Macro94

For Questions No. 1 and 2, refer

hypothetical economy.
C = 150
I = 100
G = 50

+ 0.8Y
+ 0.1Y

to the following equations which describe a

where

C
Y
I
G

=
=
=
=

Consumption expenditure
Income
Investment expenditure
Government expenditure

If the government expenditure increases by 1, the income of the economy will

increase by
[94.1]
A.
1
B.
5
C.
8
D.
10

Suppose the production function of the economy is

Y = 10N
where N is labour employment. If the labour supply is 400, which of the
following statements is correct?
[94.2]
A.
There is an excess demand for labour.
B.
There is an excess supply of labour.
C.
The equilibrium income is equal to the full employment income.
D.
The equilibrium income cannot be determined with the given
information.

The labour market will be in equilibrium when

[94.3]
A.
the natural rate of unemployment is less than 3
B.
the voluntary unemployment rate is positive.
C.
the involuntary unemployment rate is zero.
D.
equally productive workers receive the same wages for the same jobs.

A shift of the saving curve from S1 to S2 implies that

(1)
the marginal propensity to consume has decreased.
(2)
the autonomous consumption expenditure has increased.
(3)
at each disposable income level, the average propensity to consume
has increased.
[94.4]
A.
(1) and (2) only
B.
(1) and (3) only
C.
(2) and (3) only
D.
(1), (2) and (3)
5

Assume that Country B would like to maintain a fixed exchange rate. When
market conditions generate pressure leading to an appreciation of Bs currency,
the government of Country B should
[94.5]
A.
encourage capital inflow.
B.
increase tariffs to discourage imports.
C.
expand the money supply and tolerate a higher price level.
D.
Any of the above policies.

Which of the following statements about an elementary Keynesian model

without government and external trade is correct?
[94.6]
A.
At Y2, the economy is at full employment.
B.
At Y1, the stock of the economy will increase.
C
At Y3, there will be an unintended increase in stock.
D.
At Y1, realized saving is greater than realized investment.

After the imposition of a proportional income tax, the after-tax consumption

curve would
the before-tax consumption curve.
[94.7]
A.
be steeper than
B.
be flatter than
C.
he parallel to
D.
coincide with

A decrease in the marginal propensity to import will have the same effect on
the size of the income multiplier as
[94.8]
A.
decrease in the marginal propensity to consume.
B.
decrease in the marginal propensity to save.
C..
a decrease in the marginal propensity to invest.
D.
an increase in the marginal propensity to save.

The existence of a deflationary gap indicates that

(1)
the equilibrium income is below the full employment income.
(2)
a surplus budget should be used to eliminate the gap.
(3)
the economy has insufficient aggregate demand to achieve full
employment.
(4)
the real income is smaller than the nominal income.
[94.9]
A.
(1) and (3) only
B.
(1) and (4) only
C.
(2) and (3) only
D.
(2) and (4) only

10

For a vertical IS curve and an upward sloping LM curve, an increase in the

autonomous consumption expenditure and a simultaneous decrease in the
money supply will lead to
in the interest rate and
in national
income.
[94.10]
A.
an increase; no change
B.
a decrease; no change
C.
an increase; an increase
D.
no change; no change
(Deleted)

11

When the marginal propensity to save declines,

[94.11]
A.
the income multiplier will become larger and the IS curve will become
flatter.
B.
the marginal propensity to consume will increase and there will be no
effect on the IS curve.
C.
the income multiplier will become larger and the IS curve will become
steeper.
D.
the income multiplier will decline and the IS curve will become
steeper.

12

If the demand for money is totally independent of the interest rate, the LM
curve would
[94.12]
A.
have a positive slope and the monetary policy would he quite
powerful.
3

B.
C.
D.

be vertical and the monetary policy would be impotent.

be vertical and the monetary policy would be quite powerful.
be horizontal.

13

Which of the following statements about an economy that lies to the left of the
IS curve is correct?
[94.13]
A.
There is an excess demand for commodities at the existing interest
rate.
B.
There will be a tendency for the level of output to decrease.
C.
There is an excess supply of commodities at the existing interest rate.
D.
There will be a tendency for the interest rate to increase.

14

An increasein the money supply will be most effective in stimulating the

aggregate expenditure when the interest elasticity of demand for money is
and the interest elasticity of investment is
.
[94.14]
A.
low; high
B.
high; low
C.
high; high
D.
low; low

15

Which of the following is NOT a result of an increase in the unemployment

benefits?
[94.15]
A.
The search cost of unemployed workers decreases.
B.
The search duration of unemployed workers increases.
C.
The number of people searching jobs decreases.
D.
The unemployment rate increases.

16

The introduction of credit cards will

[94.16]
A
shift the asset demand curve for money with the LM curve being
unaffected.
B.
shift both the asset demand curve for money and the LM curve.
C.
shift the transaction demand curve for money with the LM curve being
unaffected.
D.
shift both the transaction demand curve for money and the LM curve.

17

According to the equation of exchange, if the money supply is fixed at a time

when both the nominal and the real income are increasing, we can conclude
that
[94.17]
A.
full employment is achieved.
B.
the unemployment rate is rising.
C.
the velocity of the circulation of money is falling.
D.
the velocity of the circulation of money is rising.

18

When the central bank buys government bonds from the non-bank public, the
immediate impact on commercial banks is that the reserves are
the
amount of the purchase.
[94.18]
A.
increased by
B.
increased by a portion of
C.
decreased by
4

D.

decreased by a multiple of

19

If part of the loans granted by banks is held as cash by the non-bank public
and does not return to the banking system, the maximum money-creating
ability of the banking system will
[94.19]
A.
increase.
B.
decrease.
C.
he unaffected.
D.
be greater than the reserve ratio times the systems excess reserves.

20

Suppose Mr Chan deposits $1 250 cash in Bank A. Later on the same day
Bank A grants a loan of $2 500 to Miss Lee. What will be the immediate
effect on the money supply?
[94.20]
A.
It will increase by $2 500.
B.
It will increase by $1 250.
C.
It will decrease by $2 500.
D.
It will decrease by $1 250.

21

Other things being equal, a contraction of commercial banks lending [94.21]

A.
will increase the money supply.
B.
will decrease the money supply.
C.
will change the composition, but not the size, of the money supply.
D.
will not change the composition nor the size of the money supply.

22

Given that the velocity of the circulation of money and the real output remain
unchanged, an increase in the money supply will
[94.22]
A.
decrease the nominal rate of interest.
B.
decrease the inflation rate.
C.
increase the real rate of interest.
D.
increase the price level.

23

Which of the following is a problem when price indexes are used as an

indicator of the inflation rate?
[94.23]
A.
The substitution of low-priced goods for high-priced goods is not
considered.
B.
The sample basket of chosen goods may not be a representative one.
C.
The improvement in the quality of the goods is not fully reflected.
D.
All of the above.

24

Inflation will occur when

[94.24]
A.
the government carries out expansionary policies.
B.
the growth rate of money is greater than the growth rate of real output.
C.
the income of the economy grows.
D.
the prices of some of the goods start to rise.

25

Reducing the money supply would be a more appropriate policy for an

economy with
and a balance of payments
problem. [94.25]
A.
inflation; surplus
B.
unemployment; deficit
C.
inflation; deficit
6

D.
26

unemployment; surplus

The labour input requirements for the production of cars and garments in
Japan and Hong Kong are given below.

1 unit of cars
1 unit of garments

Japan
1 man-hour
3 man-hours

Hong Kong
2 man-hours
4 man-hours

If there are no transportation costs, which of the following statements is

correct?
[94.26]
A.
Japan has a comparative advantage in producing cars and an absolute
disadvantage in producing garments.
B.
Japan has a comparative disadvantage in producing cars and a
comparative advantage in producing garments.
C.
Japan has a comparative advantage in both goods.
D.
Japan has an absolute advantage in both goods.
27

Based on the data in Question No. 94.26, which of the following term of trade
will lead to a commodity exchange between Japan and Hong Kong? [94.27]
A.
1 unit of cars can be exchanged for 1 unit of garments
B.
1 unit of cars can be exchanged for 0.4 units of garments
C.
1 unit of cars can he exchanged for 0.25 units of garments
D.
1 unit of cars can be exchanged for 4 units of garments

28

Assuming Country A has adopted a floating exchange rate regime, which of

the following is most likely to result in an appreciation of As currency in the
foreign exchange market?
[94.28]
A.
a rise in As trading partners interest rates
B.
an increase in the national income of A
C.
As trading partners have experienced sustained inflation while the
domestic prices of A have remained stable
D.
a mass outflow of capital from A for non-economic reasons

29

Consider a closed economy with expenditures given by :

C
I
G
Ta
Tr

=
=
=
=
=

1000
400
200
100
50

(Consumption)
(Investment)
(Government expenditure)
(Tax)
(Transfer Payment)

The gross national product of the economy is

A.
1 450
B.
1 500
C.
1 550
D.
1 600

[94.29]

30

Tariffs protect
.
A.
consumers
B.
the import-competing industries
C.
the export industries
D.
both the import-competing and the export industries

[94.30]

SECTION B
94.1. Consider the following economic model:
C
T
I
G

=
=
=
=

20
+ 0.8Yd
0.25 (Y - 100)
100
60

where

C
Yd
T
Y
I
G

=
=
=
=
=
=

Consumption expenditure
Disposable income
Tax
income
investment expenditure
government expenditure

(a)

Find the income multiplier.

(b)

Find the equilibrium values of income, consumption and the government

budget surplus.
(6 marks)

94.2

Explain why people reduce their cash holdings and savings deposit balances in
banks when there is high inflation.
(8 marks)

94.3
(a)
(b)

(2 marks)

Explain briefly how purchases of government bonds by the central bank would
affect the money supply.
(3 marks)
If the reserve ratio is 0.2, what is the impact on the money supply if the central
bank purchases bonds worth 1 million dollars? List two of the assumptions
you have made in your calculation.
(5 marks)

94.4 Use the elementary Keynesian model to compare the differences in the
fluctuations in income caused by fluctuations in investment under lump sum
and proportional tax systems.
(8 marks)
94.5

An economy uses labour to produce goods X and Y. the labour requirements

for each unit of X and Y are 1 and 2 respectively. In the absence of
international trade, the economy consumes 100 units of x and 100 units of Y.
(a)
Explain which good, X or Y, the economy will export.
(2 marks)
(b)
In what way will international trade affect the production and the
consumption of the economy?
(6 marks)

94.6

Use demand and supply analysis, with the vertical axis as the exchange rate
(price of foreign currency) to explain how an increase in imports would affect
(a)
the exchange rate under a floating exchange rate system. (4 marks)
(b)
the official and the black market exchange rates in a fixed exchange
rate system (assume that the black market exchange rate is initially
higher than the official rate).
(6 marks)
8

94.7

94.8
(a)

(b)

94.9

Suppose that the money demand function is Md = kYP, where Md = money

demand, Y = real income, P = price level and k is a positive constant.
(a)
Explain how k is related to the velocity of the circulation of money if
the Quantity Theory of Money holds
(6 markets)
(b)
Explain, with the help of an example, how changes in institutional
arrangements can affect the velocity of the circulation of money.
(4 marks)

Suppose in a fixed-price IS/LM model, consumption only depends on income.

Explain how an expansionary monetary policy affects the income level of the
economy.
(4 marks)
If consumption is not only affected by income but also depends negatively on
the interest rate, explain whether an expansionary monetary policy can be
more effective in affecting income.
(6 marks)
The following table gives the unit value indices of Hong Kong exports and
imports in 1991 and 1992:
(10 marks)

1991
1992
(a)
(b)

Exports Unit
Value Index
102.6
103.5

Imports Unit
Value Index
101.9
102.1

Explain whether there is any improvement in the terms of trade from

1991 to 1992.
(3 marks)
Suppose a countrys import volume of one good takes up a large share
of the worlds supply. Explain why this country can improve its
welfare through the imposition of tariffs on the good. Briefly explain
whether you arguments apply to Hong Kong.
(7 marks)

Solution
SECTION A
1D

16 D

2B

17 D
18 A

3C
4A
5C
6C
7B
8B
9A
10 X
11 A
12 C
13 A
14 A
15 C

19 B
20 A
21 B
22 D
23 D
24 B
25 C
26 D
27 B
28 C
29 D
30 B

10