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ECON 1020
Introductory
Macroeconomics
Pass
Workbook
Semester 2, 2007
Student Version
Peer Assisted Study Sessions
University of Queensland School of Economics
Contents
Welcome
Contact details
Important dates
Topic 1: Macroeconomics, National Income and GDP (A.1-A.2)
Topic 2: The Labour Market and Unemployment (A.3)
Topic 3: Productivity and Economic Growth (B.1)
Topic 4: Economic Development and Trade (B.2)
Topic 5: The Monetary Sector: Money, Banks and Inflation (C.1)
Topic 6: The Real Sector: Aggregate Expenditure and the
Multiplier (C.2)
Topic 7: Revision of Module C
Topic 8: The Economic Fluctuations Model (D.1)
Topic 9: Monetary Policy (D.2-E.1)
Topic 10: Fiscal Policy (E.2)
Topic 11: Australia and the International Economy (E.3)
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i
Welcome to PASS!
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ii
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iii
Important Dates
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6 AUGUST (WEEK 3):
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15 AUGUST (WEEK 4):
EXHIBITION DAY HOLIDAY
20 AUGUST (WEEK 5)
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24 SEPTEMBER:
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(no PASS sessions)
1 OCTOBER (WEEK 10):
CLASSES RESUME
TUTORIAL EXAM – MODULE C
29 OCTOBER:
SWOT VAC BEGINS
iv
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v
1
Macroeconomics, National Income and GDP
Topic One
Key Concepts of Macroeconomics
Gross Domestic Product (GDP)
Economic growth
Recession
Peak
Unemployment
Inflation
Labour
Capital
Real GDP
Business cycle
Trough
Disinflation
Technology
Potential GDP
Expansion
Recovery
Deflation
Production function.
Group Discussion Questions
1. What is economic growth? Why do we care about it?
Economic Growth in Australia: 1959-2007
300000
300000
250000
250000
200000
200000
150000
150000
100000
100000
50000
50000
0
0
Se
p5
Se 9
p6
Se 1
p6
Se 3
p6
Se 5
p6
Se 7
p6
Se 9
p7
Se 1
p7
Se 3
p7
Se 5
p7
Se 7
p7
Se 9
p8
Se 1
p8
Se 3
p8
Se 5
p8
Se 7
p8
Se 9
p9
Se 1
p9
Se 3
p9
Se 5
p9
Se 7
p9
Se 9
p0
Se 1
p0
Se 3
p05
Real GDP ($ million)
(Source: RBA, July 2007)
Date
2
2. What is Gross Domestic Product? Explain the concept in terms of what, where and when
goods are produced.
3. What are the main weaknesses of using GDP as a measure of national well-being?
3
Multiple Choice Questions
1. Which of the following is an assumption that allows economists to use models for
prediction?
a.
b.
c.
d.
Rationality
Ceteris paribus
Scarcity
Perfect/full knowledge
2. Macroeconomics is different from microeconomics because
a.
b.
c.
d.
It is generally on a much bigger scale.
We observe different behaviour by different groups.
Both of the above.
Neither of the above.
3. The total value of all goods & services made in a country during a specified period of time is
called
a.
b.
c.
d.
Gross domestic product
Demand
Consumer price index
Net domestic product
4. Economic growth describes
a.
b.
c.
d.
an increase in growth
an increase in inflation
an increase in real GDP
an increase in interest rates
5. A slump occurs when _____ and a recession occurs when _____
a.
b.
c.
d.
e.
output falls; output falls while inflation rises.
output falls; output falls below potential.
output is below potential, output falls.
output falls rapidly or by a large amount; output falls slowly or by a small amount.
“Slump” and “recession” are the same thing.
6. Which of the following is not correct?
a.
b.
c.
d.
e.
Y=C+I+G+X
S=Y–C–G
S=I+G
S=I+X
X=S–I
4
7. Answer the question below on the basis of the following national income data. All
figures are in billions of dollars.
Labour income
Capital and mixed income
Indirect taxes
Subsidies
124
113
43
12
GDP is:
a. $292 billion
b. $268 billion
c. $280 billion
d. $182 billion
8. In the production approach, what does the value-adding method try to avoid?
a.
b.
c.
d.
double counting
double upping
double income
double dipping
9. Ceteris Limited buy $100,000 of sand, rock, and cement to produce pre-mixed concrete.
It sells 10,000 cubic yards of concrete at $30 a cubic yard. The value added by Ceteris
Limited is:
a.
b.
c.
d.
$300,000
$100,000
$200,000
zero dollars
10. Which of the following items would be included in GDP?
a.
b.
c.
d.
e.
f.
Transfer payments made to an unemployed worker during the year.
The cost of the new hammer bought by a thief and used to break into your car
The cost of pollution caused during the processing of steel.
The purchase of shares on the Tokyo exchange
The purchase of stocks on the Australian stock exchange.
None of the above.
5
11. Which of the above would be included in Australia’s measure of GDP?
a. The housework done by Marvyn, a university student living at St Lucia.
b. The Sandman’s haircuts (which are so artistically messy that they require a team of
trained professionals!).
c. The make-up an American band brought with them on tour.
d. A framed photo of Paul from ‘The Wonder Years’, made in Canberra
e. 2nd hand shirts folded at Lifeline.
f. Nike shoes made in Indonesia
g. Plastic bottles of beer sold at the footy.
h. Hydroponically grown plants in a student house for personal consumption.
i. A trampoline from Toys-R-Us, Sydney.
a.
b.
c.
d.
e.
1, 5, 7,9
2, 5, 6, 8
2, 4, 7, 9
1, 3, 6, 8
2, 5, 8, 9
Key Concepts of National Income and GDP
Spending approach
Consumption
Investment
Inventory investment
Residential investment
Net exports
Exports
Trade balance
Income approach
Labour income
Capital income
Net investment
Gross investment
Production approach
Value added
Intermediate good
National saving
Business fixed investment
Government expenditure
Imports
Depreciation
Indirect taxes
Final good
6
Bonus Questions:
1. ‘CPI’ stands for:
a. Consumer Propensity for Income
b. Consumer Price Index
c. Current Price of Inflation
d. Current Price Index
2. If a price index was 128 at the end of 1987 and 136 at the end of 1988, what was the rate
of inflation for 1988?
a. 4.2 per cent.
b. 5.9 per cent.
c. 6.25 per cent.
d. 9.4 per cent.
3. Net exports are a negative figure when:
a. a nation’s imports of goods and services exceed its exports.
b. the economy’s stock of capital goods is declining.
c. depreciation exceeds gross private domestic investment.
d. a nation’s exports of goods and services exceed its imports.
4. Suppose the value of the CPI is 1.10 in year 1, 1.21 in year 2, and 1.331 in year 3. Assume
also that the price of computers increases by 3% between year 1 and year 2, and by
another 3% between year 2 and year 3. The price level is increasing, the inflation rate is
_______, and the relative price of computers is _________.
a.
b.
c.
d.
e.
increasing; increasing
constant; increasing
constant; decreasing
increasing; decreasing
decreasing; decreasing
5. The following are the annual national account figures for Econland.
Consumption expenditure ($m)
350
Gross investment ($m)
100
Depreciation ($m)
40
Government expenditure ($m)
100
Imports ($m)
25
Exports ($m)
20
What is Econland’s GDP for the year?
a. $500 million
b. $555 million
c. $545 million
d. $505 million
7
6. What is the net investment in Econland for the year?
a.
b.
c.
d.
$100 million
$60 million
$140 million
$70 million
7. Suppose that the total expenditures for a typical household in 2000 equalled $2,500 per
month, while the cost of purchasing exactly the same items in 2003 was $3,000. If 2000 is
the base year, the CPI for the year 2003 equals
a.
b.
c.
d.
0.83
2.00
1.2
1.25
8. A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A
college graduate in 2000 found a job paying $28,000. The CPI was 1.68 in 2000. The 1972
graduate's job paid ____ in nominal terms and ______ in real terms than the 2000
graduate's job.
a.
b.
c.
d.
e.
more; less
more: more
less; the same
less; more
less; less
Short Answer Questions:
1. In 1965, investment in the United States was about $113.5 billion and the trade deficit was
$5.4 billion. How much was national saving in the United States?
2. In 1999 Macronesia had an annual GDP of $280 m. Consumption accounted for 25 per cent
of this and government spending was $30 m. If there is a trade surplus of $80 m, what is
investment? How much is national saving?
3. What is the GDP deflator? What does it show?
8
9
The Labour Market and Unemployment
Topic Two
Key Concepts of the Labour Market and Unemployment
Natural unemployment rate
Cyclical unemployment
Frictional unemployment
Structural unemployment
Labour force
Working-age population
Unemployment rate
Labour force participation rate
Employment-to-population ratio
Job losers
Job leavers
Real wage
Minimum wage
Job search
Insider-outsider theory
New entrants
Efficiency wage
Job rationing
Unemployment in Australia: 1978-2007
0.0
bFe
bFe
bFe
bFe
bFe
bFe
bFe
bFe
bFe
88
Fe
b-
bFe
bFe
bFe
bFe
bFe
06
0.0
04
2.0
02
2.0
00
4.0
98
4.0
96
6.0
94
6.0
92
8.0
90
8.0
86
10.0
84
10.0
82
12.0
80
12.0
78
Unemployment Rate (%)
(Source: RBA, July 2007)
Date
Group Discussion Questions
1. Complete the following table.
Unemployment Rate
Labour force participation rate
Employment-to-population ratio
10
2. What are the problems with the Australian measurement of unemployment?
3. According to the Australian Bureau of Statistics, in June 2002, there were 9 311 500
employed people in Australia, and 623 600 unemployed. The labour force participation rate
had just decreased slightly to 63.6%.
What was the unemployment rate?
What was the size of the working age population?
4. Jane has just graduated from school and is looking for work. James used to be call-centre
employee, before the service became fully automated. Joseph has left his job because he
thinks he can get more money elsewhere. Julie went fruit-picking for the summer and has
now returned home. What type of unemployment do each of these people exhibit? Also,
what are their reasons for unemployment?
11
Multi-choice Questions:
1. According to the job rationing explanation of unemployment, if there is unemployment,
a)
b)
c)
d)
e)
the real wage will fall to the equilibrium level.
the real wage will increase to the equilibrium level.
the number of people employed will increase to the equilibrium level.
the real wage will not fall to the equilibrium level.
the number of people employed will decline to the equilibrium level.
2. Which of the following is not an explanation of why actual wages may always be above the
equilibrium wage rate?
a)
b)
c)
d)
Minimum wages
Job vacancies
Insider / outsider Theories
Efficiency wage Theory
3. Historical evidence in America and Australia shows that,
a)
b)
c)
d)
Unemployment has fallen consistently since the late 1960s
Unemployment rises sharply in a recession but falls slowly in a recovery.
Unemployment rises slowly in a recession but falls sharply in a recovery.
The participation rate remains steady over the course of the business cycle.
4. Of the unemployment rate, the employment-to-population ratio, and the labour force
participation rate, which of the three is (are) unaffected by the discouraged worker
phenomenon?
a)
b)
c)
d)
e)
Only the unemployment rate.
Only the employment-to population ratio.
Only the labour force participation rate.
Both the unemployment rate and the labour force participation rate.
Both the unemployment rate and the employment-to-population ratio.
5. Dean voluntarily quit his job as an insurance agent, to return to university full-time and earn
an MBA degree. With degree in hand, he is now searching for a position in management.
Dean presently is:
a)
b)
c)
d)
cyclically unemployed.
structurally unemployed.
frictionally unemployed.
not a member of the labour force.
12
6. Holding other factors constant, if a larger proportion of the population enters the labour
force as a result of a growing social acceptance of women working, then the real wages of
workers will _____ and employment of workers will _____.
a) increase; increase
b) decrease, increase
c) decrease, decrease
d) increase, decrease
7. During a recession, a number of individuals drop out of the labour force because they get
discouraged looking for a job. Assuming everything else is held constant, this causes
a) The unemployment rate to increase
b) The unemployment rate to decrease
c) The labour force participation rate to increase.
d) Nothing that affects the unemployment rate
e) The unemployment rate to increase and the labour force participation rate to increase
8. Rosita has lost her job in a Launceston textile plant because of import competition. She
intends to take a short course in electronics and move to New South Wales where she
anticipates new job will be available. We can say that Rosita is faced with:
a) secular unemployment.
b) cyclical unemployment.
c) structural unemployment.
d) frictional unemployment.
13
Notes
14
15
Productivity and Economic Growth
Topic Three
Key Concepts of Productivity and Economic Growth
Labour
Capital
Technology
Diminishing returns
Subsistence line
Growth accounting formula
Invention
Innovation
Diffusion
Division of labour
Learning by doing
Human capital
Group Discussion Questions
1. What was Thomas Malthus’s prediction about economic growth?
Why was he wrong? What had he not foreseen?
Calculation Questions
2. What is the growth accounting formula?
3. Suppose the growth rate of real GDP per hour of worked is 4% and the growth rate of
Capital is 1.8% per year. What does the growth accounting formula suggest the growth of
technology is?
4. Suppose the growth rate of capital per hour of work is 2.7% per year and the growth of
technology is 3.2% per year. What does the growth accounting formula suggest the growth in
GDP per hour of work is?
5. Suppose the growth of GDP per hour of work is 4.8% per year and the growth in
technology is 3.3% per year. What does the growth accounting formula suggest the growth in
Capital is?
16
Multi-choice Questions
1. According to the neoclassical model, economic growth is determined by:
a)
b)
c)
d)
increase in the inputs of capital (plant and machinery).
increase in the inputs of labour (workers).
technological progress or total factor productivity.
all of the above.
(End of semester exam, June 2001)
2. In the region below the subsistence line,
a)
b)
c)
d)
e)
people have less than is needed for subsistence.
people have more than is needed for subsistence.
there are diminishing returns.
there are increasing returns.
there are constant returns.
(In tute quiz, 2004)
3. If the amount of output corresponding to a given labour input is below the subsistence line,
then
a)
b)
c)
d)
e)
4.
the population and labour force will increase.
the population and the labour force will decrease.
the subsistence line will shift up.
the subsistence line will shift down.
nothing will happen.
(In tute quiz, 2004)
Suppose an economy produces 6,000 units of output with 100 units of labour. If the subsistence
level for this amount of labour is 5,000 units of output, we would predict that there will be
a)
b)
c)
d)
e)
no change in output or population.
a decrease in population and output.
an increase in population and output.
an increase in the subsistence level of output per person.
a decrease in the subsistence level of output per person.
(In tute quiz, 2004)
5. The iron law of wages refers to the prediction that
a)
b)
c)
d)
e)
wages were limited to their subsistence level.
wages would always rise.
increases in wages would improve living standards.
increases in living standards would improve wages.
nominal wages would fall but real living standards would rise.
(In tute quiz, 2004)
6. Which of the following statements is true in the Malthusian model?
a)
b)
c)
d)
e)
Technological advance makes the Malthusian equilibrium arrive sooner.
Capital accumulation reduces the rate of growth of the work force and the population.
Even when capital per worker rises, growth in labour productivity stops eventually.
All of the above are true.
Both a and b are true.
17
7. Which of the following statements is true?
a) The inclusion of capital in the production function almost entirely explains the fifty-fold
productivity gain in the advanced nations since the Industrial Revolution.
b) Even when capital is added to the production relationship, the Malthusian prediction is still
true, if technology is held constant.
c) When capital is added to the production relationship, eventually growth in labour
productivity will become constant.
d) When capital is added to the production function, the per capita subsistence level increases.
e) When capital is added to the production function, the per capita subsistence level decreases.
8. The main purpose of the growth accounting formula is to
a)
b)
c)
d)
e)
quantify the environmental limits to growth.
explain why economies stop growing.
measure the rate at which GDP grows.
determine the role of government in affecting growth.
determine how much of productivity growth is due to changes in the capital stock and how
much is due to changes in technology.
9. Technology can best be thought of as
a)
b)
c)
d)
e)
physical equipment.
scientific process.
what inventors produce.
recipes that show how to combine resources.
any type of capital equipment.
`
10. Intellectual property laws arise in response to
a)
b)
c)
d)
e)
learning by doing.
human capital formation.
non-rivalry.
non-excludability.
diffusion.
11. Which of the following could the government do to increase the incentive for individuals
and firms to engage in R&D?
a)
b)
c)
d)
e)
It should tax away any resulting monopoly profits.
It can protect and create property rights to increase the private gain from R&D.
It needs to ensure that there will be social gains from the activity.
It should reduce intervention and leave resource allocation to markets.
It needs to eliminate any unfair private gain arising from the R&D.
18
19
Economic Development and Trade
Topic Four
Key Concepts of Economic Development and Trade
Economic development
Developing country
Newly industrialised country
Country in transition
Catch-up line
North-South problem
Informal economy
Foreign direct investment
International Monetary Fund
World Bank
Industrialised country
Portfolio investment,
Conditionality
Group Discussion
1. Draw the catch-up line.
Why is ‘catch-up’ predicted? That is, why (in theory) will poor countries grow faster than rich?
2. What role can trade play in encouraging economic development?
Multi-choice Questions
1. The main purpose of the catch-up line is to show
a)
b)
c)
d)
e)
how well the rate of productivity growth predicts the level of productivity.
how well the level of productivity predicts the rate of productivity growth.
that catch-up has occurred.
income inequality between different countries or regions.
how uneven the rate of growth has been in different countries or regions of the world.
20
2. A country located on the lower right-hand corner of the catch-up line is
a)
b)
c)
d)
e)
a rich country experiencing slow rates of growth.
a rich country experiencing rapid rates of growth.
a poor country experiencing slow rates of growth.
a poor country experiencing rapid rates of growth.
Not enough information is given.
3. Statistics suggest that the catch-up line can be applied
a)
b)
c)
d)
e)
to all countries.
only to developing countries.
only to NICs (newly industrialised countries).
only to upper and middle income countries.
all countries below the industrialised countries.
4. _________________. attempts to explain why poor countries do not develop faster
a.
b.
c.
d.
e.
The transition phenomenon.
High population growth
New growth theory
The industrialization phenomenon
North-South problem
5. According to economic growth theory, catch-up among different countries of the world is
expected, in part, because of
a)
b)
c)
d)
e)
foreign aid.
diminishing returns to capital.
the costliness of adopting new technologies.
long-term mobility of labour.
increasing returns to labour.
6. Which of the following is not a true phenomenon for rich and poor countries?
a) Rich countries utilize advanced technology, and poor countries use more basic technology
b) Rich countries have high productivity, and poor countries have low productivity
c) Rich countries have a high level of capital per worker, and poor countries have a low level of
capital per worker
d) Rich countries do not exhibit diminishing returns, and poor countries exhibit diminishing
returns
21
Notes
22
23
The Monetary Sector: Money, Banks and
Inflation
Topic Five
Key Concepts of the Monetary Sector
Money
Commodity money
Barter
Coincidence of wants
Medium of exchange
Store of value
Money supply
Monetary base
Currency-to-deposit ratio
Money multiplier
Quantity theory of money
Velocity of money
Currency
Unit of account
Reserve ratio
Phillips curve
Inflation in Australia: 1970-2007
20
20
18
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
Se
p70
Se
p72
Se
p74
Se
p76
Se
p78
Se
p80
Se
p82
Se
p84
Se
p86
Se
p88
Se
p90
Se
p92
Se
p94
Se
p96
Se
p98
Se
p00
Se
p02
Se
p04
Se
p06
Inflation rate (%,pa)
(Source: RBA, July 2007)
-2
-2
Date
Group Discussion
1. Jack wants to sell his 9-speed mountain bike, to buy a second-hand CD player. Jill wants to
sell her CD player, in order to buy a second-hand 9-speed mountain bike.
Do Jack and Jill need money for their transaction? Why not?
Why, then, does society as a whole need money?
Which aspect of money does this illustrate?
24
2. Robert Wright (among many others) describes money as an information technology. What
does he mean? How does money assist in transferring information?
Which aspect of money does this illustrate?
3. Captain Hook pays his band of pirates in cigarettes. Unfortunately, the pirate boat and
everything on board is drenched in a freak storm. How would the pirates feel (aside from
‘wet’)?
What is the problem with using cigarettes as a form of commodity money?
Which aspect of money does this illustrate?
4. What is the formula for the
a) money multiplier?
b) Suppose the currency to deposit ratio is initially 50 percent and the required reserve ratio
is 7 percent. What is the money multiplier?
c) Because of increases in the use of ATMs, the currency to deposit ratio falls to 30 percent
while the required reserve ratio remains constant at 7 percent. What happens to the money
multiplier? Why?
5. What is the:
a) Equation of exchange?
b) Quantity theory of money?
6. What is the Phillips Curve? Do economists think it holds in the long run?
25
Multi-choice Questions:
1. The quantity theory of money predicts that increases in the money supply will result in
a) a proportionate increase in both real GDP and the price level.
b) less than proportionate increases in both real GDP and the price level.
c) no change in real GDP, but a proportionate increase in the price level.
d) a proportionate increase in real GDP, but no change in the price level.
2.
a)
b)
c)
d)
e)
Velocity of circulation is equal to
the real money supply divided by real GDP.
nominal GDP divided by the nominal money supply.
the interest rate times real GNP.
real GDP divided by the real money supply.
Both (b) and (d).
3. The central proposition of the theory of the Phillips curve is, other things remaining constant, the
higher the
a) unemployment rate, the lower the inflation rate.
b) price level, the lower the inflation rate.
c) price level, the lower the unemployment rate.
d) money supply, the lower the unemployment rate.
e) growth rate of the money supply, the higher the inflation rate.
4. The conventional Phillips curve shows:
a) an inverse relationship between the unemployment rate and the inflation rate.
b) a direct relationship between the inflation rate and the unemployment rate.
c) no relationship between the inflation rate and the unemployment rate.
d) none of the above.
5. If the required reserve ratio is 100%, then the deposits multiplier is
a) infinity
b) one
c) zero
d) greater than zero but less than one
6. In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the
desired reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from
the Central Bank through discount window lending, then the money supply in Macroland will
_____ to _____ econs, assuming that the public does not wish to change the amount of currency it
holds.
a) increase; 3,133
b) increase; 4,100
c) increase; 4,667
d) decrease; 3,133
26
7. The quantity theory of money assumes that,
a) the velocity of circulation is constant, and real GDP is not affected by the money supply
b) the velocity of circulation is inversely related to the quantity of money, and real GDP is not
affected by the money supply
c) the velocity of circulation is inversely related to the quantity of money, but real GDP
increases proportionately to the increase in money supply
d) the velocity of circulation increases, and real GDP is not affected by the increase in money
supply
Experiment: The Lolly Auction
Your leaders will distribute ‘money’ around the class. Your task is simple: to outbid everybody
else in a series of auctions for lollies!
What principle does this experiment illustrate?
The effects of hyperinflation: a Yugoslav 500 billion dinar note, circa 1993.1
1
Watkins T, ‘Episodes of Hyperinflation’, San Jose State University, <http://www.sjsu.edu/faculty/watkins/hyper.htm>
27
Notes
28
29
The Real Sector: Aggregate Expenditure and
the Multiplier
Topic Six
Key Concepts of Aggregate Expenditure and the Multiplier
Sticky price assumption
Limited information
Implicit contracts
Marginal propensity to consume (MPC) Average propensity to consume (APC)
Autonomous consumption
Aggregate income
Disposable income
45-degree line
Aggregate expenditure line
Spending balance
Autonomous expenditure
Multiplier
Marginal propensity to import (MPI).
Consumption and GDP: 1959-2007
$m
(Source: RBA, July 2007)
300000
300000
250000
250000
200000
200000
150000
150000
100000
100000
50000
50000
0
Se
p5
Se 9
p6
Se 1
p63
Se
p6
Se 5
p6
Se 7
p6
Se 9
p7
Se 1
p7
Se 3
p7
Se 5
p7
Se 7
p7
Se 9
p8
Se 1
p83
Se
p8
Se 5
p8
Se 7
p8
Se 9
p9
Se 1
p9
Se 3
p9
Se 5
p9
Se 7
p99
Se
p0
Se 1
p0
Se 3
p05
0
Date
Group Discussion
1. What is Aggregate Expenditure (AE)? Where does it come from, and what can it tell us about
equilibrium GDP?
30
2. If MPC equals 0.7 and MPI equals 0.2, by how much does the current level of GDP change
when:
a) Government spending increases by $200 million?
b) Investment decreases by $35 million?
c) The level of autonomous consumption declines by $23 million?
a.
Suppose, for a certain economy, the MPC = 0.67 and the MPI = 0.2. If government purchases
decline by $100 billion, what will happen to net exports?
Multi-choice Questions:
1. The 45 degree line depicts the equality of
a)
b)
c)
d)
Consumption and income
Real GDP and potential GDP
Income and spending
Income and real GDP
2. Assume that a particular nation’s imports do not depend upon GDP. Which of the following is false?
a)
b)
c)
d)
multiplier = 1 ÷ (1 – MPC)
multiplier = the ratio of the change in GDP to the shift in AE
multiplier = 1 ÷ (1 + C + I + G + X )
multiplier = 1 ÷ (1 – the slope of the AE curve)
3. Which of the following would cause the AE curve to pivot upwards?
a)
b)
c)
d)
e)
an increase in transfer payments
increased foreign confidence in Australian made goods.
an increase in consumers’ marginal propensity to consume
an increase in taxes
an increase in investment
4. If there is an unplanned fall in inventories, aggregate planned expenditure is
a)
b)
c)
d)
e)
greater than real GDP and firms will increase output.
greater than real GDP and firms will decrease output.
less than real GDP and firms will increase output.
less than real GDP and firms will decrease output.
greater than real GDP and firms will increase investment.
31
5. If real GDP is $2 billion and planned aggregate expenditure is $2.25 billion, inventories will
a)
b)
c)
d)
e)
pile up and output will increase.
pile up and output will decrease.
be depleted and output will increase.
be depleted and output will decrease.
stay constant and so will output, but only in the short- to medium-term.
6. Which of the following will not cause a change in the multiplier?
a)
b)
c)
d)
The AE line getting steeper.
The AE line getting flatter.
The AE line shifting up in a parallel way.
The AE line becoming more sensitive to changes in income.
7. In Econoworld people consume at least $200 worth of goods, even if they are earning nothing.
Last year, when aggregate income was $800, they consumed $600 worth of goods. What must
the MPC in Econoworld be?
a)
b)
c)
d)
0.4
0.5
0.6
0.7
8. Assume that Econoworld (from the previous question) is a closed economy (does not import or
export), and that the government increases its spending by $500. By how much will national
income change?
a)
b)
c)
d)
$250
$500
$1000
National income will not change.
9. The marginal propensity to consume in an economy is 0.7. Imports do not depend upon income.
If equilibrium expenditure rose by $200 million, what was the initial rise in autonomous
expenditure?
a)
b)
c)
d)
$60 million.
$140 million.
$120 million.
Cannot be calculated.
4
1
10. If C = 6 + Y , if I + G = 4 , exports = 5 and imports = 1 + Y , then:
5
5
a)
b)
c)
d)
e)
the intercept of the AE curve is 14, its slope is 2/5 and the equilibrium level of income is 35.
the intercept of the AE curve is 12, its slope is 533/5 and the equilibrium level of income is 30.
the intercept of the AE curve is 12, its slope is 4/5 and the equilibrium level of income is 60.
the intercept of the AE curve is 13 and its slope is 1.
the intercept of the AE curve is 14, and its slope is 3/5.
32
11. If two levels of aggregate income are $160 and $200 billion respectively, and if the change in
consumption spending is $20 billion between these two levels of income, then the MPC will
equal
a.
b.
c.
d.
0.75.
0.1.
0.5.
0.6.
(End of semester exam, November 2005)
12.
Suppose that the G component of AE rises by $10b. The MPC is 0.8 and the MPI is 0.2. If the
resulting change in GDP is 25, the extra consumption spending is $___b and the extra import
spending is ____.
a.
b.
c.
d.
e.
15; 3.
12, 3.
20, 5.
18; 3.
15; 5.
(End of semester exam, November 2005)
Spending
45-degree line
AE1
AE2
Income or Real GDP
13. The movement from AE1 to AE2 in the above figure could be a result of
a.
b.
c.
d.
e.
a decrease in the MPC (the marginal propensity to consume).
an increase in autonomous consumption.
a decrease in autonomous consumption.
a decrease in the MPI (the marginal propensity to import).
Both a and d.
(End of semester exam, November 2005)
33
Notes
34
35
Revision
Topic Seven
ECON1020 TEST 3 SEMESTER 2, 2004
1.
Which of the following statements is true?
a.
b.
c.
d.
e.
2.
The 'quantity theory' can be best explained using
a.
b.
c.
d.
e.
3.
MV=PY.
it encourages more borrowing, which improves economic growth.
strong demand improves profits, which improves economic growth.
it increases uncertainty about future returns, which reduces economic growth.
it encourages more investment in assets like real estate and gold which appreciate by
the rate of inflation or more, and this raises trend growth.
The supply of money is defined in the textbook as
a.
b.
c.
d.
e.
5.
MV = PY.
M= BR +D.
C+I+G+X =GDP.
S = I + X.
M= CU+D.
Sustained high inflation affects economic growth because
a.
b.
c.
d.
e.
4.
Disinflation and deflation have the same meaning.
Disinflation occurs only when there is a fall in the price level.
Deflation occurs whenever the rate of inflation declines.
Both b and c.
None of the above.
currency plus reserves.
coins, paper money and cheques in circulation.
currency minus reserves.
currency plus reserves plus bank deposits.
currency plus bank deposits.
Suppose banks desire to keep 10 percent of all deposits on reserve, and the U.S. Federal
Reserve buys $10 million of government securities from the U.S. Bank INF. As a result,
a.
b.
c.
d.
e.
the maximum amount that deposits in the economy can increase is $100 million.
the maximum amount that deposits in the economy can decrease is $100 million.
the maximum amount that deposits in the economy can decrease is $10 million.
the maximum amount that deposits in the economy can increase is $10 million.
the total amount of deposits in the economy do not change.
36
6.
The monetary base is equal to
a.
b.
c.
d.
e.
7.
If the currency-to-deposit ratio is 0.3 and the reserve-to-deposit ratio is 0.2, then the
money multiplier is equal to
a.
b.
c.
d.
e.
8.
the money supply.
currency plus deposits.
deposits plus reserves.
currency plus reserves.
currency plus reserves plus deposits.
4.
3.33.
2.6.
2.0
2.8.
Suppose there is a slump. In the model using the AE and 45-degree lines, if households
decide to increase the fraction of their income that they save, then, over the short term,
GDP would
a. increase because there would be more funds available for firms to invest.
b. fall because the decreased consumption that results from increased saving would cause
the economy to contract.
c. remain constant because the change in saving would equal the total change in
investment and exports.
d. increase because real interest rates would fall, and available resources would start to
move to the investment sector.
e. Both a and d.
9.
The 45-degree line indicates
a.
b.
c.
d.
e.
10.
what planned spending is at each level of output.
what firms want to supply at each level of planned expenditure.
that, during fluctuations, the price level rises as income rises.
the point along the AE line where unplanned inventories are zero.
that Y and AE are always in spending balance.
The expenditure multiplier exists because
a. more spending creates more income, which creates more saving and this funds more
investment.
b. more spending creates more income, which induces more spending.
c. more spending creates more income, which creates more deposits that banks can
collectively lend by a multiple amount.
d. the central bank changes interest rates whenever Y departs from Y*.
e. All of the above.
37
11.
When higher income raises imports, the multiplier is equal to
a.
1/(MPC-MPI.)
1
b.
MPC
c. 1/(1 + MPC)
1
d.
1 – MPC
e. None of the above.
12.
According to the table to the right, when the
economy is at the point of spending balance,
consumption equals ___ and unplanned
inventories equal ___
a.
b.
c.
d.
e.
13.
I + G + X
4
4
4
4
4
4
4
4
AE
6.0
9.5
13.0
16.5
20.0
23.5
27.0
30.5
a $100 million decline in spending will lead to a $70 million decline in income.
a $100 million decline in income will lead to a $70 million decline in spending.
a $70 million decline in spending will lead to a $49 million decline in income.
a $100 million decline in income will lead to a $100 million decline in spending.
a $70 million decline in income will lead to a $70 million decline in spending.
For a given economy, the MPC is 0.8 and the MPI is 0.3. The government wants to
increase real GDP by $90 million. G would need to ____ by $____m.
a.
b.
c.
d.
e.
15.
C
Suppose the MPC for an economy is 0.7. If net exports decline by $100 million in round
one of the multiplier process, then in the second round
a.
b.
c.
d.
e.
14.
25; 1.5.
25; 0.
16; 0.
15; 1.5.
16; 4.
Real GDP
0
5
10
15
20
25
30
35
rise; 90
fall; 90
rise; 45
fall; 30.
fall; 27
In the AE model, an increase in taxes causes
a.
b.
c.
d.
e.
the consumption function to shift upwards.
the consumption function to shift downwards.
G to shift up by the same amount.
has no clear net effect on AE.
Both b and c.
38
39
The Economic Fluctuations Model:
Aggregate Demand and the Short Run
Adjustment Curve
Topic Eight
Key Concepts of the Economic Fluctuations Model
Aggregate demand
Monetary policy rule
Official cash rate
Target inflation rate
Short run adjustment line Baseline
Deflation
Disinflation
Reinflation
Demand shock
Price shock
Stagflation
Boom-bust cycle
Group Discussion Questions
1. State which of the following changes causes a shift of the aggregate demand curve and which
ones are a movement along it. State the direction of any shift or movement.
1. An increase in consumer spending
2. A decrease in government purchases
3. An unexpected reduction in oil prices
4. A shift to a lower inflation target
2. For our economic fluctuations model, we need to know how the components of aggregate
expenditure interact with interest rates. For the following components, explain:
a) How consumption is related to the interest rate (and why);
b) How investment is related to the interest rate (and why);
c) How the level of net exports is related to the interest rate (and why).
40
Multi-choice Questions:
1. Which of the following would cause the AD curve to shift up or to the right?
a)
b)
c)
d)
e)
A decrease in military purchases.
An increase in the rate of sales tax.
Both (a) and (b).
An increase in potential GDP.
An increase in the generosity of the social security system (pensions etc.).
2. If consumer confidence declines, then
a)
b)
c)
d)
e)
there will be a downward movement along the AD curve.
there will be an upward movement along the AD curve.
the ADI curve will shift to the left.
the ADI curve will not be affected.
the ADI curve will shift to the right.
3. The flat inflation adjustment line reflects the idea that:
a)
b)
c)
d)
e)
real GDP in the short run responds by the same amount as the shift of AD.
GDP is infinitely responsive to changes in inflation.
inflation rises only when real GDP exceeds potential GDP.
inflation is as likely to decline as increase.
inflation adjusts in the short run.
4. Which of the following explains the slope of the AD curve?
a) A change in real GDP changes the interest rate, which changes the inflation rate.
b) A change in inflation causes GDP to depart from Y*, which results in a change in interest
rates and so GDP starts to move back to Y*.
c) A change in the rate of interest causes the rate of inflation to change, which results in
potential GDP changing.
d) A change in inflation causes interest rates to change, which results in a change in aggregate
expenditure and therefore GDP.
e) A change in potential GDP causes the rate of inflation to change, which leads to a change in
interest rates.
5. Expectations of steady inflation and staggered wage and price setting are two reasons why
a) the AD line is downward sloping.
b) inflation is stable in the long run.
c) inflation does not change very much in the short run after AD shifts.
d) inflation changes gradually in the medium run.
e) Both c. and d.
41
6. If the Australian Government decides to increase government purchases, the Australian AD
curve will:
a)
b)
c)
d)
remain unchanged
shift left
shift right
pivot upwards
7. A price shock would result from
a)
b)
c)
d)
e)
an unexpected change in the growth rate of the money supply.
a sudden shift of AE or AD.
a change in the RBA's target trend rate of inflation.
a decline in the GST rate.
All of the above.
8. According to the figure to the right and
the explanation of cyclical inflation
supplied in the textbook, what should have
happened to the rate of inflation between
1974 and 1976?
a)
b)
c)
d)
It should have decreased.
It should have been negative.
It should have increased.
It should have fallen during 1974 and then
risen during 1975.
e) It should have been constant.
Billions of 1987
Dollars
3,600.00
3,500.00
3,400.00
Potential GDP
3,300.00
3,200.00
Real GDP
3,100.00
3,000.00
2,900.00
1971 1972 1973 1974 1975 1976 1977
9. If inflation is falling, then what is happening to prices?
a)
b)
c)
d)
Prices are rising.
Prices are falling.
Prices are staying the same
There is not enough information to tell
10. If GDP is less than potential GDP at the intersection of the AD curve and the SRA line then
the economy is in
a)
b)
c)
d)
equilibrium and there is no reason for inflation or real GDP to change
a recession, causing inflation to fall and GDP to rise until equilibrium is reached
a boom, causing inflation to fall and GDP to rise until equilibrium is reached
a boom, causing inflation to rise and GDP to rise until equilibrium is reached
42
43
Monetary Policy
Topic Nine
Key Concepts of Monetary Policy
Central bank independence
Time inconsistency
Open market operations
Political business cycle
Money demand
Group Discussion Questions
1. A lecturer wants his students to do really well on the end of semester exam, so wants them to
study very hard. He tells his class, “The final exam will be really, really difficult – unless you
study really hard, you won’t pass!”
The lecturer sits down to write the final exam. What is the best thing for the lecturer to do if he
wants as many of his students as possible to get 7s? (Write an easy exam.)
Should the lecturer do this? Why or why not?
What is the name for this phenomenon? How does this relate to the role of the Reserve Bank in
setting monetary policy?
44
2. Using the aggregate demand (AD) curve and the short run adjustment (SRA) line, show how
real GDP would change over time if the RBA targeted a lower inflation rate and there was no
change in fiscal policy. Assume real GDP equaled to potential before the change.
Is there any way that the RBA could achieve a lower inflation rate without having real GDP
deviate from potential GDP? [Hint: It relates to Larry Lecturer from the earlier question!]
3. Draw a flow-chart describing the monetary transmission channel.
45
Multi-choice Questions:
1.
a)
b)
c)
d)
Ceteris paribus, an expansionary monetary policy leads to:
higher domestic interest rates and an appreciation of the Australian dollar
lower domestic interest rates and an appreciation of the Australian dollar
lower domestic interest rates and a depreciation of the Australian dollar
lower domestic interest rates, but no change in the Australian dollar
2.
a)
b)
c)
d)
The _____________ makes key decisions regarding monetary policy in Australia.
Prime Minister
Board of the Reserve Bank
Treasurer
Cabinet
The quantity of money demanded is:
negatively related to the rate of interest.
positively related to the rate of interest.
not related to the rate of interest.
either negatively or positively related to the rate of interest depending on whether the rate of
interest is high or low.
e) determined by the central bank.
3.
a)
b)
c)
d)
4.
a)
b)
c)
d)
e)
Monetary policy that attempts to increase the rate of inflation is called a
temporary growth slowdown.
disinflation.
reinflation.
supply shock.
recession.
5.
a)
b)
c)
d)
e)
Which one of the following would be considered a contractionary monetary policy?
A decrease in the reserve requirement.
An increase in personal income taxes.
The Reserve Bank of Australia encourages banks to make loans.
The Reserve Bank of Australia sells government bonds.
The Reserve Bank of Australia buys government bonds.
6. Suppose that output exceeds potential by 600. Suppose that a 1 percentage point increase in the
real interest rate reduces autonomous spending by 200. The slope of AE equals 1/3. This
output gap can be eliminated by raising the real interest rate by ___ percentage points.
a.
b.
c.
d.
e.
1
2
3
4
5
46
7. Which of the following is not a measure that could be taken to slow an economy with a high
rate of inflation and near full employment?
a)
b)
c)
d)
Raise the interest rate.
Buy government bonds.
Decrease the money supply.
All of the above would slow the economy.
8. If the central bank is following its monetary policy rule and raises the nominal rate of interest
by 2 percentage points, then we would expect that the real interest rate:
a)
b)
c)
d)
e)
increases by 2 percentage points.
increases by more than 2 percentage points.
decreases by more than 2 percentage points.
decreases by less than 2 percentage points.
increases by less than 2 percentage points.
9. Which of the following statements is true if the RBA is decreasing the interest rate over the
short term by a specific amount?
a) A steeper slope of AE implies that a larger increase in the monetary base is required.
b) A flatter slope of the money demand curve implies that a larger increase in the monetary
base is required.
c) A smaller money multiplier implies that a smaller increase in the monetary base is required.
d) A larger slope of AE implies that a larger increase in the monetary base is required.
e) Both a. and b.
10. If the RBA is able to bring about a credible disinflation, then:
a) the change to the new long-run rate of inflation will be slower than if the RBA’s policy had
been less credible.
b) the new long-run rate of inflation will be lower than if the RBA’s policy had been less
credible.
c) the recession will be shallower than if the RBA’s policy had been less credible.
d) the recession will be more sudden and deeper than if the RBA’s policy had been less
credible.
e) Both b and c.
47
Notes
48
49
Fiscal Policy
Topic Ten
Key Concepts of Fiscal Policy
Federal budget
Budget surplus
Countercyclical policy
Progressive tax
Balanced budget
Budget deficit
Discretionary fiscal policy
Automatic stabilisers
Federal debt
Structural surplus
Commonwealth monthly budget headline outcome: 1973 to 2005
(Source: RBA, July 2005)
15000
5000
Jul-04
Jul-03
Jul-02
Jul-01
Jul-00
Jul-99
Jul-98
Jul-97
Jul-96
Jul-95
Jul-94
Jul-93
Jul-92
Jul-91
Jul-90
Jul-89
Jul-88
Jul-87
Jul-86
Jul-85
Jul-84
Jul-83
Jul-82
Jul-81
Jul-80
Jul-79
Jul-78
Jul-77
Jul-76
Jul-75
Jul-74
0
Jul-73
Headline surplus ($m)
10000
-5000
Date
`
Group Discussion Questions
1. Suppose an economy’s real GDP equals potential GDP and the structural deficit is $70
billion.
a) Illustrate this situation graphically with the budget surplus and real GDP on the two axes.
50
b) Use the AD curve and SRA line to explain what would happen in the short-run, medium-run
and long-run if this economy eliminated its structural deficit.
c) What impact can we say that fiscal policy has on long term interest rates?
Multi-choice Questions:
1. When tax revenues are greater than outlays, there is a
a)
b)
c)
d)
e)
budget deficit.
balanced budget.
budget surplus.
budget supplement.
government absorption.
2. The difference between the actual deficit and the structural deficit is the:
a)
b)
c)
d)
budget deficit
cyclical deficit
full-employment deficit
a and c
3. The structural budget deficit is the size of the budget deficit when:
a)
b)
c)
d)
e)
the unemployment rate is zero.
real and potential GDP are equal.
the ADI curve intersects the IA line.
the economy is in a recession.
there is a spending balance.
51
4. Government debt is a
a)
b)
c)
d)
e)
flow, whereas its budget balance is a stock.
stock, whereas its budget balance is a flow.
flow, as is its budget balance.
stock, as is its budget balance.
stock, while its budget balance is a flow if it is a deficit and a stock if it is a surplus.
5. Unemployment benefits are a form of:
a)
b)
c)
d)
discretionary policy
counter-cyclical fiscal policy
automatic stabiliser
(b) and (c)
6. Automatic stabilisers refer to:
a) the central bank’s monetary policy rule.
b) taxes and government outlays that change automatically whenever the state of the economy
changes.
c) the self-adjusting nature of a market economy.
d) the fact that Parliament meets to adjust aggregate spending whenever there is a recession.
e) how government spending in a slump falls because the taxes required to fund it have
declined.
7. Compared to the baseline, the short-run effect of changing fiscal policy to reduce trend G/Y
is
a)
b)
c)
d)
e)
no change in the real interest rate.
no change in the nominal interest rate.
Both a and b.
no change in inflation.
All of the above.
8. Suppose that real and potential GDP are initially equal. However, there is now a sustained
decrease in government expenditure. Compared to the baseline, we would expect to see, in
the long run,
a)
b)
c)
d)
e)
a decrease in consumption and an increase in both net exports and investment.
an increase in consumption and a decrease in both net exports and investment.
an increase in consumption, a decrease in net exports, but no change in investment.
an increase in consumption and net exports but a decrease in investment.
an increase in consumption, investment and net exports.
52
9. Countercyclical policy involving balancing the government budget over the business cycle
requires
a)
b)
c)
d)
e)
A budget surplus during a recession
A budget deficit to finance expansions and budget surplus to offset contraction
Increased taxes during recessions and reduced government spending during expansions
A budget deficit during slump and budget surplus during a boom
All of a, b and c
10. Most macroeconomists disagree with the view that government budget should be balanced
annually. The reason is that:
a) it is better to have a budget deficit each year.
b) it is better to have a budget surplus each year.
c) the things on which government spends are so important to society that the spending should
continue even if tax revenues are inadequate.
d) if the government budget is balanced annually, fiscal policy could add to cyclical instability.
e) it is not politically popular to cut spending or raise taxes during a slump, even though this is
the best thing to do according to macroeconomics.
53
2005 Final Exam Short Answer Q3
800
Real GDP
(billions of
dollars
Fiscal surplus 0
(billions of
dollars)
805
810
815
820
2.0
4.0
6.0
8.0
Suppose, for a hypothetical economy, potential GDP equals $805 billion.
a) If spending balance initially occurs when real GDP equals $815 billion, then, according
to the above table,
the cyclical surplus equals $ _____ b.
and
the structural surplus equals $ _____ b.
(1 mark)
b) Suppose there is a decrease in G of $5b. The multiplier is 2.
At the new short-run equilibrium of $______b., the new structural surplus is $_____b.,
and the cyclical component of the surplus has risen fallen (circle your choice)
by $____ b.
(2 marks)
c) At the initial spending balance, the actual surplus was $6b. After a cut in G of $5b.,
the actual surplus at the new income balance is $ ____b.
(1 mark)
d) Explain briefly why a change in the structural surplus is a better indicator of a
counter-cyclical change in fiscal stimulus than a change in the actual surplus.
(1 mark)
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55
Australia and the International Economy
Topic Eleven
Key Concepts of Australia and the International Economy
Net exports
National saving
Investment
Balance of payments
Current account
Capital account
Fixed exchange rate system
Flexible exchange rate system
Australian Current Account Deficit: 1959 to 2003
(Source: RBA, July 2003)
Sep-59
Sep-60
Sep-61
Sep-62
Sep-63
Sep-64
Sep-65
Sep-66
Sep-67
Sep-68
Sep-69
Sep-70
Sep-71
Sep-72
Sep-73
Sep-74
Sep-75
Sep-76
Sep-77
Sep-78
Sep-79
Sep-80
Sep-81
Sep-82
Sep-83
Sep-84
Sep-85
Sep-86
Sep-87
Sep-88
Sep-89
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
0
Current Account Surplus ($m)
-2000
-4000
-6000
-8000
-10000
-12000
Date
Group Discussion Question
Year 2000 ($bn)
Year 2004 ($bn)
National Saving
$400
$544
Investment
$443
$500
(a)
Referring to the above table, calculate the trade deficit or surplus for the years
2000 and 2004.
(b)
Using the same data in the above table, now suppose net factor income and net
transfers from abroad are zero. Is capital flowing into or out of the country in
these years?
56
Multi-choice Questions:
1. According to the table below, what is the balance on the current account?
International Transactions for the Year 2010 ($m)
Merchandise trade balance
Service trade balance
Net factor income
Net transfers
a)
b)
c)
d)
e)
-85,000
30,000
-5,000
-15,000
$75 billion
-$75 billion
$55 billion
-$55 billion
-$60 billion
2. The capital account is:
a)
b)
c)
d)
e)
the amount of plant and equipment Australian residents own compared to other nations.
a record of our investments abroad and foreign investments here.
the amount of our dollars held abroad.
the amount of foreign currency held domestically.
a record of the dollar amount of exported and imported goods and services.
3.
a)
b)
c)
d)
e)
Which of the following is not included in a nation’s current account?
Merchandise exports.
Investment income receipts.
Foreign aid payments.
Merchandise imports.
Purchases of foreign assets.
4. Which of the following are likely to benefit from an increase in the value of the Australian
dollar?
1)
2)
3)
4)
a)
b)
c)
d)
e)
A Holden factory exporting to Japan
A popular tourist facilitity on the Great Barrier Reef
An Indonesian furniture importer located in Indooroopilly
The Australian Wool Industry
1
2
3
1 and 4
2 and 3
57
5. Vivian earns $1,000 per week and spends $850 per week on living expenses, puts $50 in a
savings account, and buys $100 worth of shares in a retirement fund. Vivian's weekly saving
is ____ and her saving rate is _____. Her weekly investment is _____.
a)
b)
c)
d)
e.)
$50; 5%, $100
$50; 5.9%, $100
$50; 5%, $150
$150; 15%, $150
$150; 15%, zero
The following table relates to questions 6-8.
Household consumption expenditure
Private-sector gross investment
Government transfer payments to households
Exports of goods and services
Imports of goods and services
Taxes
Government purchases of goods and services
Capital consumption (depreciation)
$bn
300
50
25
49
54
75
60
55
6. What is GDP (in $billion)?
a)
b)
c)
d)
e)
405
415
440
460
480
7. Refer again to the table above. There is a fiscal _______ that equals ____ and a balance of
trade that equals_____
a)
b)
c)
d)
e)
surplus; 15; 5
deficit; 10; – 5
surplus; 15; –5
deficit; 10; 5
surplus; 50; –5
8. Refer again to the table above. Assuming that other items relevant to the balance of payments
equal zero, there is a ______ on the current account of _______ and there is a ______ on
the capital account of _______
a)
b)
c)
d)
e)
deficit; 5; surplus; 5
deficit; 5; surplus; 6
deficit; 5; deficit; 5
surplus; 5; surplus; 6
surplus; 5; surplus; 20
58
The following table relates to questions 9 and 10.
Gross fixed capital formation by the private sector
Value of physical increase in stocks
Net exports
Aggregate saving
Government spending on infrastructure
Capital consumption (depreciation)
Net change in foreign ownership of domestic assets (equity)
Net change in domestic ownership of foreign assets (equity)
$bn
51
4
14
75
6
55
0
0
9. What is the change in the stock of capital ($b.)?
a)
b)
c)
d)
e)
6
2
75
89
20
10. Refer to the table above. This country is a _______ of ______$b.
a)
b)
c)
d)
e)
borrower; 14
lender; 14
borrower; 8
lender; 6
borrower; 6
59
PASS Mock Exam
The mock exam will be written by PASS leaders as the semester progresses.
It will be distributed (free) in PASS classes in this week. The mock exam will not be available on
the internet – if you would like to do the mock exam, you must attend PASS.
60