
TYPE: 5
TYPE: 4
TYPE: 1
TYPE: 1
TYPE: 3
SHORT ANSWER
35. ANS:
(a) 24*(1.07)^400 = 1.36057*10^13
(b) Shares should not be of companies in the same industry or country, if you want to diversify your
investment in order to reduce idiosyncratic risk.
1
ID: D
36. ANS:
(a) If purchasing power parity holds, the real exchange rate is fixed and equal to one.
(b) The supply of loanable funds increases, and the equilibrium real interest rate falls. Because of the
lower interest rate, UK net capital outflow rises. This increase makes the supply of pounds shift to the
right, and the real exchange rate of sterling depreciates.
37. ANS:
(A)
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become
relatively less expensive. (2) introduction of new goods. Because the CPI uses a fixed basket of goods, it
does not take into account the increased well-being of consumers created when new goods are introduced.
(3) Unmeasured quality change. Not all quality changes can be measured.
(B)
i. The expected real interest rate was 4 percent.
ii. The actual real interest rate was 1 percent.
iii. Mervin, the banker, lost because he receives less real interest income than he expected. Romeo
and Juliet gain because they pay less real interest income than they expected.
38. ANS:
a. £2,000.
b. £2,000.
c. £2,000.
d. £20,000.
e. £11,000.
2
No. of Pages: ( E )
No. of Questions:
6
38
EC1001
EC1001
MIDSUMMER EXAMINATIONS 2009
Subject
ECONOMICS
Title of Paper
EC1001 MACROECONOMICS
Time Allowed
Two hours (2 Hours)
______________________________________________________________________________________________________
Instructions to candidates
This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section
B. The maximum mark awarded for Section A is 75.55 marks. The maximum mark awarded for Section B is
33
marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).
______________________________________________________________________________________________________
SECTION A: Multiple Choice
All questions should be attempted. Use the answer sheet provided to record the one response you believe to
be the most appropriate for each question.
The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each
right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong
answer, and Zero mark if no answer is given.
____
____
____
1. The link between the loanable funds market and the foreign exchange market is
a. purchasing power parity.
b. net capital outflow.
c. the International Monetary Fund.
d. the governments of the countries involved.
2. The percentage of families with incomes below the poverty line
a. is known as the poverty rate.
b. rises as the general income level rises.
c. is known as the unemployment rate.
d. is defined as the lowest 10 percent of households in terms of incomes in the United
Kingdom.
3. When economists say that there is a time lag in the effect of monetary policy, they mean that
a. it takes time to observe the effects of fiscal policy on the economy.
b. the Congress takes awhile to figure out what it wants to do.
c. the Fed takes awhile to figure out what it wants to do.
d. it takes time to observe the effects of monetary policy on the economy.
1
EC1001 - Macroeconomics
____
____
____
____
____
____
____
____
____
ID: E
4. The irrelevance of monetary changes for real variables is called
a. the classical dichotomy.
b. hyperinflation.
c. the equation of exchange.
d. monetary neutrality.
5. If the CPI increases from 100 to 200 and the nominal wage increases from £100 to £400, what is the
change in the real wage in terms of the beginning year's pounds?
a. £400
b. £100
c. £200
d. -£200
6. Capital flight is often caused by
a. shifts away from the industrial sector and towards the service sector.
b. political instability.
c. policies of the International Monetary Fund.
d. political stability.
7. When borrowing money to purchase an automobile, Wei has the choice between a fixed nominal interest
rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than
the fixed rate loans. Given that, Wei would most likely want to borrow money at the higher fixed rate
when she expects the
a. government to take action to lower the inflation rate in the near future.
b. inflation rate to rise.
c. inflation rate to remain unchanged.
d. inflation rate to fall.
8. Which price index measures the average price of things purchased by the typical family in an urban area?
a. minimum wage
b. GDP deflator
c. consumer price index
d. producer price index
9. The good that receives the most weight in the CPI is the good that
a. consumers buy most frequently.
b. has the highest price.
c. has experienced the greatest price increase.
d. consumers spend the largest fraction of their income on.
10. In a world where people would have no prior information about where they are in an income distribution,
given the choice, Rawls argues that they would prefer
a. that everyone has the same work opportunities and market determined wage rates.
b. an income distribution that is relatively equal.
c. less economic assistance to the poor because it distorts the price system.
d. that private property be transformed to government property to safeguard their incomes.
11. Efficiency wages are
a. negotiated by unions when officials are interested in trimming work forces.
b. higher than market wages paid by employers to increase productivity.
c. government-determined minimum wages set to protect workers from unfair employers.
d. lower than market wages paid by employers to increase profitability.
12. The GDP deflator differs from the CPI because the GDP deflator includes goods we __________, while
the CPI includes goods we __________.
a. buy; sell
b. consume; produce
c. export; import
d. import; export
2
EC1001 - Macroeconomics
ID: E
____ 13. In the long run, large and continuing budget surpluses
a. mean a larger money supply and higher interest rates.
b. are a problem because they crowd out private spending.
c. mean higher taxes and a lower standard of living.
d. permit the government to lower taxes and to reduce national debt.
____ 14. Which of the following will cause stagflation?
a. an increase in the money supply
b. an increase in oil prices
c. technical progress
d. a decrease in the money supply
____ 15. Which of the following changes would increase the present value of a future payment?
a. an increase in the amount of time that elapses before receiving the payment
b. a decrease in the interest rate
c. a decrease in the certainty of the payment actually being received
d. a decrease in the size of the payment
____ 16. If we are most interested in short-run changes in economic activity,
a. labor markets are irrelevant.
b. total spending can be ignored.
c. we should assume that neither expansions nor recessions can occur.
d. the classical model is an unreliable guide.
____ 17. According to a utilitarian, total social utility will be maximized when marginal pounds are distributed to
the people with the
a. highest total utility from their income.
b. most productive labor resources.
c. highest marginal utility of income.
d. greatest need.
____ 18. If you and your friends are still looking for a job eighteen months after graduation, even after lowering
your wage expectations, you are probably in the business cycle phase of a
a. recession.
b. boom.
c. peak.
d. recovery
____ 19. The short-run Phillips Curve is drawn on the assumption that
a. technology does not affect output in the short run.
b. prices and wages are sticky in the short run.
c. the skill level of the workforce does not affect output in the short run.
d. All of the above are correct.
____ 20. To diversify, a homeowner with a variable-rate mortgage should choose investments that
a. pay higher returns when interest rates rise and lower returns when interest rates fall.
b. pay lower returns when interest rates rise and higher returns when interest rates fall.
c. provide a lower return than the market average.
d. provide a higher return than the market average.
____ 21. Which of the following would not be an appropriate response to a trade deficit for the United Kingdom?
a. impose import quotas
b. appreciate the pound
c. subsidize exports
d. increase tariffs
____ 22. The existence of many discouraged workers in an economy may cause us to
a. understate the employment rate.
b. understate the unemployment rate.
c. overstate the unemployment rate.
d. overstate the employment rate.
3
EC1001 - Macroeconomics
ID: E
____ 23. The stock market is an institution that promotes
a. the purchase and sale of mutual funds.
b. the purchase and sale of firm equities.
c. bank borrowing and lending.
d. buying and selling of debt financing.
Figure 35-1
____ 24. Refer to Figure 35-1. Suppose that the government in the economy of this diagram regards 9 percent
unemployment as unacceptable. If the government insists on reducing the unemployment rate from 9
percent to 7 percent, regardless of the consequences, then
a. the inflation rate will increase but the unemployment rate will stay at 7 percent.
b. in the long run the rate of unemployment remains unchanged, but inflation will likely
accelerate.
c. pressure will build in the economy to continuously reduce the rate of inflation.
d. the long-run Phillips curve becomes horizontal, freezing the rates of inflation and
unemployment.
____ 25. If the supply of money is greater than the amount of money people want to hold, then
a. spending will increase and the price level will fall.
b. spending will increase and the price level will rise.
c. spending will increase and the rate of interest will rise.
d. None of the above are correct. The amount of money supplied is never greater than the
amount people want to hold.
____ 26. If a bank receives a new demand deposit of £10,000, and the legal reserve requirement is 20 percent, then
the bank can lend out
a. £10,000.
b. £2,000.
c. £40,000.
d. £8,000.
____ 27. Movements along the aggregate supply curve are caused by changes in
a. the price level.
b. wages and salaries.
c. technology.
d. government regulations.
____ 28. When the inflation rate ends up being lower than expected,
a. everyone benefits because prices do not increase.
b. borrowers with fixed-rate loans will benefit because their purchasing power will not
decline as much.
c. lenders of fixed-rate mortgages generally benefit because they will make higher profits
than they had calculated.
d. everyone benefits because money is cheaper.
4
EC1001 - Macroeconomics
ID: E
____ 29. If a central bank supplies more money than the quantity people want to hold
a. spending will remain constant but the price level will rise.
b. spending will decrease and the price level will fall.
c. there will be no change in the level of economic activity or prices; money is neutral.
d. spending will increase and the price level will rise.
____ 30. The amount of money that someone would pay today for the right to receive a future payment is called the
a. principal.
b. present value of the future payment.
c. determinate value of the future payment.
d. market interest rate.
____ 31. Which of the following is not a determinant of long-run aggregate supply?
a. the quantity of capital
b. technology
c. the price level
d. the level of skills in the workforce
____ 32. The supply of loanable funds curve is upward sloping because a rise in the interest rate
a. increases the opportunity cost to households of consuming.
b. decreases the opportunity cost of firms' investment spending.
c. increases the opportunity cost of firms' investment spending.
d. decreases the opportunity cost to households of consuming.
____ 33. Which of the following is a reason why exchange rates may deviate from their purchasing power parity
values for many years?
a. Some goods are not tradable.
b. In some cases, a foreign-produced good is not a perfect substitute for a
domestically-produced version of the same thing.
c. In some markets, import quotas limit the ability of firms to agree on exchange prices.
d. Both a and b are correct.
____ 34. The Bank of England will tend to tighten monetary policy when
a. interest rates are rising too rapidly.
b. the growth rate of real GDP is quite sluggish.
c. it thinks inflation is too high today, or will become too high in the future.
d. it thinks the unemployment rate is too high.
SECTION B
Answer one and only one of the questions numbered 35 to 38. The maximum number of marks awarded for
this Section is 33.
35. Answer both parts (a) and (b).
(a) List the three major problems in using the CPI as a measure of the cost of living.
(b) Romeo and Juliet meet Mervin, the banker, to work out the details of a mortgage. They all expect that
inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent.
As it turns out, the inflation rate is 5 percent over the term of the loan.
i. What was the expected real interest rate?
ii. What was the actual real interest rate?
iii. Who benefited and who lost because of the unexpected inflation?
5
EC1001 - Macroeconomics
ID: E
36. Answer both (a) and (b):
(a) About 400 years ago, native Americans sold the island of Manhattan for $24. If they had
invested this money at an interest rate of 7 per cent per year, how much would they have
today?
(b) Imagine that you intend to buy a portfolio of ten shares with some of your savings. Should
the shares be of companies in the same industry? Should the shares be of companies located
in the same country? Explain.
37. The economy of Elmendyn contains 2,000 £1 coins.
(a) If people hold all money as currency, what is the quantity of money?
(b) If people hold all money as demand deposits, and banks maintain 100 per cent reserves, what
is the quantity of money?
(c) If people hold equal amounts of currency and demand deposits, and banks maintain 100 per
cent reserves, what is the quantity of money?
(d) If people hold all money as demand deposits, and banks maintain a reserve ratio of 10 per
cent, what is the quantity of money?
(e) If people hold equal amounts of currency and demand deposits, and banks maintain a reserve
ratio of 10 per cent, what is the quantity of money?
38. Answer both parts:
(a) What does purchasing power parity imply about the real exchange rate?
(b) Suppose that UK citizens start saving more. What does this imply for the supply of loanable funds and
the equilibrium real interest rate?
6
ID: E
EC1001
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
B
A
D
D
B
B
B
C
D
B
B
C
D
B
B
D
C
A
B
A
B
B
B
B
B
D
A
B
D
B
C
A
D
C
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 3
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 2
SECTION: 3
SECTION: 2
SECTION: 1
SECTION: 1
SECTION: 2
SECTION: 5
SECTION: 1
SECTION: 4
SECTION: 5
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 4
TYPE: 1
TYPE: 1
TYPE: 2
TYPE: 4
TYPE: 4
TYPE: 5
TYPE: 1
TYPE: 1
TYPE: 3
TYPE: 5
TYPE: 3
TYPE: 4
TYPE: 4
REF:
REF:
REF:
REF:
SECTION: 2
SECTION: 2
SECTION: 1
SECTION: 1
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 2
TYPE: 3
TYPE: 1
TYPE: 1
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
REF:
SECTION: 3
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 1
SECTION: 3
SECTION: 4
SECTION: 2
SECTION: 1
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 2
TYPE: 1
TYPE: 1
TYPE: 1
TYPE: 1
TYPE: 3
TYPE: 3
TYPE: 5
TYPE: 3
REF:
REF:
REF:
REF:
SECTION: 4
SECTION: 3
SECTION: 3
SECTION: 1
OBJ:
OBJ:
OBJ:
OBJ:
TYPE: 3
TYPE: 4
TYPE: 6
TYPE: 1
1
ID: E
SHORT ANSWER
35. ANS:
(A)
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become
relatively less expensive. (2) introduction of new goods. Because the CPI uses a fixed basket of goods, it
does not take into account the increased well-being of consumers created when new goods are introduced.
(3) Unmeasured quality change. Not all quality changes can be measured.
(B)
i. The expected real interest rate was 4 percent.
ii. The actual real interest rate was 1 percent.
iii. Mervin, the banker, lost because he receives less real interest income than he expected. Romeo
and Juliet gain because they pay less real interest income than they expected.
36. ANS:
(a) 24*(1.07)^400 = 1.36057*10^13
(b) Shares should not be of companies in the same industry or country, if you want to diversify your
investment in order to reduce idiosyncratic risk.
37. ANS:
a. £2,000.
b. £2,000.
c. £2,000.
d. £20,000.
e. £11,000.
38. ANS:
(a) If purchasing power parity holds, the real exchange rate is fixed and equal to one.
(b) The supply of loanable funds increases, and the equilibrium real interest rate falls. Because of the
lower interest rate, UK net capital outflow rises. This increase makes the supply of pounds shift to the
right, and the real exchange rate of sterling depreciates.
2