EC1301

NATIONAL UNIVERSITY OF SINGAPORE

EC1301 PRINCIPLES OF ECONOMICS

(SEMESTER I: A Y2004-2005)

Time Allowed: 2 Hours

INSTRUCTIONS TO CANDIDATES

1. This examination paper consists of SEVENTY (70) multiple choice questions and comprises TWENTY -ONE (21) printed pages, including the cover page.

2. Candidates must attempt ALL questions. Each question is worth 6/7 mark. The total mark for this paper is 60.

3. All questions must be answered on the computer bubble form provided.

4. This is a CLOSED BOOK examination.

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1. Because marginal product decreases as input is increased [A] it takes zero input to produce one more unit of output.

[B] the amount of input it takes to produce one more unit of output does not change. [C] nothing is implied about how much input is required to produce one more unit of

output.

[D] it takes decreasing amounts of input to produce one more unit of output. [E] it takes increasing amounts of input to produce one more unit of output.

2.

3,1011

R.1l GDP (bili_ 011987 doll_I) ",DOlI

•

1.ADll

3,100

2,1011

Iml 1972 1914 1976 1m IPID

--rrIllODP

-- .,D1I1hvml& I

In the figure above, the best example of a recession phase is

[A] from point b to point d. [B] from point b to point c.

[C] from point a to point b. [E] from point a to point d.

[D] from point a to point c.

3. Ifreal GDP and population are both growing at a positive rate [A] real GDP must be growing faster than real GDP per capita. [B] real GDP per capita must be increasing.

[C] real GDP must be growing slower than real GDP per capita.

[D] real GDP per capita must be decreasing.

[E] none of these

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4. Suppose computer technicians have been making a lot of money so the number of individuals becoming computer technicians doubles. Then in the market for computer technicians

[A] the equilibrium computer technician wage (price) will fall and the number of

technicians hired will fall.

[8] the equilibrium computer technician wage (price) will fall.

[C] demand increases because there are so many more technicians available.

[D] the number of computer technicians employed will fall as the market becomes saturated.

[E] As demand is not changing, no more computer technicians will be hired.

5. The long-run overall effect of decreased government purchases is [A] consumption is lower, and investment is higher.

[8] consumption and net exports are higher. [C] investment is higher.

[D] consumption and net exports are the same, and investment is higher. [E] consumption, investment, and net exports are all higher.

6. As firms enter a competitive industry [A] industry economic profits increase.

[8] output price falls and industry output increases.

[C] output price falls and individual firms increase output. [D] output price falls and cost curves shift down.

[E] market demand increases and industry output increases.

7. At any given market price, a consumer

[A] will feel cheated by the individual seller.

[8] will never be able to buy a quantity of the good that maximizes utility. [C] holds out (refuses to buy) until the price falls.

[D] will seek to buy a quantity of a good that maximizes utility.

[E] will always be able to buy a quantity of the good that maximizes utility.

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8. An increase in the price of a good

[A] increases the number of combinations of goods a consumer can purchase. [B] changes the consumer's preferences.

[C] has no effect on the maximum combinations of goods the consumer can purchase. [D] decreases the total utility of the consumer.

[E] increases the quantity of the good demanded by a consumer.

9. The long-run effect of a decline in exports is

[A] for net exports to decline, with no change in investment or consumption. [B] for there to be no change in any of the aggregate-expenditure categories.

[C] an ambiguous change in net exports and a decline in both investment and consumption. [D] an increase in net exports, consumption, and investment.

[E] an ambiguous change in net exports and an increase in both consumption and investment.

10.

Inflation

P oLemel ODP

ReelODP (percent devio.t.ion from potential)

Suppose the economy is initially at point A in the figure above. If government purchases increase, which point best depicts where the economy will be in the short run as a result of the change in spending?

[A] F

[E] E

[C] D

[D] B

[B] C

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11. Which of the following best explains how employment can increase at the same time as the real wage is decreasing?

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

[B] 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.

[C] 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.

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

[E] 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.

12.

Year Price RealGDP Money Velocity
Level (billions of SUlll"Y
1987 dollars)
1988 0.95 4.719 3.078 1.45
1989 4,838 3.233 1.60
1990 4.897 3.346 1.65
1991 4.861 3.346 1.75 According to the above table, the rate of inflation between 1990 and 1991 was

[A] 6.2 percent. [D] 4.4 percent.

[B] 2 percent. [E] 5.8 percent.

[C] - 6.4 percent

13. If both hours worked per employee and the number of employed workers stay constant while the working-age population increases,

[A] aggregate hours will not change.

[C] the unemployment rate will decrease. [E] aggregate hours will increase.

[B] the unemployment rate will increase. [D] aggregate hours will decline.

14. If the currency-to-deposit ratio is 0.3, the reserve-to-deposit ratio is 0.2, and the amount of currency in circulation is $540 billion, then the money supply is equal to

[A] $1,944 billion. [B] $1,460 billion. [C] $1,470 billion.

[D] $2,340 billion. [E] $1,404 billion.

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15.

1997 1998
Price Quantity Price Quantity
Bananas 2 100 4 125
Sunscreen 5 60 4- 75 If prices were kept constant at 1998 levels, then according to the above table, production between 1997 and 1998 changed by

[A] 28 percent. [B] 25 percent. [C] 30 percent.

[D] 60 percent.

[E] 20 percent.

16. Which of the following statements is true when the central bank increases reserves by buying a government bond from a bank?

[ A] The amount of reserves in the banking system will increase by the amount of the bond purchase.

[B] The amount of loans made by the banking system will increase by the amount of the bond purchase.

[C] The amount ofloans made by that bank will be greater than the increase in reserves. [D] The amount of deposits made by the banking system will increase by the amount of the bond purchase.

[E] The amount of reserves in the banking system will increase by an amount greater than the amount of the bond purchase.

17. When a market equilibrium is achieved,

[ A] those who are willing to pay the most for the good obtain it. [B] government regulation will have succeeded.

[C] anyone who has the skills to produce the good sells some. [D] anyone who is willing to pay anything for the good obtains it. [E] shortages and surpluses become minor.

18. If the price of product X falls and this causes the demand for product Y to shift to the right, then we can conclude

[A] X and Y are substitutes. [C] X and Y are normal.

[B] X and Y are complements.

[D] X and Y are inferior.

[E] X and Y are not related.

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19. When the rate of inflation rises, the goal of the central bank is to

[A] raise the nominal rate of interest. [B] lower the real rate of interest.

[C] increase aggregate expenditures. [E] raise the real rate of interest.

[D] lower the nominal rate of interest.

20. If the central bank determines aggregate demand is not very sensitive to changes in the interest rate,

[A] the monetary-policy-rule line will shift down.

[B] the monetary-policy-rule line will become steeper. [C] the monetary-policy-rule line will shift up.

[D] there will be movement along the monetary-policy-rule line. [E] the monetary-policy-rule line will become flatter.

21. Which of the following statements concerning a French manager working in the United

States is true?

[A] The salary of the French manager is part of net exports.

[B] The salary of the French manager is not part of U.S. labor income.

[C] The salary of a French manager, which is payment for services produced, is not included in GDP.

[D] The salary of the French manager is included in labor income. [E] The salary of the French manager is included in France's GDP.

22. As a measure of money, Ml emphasizes the use of money as

[A] a unit of account. [B] an illiquid asset. [C] a medium of exchange.

[D] a store of value.

[E] a standard of deferred payment.

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23. Which of the following statements is incorrect?

[A] In order to achieve efficiency a producer whose marginal cost is lower than his

competitors should produce more than his competitors.

[B] Taking money from the rich and giving it to the poor does not improve efficiency. [C] If all consumers experience the same marginal benefit, equity has resulted.

[D] Three conditions must be met to achieve efficiency.

[E] If marginal cost exceeds marginal benefit, too much is being produced.

24. Which of the following is not a determinant of aggregate supply capability? [A] Available know-how

[B] Aggregate demand [C] The amount of factories in the economy

[D] The supply oflabor [E] Computers

25. In a hypothetical economy, a market basket consists of one stereo and two TVs. In the base year, 1987, the price of a TV was $200, and the price of a stereo was $500. In 1993, the price of a TV was $380, and the price of a stereo was $750. The CPI for 1993 was

[A] 1.00. [D] 1.63.

[B] 1.68.

[C] 2.00.

[E] CPI cannot be calculated with the given information.

26. Which of the following statements best describes the money multiplier?

[A] The money multiplier shows how much the money supply will change as a result of a change in the monetary base.

[B] The money multiplier shows how much loans will change as a result of a change in reserves.

[C] The money multiplier shows how much deposits will change as a result of a change in reserves.

[D] The money multiplier shows how much the money supply will change as a result of a given change in reserves.

[E] The money multiplier shows how much the money supply will change as a result of a change in deposits.

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27. For a hypothetical economy in a given year, GDP equaled $1,171, consumption equaled $482, investment equaled $286, goods exported equaled $198, and goods imported equaled $57. What did government spending equal?

[A] $148 [B] $544 [C] Not enough information is given. [D] $403

[E] $262

28. Which of the following statements isfalse?

[A] When a competitive firm increases output by one unit, revenue increases by an amount equal to market price.

[B] A competitive firm maximizes profit when marginal revenue equals marginal cost. [C] When a monopoly increases output by one unit, revenue increases by an amount less than market price.

[D] A monopoly and a competitive firm use a similar rule for setting output to maximize profit.

[E] A monopoly maximizes profit when price equals marginal cost.

29. Trends and fluctuations in nominal interest rates [ A] depend on the exchange rate.

[B] are closely connected with real GDP and the rate of inflation.

[C] are closely connected only with trends and fluctuations in the rate of inflation. [D] are closely connected with real GDP and not with the rate of inflation.

[E] are not closely connected with any economic variable.

30. One reason the government should formulate a technology policy is [A] the incentives to produce the technology are too high.

[B] so research on technology can be kept secret.

[C] that private incentives for technology production may outweigh the social benefits of such production.

[D] the incentives are too low without government intervention. [E] the technology being produced is highly excludable.

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31. An individual who purchases a computer later decides to acquire a new motherboard. In terms of computing GOP, this new motherboard would be a(n)

[A] economic good. [B] input. [C] double good.

[0] final good. [E] intermediate good.

32. If a $1 increase in price changes quantity demanded by 4 units, [ A] price elasticity of demand must equal 4 percent.

[B] price elasticity of demand cannot be calculated with this information. [C] price elasticity of demand must equal 114.

[0] price elasticity of demand must equal 4.

[E] price elasticity of demand must equal .25 percent.

33. A price-taking firm cannot affect its own output price because

[A] market demand is perfectly elastic, that is, even a tiny increase in price will result in

zero quantity demanded.

[B] price is determined by consumers, not producers.

[C] of government statutes, such as price floors and price ceilings.

[0] consumer preferences dictate a single price in a competitive market.

[E] it is only one firm among many, so the price is determined in the market as a whole.

34. Suppose people are holding $100 million of currency, total deposits in the banking system

are $2,000 million, and bank reserves are $400 million. In this case,

[A] we do not have enough information to determine the money supply. [B] the supply of money is $2,500 million.

[C] the supply of money is $2,100 million.

[0] the supply of money is $2,000 million.

[E] the supply of money is $2,400 million.

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35.

Total Spending (billions of dollars)
C I G X
1991 3906 737 1099 -20
1992 4140 797 IB2 -30 According to the above table, national saving between 1991 and 1992 changed by

[A] $83 billion. [B] Not enough information is given.

[C] $60 billion. [0] $50 billion. [E] O.

36. The equation for the real interest rate indicates that, other things equal, [A] as inflation decreases, real income will fall.

[B] as inflation changes, the real interest rate will not change. [C] as inflation decreases, the real interest rate will rise.

[0] as inflation increases, the real interest rate will rise.

[E] as inflation increases, the nominal interest rate will fall.·

37. Which of the following would be emphasized as a primary cause of economic fluctuations

according to a real business cycle theorist?

[A] changes in investment spending [B] changes in technology [C] changes in the weather which severely impact the agricultural sector

[0] changes in taxes [E] changes in government spending

38. The aggregate-demand curve and the inflation-adjustment line intersect [A] where real GOP is equal to potential GOP.

[B] where real GOP is greater than potential GOP.

[C] where real GOP is greater than or equal to potential GOP.

[0] where real GOP is less than, equal to, or greater than potential GOP. [E] where real GOP is less than potential GOP.

39. If the growth rate of technology is 3 percent over a given period of time, and there has been no change in the amount of capital per hour worked, then, based on the growth accountingformula, the growth rate of real GOP per hour of work is

[A] 1 percent. [B] 2 percent. [C] 2.67 percent.

[0] 3.33 percent.

[E] 3 percent.

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40. Which of the following will cause unemployment from job search to decline? [A] Improving communications about the labor market

[B] Lowering the minimum wage [C] Increasing the minimum wage

[D] Increasing the bargaining strength of labor

[E] Increasing unemployment compensation

41. Which of the following statements is true?

[A] Rental payments are part of depreciation. [B] Rental payments are part of labor income. [D] Interest payments are part of depreciation. [E] Rental payments are part of capital income.

[C] Profits are part of labor income.

42. Which of the following statements is true?

[A] During a business cycle, the unemployment rate increases only if real GDP is below potential GDP.

[B] During a business cycle, the unemployment rate increases at the same time real GDP increases.

[C] During a business cycle, the unemployment rate increases at the same time real GDP declines.

[D] During a business cycle, the unemployment rate declines at the same time real GDP declines.

[E] There is no relationship between real GDP and the unemployment rate over a business cycle.

43.

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Spending

V,. 1 V,.2 Vllr3

In the above figure, line abd shows the path of potential GDP. In Year 2, suppose the expenditure line intersects the 45-degree line at the level of spending corresponding to point b. If, in Year 3, the economy is at point c, then

[A] the expenditure line has shifted up the 45-degree line to a point where real GDP equals potential GDP in Year 3.

[B] the expenditure line has shifted down the 45-degree line.

[C] the expenditure line has shifted up the 45-degree line more than it would have if real GDP equaled potential GDP in Year 3.

[D] the expenditure line has shifted up the 45-degree line and equals a level of income greater than real GDP.

[E] potential GDP has risen, and we've moved to a new point of spending balance.

44. An important implication of scarcity is that [A] it inhibits economic interaction.

[C] people must make a choice.

45. c = 100 + O.7Sr

/=200

[B] it is a problem easily abolished. [D] people will always be poor.

[E] people are not able to use all the available resources.

G=200

X= 100

Based on the above information, the level of equilibrium output is

[A] 2,400.

[B] 1,800.

[C] 600.

[D] 2,800.

[E] 800.

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46. At the end of a recession

[A] potential GDP equals real GDP.

[C] potential GDP is less than real GDP. [E] potential GDP is greater than real GDP.

[B] real GDP is greater than potential GDP. [D] real GDP is falling.

47. Expectations of steady inflation and staggered wage and price setting are two reasons why [A] inflation changes immediately after a change in real GDP.

[B] the fA line is usually upward sloping.

[C] inflation is highly variable during the short run. [D] the fA line is usually downward sloping.

[E] inflation does not change very much in the short run.

48. Which of the following statements is true?

[A] A change in government purchases affects GDP but not income.

[B] A change in government purchases has no effect on GDP, but it does affect consumption.

[C] A change in government purchases affects income. However, the change in income does not affect consumption.

[D] A change in government purchases affects GDP, which is the same as income. The change in income affects consumption.

[E] A change in government purchases does not affect income or consumption.

49. Which of the following might cause the natural unemployment rate to increase?

[A] More young people entering the workforce [B] People having fewer children

[C] Unemployment insurance is abolished [D] Aging of the labor force

[E] An increase in migration to other countries

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50. Compared to the baseline, the short-run effect of a monetary policy change to lower

inflation is for

[A] consumption, investment, and net exports to decline.

[8] consumption and investment to decline while net exports increase. [C] consumption and net exports to increase while investment falls.

[0] consumption, investment, net exports, and government purchases to decline. [E] consumption and net exports to decline, while investment stays constant.

51. Which of the following statements is true?

[A] A higher value of the domestic currency means more expensive exports and cheaper imports.

[8] A higher value of the domestic currency means cheaper exports and cheaper imports. [C] A higher value of the domestic currency means cheaper exports and more expensive imports.

[0] A higher value of the domestic currency has no effect on exports and imports.

[E] A higher value of the domestic currency means more expensive exports and more expensive imports.

52.

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Spencing

Expenditure line

IncDme or Reel GDP

If spending was equal to the amount corresponding to point B in the above figure,

[A] aggregate output would increase. [B] the economy would be in equilibrium.

[C] the marginal propensity to consume would increase.

[D] spending is too high, and the expenditure line will shift down. [E] aggregate output would decrease.

53. An increase in the target inflation rate will [A] cause a rightward shift of the AD curve.

[B] cause a downward movement along the AD curve. [C] have no effect on the AD curve.

[D] cause an upward movement along the AD curve. [E] cause a leftward shift of the AD curve.

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54. ree1GDP

ree1GDP

Pctm.1l GDP

A. B

D E F

Time

According to the graph, which of the following best explains the change in real GDP from

year B to year D?

[A] Foreign countries must have decided to purchase more U.S. goods. [B] Consumers must have become more optimistic.

[C] The available supply of labor fell. [D] The government must have cut taxes.

[E] Firms must have become more pessimistic.

55. Ifreal GDP is less than potential GDP, [A] the rate of inflation will increase. [C] the rate of inflation will not change. [E] the price level will not change.

[B] the rate of inflation will decrease. [D] the price level will fall.

56. The slope of the consumption function is equal to

[A] the real interest rate. [B] the nominal interest rate.

[C] the marginal propensity to save.

[E] the marginal propensity to consume.

[D] the relative price of consumption.

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57. Which of the following is not a characteristic of technology? [A] It is difficult to preclude others from using the good. [B] It is easy to preclude others from using it.

[C] It requires trademarks and copyrights in order for those developing it to be compensated.

[D] It is possible for more than one person to use the good at the same time. [E] Its supply depends on the cost of producing it.

58.

Inflation

P ctemi e1 ODP

Ree10DP (percent dniauon from potentie1)

Suppose the economy is initially at point A in the above diagram, and oil prices suddenly fall. Which point best depicts where the economy will end up in the short run?

[A] E

[E] C

[B] F

[C] A

[D] D

59. Which of the following explains the slope of the AD curve?

[A] A change in the interest rate causes the rate of inflation to change, which results in potential GDP changing.

[B] A change in potential GDP causes the rate of inflation to change, which leads to a change in interest rates.

[C] A change in inflation causes interest rates to change, which results in a change in spending.

[D] A change in inflation causes spending to change, which causes a change in interest rates.

[E] A change in real GDP causes potential GDP to change, which results in the rate of inflation changing.

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60. The production function shows the relationship between

[A] real GDP and the combination oflabor, capital, and technological inputs.

[B] a country's GDP and GDP in the rest of the world. [C] potential and real GDP.

[D] GDP and real GDP. [E] inflation and potential GDP.

61. If there is an increase in government purchases, real GDP will

[A] not change. [B] decrease by less than the amount of the purchases.

[C] increase by more than the amount of the purchases.

[D] increase by the amount of the purchases.

[E] increase by less than the amount of the purchases.

62. Economic policies that focus on long-term growth are referred to as

[A] regional policies. [B) monetary policies. [C] demand-side policies.

[D] fiscal policies. [E] supply-side policies.

63. Economic growth theory

[A] explains the difference between real and nominal GDP. [B] tries to explain the shorter-term fluctuations in real GDP.

[C] explains the difference between long-run growth and the growth trend. [D) explains the long-term upward rise in real GDP.

[E] determines the maximum amount that GDP can be.

64. The economic fluctuations model is used to determine

[A] inflation and unemployment. [C] potential GDP and real GDP. [E] potential GDP and inflation.

[B) real GDP and unemployment. [D] real GDP and inflation.

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65. The unemployment rate is defined as

[A] the number of people in the population who do not work. [8] the percentage of the labor force not working full time. [C] the number of people in the labor force who do not work. [D] the percentage of the labor force not working.

[E] the percentage of the population not working.

66. Expenditure on is spending that is not included in GDP.

[A] financial assets [8] used goods [C] intermediate goods

[D] all of these [E] none of these

67. When the difference between the receipts from taxes and government expenditures is

positive

[A] national saving is greater than private saving. [8] national saving is less than private saving. [C] national saving equals private saving.

[D] national saving less net exports equals private saving. [E] there is a budget deficit.

68. The real rate of interest is

[A] the sum of the stated, or nominal, interest rate plus the expected inflation rate.

[8] the difference between the stated, or nominal, interest rate and the rate of growth of real GDP.

[C] the same as the prime rate.

[D] the difference between the stated, or nominal, interest rate and the expected rate of inflation.

[E] the rate of interest on Treasury bills.

69. Potential GDP is

[A] a measure of short-term movements in GDP.

[8] the upward trend line in real GDP. [C] another name for aggregate demand.

[D] another name for real GDP. [E] another name for GDP.

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70. Investment expenditures are the sum of

[A] business fixed investment, residential investment, and financial investment. [8] business fixed investment plus financial investments.

[C] business fixed investment and services.

[D] business fixed investment plus inventories.

[E] business fixed investment, inventory investment, and residential investment.

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