Macro90

Which of the following are included in the national income of Hong Kong?
(1)
government spending on public assistance
(2)
commission from the sale of second-hand cars
(3)
salaries of the employees of the Jockey Club
(4)
receipts from the sale of stocks and shares
A.
(1) and (2) only
B.
(1) and (4) only
C.
(2) and (3) only
D.
(3) and (4) only

In a hypothetical closed economy,

C = 50
+ 0.8Y
I = 20
Y = 10N

C
Y
I

= consumption expenditure
= national income
= investment expenditure

= employed labour force

[90.1]

If the total labour force is 50, how much will the government have to spend so that
national income will reach its full employment level?
[90.2]
A.
30
B.
150
C.
350
D.
500
3

The most feasible and frequently used instrument of monetary policy in Hong Kong is:[90.3]
A.
open market operations in foreign exchange
B.
changes in discount rates
C.
variations in reserve requirements
D.
moral suasion

Which of the following are preconditions for open market operations to be effective?[90.4]
(1)
There is a large stock of government securities.
(2)
Commercial banks have a propensity to keep excess reserves.
(3)
There is a well-developed securities market.
(4)
There is a Central Bank.
A.
(1), (2) and (3) only
B.
(1), (2) and (4) only
C.
(1), (3) and (4) only
D.
(2), (3) and (4) only

An expansionary fiscal policy will be less effective if

[90.5]
A.
the country has a low marginal propensity to import.
B.
interest rates are rigid due to institutional and legal restrictions.
C.
there is considerable unemployment.
D.
households respond to a temporary rise in disposable income by reducing their
marginal propensity to consume.

Which of the following is the least inflationary measure to reduce a budget deficit? [90.6]
A.
open market sales of government bonds
B.
raising sales tax
C.
raising income tax
D.
borrowing from foreign financial institutions

The following table gives the output of X and Y per unit of resources in countries A and
B.
Country
A
B
Goods
X
1
3
Y
2
4
Which of the following terms of trade will allow mutually beneficial trade between the
two countries to occur?
[90.7]
A.
1X=2Y
B.
2X=3Y
C.
3X=4Y
D.
All of the above.

Consider the following information about a hypothetical economy

I
= 10
- 100r
where I
= investment
S = 0.15Y
r
= interest rate
Md = 100
+0.4Y - 500r
S
= saving
Y
= income
Ms = 100
Md = demand for money
Ms = money supply
What can be said about the economy when Y = 100, r = 8%?
A.
There is an excess supply in the money market.
B.
There is an excess supply in the product market.
C.
There is an excess demand in the money market.
D.
There is an excess demand in the product market.

When the Phillips Curve shifts up,

A.
the expected rate of inflation rises.
B.
unemployment falls.
C.
the aggregate supply curve shifts up at a constant rate.
D.
the aggregate demand curve shifts up at a constant rate.

[90.8]

[90.9]

10

If the domestic currency is devalued, then

A.
the balance of payments will improve.
B.
the balance of payments will deteriorate.
C.
the balance of payments will be unaffected.
D.
the effect on the balance of payments is uncertain.

[90.10]

11

Which of the following statements about inflation are correct?

[90.11]
(1)
Inflation can exist in a barter economy.
(2)
in times of inflation, income will be redistributed from the general public to the
government.
(3)
The nominal interest rate will be greater than the real interest rate when inflation
is fully anticipated.
(4)
Inflation can be eliminated by price control.
A.
(1) and (3) only
B.
(1) and (4) only
C.
(2) and (3) only
D.
(2) and (4) only

12

The natural rate of unemployment can-be reduced by

A.
allowing Vietnamese refugees in open camps to work in Hong Kong.
B.
an expansionary fiscal policy.
C.
increasing the money supply.
D.
improving labour market information and mobility.

[90.12]

13

Which of the following correctly explains the rightward shift of the asset demand
function from MA0 to MA1?
[90.13]
A.
a rise in the interest rate
B.
a rise in the marginal efficiency of investment
C.
an increase in the sale of government bonds
D.
a rise in the risk of holding bonds

14

Consider the following data of a hypothetical economy

Year
1
2

Money Stock ($ million)

45
50

GDP ($ million, current prices)

400
600

Which of the following statements about the economy must be correct?

A.
There was a fall in real GDP.
B.
There was a fall in the general price level.
C.
There was a rise in the income velocity of money.
D.
There were fluctuations in the demand for money.

[90.14]

15

Assume that both the IS curve and the LM curve have normal slopes, then an increased
desire to save, other things being equal, will lead to a
in the interest rate and
a
in the national income.
[90.15]
A.
rise; rise
B.
rise; fall
C.
fall; rise
D.
fall; fall

16

In the
then
A.
B.
C.
D.

17

The L-shaped Keynesian aggregate supply curve suggests that

(1)
there is downward rigidity in wages.
(2)
inflation emerges only when the economy reaches full employment.
(3)
unemployment, if it ever exists, must be voluntary.
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3)

18

A person deposits $1 000 with the banking system. The required reserve ratio is 0.25.
As a result of the deposit, the maximum amount of deposit created would be
and
the maximum amount of money supply created would be
.
[90.18]
A.
$4 000; $4 000
B.
$4 000; $3 000
C.
$3 000; $4 000
D.
$3 000; $3 000

IS-LM model, if there is a simultaneous cut in the tax rate and the money supply,
[90.16]
the national income will rise.
the national income will decrease.
the interest rate will rise.
the interest rate will fall.
[90.17]

19

The maximum banking multiplier will increase when there is

A.
a reduction in the excess reserve ratio in the banking system.
B.
a reduction in the minimum legal reserve ratio.
C.
a wider spread of the banking habit among the public.
D.
technological progress in the electronic payments system.

20

Refer to the following diagram about a country

[90.19]

AB = pre-trade consumption possibility curve

AC = post-trade consumption possibility curve
Which of the following statements about the country are correct?
[90.20]
(1)
Trade allows consumption to go beyond its production possibility curve.
(2)
It has a comparative advantage over its trading partner in the production of X
(3)
The cost to its trading partner of producing 1 Y is higher than 1.5 X.
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3)
21

The Purchasing Power Parity Theory implies that

[90.21]
A.
domestic inflation will be reflected in exchange rate movements.
B.
short term movements in exchange rates will not be affected by expectations.
C.
the existence of transaction costs tends to hinder exchange rate movements.
D.
the exchange value of a currency goes in the same direction as its domestic
interest rates.

22

The major difference between a quota and a tariff on imports lies in their effects on[90.22]
A.
wealth redistribution.
B.
domestic production.
C.
domestic consumption.
D.
the price level.

23

A
in the interest rate will raise the desired stock of capital in an economy; the
schedule of marginal efficiency of capital will
as a result.
[90.23]
A.
fall; not change
B.
rise; not change
C.
fall; rise
D.
rise; rise

24

The inflation rate and the real interest rate were expected to be 5% and 4% respectively.
In reality, the actual inflation rate turned out to be 7%. What was the real interest rate?[90.24]
A.
1%
B.
2%
C.
3%
D.
9%

25

The diagram below shows the aggregate expenditure in a closed economy

At the equilibrium income level, the average propensity to consume is shown by the ratio[90.25]
A.
UQ/0Q
B.
TP/0P
C.
SQ/0Q
D.
US/0Q
26

The Quantity Theory implies that in the short-run a change in the money stock will affect[90.26]
A.
real output only.
B.
the price level only.
C.
both the real output and the price level.
D.
the income velocity of money.

27

Which of the following will contract the money supply in Hong Kong?
(1)
a decline in public confidence in the banks
(2)
the Hongkong Bank takes over all other banks
(3)
a balance of payments deficit under the linked exchange rate system
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3)

[90.27]

28

Monetary policy is more effective if

(1)
investment is highly interest elastic.
(2)
the asset demand for money is highly interest elastic.
(3)
the transactions demand for money is highly income elastic.
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3)
(Deleted)

29

Under a system of floating exchange rates, which of the following will be the most likely
consequences of an increase in the domestic interest rates?
[90.29]
(1)
an increase in the demand for domestic currency
(2)
a decrease in the demand for domestic currency
(3)
an increase in the foreign exchange value of the domestic currency
(4)
a decrease in the foreign exchange value of the domestic currency
A.
(1) and (3) only
B.
(1) and (4) only
C.
(2) and (3) only
D.
(2) and (4) only

30

Refer to the diagram below

S
1
G
Y

=
=
=
=

[90.28]

saving
investment
government expenditure
income

Which of the following statements is INCORRECT?

A.
The expenditure multiplier will decrease.
B.
The IS curve will shift to the right.
C.
The average propensity to save will increase.
D.
There will be a rise in realized injection.

[90.30]

SECTION B
90.1. Explain what is meant by automatic stabilizers of fiscal policy. Give at least two
examples.
(10 marks)
90.2. Thriftiness, while a virtue for the individual, is disastrous for an economy which is not
fully employed. Explain this statement, with the aid of a diagram.
(10 marks)
90.3. Define tariff. Under what conditions are tariffs effective in correcting a balance of
payments disequilibrium?
(10 marks)
90.4.

The following table gives the output of X and Y per unit of resources in countries A and
B.
Country
A
B
Goods
X
1
3
Y
2
4
It is less costly for Country A to produce Y because one unit of resources can produce
2Y but only 1X. Therefore, Country A enjoys a comparative advantage in producing Y.
Explain why the above line of reasoning is wrong.

(10 marks)

90.5.

Explain the meaning of liquidity trap with the aid of a diagram.

(10 marks)

90.6.

Suppose that, on a certain date, the consolidated balance sheet of the banking system is as
follows (in billion dollars):
Assets
Cash
Loans and advances
Investments

50
115
35
200

Liabilities
Customers deposits
Capital

175
25
200

The minimum legal cash ratio is 25%.

(a)
According to the above balance sheet, can the banking system as a whole engage
in further multiple deposit expansion? If so, how?
(8 marks)
(b)
Suppose customers withdraw $25 billion deposits in cash. Show what the banking
system needs to do in order to meet the legal requirement.
(8 marks)
(c)
Suppose the banking system buys bonds worth $5 billion from the public. Show
how the consolidated balance sheet will change as a result.
(9 marks)

90.7.

Under Hong Kongs present linked exchange rate system, what will happen to the
exchange rate between the Japanese yen and the Hong Kong dollar, if, assuming other
things being equal,
(a)
the US dollar depreciates by 10 percent against the Japanese yen?
(9 marks)
(b)
Hong Kong has a large surplus against Japan in its balance of payments?
(7 marks)
(c)
the inflation rate rises in the USA?
(9 marks)
Use simple diagrams to illustrate your answer.

90.8.
(a)
Explain whether inflation would occur in the following situations
(1)
the imposition of a sales tax to reduce a fiscal deficit
(8 marks)
(ii)
a continuous increase in the money supply when the economy is also growing
(8 marks)
(b)
If inflation is fully anticipated, would there be redistribution of income? Explain.
(9 marks)
9.

Some economists argue. that the interest rate is determined by monetary forces (the
demand for and supply of money) only. Others claim that it is determined by real forces
(thrift and productivity) only. Comment on these two views and show that they can be
synthesized by using the IS-LM model. Use simple diagram to illustrate your answer.
(25 marks)

Solution
SECTION A
1C

16 C

2A

17 C

3A

18 B

4C

19 B

5D

20 B

6C

21 A

7B

22 A

8B

23 A

9A

24 B

10 D

25 D

11 C

26 C

12 D

27 B

13 D

28 X

14 C

29 A

15 D

30 A

10