Semester Two Sample Final Examination, 2018 ECON1020 Introductory Macroeconomics

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School of Economics
EXAMINATION
Semester Two Sample Final Examination, 2018

ECON1020 Introductory Macroeconomics

(SAMPLE)
This paper is for St Lucia Campus students.

Examination Duration: 120 minutes

Reading Time: 10 minutes
For Examiner Use Only

Exam Conditions: Question Mark

This is a Central Examination
This is a Closed Book Examination - specified materials permitted
During reading time - write only on the rough paper provided
This examination paper will be released to the Library

Materials Permitted In The Exam Venue:

(No electronic aids are permitted e.g. laptops, phones)
An unmarked Bilingual dictionary is permitted
Calculators - Casio FX82 series or UQ approved (labelled)

Materials To Be Supplied To Students:

1 x Multiple Choice Answer Sheet

Instructions To Students:
Additional exam materials (eg. answer booklets, rough paper) will be
provided upon request
Part A: Answer all questions in the Answer Booklet
Part B: Answer all questions on the Multiple Choice Answer Sheet

Total Questions: 30 (25 questions in Part A, 5 questions in Part B)

Total Marks: 50 (25 marks in Part A, 25 marks in Part B)

Total ________

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Semester Two Sample Final Examination, 2018 ECON1020 Introductory Macroeconomics

PART A
ANSWER ALL QUESTIONS IN THE ANSWER BOOKLET
EACH QUESTIONS IS WORTH 1 MARK (Total Marks: 25)

1. Consider the following two countries. In the first country, real gross domestic product
per person is $20,000 and the growth rate is 8 percent a year. In the second country,
real gross domestic product per person is $40,000 and the growth rate is 4 percent a
year. When will real gross domestic product per person be greater in the first than the
second country, assuming that the population growth is the same between the two
countries?

A. Never
B. In 5 years
C. In 9 years
D. In 15 years
E. In 18 years

2. In the long run, a country will only experience an increasing standard of living if it
experiences:
I. a high rate of consumption.
II. continuous technological change.
III. a high rate of labour force growth.
IV. an increase in capital per hour worked.

A. I and II
B. II and III
C. Only II
D. Only IV
E. All of the above

3. If you take money out of the bank and buy shares in a manufacturing company, the market
value of the shares is:

A. included in gross domestic product under investment if the shares are newly issued.
B. not included in gross domestic product.
C. included in gross domestic product under consumer expenditure.
D. included in gross domestic product as a business expense.
E. included in gross domestic product under private investment.

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4. Suppose there are 10 million in the labour force, and 600 000 unemployed people.
During the next month, 20 000 people lose their jobs and 30 000 find jobs. The new
total of employed persons is __________ and the new unemployment rate is
___________. (Assume there are no new entrants into the labour force.)

A. 10.1 million; 5.9 percent

B. 10.1 million; 6.1 percent
C. 9.41 million; 5.9 percent
D. 9.39 million; 6.1 percent
E. 9.41 million; 6.1 percent

5. Demand-pull inflation is characterised by:

A. high levels of aggregate demand which then pulls prices down to lower levels.
B. the short-run aggregate supply curve shifting to left.
C. the short-run aggregate supply curve shifting to right.
D. rising prices and rising employment in the short run.
E. Both (C) and (D) are correct.

6. Which of the following statements is true?

A. When unanticipated inflation occurs regularly, the degree of risk associated with
investments in the economy decreases.
B. Inflation that is higher than expected benefits debtors, and inflation that is lower
than expected benefits creditors.
C. Inflation improves the balance of trade as exports appear relatively cheaper to
overseas buyers and imports become relatively more expensive.
D. There are no costs or losses associated with inflation when it is fully anticipated.
E. The nominal interest rate will be less than the real interest rate when the inflation
rate is positive.

7. Which of the following will raise consumer expenditure?

A. An increase in interest rates.

B. A general decline in housing prices.
C. An increase in expected future income.
D. An increase in the price level.
E. All of the above.

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8. According to the aggregate demand, aggregate supply model, if there is a sudden

increase in labor force due to the increase in the number of immigrated workers, then:
I. the short run aggregate supply curve shift to the right.
II. the long run aggregate supply curve shifts to the left.
III. the economy move along the aggregate supply curve.
IV. the long run aggregate supply curve shifts to the right.

A. I and II
B. I and IV
C. Only III
D. Only IV
E. Only I

9. During 2013, one Australian dollar could buy approximately one US dollar. This means
that in that year:

A. Australia was as wealthy as the US.

B. Australia’s labour productivity was the same as the US labour productivity.
C. Australia’s multifactor productivity was the same as the US multifactor productivity.
D. Both (B) and (C) are correct.
E. None of above is correct.

10. Consider the following figure:

Suppose that the economy is at point B, which of the following can lead the economy to
the long run equilibrium, point C?

A. A decrease in the interest rate.

B. Technological advances.
C. An increase in government spending.
D. Both (A) and (C) are correct.
E. All of the above are correct.

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11. Banks can increase the money supply by:

A. offering financial services, such as money market accounts.

B. printing additional currency notes.
C. paying interest to their depositors.
D. making loans that result in additional deposits.
E. All of the above.

12. What would happen if the Reserve Bank of Australia sells bonds and securities in the
open market?
A. Interest rates would increase, leading to an exchange rate appreciation and a fall
in net exports.
B. Interest rates would decrease, leading to an exchange rate appreciation and a fall
in net exports.
C. Interest rates would decrease, leading to an exchange rate depreciation and a rise
in net exports.
D. Interest rates would increase, leading to an exchange rate depreciation and a rise
in net exports.
E. Interest rates would increase, leading to an exchange rate appreciation and a rise
in net exports.

13. When a currency's exchange rate is pegged to the United States (US) dollar and the
value is fixed above the equilibrium exchange rate as expressed in US dollars per unit
of the currency, then in order to maintain the peg, the country's central bank must:

A. rid itself of as much domestic currency as possible.

B. not interfere in the foreign exchange market.
C. sell the surplus domestic currency for US dollars.
D. buy up the excess domestic currency with US dollars.
E. buy US dollars with the domestic currency.

14. Potential GDP is defined as the ______.

A. maximum level of GDP that the economy can produce

B. amount of GDP produced if there is a zero rate of unemployment
C. level of GDP attained when all firms are producing at normal capacity
D. amount of GDP produced when the economy is in equilibrium
E. the expected level of GDP produced in the economy forecasted by the government

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15. The short-run aggregate supply curve has a ______ slope because as prices of _____ rise,
prices of_______ rise more slowly.

A. positive; final goods and services; inputs

B. negative; final goods and services; inputs
C. vertical; final goods and services; inputs
D. positive; inputs; final goods and services
E. vertical; inputs; final goods and services

16. Which of the following hampers the effectiveness of discretionary fiscal policy?

A. Time lags involved in enacting appropriate legislation.

B. Time lags involved in recognizing the need for fiscal policy.
C. Inconsistent monetary policy.
D. All of the above.
E. None of the above

17. If the reserve ratio is 0.10, then the simple deposit multiplier is ___________.

A. 10
B. 5
C. 2
D. 20
E. 0.25

18. If the current account balance is positive _______.

A. net foreign investment must be positive

B. capital inflows must be less than capital outflows
C. budget balance is also positive
D. financial account balance must be negative
E. Both A and B are correct

19. The Chinese were reluctant to allow the value of the yuan to rise against the US dollar
because it would _______.

A. make Chinese exported goods more expensive in the USA

B. increase the value of the large holdings of US dollars that China had accumulated
C. raise the price of imported goods from the USA
D. promote exports from Chinese to the USA
E. makes US exported goods more expensive in China

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20. The benefit of holding money is _______, while the opportunity cost of holding money is
_______.
a) the nominal interest rate; the fees charged by banks
b) the nominal interest rate; its usefulness in carrying out transactions
c) increased income; lost purchasing power
d) its usefulness in carrying out transactions; the nominal interest rate
e) its usefulness in carrying out transactions; the price of wallets

21. The aggregate supply curve shows the relationship between inflation and
a) the nominal interest rate.
b) the real interest rate.
c) the unemployment rate.
d) the exchange rate.
e) output.

22. The purchasing power parity theory is a reasonably good explanation for
nominal exchange rate determination:

a) in the short run.

b) in the long run.
c) when there are huge volumes of non-traded goods and services.
d) for international trade in non-standardised goods and services.
e) when there are fixed exchange rates.

23. M1 includes ..........................

A. currency plus demand deposits in banks.
B. currency plus demand deposits in Australian-owned banks only.
C. currency plus all banks and non-bank financial institution deposits.
D. currency plus all deposits in Australian- and foreign-owned banks.
E. currency plus all deposits in Australian and foreign-owned banks and deposits with
non-bank deposit taking institution.

24. Which of the following hampers the effectiveness of discretionary fiscal policy?
A. Time lags involved in enacting appropriate legislation.
B. Time lags involved in recognizing the need for fiscal policy.
C. The difficulty of estimating the natural rate of unemployment.

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D. A and B.
E. All of the above.

25. Bank runs can occur

A) when banks hold only a fraction of deposits as reserves.
B) when many depositors at a bank try to withdraw their deposits at the same time.
C) when banks do not have deposit insurance.
D) All of the above
E) None of the above.

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PART B
ANSWER ALL QUESTIONS IN THE SPACES PROVIDED
EACH QUESTION IS WORTH 5 MARKS (Total Marks: 25)

Question 1
a) What is the quantity theory of money? What will be the long-run effect of increasing
money supply? Explain.
(2 marks)
MV = PY

M = Money Supply, V = velocity of money, P = price level and Q = Quantity of output.

Assuming that Velocity is constant, in the long run, an increase in money will not create

more output, rather to maintain the equality, an increase in M will be associated with a

proportionate increase in P i.e. price level.

In other words, an increase in M leads to an increase in P. That means in the long run

when money supply is increased, price level goes up. That is inflation results.

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b) Distinguish between potential output and actual output.

(3 marks)

A country’s long-run trend GDP value is called potential GDP.

A country’s potential GDP is not its maximum GDP.

Maximum GDP is attained when firms operate as long as they can and use as many

workers as they can hire.

Potential GDP is attained when firms operate on their normal hours using a normal

workforce.

Actual GDP can be bigger or smaller than potential GDP.

Output gap is Actual Output – Potential Output.

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Question 2
a) Why factors might cause a shift in the long-run aggregate supply curve?
(2 marks)

The LRAS curve shifts because potential GDP increases over time.

Increases in potential GDP (or economic growth) are due to:

1. An increase in resources.

2. An increase in machinery and equipment (capital)..

3. Technological improvements

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Semester Two Sample Final Examination, 2018 ECON1020 Introductory Macroeconomics

b) Why does the SRAS slope upwards?

(3 marks)

The SRAS is upward sloping because in the short-run, firms will produce more in

response to higher prices.

The prices of inputs tend to rise more slowly than the prices of final products.

Contracts make some wages and prices ‘sticky’. – Nominal wages are often slow

to adjust.

Thus, as P rises, real wages W/P fall, and so real production costs fall.

Hence, firms produce more.

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Question 3
What are the main fiscal policy instruments? How are they used?
(5 marks)
Expansionary Fiscal Policy

It involves – increasing government purchases (G), or –increasing transfer payments

(TR), or –decreasing taxes (T).

An increase in G will increase AD directly.

An increase in TR or a reduction in T has an indirect effect by increasing disposable

Income and, thereby, consumption –which is a component of AD

Contractionary Fiscal Policy

It involves – decreasing government purchases (G), or –decreasing transfer payments

(TR), or –increasing taxes (T).

A decrease in G will decrease AD directly.

An decrease in TR or a raise in T has an indirect effect by decreasing disposable

Income and, thereby, consumption –which is a component of AD

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Semester Two Sample Final Examination, 2018 ECON1020 Introductory Macroeconomics

Question 4
Starting from a long run equilibrium, demonstrate the effect an increase in world oil prices
on Australia. How would Australia use monetary policy to bring the economy to long run
equilibrium? Illustrate using AD-AD framework.
(5 marks)

Start with a graph showing long run equilibrium – show LRAS, SRAS and AD label the

Vertical and horizontal axes

Now show the oil price shock with a left shift of the SRAS

(you can do on the same graph or use two graphs – upto you)

Label the created gap (in this case contractionary gap where Y*>Y)

Now explain that you will conduct open market repurchase of bonds to increase money

Supply and reduce interest rates and this will increase investment and consumption

An increase in I and C will lead to a right shift of the AD curve

Now show the right shift of the AD in another graph

So now the economy is back in long run equilibrium where Y = Y*

But this has been done by accommodating the supply shock

This means the price level is now permanently higher.

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Semester Two Sample Final Examination, 2018 ECON1020 Introductory Macroeconomics

Question 5
a) Distinguish between nominal exchange rate and trade weighted index.
(2 marks)

Nominal exchange rate: The value of one country’s currency in terms of another

country’s currency.

The market exchange rate of two currencies is determined by the interaction of relative

demand for and relative supply of the two currencies.

The Nominal Trade Weighted Index (TWI) measures the value of a currency against a

basket of the currencies of the country’s main trading partners.

Even if a country pegs its currency against another currency (i.e. the anchor currency),

its TWI may still fluctuate if its trading partners do not peg their currencies against the

same anchor currency.

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b) Distinguish between fixed and floating exchange rate regimes.

(3 marks)

There are three main types of exchange rate systems:

Floating exchange rate / Managed floating exchange rate

Fixed exchange rate

Floating exchange rate: The exchange rates are determined by the demand for and the

supply of currencies in the foreign exchange (FX) market. There is no “pure” floating

exchange rate regime. The IMF uses the term “independently floating regime.”

Examples of independently floating regimes: Australia, Mexico, Israel, the UK, the US,

and Japan.

Fixed or pegged exchange rate system:

A country unilaterally keeps the value of its currency fixed against another currency,

which is called the anchor currency.

Examples: Bahamas (USD), Nepal (Indian rupee), Egypt (USD), China (USD).

Most people use “fixed exchange rate” and “pegged exchange rate” interchangeably.

END OF EXAMINATION

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