ECON1020-Sem 1 2011 Final Exam

ECON1020: Introductory Macroeconomics – Final Examination, Semester 1, 2011

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Part A- Multiple Choice Questions Answer ALL questions on the MCQ Sheet provided

(1 mark for each CORRECT answer)

1) Assume that some people who receive bank loans do not deposit the full amount of the loan into a bank. This will cause the deposit multiplier to be ________ it would have been if all loans are deposited in banks.

A) either greater than or smaller than B) smaller than C) the same as D) greater than

2) If the MPC is 0.95, then a $10 million increase in disposable income will

A) increase consumption by $5 million. B) increase consumption by $950 million. C) increase saving by $9.5 million. D) increase saving by $0.5 million

3) A federal budget surplus could be reduced by

A) raising taxes. B) lowering interest rates. C) increasing transfer payments. D) lowering government spending.

4) Not enforcing property rights in an economy will

A) not change the level of investment. B) raise the level of investment. C) cause the market system to work efficiently. D) lower the level of investment.


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5) Which of the following correctly describes how an increase in the price level affects consumption spending?

A) An increase in the price level raises real wealth, which causes consumption to increase.

B) An increase in the price level decreases the amount of money a household needs to buy goods, raises the interest rate, which causes consumption to increase.

C) An increase in the price level lowers real wealth, which causes consumption to decrease.

D) An increase in the price level increases the amount of money a household needs to buy goods, raises the interest rate, which causes consumption to increase.

6) If CAB = current account balance, I = private sector investment, S = national saving and NX = net exports, then

A) I = CAB — S.

B) CAB + NX = S.

C) CAB = I + NX.

D) CAB + I = S.

7) Commodity money is

A) a good that is designated as money by law. B) a good used as money that has no intrinsic value. C) a good used as money that also has value independent of its use as

money. D) a good used as money that has no secondary use.

8) If the Reserve Bank of Australia pursues expansionary monetary policy, ceteris paribus,

A) aggregate demand will rise, and the price level will fall. B) aggregate demand will fall, and the price level will rise. C) aggregate demand will rise, and the price level will rise. D) aggregate demand will fall, and the price level will fall.


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9) The unemployment rate is calculated by

A) dividing the number of unemployed people by the number of working individuals, and multiplying by 100.

B) dividing the number of unemployed people by the number of people in the labour force, and dividing by 100.

C) dividing the number of unemployed people by the sum of the number of working people plus the number of unemployed people, and multiplying by 100.

D) dividing the number of unemployed people by the number in the working-age population, and multiplying by 100.

Figure 1 refers to Question 10.

Figure 1

10) Suppose that the economy is at point A on the Phillips Curve in Figure 1. If the aggregate demand curve shifts to the right by less than the long run aggregate supply, then the economy will

A) move to point B on the Phillips Curve. B) move to point D on the Phillips Curve. C) move to point C on the Phillips Curve. D) remain at point A on the Phillips Curve.


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11) The effect of monetary policy on long term interest rates is usually

A) smaller than its effect on short term interest rates. B) larger than its effect on short term interest rates. C) larger than its effect on short term rates, but the effect occurs with a lag. D) immediate, as long term rates are closely linked to the cash rate.

12) The slope of the consumption function is equal to

A) the change in national income divided by the change in consumption. B) the change in consumption divided by the change in disposable income. C) the change in disposable income divided by the change in consumption. D) the change in consumption divided by the change in personal income.

13) Macroeconomics involves the economic issues of:

A) how the economy should organise resources within a particular industry. B) how to generate full employment, price stability and maintain long-term

economic growth. C) profit maximisation by firms. D) how firms choose the prices they should charge for their products.

14) A transfer payment is a payment by the government to an individual for

A) a consumption good. B) an investment good. C) a service, such as a payment to hospital nurses and school teachers. D) which the government does not receive a good or service in return.

15) The Bretton Woods system is

A) a system of fixed exchange rates based on the gold standard. B) a system of floating exchange rates where central banks floated the value of th

eir currencies. C) a system of fixed exchange rates where central banks fixed the value of t

heir currencies against the US dollar. D) a system of managed-float exchange rates where demand and supply mainly

determined the value of currencies with occasional government intervention.


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Figure 2 refers to question 16.

Figure 2

16) In Figure 2, given the economy is at point A in year 1 and point B in year 2, what is the rate of increase in the price level (the inflation rate) between those two years?

A) 2.7% B) 1.8% C) 0.9% D) 3.0%

17) When the capital stock per hour worked

A) decreases, labour productivity increases. B) increases, labour productivity increases. C) increases, capital productivity increases. D) increases, labour productivity falls, as workers are being replaced with capital

and machinery.


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18) In the model of the market for loanable funds, which of the following will NOT shift the demand curve for loanable funds? A) The effect of technological change on profitability. B) Lower interest rates. C) Expectations of high returns to investments. D) The expectation of a recession by businesses.

19) If net income and net transfers are $0, and a country's purchases of foreign goods and services are $25 billion while its sales of goods and services overseas are $26 billion,

A) it has a surplus of $1 billion in its balance of payments. B) it has a $1 billion deficit in its current account. C) it has a surplus of $26 billion in its current account. D) it has a $1 billion surplus in its current account.

20) Under the current operation of monetary policy in Australia, the money supply is

A) perfectly elastic at the current interest rate. B) perfectly inelastic at the current interest rate. C) fixed by the Reserve Bank of Australia. D) targeted by the use of open market operations.

21) The ________ the tax wedge, the smaller the difference between pre-tax and post tax returns for an economic activity, the ________ of that activity will occur.

A) larger; more B) larger; less C) smaller; less D) smaller; more

22) A federal budget deficit leads to a(n)

A) increase in interest rates, a depreciation of the dollar, and an increase in net exports.

B) decrease in interest rates, an appreciation of the dollar, and a decline in net exports.

C) increase in interest rates, an appreciation of the dollar, and a decline in net exports.

D) decrease in interest rates, a depreciation of the dollar, and a decline in net exports.


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23) Suppose that average productivity of Chinese firms increases more rapidly than the average productivity of Australian firms, then

A) production costs in China rise, quantity demanded for Chinese products falls, the value of yuan (RMB) falls against the dollar.

B) production costs in China fall, quantity demanded for Chinese products rise, the value of yuan (RMB) rises against the dollar.

C) production costs in China rise, quantity demanded for Chinese products rises, the value of yuan (RMB) rises against the dollar.

D) production costs in China fall, quantity demanded for Chinese products rise, the value of yuan (RMB) falls against the dollar.

24) Suppose that the economy is currently in a recession and that economic forecasts indicate that the economy will soon enter an expansionary phase. As a result,

A) expected profitability of new investment in plant and machinery increases and the supply of loanable funds rises, while demand remains unchanged.

B) expected profitability of new investment in plant and machinery increases and both the demand for and supply of loanable funds rises.

C) expected profitability of new investment in plant and machinery increases and the demand for loanable funds falls.

D) expected profitability of new investment in plant and machinery increases and the demand for loanable funds rises.

25) If a country passes a labour law limiting the number of hours of work per week, GDP would ________ and leisure would ________.

A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase

26) A professional has been being unemployed since her company relocated overseas one year ago. While she is searching for a new job she would be classified as:

A) cyclically unemployed B) structurally unemployed C) frictionally unemployed D) not in the labour force


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Figure 3 refers to question 27.

Figure 3

27) If the foreign exchange market is currently at point A and the Thai government wants to maintain an exchange rate of 0.04 US dollars per baht, as illustrated in Figure 3, then it must

A) purchase 100 million bahts per day with US dollars. B) sell 50 million bahts per day in exchange for US dollars. C) sell 100 million bahts per day in exchange for US dollars. D) purchase 50 million bahts per day with US dollars.

28) Knowledge capital is ________ in production and ________. As a result, firms ________ free ride.

A) non-rival; excludable; can

B) non-rival; non-excludable; can C) rival; non-excludable; cannot

D) non-rival; non-excludable; cannot


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29) The trade weighted index (TWI) is A) a measure of the price changes in goods and services traded between

Australia and the rest of the world. B) a measure of the difference between exports and imports, to establish the

balance of trade. C) a measure of the value of the Australian dollar against a basket of

currencies of its major trading partners. D) a measure of the volume of international trade throughout the world.

30) Suppose that a very simple economy produces three goods: movies, burgers, and bikes. Suppose the quantities produced and their corresponding prices for 2004 and 2009 are shown in the following table:

2004 2009

Product Quantity Price Quantity Price

Movies 20 $8 30 $7

Burgers 100 $1.50 90 $2.50

Bikes 3 $1000 6 $1100

What is real GDP in 2009, using 2004 as the base year?

A) $6390 B) $6375 C) $6360 D) $6935

31) The money demand curve is downward sloping because

A) lower interest rates cause households and firms to switch from money to shares.

B) lower interest rates cause households and firms to switch from financial assets to money.

C) lower interest rates cause households and firms to switch from money to financial assets.

D) lower interest rates cause households and firms to switch from money to bonds.


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32) In an open economy, contractionary monetary policy will have a secondary effect on GDP because

A) net exports will rise due to the higher foreign exchange value of the dollar. B) net exports will rise due to the lower foreign exchange value of the dollar. C) net exports will fall due to the higher foreign exchange value of the

dollar. D) net exports will fall due to the lower foreign exchange value of the dollar.

33) Economists during the early 1960s thought of the Phillips Curve as a “policy menu” because they thought that the Phillips Curve:

A) represented a structural relationship in the economy that would not change as a result of policy changes.

B) represented a direct relationship between unemployment and inflation in the short run.

C) presented policy makers with a reliable menu of combinations of unemployment and inflation.

D) represented a relationship that did not depend on consumers and firms and could change over time.

34) Which of the following is TRUE regarding the social costs of unemployment?

i. The costs of unemployment are spread equally across economic classes.

ii. Prolonged unemployment causes a loss of human capital.

iii. Because of unemployment benefits, loss of income is a minor concern.

A) i and ii. B) i only. C) i and iii. D) ii only.

35) Which of the following four statements is correct?

A) With a multiplier of 2, an increase of $125 billion in the money supply will increase GDP by less than $250billion.

B) With a multiplier of 2, an increase of $125 billion in the money supply will increase GDP by $250billion.

C) With a multiplier of 2, an increase of $125 billion in the money supply will increase GDP by more than $250billion.

D) None of the above as the multiplier does not apply to increases in the money supply.


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PART B

ANSWER ALL 4 QUESTIONS IN THE WRITING BOOKLET PROVIDED

Question 1: (20 marks in total)

Use the diagram below to answer the following questions.

The economy is currently at equilibrium point A and the Treasury is considering the use of fiscal policy to increase GDP to its potential level. It is known that the government purchase multiplier is equal to 2.5 and the tax multiplier is equal to –1.5. In all cases show your calculations.

a. If the Treasury decides to use tax changes as an instrument, what direction and size of tax change are required to achieve this policy objective? Explain. (3 marks)

b. Suppose now the Treasury decides to change government expenditure instead of changing taxes. If government expenditure increases by $32b, will it achieve its objective? Explain. (3 marks)

c. Copy the above diagram and then illustrate and explain the impact of the policy change in part (b) on the diagram. (3 marks)

Question 1 continued over the page


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d. Suppose now the Treasury decides to use a combination of tax and government

expenditure to achieve its policy objective. It wants to increase government expenditure by $30b. What complementary tax change is required to achieve the policy objective? Explain. (4 marks)

e. Returning to part (a), what direction of monetary policy will achieve the same policy objective? To accomplish such monetary policy change, should the central bank buy or sell securities? Give one reason why monetary policy may be more effective in achieving the same policy objective than fiscal policy. (3 marks)

f. Referring back to the diagram, when there is no monetary policy (or fiscal policy) action, the economy will be at point A. If the velocity of money is constant, what growth rate of money supply will be required based on the Quantity Theory of Money to move the economy from point A to B? Explain. (4 marks)


a. Explain how the ABS calculates the unemployment rate. (3 marks)

b. Using the data in the table below calculate (showing your calculations):

1978 2009

Civilian population aged 15 years and over ('000) 10,498.9 17,857.1 Employed ('000) 6010.0 11,013.3

Unemployed ('000) 415.3 655.2

i. The unemployment rate in 1978 (2 marks)

ii. The Labour Force Participation rate in 2009 (2 marks)

iii. The annual average rate of growth in the labour force 1978-2009 (2 marks)

c. Identify and explain the different types of unemployment. (3 marks)

d. Explain what economists mean by the concept of “Full Employment”. (3 marks)


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Question 3: (15 marks in total) 2000 2001 2002

Item Quantity Price $ Price $ Price $

Bread 10 kg 1.00 p/kg 1.20 p/kg 1.50 p/kg

Coke 50 bottles 3.00 p/bottle 2.80 p/bottle 3.20 p/bottle

Petrol 200 litres 1.50 p/litre 1.70 p/litre 2.00 p/litre

The table above presents the quantity of the basket of goods and services consumed by

the typical family, and the prices in 2000, 2001 and 2002.

In all cases show your calculations.

a. Calculate the CPI for 2001 and 2002 if 2000 is the base year. (4 marks)

b. Calculate the CPI for 2001 and 2002 if 2001 is the base year. (2 marks)

c. Calculate the inflation rate between 2001 and 2002 when the base year is 2000. (2 marks)

d. What was the inflation rate between 2001 and 2002 if the base year is 2002? (2 marks)

e. In the diagram below the economy is originally at the long run equilibrium point A. A large negative supply shock however, shifts the economy to point B. Copy the diagram and then use it to illustrate and explain why it is difficult for the central bank to use monetary policy to raise the output level back to the natural level and to lower the inflation rate below 8% at the same time. (5 marks)

Part B continued over the page


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a. i. Use a 45° line diagram to illustrate macroeconomic equilibrium. Ensure that your axes are correctly labelled. (2 marks)

ii. Explain the operation of the multiplier effect. (2 marks)

iii. Use the 45° line diagram to illustrate and explain the multiplier effect of a decrease in government purchases. (2 marks)

b. Illustrate and explain the relationship between the aggregate demand (AD) curve and aggregate expenditure (AE). (6 marks)

c. Use your diagram from part b of this question to show and describe the impact of an appreciation of the Australian dollar against the US dollar on both the AE and AD of Australia. (3 marks)

END OF PAPER

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ECON1020-Sem 1 2011 Final Exam