EXAMINATION : MACROECONOMICS (MAC) ECONOMICS 1 (ECO101)

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1 Page 1 of 7 EXAMINATION : MACROECONOMICS (MAC) ECONOMICS 1 (ECO101) DATE : 23 OCTOBER 2013 TIME ALLOWED : 3 HOURS TOTAL MARKS : 100 MATERIAL SUPPLIED : ANSWER BOOK INSTRUCTIONS TO CANDIDATES 1. Please refer to the examination rules and regulations as found in the examination answer book. 2. Section A is COMPULSORY. This section is worth (40 marks). 3. Answer ANY THREE (3) questions from Section B. This section is worth (60 marks). 4. Read each question carefully to determine exactly what is required before attempting the answer. 5. Set your answers out in a systematic way under appropriate headings and sub-headings. 6. Number your answers clearly. 7. IMPORTANT: Indicate the questions attempted by drawing a circle around the question number on the front cover of the answer book. NOTE: Examination answer books are the property of the IMM GSM and may not be removed from the examination hall. Answers to examination questions should not include appendices in the form of personal notes to the examining panel.

2 Page 2 of 7 SECTION A (40 MARKS) COMPULSORY QUESTION 1 (MULTIPLE CHOICE) [40] Indicate your answers to each of the following questions in the answer book provided. Each question is worth two (2) marks. For each question below select the MOST APPROPRIATE answer from the choices given. Mark your answer with an X in the correct block in your ANSWER BOOK An incomes policy a. is a supply-side response to the problem of inflation. b. seeks to control inflation by reducing or controlling production costs. c. is usually associated with the agreement from trade unions to link wages to productivity measures. d. is usually associated with calls to firms to limit their profit margins. e. is characterised by all of the above In South Africa, the strict rate of unemployment is different from the broad rate of unemployment because the strict rate excludes a. people working in the informal sector. b. people who are involuntarily unemployed. c. people who work in subsistence agriculture. d. discouraged work-seekers who are not actively looking for work. e. All of the above A rightward shift of the Phillips curve a. indicates that the trade-off between inflation and unemployment has become less severe. b. is associated with deflation. c. might be the result of a decrease in the price of imported capital goods. d. indicates an expansion in economic output. e. indicates that every level of inflation is associated with more unemployment than before Which of the following statements about inflation is true? Inflation refers to a. a sudden and self-contained increase in prices. b. a small increase in prices. c. too much money chasing too few goods. d. a sustained increase in the general price level. e. an increase in the purchasing power of money.

3 Page 3 of Which of the following statements about the PPI is incorrect? a. PPI inflation is a measure of inflation that is not directly related to consumers living standards. b. A depreciation in the rand against major currencies may result in an increase in PPI inflation. c. A change in PPI inflation often precedes a change in CPI inflation. d. An increase in the price of health-care services would be reflected by a rise in the PPI. e. A PPI inflation that is larger than headline CPI inflation in a given year may reflect falling interest rates over that year Which of the following statements is/are correct? i. One way to combat demand-pull inflation is by the Reserve Bank raising interest rates and limiting the supply of money. ii. Demand-pull inflation usually leads to increased prices and increased unemployment. iii. Demand-pull inflation can be initiated by a cut in the marginal tax rate. a. i and ii b. i and iii c. ii and iii d. All three statements are correct. e. Only statement iii is correct Which of the following statements is correct? a. The aggregate demand curve (AD curve) can be shifted by monetary as well as fiscal policy measures. b. A restrictive fiscal policy will result in a rightward shift of the aggregate demand curve. c. A general increase in wages in the economy will, ceteris paribus, shift the aggregate supply curve downward (to the right). d. A supply shock results in a simultaneous increase in prices and production in the economy. e. None of the above statements Stagflation refers to a situation where a. economic growth is experienced and leads to an increase in the inflation rate. b. high inflation rates and high employment rates are experienced simultaneously. c. high inflation rates and high unemployment rates are experienced simultaneously. d. a period of high inflation is followed by a period of stagnation in the economic growth rate. e. None of the above.

4 Page 4 of Using AD-AS analysis, it follows that an expansionary monetary policy will result in a. an increase in equilibrium income and the price level. b. a decrease in equilibrium income and the price level. c. an increase in equilibrium income and no change in the equilibrium price level. d. a decrease in equilibrium income and an increase in the equilibrium price level. e. an increase in equilibrium income and a decrease in the equilibrium price level In the Keynesian model, government expenditure a. is undertaken solely to regulate the level of spending. b. increases with investment because investment increases the size of the tax base. c. is taken to be autonomous because it is subject to government policy. d. can be ignored because investment is taken to be the key determinant of income. e. is determined by the level of tax revenue In the Keynesian model, exports a. remain unaffected by changes in output. b. increase when income increases. c. decrease when income decreases. d. depend on the interest rate. e. depend on government policy Which of the following are determinants of the size of the multiplier in the full Keynesian model? a. The marginal propensity to export b. The level of exports c. The level of aggregate expenditure d. The rate of taxation e. The equilibrium level of income Which of the following statements is/are true? i. The level of autonomous consumption is determined in part by the level of wealth. ii. The level of induced consumption is determined by the level of wealth. iii. The level of induced consumption is determined by the level of income. iv. The level of consumption is determined only by the level of induced consumption. a. i b. ii c. i and ii d. i and iii e. i, iii and iv

5 Page 5 of The MPC measures the relationship between a. a change in consumption and a change in income. b. a change in consumption and savings. c. changes in consumption and changes in savings. d. the proportion of income to consumption at any given level of income. e. the total level of consumption and the total level of saving In the Keynesian model, unemployment can be reduced by a. increasing the level of saving, and hence investment. b. decreasing the level of saving, ceteris paribus. c. persuading households to reduce their consumption. d. raising the interest rate. e. None of the above, since it is not part of the model If two countries have differing opportunity costs of production for two goods, then a. each country should specialise in the good for which it has a higher opportunity cost of production. b. only the country with an absolute advantage in the production of both goods stands to gain from trade. c. each country should purchase inputs from the other country in order to gain an absolute advantage. d. each country should specialise in the production of the good for which it has a relative advantage. e. each country should import all goods instead of producing them domestically Which of the following summarises transactions involving a country s international exchange of goods, services, current transfers and income? a. Current account b. Financial account c. Balance of payments d. Gold standard e. Balance of trade Economic externalities a. arise where costs or benefits associated with a particular economic activity affect individuals not directly involved in that activity. b. arise in market economies but not in command economies. c. are always harmful. d. are associated only with economic activities where the exclusion principle cannot be applied. e. Statements a and c are correct The South African income tax system is a. regressive. b. a flat-rate tax. c. proportional. d. progressive. e. indirect.

6 Page 6 of Which of the following would be classed as an expansionary fiscal policy? a. An increase in the money supply b. A reduction in the number of goods exempted from VAT c. An increase in government taxation d. An increase in government expenditure e. An increase in the VAT rate SECTION B (60 MARKS) ANSWER ANY THREE (3) QUESTIONS QUESTION 2 [20] 2.1 The relationship between household expenditure and income is called the consumption function. Graphically illustrate the consumption function and briefly describe three (3) important features of the consumption function. (11) 2.2 List five (5) macroeconomic objectives. (5) 2.3 Identify four (4) sources of cost-push inflation. (4) QUESTION 3 [20] 3.1 There are a number of differences between the Consumer Price Index (CPI) and the Production Price Index (PPI). Indicate which of the features listed below pertains to the CPI and/or to PPI Measures cost of living (1) Prices exclude VAT (1) Interest rates are excluded (1) Capital and intermediate goods are excluded (1) 3.2 Discuss the role of government in the circular flow of production, income and spending by drawing a diagram and then explaining government s role. Please label your diagram and ensure that the flows are indicated. (16) QUESTION 4 [20] 4.1 Assume that the current equilibrium exchange rate is $1 = R8 and the quantity exchanged at this rate is $10 billion. Illustrate by using a diagram the effect on the price of US dollars in South African rands should the supply of dollars decrease because the price of gold has dropped. Please label your diagram accordingly. (10) 4.2 The aim of a simple Keynesian macroeconomic model is to explain how national income is determined. List five (5) assumptions and the corresponding implications thereof upon which this model is based. (10)

7 Page 7 of 7 QUESTION 5 [20] 5.1 Explain by means of a diagram the impact of government spending and a proportional tax on the equilibrium level of income in the Keynesian model. (15) 5.2 Explain the difference between the strict definition and expanded definition of unemployment. (5) EXAM TOTAL: 100