Sample questions for MAE103 final

examination
Coverage of the final examination:
COMPREHENSIVE. THERE IS NO SELECTIVE
READING.
Questions will cover numerical, problem
solving, analytical and explanation type
questions.
The following are some sample questions and
their answers.
Please note that these are for practice only.
Also note that by just attempting and solving
these questions will not be sufficient for
your final examination preparation.
Your preparation materials should include:
lecture slides, book chapters, tutorial
questions, assignment questions, online
practice questions in APLIA and online test
questions in APLIA.
1

PART A: Multiple Choice Questions

1. Bill has $10 that he can spend on a Superman action figure, a Batman graphic novel or an X-Men
T-shirt. Bill decides to buy the action figure, even though the graphic novel was a close second
choice. What is the opportunity cost of buying the action figure?
A. The amount he spends: $10.
B. Nothing, since he got his preferred choice.
C. The Batman graphic novel.
D. The X-Men T-shirt.
ANS: C

2. A farmer is deciding whether or not to add fertiliser to his or her crops. If the farmer adds 1
kilogram of fertiliser per hectare, the value of the resulting crops rises from $80 to $100 per hectare.
According to marginal analysis, the farmer should add fertiliser if it costs less than:
A. $12.50 per kilogram.
B. $20 per kilogram.
C. $80 per kilogram.
D. $100 per kilogram.
ANS: B

Figure 1. Production possibilities frontier

3. The production possibilities in Figure 1 above indicates that the opportunity cost of corn is:
A. increasing.
B. decreasing.
C. does not change.
D. zero.
ANS: C

4. In Figure 1 above, the opportunity cost of coffee when moving from B to C is:
A. 2 million bushels of corn.
B. 6 million bushels of corn.
C. 8 million bushels of corn.
D. 14 million bushels of corn.
ANS: A
5. In Figure 1 above, the opportunity cost of coffee when moving from A to B is:
A. 2 million bushels of corn.
B. 6 million bushels of corn.
C. 8 million bushels of corn.
D. 14 million bushels of corn.
ANS: A

Figure 2. Production possibilities frontier

6. For the economy shown in Figure 2 above, which of the following is true when the economy is at
point A?
A. Not enough grain is being produced.
B. There must be resources that are not being used fully.
C. If the economy reallocates resources from A to D, it has to sacrifice some car production.
D. Increased grain production would be impossible.
ANS: C

Figure 3. Market demand

7. Suppose there are only three people in the economy: Jane, Harry and Bob. The individual demand
for corn for each of these consumers is given in Figure 3. The total quantity demanded of corn if the
market price is $5 is _____.
A. 3
B. 25
C. 17
D. 8
ANS: B
8. Suppose there are only three people in the economy: Jane, Harry and Bob. The individual demand
for corn for each of these consumers is given in Figure 3. The total quantity demanded of corn if the
market price is $4 is _____.
A. 3
B. 8
C. 17
D. 35
ANS: D

9. If the price of hot dogs increases, what will happen in the market for potato chips, a complementary
good?
A. Demand will increase.
B. Quantity demanded will increase.
C. Demand will decrease.
D. Quantity demanded will decrease.
ANS: C
10. The demand curve shows how the quantity demanded is related to the price. A change in other
variables will:
A. shift the demand curve to the left.
B. shift the demand curve to the right.
C. not shift the demand curve.
D. shift the demand curve.
ANS: D
4

Figure 4. Supply curves

11. In Figure 4 above, a shift in the supply curve from S1 to S2 can be because of:
A. subsidies to consumers.
B. higher taxes imposed on producers.
C. changes in consumer preferences.
D. technological innovation.
ANS: D
12. In Figure 4, which of the following could have caused the shift in the supply curve from S1 to S2?
A. Increase in demand.
B. Decrease in demand.
C. Decrease in the number of suppliers in the market.
D. Increase in the number of sellers.
ANS: D
13. In Figure 4, a shift in the supply curve from S1 to S2 represents a/an:
A. decrease in supply.
B. decrease in the quantity supplied.
C. increase in supply.
D. increase in the quantity supplied.
ANS: C

14. When the price of a good is above its equilibrium price, a:

A. surplus puts upward pressure on the price.
B. surplus puts downward pressure on the price.
C. shortage puts upward pressure on the price.
D. shortage puts downward pressure on the price.
ANS: B

Figure 5. Supply and demand curves

15. Which of the graphs in Figure 5 illustrates a surplus existing at the indicated market price?
A. Graph A.
B. Graph B.
C. Graph C.
D. Graphs A and C.
ANS: B
16. Which of the graphs in Figure 5 above illustrates a shortage existing at the indicated market price?
A. Graph A.
B. Graph B.
C. Graph C.
D. Graphs A and B.
ANS: C
17. An increase in demand and a decrease in supply cause which of the following?
A. Equilibrium price change is indeterminate.
B. Equilibrium quantity decreases.
C. Equilibrium price falls.
D. Equilibrium price rises.
ANS: D

18. If two goods A and B are complements, then an increase in price of good A will result in a:
A. temporary surplus of good B.
B. temporary surplus of good A.
C. temporary shortage of good B.
D. temporary shortage of good A.
ANS: A

Figure 6. Demand and supply curves

19.
A.
B.
C.
D.

In Figure 6, a movement from A to B is best described as a/an:

increase in the quantity supplied and an increase in the demand.
increase in the quantity supplied and a decrease in demand.
decrease in the quantity supplied and an increase in demand.
decrease in the quantity demanded and a decrease in supply.

ANS: B
20.
A.
B.
C.
D.

In Figure 6, a movement from A to B is best explained by:

an increase in income and in the number of suppliers.
an increase in the price of complements and an increase in the price of inputs.
an increase in income and a decrease in the number of producers.
an increase in the number of suppliers and a decrease in price of substitutes.

ANS: D
21.
In Figure 6, a movement from A to B in which price has decreased and quantity has increased
is best explained by a/an:
A. increase in supply and demand.
B. decrease in supply and demand.
C. increase in supply that dominates a decrease in demand.
D. increase in demand that dominates a decrease in supply.
ANS: C

Figure 7. Supply and demand data for cars

Cars demanded
per month
50
55
60
65
70

22.
A.
B.
C.
D.

Price per
car ($)
50
40
30
20
10

000
000
000
000
000

Cars supplied
per month
80
75
70
65
55

In Figure 7, the equilibrium price is:

$10 000.
$20 000.
$30 000.
$40 000.

ANS: B
23.
In Figure 7, assume that the government initially sets a price floor of $30 000 for cars, and
then removes this price floor. What effect will this price change have?
A. The price of cars will rise.
B. The quantity of cars demanded will fall.
C. The quantity of cars supplied will decline.
D. Quantity supplied will continue to exceed quantity demanded.
ANS: C
24.
In Figure 7, assume that the government sets a price ceiling of $10 000 for cars. What effect
will this price change have?
A. The quality of cars will improve.
B. The quantity of cars demanded will fall.
C. A black market for cars is likely to develop.
D. The price of cars will rise.
ANS: C

25.
A.
B.
C.
D.

Which of the following is the best example of a public good?

Apples.
Cars.
Education.
National defence.

ANS: D
26.
A health club sells 100 memberships when the monthly price is $70 and 120 memberships
when the monthly price is $60. The price elasticity of demand for memberships at this health club is
(using the midpoint formula):
A. 0.25.
B. 0.65.
C. 1.18.
D. 1.
ANS: C

Figure 8. Demand curves

27.
A.
B.
C.
D.

In Figure 8, the demand curve between points b and c is:

price elastic.
price inelastic.
unit elastic.
perfectly elastic.

ANS: B
28.
A.
B.
C.
D.

In Figure 8, between points a and b, the price elasticity of demand measures:

0.67.
1.5.
2.
1.0.

ANS: D
29.
A.
B.
C.
D.

In Figure 8, between points b and c, the price elasticity of demand measures

4.27.
1.5.
1.56.
0.636.

ANS: D
30.
A.
B.
C.
D.

In Figure 8, between points a and c, the price elasticity of demand measures

4.1.
0.8.
1.5.
0.3.

ANS: B

31.
A.
B.
C.
D.

Along a straight-line demand curve, the elasticity of demand:

is unitary elastic.
is more elastic as the price falls.
different at every point along the curve.
is perfectly elastic.

ANS: C
32.
A study of consumers in an area found that as family income increased from $25 000 per year
to $35 000 per year and other factors held constant, the number of houses purchased increased from
7000 per year to 11 000 per year. This finding indicates an income elasticity of demand coefficient for
housing over this family income range of:
A. 0.22.
B. 0.75.
C. 1.33.
D. 4.50.
ANS: C
33.
Suppose that the quantity of apples sold increases by 30 per cent after the price of pears
increases by 15 per cent. What is the coefficient of the cross elasticity of demand?
A. 3.
B. 1.5.
C. 0.2.
D. 2.
ANS: D
Figure 9. Production of pizza data
Workers

Pizzas

0
1
2
3
4
5

0
4
10
15
18
19

34.
Figure 9 shows the change in the production of pizzas as more workers are hired. The
marginal product of the second employee equals:
A. 4.
B. 10.
C. 14.
D. 6.
ANS: D
35.
Figure 9 shows the change in the production of pizzas as more workers are hired. The
marginal product of the labour input begins to fall with the employment of the _____ worker.
A. first
B. second
C. third
D. fourth

10

ANS: C
36.
Figure 9 shows the change in the production of pizzas as more workers are hired. The
marginal product of the fifth worker is.
A. 0
B. 1
C. 4
D. 6
ANS: B
37.
A.
B.
C.
D.

Which of the following statements is true?

TC = TFC TVC.
AVC = TC/Q.
TFC = TC TVC.
MC equals the change in ATC divided by the change in Q.

ANS: C
38.
A.
B.
C.
D.

Which of the following is true if the total variable cost curve is rising?
Average fixed cost is increasing.
Marginal cost is decreasing.
Marginal cost is increasing.
Average fixed cost is constant.

ANS: C
Figure 10. Cost schedule for a firm

39.
are
A.
B.
C.
D.

Quantity

Total cost ($)

0
1
2
3

200
900

Marginal cost ($)

900

3000

In Figure 10, by filling in the blanks it can be determined that the fixed costs for the 2nd unit
$0.
$200.
$900.
$1000.

ANS: B
40.
In Figure 10, by filling in the blanks it can be determined that the marginal cost of the first
unit of output is:
A. $200.
B. $700.
C. $900.
D. $1000.
ANS: B

11

41.
In Figure 10, by filling in the blanks it can be determined that the marginal cost of the third
unit of output is:
A. $0.
B. $200.
C. $700.
D. $1200.
ANS: D
42.
is:
A.
B.
C.
D.

In Figure 10, by filling in the blanks it can be determined the variable costs for the first unit
$0.
$200.
$700.
$1000.

ANS: C
Figure 11. Cost schedule for producing pizzas

Pizzas
0
1
2
3
4
5
6
7

43.
A.
B.
C.
D.

Fixed
cost ($)

Variable
cost ($)

Total
cost ($)
48

17
27
78
40
64
80

By filling in the blanks in Figure 11, the AFC of 4 pizzas is shown to be equal to:
$9.50.
$10.00.
$19.50.
$40.00.

ANS: B
44.
A.
B.
C.
D.

By filling in the blanks in Figure 11, the ATC of 4 pizzas is shown to be equal to:
$9.50.
$10.00.
$19.50.
$40.00.

ANS: C
45.
A.
B.
C.
D.

By filling in the blanks in Figure 11, the AVC of 4 pizzas is shown to be equal to:
$9.50.
$10.00.
$19.50.
$40.00.
12

ANS: A
46.
A.
B.
C.
D.

By filling in the blanks in Figure 11, the AFC of 3 pizzas is shown to be equal to:
$9.00.
$10.00.
$13.33.
$22.33.

ANS: C
47.
A.
B.
C.
D.

By filling in the blanks in Figure 11, the ATC of 3 pizzas is shown to be equal to:
$9.00.
$10.00.
$13.33.
$22.33.

ANS: D
48.
A.
B.
C.
D.

By filling in the blanks in Figure 11, the AVC of 3 pizzas is shown to be equal to:
$9.00.
$10.00.
$13.33.
$22.33.

ANS: A
49.
A.
B.
C.
D.

In the long run, total fixed cost will:

remain constant.
increase.
decrease.
not exist by definition.

ANS: D
50.
A.
B.
C.
D.

For a typical firm, the long-run average total cost curve:

is a tangent to the minimum point of each possible short-run average total cost curve.
is a tangent to each possible short-run average total cost curve at one point.
intersects each possible short-run average total cost curve at two points.
passes through the minimum points of all possible short-run average total cost curves.

ANS: B
51.
Assume that the market equilibrium is 100 units at the price of $70. What is the price each
firm can charge if each produces 10 units of output?
A. $7
B. $0.7
C. $70
D. $700
ANS: C

13

52.
A.
B.
C.
D.

If a firm can easily enter and exit the market it operates in which market?
Perfectly competitive.
Monopolistically competitive.
Monopolistic.
Oligopolistic.

ANS: A
53.
A.
B.
C.
D.

One of the characteristics of the perfectly competitive market is:

a small number of large firms.
firms that sell a heterogeneous product.
sellers and buyers both can increase the price on the market.
there is a large number of small firms.

ANS: D
Figure 12

54.
According to Figure 12, the short-run equilibrium output level for this perfectly competitive
firm is:
A. 1000.
B. 100.
C. 120.
D. 130.
ANS: D
55.
A.
B.
C.
D.

Refer to Figure 12 above. The short-run results for this firm are:
a positive economic profit.
a normal profit.
a quasi-loss.
such a large loss it should shut down.

ANS: A

14

56.
According to Figure 12, given the short-run equilibrium of this firm, we would expect in the
long run:
A. the market supply curve to shift to the left.
B. the price to increase.
C. firms to exit the industry.
D. new firms to enter the industry.
ANS: D
57.
The long-run equilibrium condition for perfect competition is:
A. P = AVC = MR = MC.
B. P = ATC = MR = MC.
C. Q = AVC = MR = MC.
D. Q = ATC = MR = MC.
ANS: B
58.
For a monopolist to practise price discrimination, one necessary condition is that the product
offered for sale must be:
A. high quality.
B. expensive.
C. cheap.
D. impossible or difficult to resell.
ANS: D
59.
Perfect competition is considered more efficient than monopoly because, in perfect
competition:
A. P = MC, while in monopoly P < MC.
B. P = MC, while in monopoly P > MC.
C. they sell a homogeneous product.
D. entry is prohibited.
ANS: B
60.
A.
B.
C.
D.

Firms in a monopolistically competitive industry produce:

homogeneous goods and services.
differentiated products.
competitive goods only.
normal goods only.

ANS: B
61.
A.
B.
C.
D.

The climate change issue involves:

no externalities.
neutral externalities.
negative externalities.
positive externalities.

ANS: C

15

62.
Suppose a miller sells flour to a baker for $100. The baker then produces bread from the flour
and sells it to Coles for $600. Coles in turn then sells it to the public for $850. The increase in GDP as
a result of these transactions will be:
A. $1550.
B. $850.
C. $600.
D. $100.
ANS: B
63.
A.
B.
C.
D.

The difference between GDP at factor cost and GDP at market prices is:
wages.
profit.
interest.
indirect taxes less subsidies.

ANS: D
64.
A.
B.
C.
D.

Australian gross domestic product is the market value of all final goods and services:
produced in Australia by Australian citizens during a year.
produced in Australia during a year.
produced outside of Australia during a year.
produced outside Australia by Australian citizens during a year.

ANS: B
65.
A.
B.
C.
D.

Income is an example of a _____, and the money in my bank account is a _____.

stock; flow
stock; stock
flow; stock
flow; flow

ANS: C
66.
A.
B.
C.
D.

Gross private domestic investment does not include:

spending for new houses.
spending to build up inventories.
unintentional inventory investment.
spending on employee salaries.

ANS: D
67.
Which of the following would not be included as part of government spending in GDP
calculations?
A. Police salaries.
B. Road construction.
C. Public service salaries.
D. Transfer payments.
ANS: D

16

Figure 13. Expenditure approach

National income account
Personal consumption expenditures (C)
Net exports (X M)
Federal government consumption and gross investment
expenditures (G)
State and local government consumption and
gross investment expenditures (G)
Imports
Gross private domestic investment (I)

(Billions of dollars)
$500
50
100
200
15
65

68.
As shown in Figure 13, total expenditures by households for domestically produced goods
are:
A. $15 billion.
B. $50 billion.
C. $300 billion.
D. $500 billion.
ANS: D
69.
As shown in Figure 13, total expenditures by businesses for fixed investment and inventories
are:
A. $15 billion.
B. $50 billion.
C. $65 billion.
D. $200 billion.
ANS: C
70.
A.
B.
C.
D.

As shown in Figure 13, total spending by government is:

$100 billion.
$200 billion.
$300 billion.
$600 billion.

ANS: C
71.
A.
B.
C.
D.

Real GDP means GDP:

valued at prices in a base year.
that does not change from year to year.
corrected for changes in quality.
valued at prices at which goods are actually sold.

ANS: A
72.
A.
B.
C.
D.

The phase in the business cycle in which real GDP declines is called a:
trendline.
peak.
recession.
recovery.

ANS: C
17

73.
A.
B.
C.
D.

Retail sales data is an example of a:

leading indicator.
lagging indicator.
coincident indicator.
goal of macroeconomic policy.

ANS: C

Figure 14. Business cycle

74.
A.
B.
C.
D.

In Figure 14, the recovery phase of the business cycle can be represented by points:
A and C.
B and F.
B and D.
C and G.

ANS: B
75.
A.
B.
C.
D.

In Figure 14, point E represents a:

recession and a trough.
peak and a trough.
recession and a trough.
recession and a peak.

ANS: A
76.
A.
B.
C.
D.

In Exhibit 121, the recession phase of the business cycle can be represented by:
D.
B and D.
F.
C.

ANS: A

18

77.
Which of the following is an example of a government policy aimed at increasing the longterm living standards of Australians?
A. Increases in government spending.
B. Decreases in taxes.
C. Decreases in interest rates.
D. Compulsory superannuation.
ANS: D
78.
Which of the following is not an example of government policy in line with the endogenous
growth model?
A. Tax incentives for spending on research and development.
B. Increased public spending on research and development.
C. Patent protection for private firms.
D. Increased spending on roads.
ANS: D
79.
A.
B.
C.
D.

One of the goals of macroeconomic policy should be:

to keep inflation at zero per cent.
to reduce the unemployment rate to zero.
to increase the productive potential of the economy.
to continually increase the saving rate.

ANS: C
80.
Suppose a market basket of goods and services costs $400 in the base year and the consumer
price index (CPI) is currently 125. This indicates the price of the market basket of goods is now:
A. $275.
B. $425.
C. $500.
D. $525.
ANS: C
81.
The problem with measuring inflation using the CPI is:
A. that inflation may be understated for people who buy mainly goods and services whose
prices are stable.
B. that inflation may be overstated for people who buy mainly goods and services whose
prices are rising faster than the average.
C. that the CPI has difficulty in accounting for changes in the prices of goods and services.
D. that the CPI uses a fixed basket of goods and services, and so cannot allow for people
substituting towards cheaper goods and services.
ANS: D
82.
Suppose your nominal income this year is 5 per cent higher than last year. If the inflation rate
for the period was 3 per cent, then your real income:
A. increased by 1.67 per cent.
B. increased by 2 per cent.
C. increased by 8 per cent.
D. declined by 0.6 per cent.
ANS: B

19

83.
A person pays cash for a house in 1990 for $200 000 and sells it in 2000 for $400 000. Over
the same period the CPI has risen from its base index to 200. In terms of this asset, the purchasing
power of this person:
A. has increased
B. has decreased
C. has remained unchanged
D. is indeterminate.
ANS: C
84.
A.
B.
C.
D.

Which of the following can create demand-pull inflation?

Excessive aggregate spending.
Sharply rising oil prices.
Higher labour costs.
Recessions and depressions.

ANS: A
85.
During the 1970s, the Organization of Petroleum Exporting Countries (OPEC) sharply
increased the price of oil which triggered higher inflation rates in Australia. This type of inflation is
best classified as:
A. pseudo-inflation.
B. demand-pull inflation.
C. cost-push inflation.
D. hyperinflation.
ANS: C
86.
Martin Malick lost his job when Holden closed down its local plant. He has been visiting the
personnel offices of the other factories in the area, looking for a new job. He is:
A. a member of the civilian labour force who is employed.
B. a member of the civilian labour force who is unemployed.
C. a member of the civilian labour force who is underemployed.
D. a discouraged worker who is not a member of the labour force.
ANS: B
87.
A.
B.
C.
D.

The unemployment rate might be understating unemployment because of:

a variable interest rate.
overexploited workers.
underemployed workers.
disinterested workers.

ANS: C
88.
A.
B.
C.
D.

An example of frictional unemployment is a/an:

textile worker permanently laid off due to jobs lost to imports.
engineer permanently laid off due to advances in technology.
fast-food restaurant worker who quits work and attends college.
computer programmer who leaves one job and accepts a new job.

ANS: D

20

89.
A.
B.
C.
D.

The economy is fully employed when there is no:

seasonal unemployment.
frictional unemployment.
structural unemployment.
cyclical unemployment.

ANS: D
90.
A.
B.
C.
D.

The effect of an increase in investment on real GDP will be greater, the larger the:
MPC.
APC.
MPS.
APS.

ANS: A
91.
If your disposable personal income increases from $30 000 to $40 000 and your savings
increase from $2000 to $4000, your marginal propensity to save (MPS) is:
A. 0.2.
B. 0.4.
C. 0.5.
D. 0.8.
ANS: A
Figure 15. Aggregate demand and supply

92.
A.
B.
C.
D.

In Figure 15, if aggregate demand shifts from AD1 to AD3, real GDP will:
increase from $3 to $4 and the price level will increase from 100 to 140.
increase from $3 to $7 and the price level will increase from 100 to 140.
increase from $3 to $4 and the price level does not change.
increase from $3 to $7 and the price level will increase from 100 to 120.

ANS: D

21

93.
A.
B.
C.
D.

In Exhibit 142, if aggregate demand shifts from AD3 to AD4, real GDP will:
rise from $7 to $8 and the price level will rise from 120 to 140.
rise from $7 to $8 and the price level will rise from 120 to 170.
rise from $7 to $8 and the price level will rise from 100 to 140.
not change and the price level will rise from 120 to 140.

ANS: A
94.
A.
B.
C.
D.

In Exhibit 142, if aggregate demand shifts from AD2 to AD1, real GDP will:
not change and the price level will not change.
fall from $7 to $4 and the price level will not change.
fall from $4 to $3 and the price level will not change.
fall from $4 to $3 and the price level will fall from 120 to 100.

ANS: C
95.
A.
B.
C.
D.

In Exhibit 142, when aggregate demand shifts from AD4 to AD5, the economy experiences:
cost-push inflation.
cost-pull inflation.
demand-push inflation.
demand-pull inflation.

ANS: D
96.
A.
B.
C.
D.

Stagflation occurs when the economy experiences:

low unemployment and low inflation.
high unemployment and rapid inflation.
low unemployment and rapid inflation.
high unemployment and low inflation.

ANS: B
97.
A.
B.
C.
D.

The key property of money is that it is:

always desired.
fluent.
liquid.
expensive.

ANS: C
98.
A.
B.
C.
D.

Other things being equal, an increase in the rate of interest causes a/an:
upward movement along the demand for money curve.
downward movement along the demand for money curve.
rightward shift of the demand for money curve.
leftward shift of the demand for money curve.

ANS: A

22

99.
If there is excess money supply in the economy, which of the following is most likely to
occur?
A. People will buy bonds, raising bond prices and decreasing interest rates.
B. People will buy bonds, raising bond prices and increasing interest rates.
C. People will sell bonds, raising bond prices and decreasing interest rates.
D. People will sell bonds, decreasing bond prices and decreasing the interest rate.
ANS: A
Figure 16. Money market demand and supply curves

100.
Starting from an equilibrium at E1 in Figure 16, a leftward shift of the money supply curve
from MS1 to MS2 would cause an excess:
A. demand for money, leading people to sell bonds.
B. demand for money, leading people to buy bonds.
C. supply of money, leading people to sell bonds.
D. supply of money, leading people to buy bonds.
ANS: A

TOP: How monetary policy affects the interest rate

101.
Beginning from an equilibrium at E1 in Figure 16, a decrease in the money supply from $150
billion to $100 billion causes people to:
A. sell bonds and drive the price of bonds down.
B. sell bonds and drive the price of bonds up.
C. buy bonds and drive the price of bonds down.
D. buy bonds and drive the price of bonds up.
ANS: A

TOP: How monetary policy affects the interest rate

23

102.
As shown in Figure 16, assume the money supply curve shifts leftward from MS1 to MS2 and
the economy is operating along the intermediate segment of the aggregate supply curve. The result
will be a:
A. higher investment, lower real GDP and lower price level.
B. lower investment, lower real GDP and lower price level.
C. higher investment, higher real GDP and higher price level.
D. higher interest rate and no effect on real GDP or the price level.
ANS: B
103.
Using the aggregate supply and demand model, assume the economy is operating along the
intermediate portion of the aggregate supply curve. An increase in the money supply will increase the
price level and:
A. lower both the interest rate and real GDP.
B. raise both the interest rate and nominal GDP.
C. lower the interest rate and raise GDP.
D. raise the interest rate and lower real GDP.
ANS: C
104.
Assume a simplified banking system subject to a 20 per cent minimum liquidity requirement.
If there is an initial increase in excess reserves of $100 000, the money supply:
A. increases $100 000.
B. increases $500 000.
C. increases $600 000.
D. decreases $500 000.
ANS: B
105.
Since the early 1990s, the RBA has implemented monetary policy primarily by focusing on:
A. interest rates.
B. the money supply.
C. the demand for money.
D. the velocity of money.
ANS: A
106.
When the RBA sells government securities:
A. the reserve deposits of banks rise.
B. the reserve deposits of banks fall.
C. the reserve deposits of banks remain unaffected.
D. the cash rate must fall.
ANS: B

24

Figure 17

107.
According to Figure 17, if the economy is currently operating at point A, the RBA is likely to:
A. increase interest rates to shift the AD curve to AD'.
B. decrease interest rates to shift the AD curve to AD'.
C. decrease interest rates to shift the AD curve to AD.
D. decrease interest rates to shift the AD curve to AD'.
ANS: A
108. According to Figure 17, if the economy is currently operating at point C, the RBA is likely to:
A. decrease interest rates to stimulate aggregate demand and shift the AD curve to the right.
B. increase interest rates to suppress aggregate demand and shift the AD curve to the left.
C. increase interest rates to stimulate aggregate demand and shift the AD curve to the right.
D. decrease interest rates to discourage investments and shift the AD curve to the left.
ANS: A
109.
Assume the marginal propensity to consume (MPC) is 0.8 and the government cuts taxes by
$250 billion. The aggregate demand curve will shift to the:
A. right by $1000 billion.
B. right by $750 billion.
C. left by $1000 billion.
D. left by $750 billion.
ANS: A
110.
Automatic stabilisers tend to stabilise the level of real GDP because:
A. Parliament quickly changes spending and tax revenue.
B. federal expenditures and tax revenues change as the level of real GDP changes.
C. the spending and tax multiplier are constant.
D. wages are controlled by the minimum wage law.
ANS: B

25

Figure 18

111.
According to Figure 18, if we assume the MPC is 0.8, then a shift in the AD curve from AD0
to AD1 would require an increase in government spending of:
A. $5 billion.
B. $10 billion.
C. $50 billion.
D. greater than $50 billion to allow for inflation.
ANS: B
112.
According to Figure 18, if we assume the MPC is 0.8, then a shift in the AD curve from AD0
to AD3 would require an increase in government spending of:
A. $15 billion.
B. $30 billion.
C. $150 billion.
D. greater than $30 billion to allow for inflation.
ANS: D
113.
According to Figure 18, if we assume the MPC is 0.9, then a shift in the AD curve from AD0
to AD1 would require an increase in government spending of:
A. $50 billion.
B. $10 billion.
C. $5 billion.
D. greater than $50 billion to allow for inflation.
ANS: C

26

Part B: Short Explanation Type Questions

Please practice all tutorial questions as short explanation type questions will be very similar
to tutorial questions.
Some sample questions (a number of these are taken from the tutorial questions)
Q1. Suppose the investment demand curve is almost a vertical line. Given this condition,
would the Keynesian or the monetarist view of the impact of monetary policy on
investment spending, aggregate demand and economic activity be more correct?
Answer: The monetarist view would be more correct. Using an expansionary monetary policy
to analyse the Keynesian monetary policy transmission mechanism as an example, the
interest rate that falls as a result of expansionary monetary policy will only increase the
investment level to a small degree. This means that AD will increase insignificantly and have
very little impact on the price level.
The monetarist monetary policy transmission mechanism, on the other hand, has no effect on
investment demand but will change AD and result in a rise in PQ. Since Q is assumed to be
constant (as it is close to full employment), P must be rising.
Q2. Using AD-AS framework, analyse the effect of an expansionary fiscal policy on the
level of real GDP, unemployment and price level.
Answer (pointers): Draw the AD-AS diagram like the way we have shown in the lectures.
Then give an example of an expansionary fiscal policy like increase in government
expenditure (say there is a fiscal stimulus). Explain how this would affect the AD curve
through affecting the consumption component. Now shift the AD curve to the right. Explain
why this policy will not shift the AS curve. Now looking at the new equilibrium point,
explain what happened to the real GDP (increases), unemployment (decreases, why?) and
price level (increases, why?)
Q3. Suppose the RBA decreases the money supply by $5 billion. Show the effect in your
graph and describe the money market adjustment process to a new equilibrium interest
rate. What is the new equilibrium rate of interest?
Answer: The decrease in money supply by $ 5 billion will shift the money supply curve left
from MS to MS1 as shown in the diagram below. Hence, the decrease in the supply of money
will increase the interest rate from 6 per cent to 7 per cent. As the diagram below shows, the
new equilibrium interest rate is 7 per cent.

27

Q4. Could each of the following items potentially serve as money? Consider each as
(1) a medium of exchange, (2) a unit of account and (3) a store of value.
A. Visa credit card, B. A dollar note, C. Cats, D. Beer mugs
Answer:
A. A Visa credit card is not money because it fails to serve as a store of value. It is a
short-term line of credit that can be withdrawn.
B. A dollar note is money and performs all three functions.
C. Cats are not money; because they die, they fail to serve as a store of value.
D. Beer mugs could serve as money as they can be exchanged, can be a unit of account
(though perhaps not very easily) and can be a store of value.

Again, to reiterate,
PLEASE PRACTICE ALL
TUTORIAL QUESTIONS AS SHORT
ANSWER TYPE QUESTIONS.
28