EC1301

NATIONAL UNIVERISTY OF SINGAPORE

EC1301: Principles of Economics

Semester I AY 2006/2007

November 2006

Time Allowed: 2 hours

INSTRUCTIONS TO CANDIDATES

1. This examination paper comprises FIFTEEN (15) printed pages, including this page. There are 45 multiple choice questions. Answer ALL questions. The total mark for this exam is 45 marks.

2. This is a CLOSED BOOK examination.

3. Use the computer bubble form for your answers.

4. You must submit the computer bubble form.

EC1301

Multiple Choice Questions

Choose the one alternative that best completes the statement or answers the question. Answer ALL questions on the computer bubble form provided.

COMPONENT AMOUNT(billions of dollars)

Net taxes 1, 635

Personal consumption expenditure 5,566

Depreciation 622

Government purchases 1,784

Gross investment 1,234

Exports 957

Imports 1,138

Household saving 1,202

Table 1

1. Refer to Table 1. What is the value of GDP?A. $13,516 billionB. $10,679 billionC. $9,541 billionD. $8,403 billion

2. Refer to Table 1. What is the value of net domestic product?A. $622 billionB. $7,781 billionC. $6,768 billionD. $8,919 billion

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3. Suppose that a Vietnamese farmer sells fruits and vegetables directly to customers. In addition, the farmer also sells fruits and vegetables to restaurants, which later use the fruits and vegetables in prepared food for customers. Denote the direct sales of fruits and vegetables to customers as I, and the sales of fruits and vegetables to restaurants as II. Which of the following would be part of Vietnam’s GDP?A. I but not II B. II but not IC. Both I and IID. Neither I nor II

4. Suppose that in 2004 a country produced 20 computers at a price of $2,000 each and 4 cars at a price of $5,000 each. In 2005 the country produced 15 computers at a price of $3,000 each and 5 cars at a price of $6,000 each. What do we know has happened? A. Nominal GDP has increased, and real GDP has increased.B. Nominal GDP has increased, and real GDP has

decreased.C. Nominal GDP has decreased, and real GDP has increased.D. Nominal GDP has decreased, and real GDP has decreased.

5. Transfer payments are:A. excluded when calculating GDP because they only reflect

inflation.B. excluded when calculating GDP because they do not

reflect current production.C. included when calculating GDP because they are a category

of investment spending.D. included when calculating GDP because they increase the

spending of recipients.

6. When 100 Singaporeans who were previously looking for jobs stop looking for jobs, the:A. unemployment rate increases.B. the size of the labor force decreases.C. labor-force participation rate does not change.D. unemployment rate does not change.

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Population 16 years old or over (millions)

207.8

Labor force (millions) 139.4

Employed (millions) 133.5

Unemployed (millions) 5.9

Table 2

7. Refer to Table 2. The number of people not in the labor force equals:A. 5.9.B. 68.4.C. 74.3.D. 201.9.

8. Refer to Table 2. The unemployment rate equals:A. 2.8%B. 4.2%C. 4.4%D. 5.0%

9. If the unemployment rate in China is 9 percent and the natural rate of unemployment is 5 percent, then the:A. frictional unemployment rate is 5 percent.B. cyclical unemployment rate and the frictional unemployment

rate together are 5 percent.C. cyclical unemployment rate is 4 percent.D. natural rate of unemployment will eventually increase.

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10.Which of the following best explains how employment can increase as the same time as the real wage in decreasing?A. The labor supply and demand curves both shift to the right;

however, the shift in the labor demand curve is greater than the shift in the labor supply curve.

B. The labor supply and demand curves both shift to the left; however, the shift in the labor supply curve is greater than the shift in the labor demand curve.

C. A rightward shift of the labor demand curve and a movement along the labor supply curve occur.

D. The labor supply and demand curves both shift to the right; however, the shift in the labor supply curve is greater than the shift in the labor demand curve.

11.If your nominal wage rises faster than the price level then we can say your real wage has _______ and the purchasing power of your income has ________.A. fallen; fallenB. fallen; risenC. risen; risenD. risen; fallen

12.If inflation in Malaysia increases unexpectedly, thenA. borrowers lose.B. lenders lose.C. lenders gain and borrowers gain.D. neither borrowers nor lenders lose.

13.Suppose that nominal GDP in year 1 is 300 and nominal GDP in year 2 is 340. Assume that inflation is five percent a year. About how fast did the economy grow between these two years (using year 1 as the base year)?A. 80 percentB. 10 percentC. 8 percentD. 13 percent

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The following table lists the basket of goods in the Vegetarian Price Index (Assume 2003 is the base year).

QUANTITY 2003 PRICE

2004 PRICE

2005 PRICE

Cucumbers 10 $1.00 $1.50 $2.00

Cabbages 5 $2.00 $3.00 $2.50

Spinach 5 $2.00 $2.00 $3.00

Table 3

14.Using the information in Table 3, the Vegetarian Price Index for 2004 is:A. 133.B. 100.C. 48.D. 158.

15.An increase in ________ shifts ________ the production function, and makes it possible to produce a higher level of GDP with ________ capital per hour worked.A. technology; down; the same amount ofB. technology; up; the same amount ofC. consumption; up; a lesser amount ofD. labor productivity; down; the same amount of

16.As a result of an increase in capital, the demand for labor would ________, the supply of labor would ________, and the real wage would _________.A. increase; increase; increaseB. increase; remain the same; increaseC. increase; remain the same; decreaseD. increase; decrease; remain the same

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17.Suppose that Pakistan’s real GDP starts at 100 and grows at a rate of 5% a year for two years. Then real GDP after 2 years would be:A. 105.B. 150.C. 110.25.D. 200.

18.Capital deepening causes _________in the demand for labor. A. an increaseB. a decreaseC. no change D. either an increase or decrease

19.If the Philippines economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP?A. an increase in wealthB. an increase in interest ratesC. a decrease in business confidenceD. an increase in the value of the Philippines peso relative to

other currencies

20.Spending on the war in Iraq is essentially categorized as government purchases. How do increases in spending on the war in Iraq affect the aggregate demand curve?A. This will move the economy up along the aggregate demand

curve.B. This will move the economy down along the aggregate

demand curve.C. This will shift the aggregate demand curve to the left.D. This will shift the aggregate demand curve to the right.

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21.Suppose Thailand receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,A. the long run aggregate supply curve will shift to the

right.B. the long run aggregate supply curve will shift to the left.C. the economy will move up along the long run aggregate

supply curve.D. the economy will move down along the long run aggregate

supply curve.

22.Hurricane Katrina destroyed oil and natural gas refining capacity in the gulf. This subsequently drove up natural gas, gasoline, and heating oil prices. As a result this shouldA. shift the short run aggregate supply curve to the left.B. shift the short run aggregate supply curve to the right.C. move the economy up along the short run aggregate supply

curve.D. move the economy down along the short run aggregate

supply curve.

23.Which of the following correctly describes the automatic mechanism through which the economy adjusts to long run equilibrium?A. the leftward shift in the short run aggregate supply curve that

occurs after a recessionB. the rightward shift in the short run aggregate supply

curve that occurs after a recessionC. the leftward shift in the aggregate demand curve that occurs

after a recessionD. the rightward shift in the aggregate demand curve that occurs

after a recession

24.Stabilization policies are policies: A. that only aim to reduce the level of GDP.B. that only aim to increase the level of GDP.C. taken to move the economy closer to potential output.D. aimed at increasing trade.

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25.The President of Vulcan hires you as an economic consultant. He is concerned that the output level in Vulcan is too high and this will cause inflation. He feels that it is necessary to reduce output by $10 billion He tells you that the marginal propensity to consume in Vulcan is 0.6. Which of the following would be the best advice to give to the Vulcan President? A. reduce government spending in Vulcan by $4 billion. B. increase taxes in Vulcan by $4 billion.C. reduce government spending in Vulcan by $10 billion.D. increase taxes in Vulcan by $2.5 billion.

26.Although running a budget deficit during a recession should not be a source of concern, running a budget deficit when there is no recession is a bad policy due to: A. crowding out.B. long inside lags.C. long outside lags.D. crowding in.

27.An increase in interest rates leads to: A. a leftward shift in the demand for money curve. B. a rightward shift in the demand for money curve.C. a leftward movement up along the demand for money

curve.D. a rightward movement down along the demand for money

curve.

28.The demand for money curve has shifted left. This may be the result of: A. a decrease in the level of prices.B. an increase in the level of prices.C. a decrease in real GDP.D. both A and C.

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29.If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the central bank expands the money supply under these circumstances, then the interest rate will A. fall substantially and investment and consumer spending will

fall substantially.B. rise substantially and investment and consumer spending

will rise substantially.C. fall substantially and investment and consumer spending will

change very little.D. change very little and investment and consumer spending

will change very little.

30.Based on the model of money market, when the risk associated with holding other assets increases, the equilibrium interest rate should: A. stay the same.B. increase.C. decrease.D. increase to the same extent that the supply of money

increases.

31.If a bond was to pay off one year from now for $110 and the interest rate is 10 per cent, what is the price of the bond?A. $11B. $100C. $110D. $121

32.Stabilization policy, if well-timed, will:A. do nothing to the magnitudes of economic fluctuations.B. dampen the effects of economic fluctuations.C. magnify the effects of economic fluctuations.D. be subject to lags.

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Figure 1

33.Refer to Figure 1. Which point on the graph is possible if prices rise but the central bank does not act? A. AB. BC. CD. D

34.Refer to Figure 1. Which point on the graph is possible if the central bank conducts open market purchases and the real income rises?A. AB. BC. CD. D

35.Suppose that the Indonesian economy is producing below potential GDP and the central bank implements the correct change in monetary policy, but does so too late. ThenA. the central bank’s contractionary policy will result in too

large of a decrease in GDP.B. the central bank’s contractionary policy will result in too

small of a decrease in GDP.C. the central bank’s expansionary policy will result in too

small of a decrease in GDP.D. the central bank’s expansionary policy will result in too

large of an increase in GDP.

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36.What would be a way for the central bank of Hong Kong to slow down the economy when it is growing too quickly or is inflationary?A. Print more money. B. Buy back government bonds.C. Sell more government bonds.D. Decrease reserve requirements (or required reserve ratio).

37.Which of the following pairs of events will definitely lead to an increase in the equilibrium interest rate? A. The purchase of government bonds by the central bank and a

decrease in the level of real GDPB. an increase in the discount rate and an increase in the

price level C. a decrease in the reserve requirements (or required reserve

ratio) and an increase in the level of real GDPD. the sale of government bonds by the central bank and a

decrease in the price level

38.Suppose that India has been experiencing 3% annual inflation. If output is less than full employment, prices will generally rise at: A. a rate of 3%.B. a rate greater than 3%.C. a rate less than 3%.D. A rate of 0%.

39.In the long run, an increase in the money supply:A. decreases interest rates, increases investment, and decreases

output.B. decreases interest rates, but has no effect on investment or

output. C. increases output, but has no effect on interest rates or

investment.D. has no effect on interest rates, investment or output.

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Figure 2

40.Refer to Figure 2. A movement from point A to point B would be the result of the:A. unemployment rate exceeding the natural rate, causing

wages to rise.B. unemployment rate exceeding the natural rate, causing

wages to fall.C. natural rate exceeding the unemployment rate, causing

wages to rise.D. natural rate exceeding the unemployment, causing wages to

fall.

41.Investment is “crowded out” by an increase in government spending because: A. an increase in government spending causes output and

prices to rise, which in turn causes interest rates to rise.B. an increase in government spending causes output and prices

to fall, which in turn causes interest rates to rise.C. an increase in government spending causes output and prices

to rise, which in turn causes interest rates to fall.D. an increase in government spending causes output and prices

to fall, which in turn causes interest rates to fall.

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42.Suppose there are only 2 nations A and B, and only two goods, x and y. If nation A produces only x, it can make 12x per day. If nation A produces only y, it can make 36y per day. If nation B produces only x, it can make 4x per day. If nation B produces only y, it can make 12y per day. After trade begins, nation _____ will specialize in the production of x and nation _____ will specialize in the production of y. A. A; BB. B; BC. B; AD. No trade will occur.

43.As a whole, nations are better off after trade and specialization because: A. nations can consume along their consumption

possibilities curve, which is outside of their production possibilities curve.

B. nations can consume along their consumption possibilities curve, which is inside of their production possibilities curve.

C. nations can consume along their production possibilities curve, which is outside of their consumption possibilities curve.

D. nations experience an outward shift of their production possibilities curve.

44.Which of the following situations will arise in the South Korean domestic market following the imposition of an import ban? A. imports increase, domestic production increases, prices

increaseB. imports increase, domestic production increases, prices

decreaseC. imports decrease, domestic production increases, prices

increaseD. imports decrease, domestic production increases, prices

decrease

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JAPAN U.S.A.

Stereos 50 30

Tractors 25 120

Table 4

45.Refer to Table 4 on the daily output of Japan and U.S.A. After trade begins, ___________ will specialize in the production of stereos and __________will specialize in the production of tractors. A. U.S.A.; U.S.A.B. U.S.A.; JapanC. Japan; U.S.A.D. Japan: Japan

END OF PAPER

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