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St. Paul’s University Information and Computer Science Department Bachelor of Business and Information Technology First Semester Exam Series BEC 2113 – Advanced Macroeconomics Examination Series 2014 Time: 2 hrs 30min ___________________________________________________________________________ INSTRUCTIONS TO CANDIDATES: ANSWER ALL QUESTIONS Question 1: Whenever Inflation occurs, which segment of the society is badly affected? (10mks) Question 2: Fill in the blanks(10mks) a. The deviation of actual rate of unemployment from the natural rate is called _______________ unemployment. b. In simple words we can say that the cost of disinflation is __________GDP. c. A budget that accounts for assets as well as liabilities is called _____________________. d. The business cycle is the change occurs automatically in response to a ______________ economy. e. The reduction in _________ raises the interest rate, which crowds out investment. f. Forward looking consumers perceive that lower taxes now mean ___________later. g. According to Keynes MPC is between _______ and ______. h. A long depression of infinite duration unless fiscal policy was used to stimulate aggregate demand is called ____________. i. The APC did not vary systematically with income, this relationship is called the _________________consumption function. j. _______________________shows the combination of first period consumption that makes the consumer equally happy. Question 3: a. Use the theory of liquidity preference to explain why an increase in the money supply lowers the interest rate. (4mks) 1 b. Use the IS-LM model to predict the effects of each of the following shocks on income, the interest rate consumption and investment: i. A boom in the stock market makes consumer wealthier. (3mks) ii. A wave of credit card fraud increases the frequency with which people make transactions in cash. (3mks) Question 4: Why is frictional Unemployment sometimes not necessarily harmful? (10mks) Question 5: There are four possible answers of each question, select the correct one: (10mks) a. Convergence refers to the hypothesis that: i. It is easier for a country to grow relatively quickly if it starts out poor ii. Rich countries must always bail out poor countries iii. Saving must be equal to investment in the macro economy iv. None of the given options b. The aggregate demand curve: i. Is an upward sloping curve ii. Is a downward sloping curve iii. May slope upward or downward iv. Is horizontal c. The aggregate demand curve slopes downward because at higher price level: i. The purchasing power of consumers' wealth declines and consumption decreases. ii. The purchasing power of consumers' assets declines and consumption increases iii. Producers can get more for what they produce, and they increase production. iv. The purchasing power of consumers' wealth increases and consumption increases. d. The aggregate demand curve would shift to the left if: i. The cost of energy was to decrease ii. Taxes were increased. iii. Government spending was increased iv. The money supply was increased e. The aggregate supply curve depicts the relationship between: i. The cost of inputs and the total quantity of goods and services that firms supply ii. The level of prices and the total quantity of goods and services that firms supply iii. The cost of labour and the total quantity of goods and services that firms supply iv. The unemployment rate and the total quantity of goods and services that firms supply 2 f. The aggregate demand curve slopes downward: i. Because of the law of demand in macroeconomics ii. Because of the law of supply in microeconomics iii. Because of the law of demand in microeconomics iv. None of the given options g. A decrease in taxes leads to: i. A decrease in aggregate demand ii. No change in aggregate demand iii. A decrease in aggregate supply iv. An increase in aggregate demand h. If the economy is in long run equilibrium at full employment, an increase in aggregate demand will: i. Decrease the price level and leave the level of output unchanged ii. Increase both the price level and the level of output iii. Decrease both the price level and the level of output iv. Increase the price level and leave the level of output unchanged i. The 2001 recession in the U.S. economy is considered to be mostly the result of: i. A sharp increase in labour costs ii. A negative shock to aggregate supply iii. A negative shock to aggregate demand iv. A slowdown in labour productivity. j. For convergence of GDP per capita between rich and poor countries to take place, it must be the case that: i. Poor countries must grow faster than rich countries ii. Rich countries must grow more slowly than poor countries iii. Countries must grow more slowly as they become richer iv. All of the given options Question 6: a. b. c. d. In which situation inflation has inertia? (2mks) What does the sacrifice ratio means? (2mks) What are the effects of imports restrictions under the floating exchange rates? (4mks) What does the sticky wage model imply? (2mks) END OF EXAM 3