INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY PROGRAMME (CFP) ECO 106 : ECONOMICS 2 FINAL EXAMINATION : JANUARY 2006

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1 O 106 (F) / Page 1 of 11 INTI OLLG MLYSI FOUNTION IN USINSS INFORMTION THNOLOGY PROGRMM (FP) O 106 : ONOMIS 2 FINL XMINTION : JNURY 2006 STION Instructions: This section consists of FORTY (40) questions. nswer LL questions in the OMR sheet provided. ll questions carry equal marks. 1. Which of the following is not a final good or service? The flour purchased by the homemaker The flour purchased by the baker The flour purchased by the grocery store and still on the shelves The increase in flour inventories of the miller ll of the above are final goods 2. The value added by a business firm corresponds to the goods it produces and sells the wages paid by the firm the difference between the firm's purchases from other firms and its sales what the firm buys from other firms the value of sales 3. Which of the following is correct? conomists view investment as the purchase of stocks and bonds purchase of raw land for later resale difference between people's income and their spending purchase of equipment, plants, and inventories purchase of certificates of deposit 4. Which of the following is correct? Gross domestic product (GP) is the value of all final goods and services produced in a country during a year. the sum of consumption, investment, government spending, and exports minus imports wages and salaries, proprietor's income, interest, rents, profits, depreciation, and indirect business taxes the value of goods and services produced in the country minus the value of intermediate goods ll of the above

2 O 106 (F) / Page 2 of In computing GP, it is essential to avoid double counting include government transfer payments include government tax revenues count all intermediate products that are produced determine the market value of government services 6. Which of the following is correct? National income equals GP GP minus depreciation net national product (NNP) NNP minus indirect business taxes NNP minus depreciation and indirect business taxes 7. Which of the following is correct? Nominal GP is the same as "GP in current dollars" GP after the effects of inflation have been removed the value of GP in constant market prices GP minus depreciation ll of the above 8. Table 1 (in billions of dollars) Government xpenditures $ 250 Wages and Salaries 1675 Gross Investment 325 Rent 20 onsumption 1425 Interest 40 Net xports 100 Indirect usiness Taxes and epreciation 300 Net foreign payment 0 Table 1 shows some (but not all) national income accounting data for Hypothetica. nswer questions 8 and 9 based on this data. The value of GP is billion. $2,100 $1,850 $2,000 $2,050 $2,150

3 9. ccording to this data, national income is billion. $225 $1,800 $2,000 $1,750 $265 O 106 (F) / Page 3 of Marvin s Metal ompany produces screws that it sells to Ford, which uses the screws as a component of its cars. In the national income accounts, the screws are classified as inventory final goods capital goods intermediate goods non-durable goods 11. If an merican construction company built a road in Kuwait, this activity would be excluded from U.S. GNP fully included in U.S. GP included in U.S. GNP only for that portion that was attributable to merican capital and labor included in U.S. GP but not in U.S. GNP neither included in the GP nor GNP of U.S 12. If the price index was 100 in 1990 and 120 in 2000, and nominal GP was $360 billion in 1990 and $480 billion in 2000, then the value of 2000 GP in terms of 1990 dollars would be $300 billion $384 billion $400 billion $424 billion $500 billion 13. Last year, Linus earned a salary of $25,000 and he spent $24,000, thus saving $1000. t the end of the year, he received a bonus of $1000 and he spent $500 of it, saving the other $500. What was his marginal propensity to consume?

4 O 106 (F) / Page 4 of When a person receives an increase in wealth, what is likely to happen to consumption and saving? onsumption increases and saving increases onsumption increases and saving decreases onsumption decreases and saving increases onsumption decreases and saving decreases onsumption increases but saving does not change 15. The aggregate demand curve holds constant all of the following XPT the money supply tax rates the price level real government spending investment demand 16. Which of the following is a correct definition of the aggregate supply curve? The aggregate supply curve shows the aggregate supply of labor throughout the economy the relationship between aggregate purchases and the price level the amount of real GP produced by firms at different price levels the effect of real wages on total economic output the amount of labor supplied at various price levels 17. Which of the following would increase aggregate demand? decrease in the price level decrease in government spending. n increase in the money supply decrease in investment spending n increase in interest rates 18. The trough of a business cycle occurs when hits its lowest point. the money supply aggregate economic activity the unemployment rate inflation interest rates

5 O 106 (F) / Page 5 of emand-side inflation is characterized by leftward shifts in the aggregate demand curve rightward shifts in the aggregate demand curve moving down an aggregate demand curve the equation of exchange, MV = PQ. rising unemployment along with a rising price level 20. You are given information on the consumer price index (PI), where the values given are those for ecember 31 of each year: Year PI In which year was the inflation rate the highest? Which of the following correctly completes this statement? Frictional unemployment is involuntary unemployment voluntary part-time unemployment unemployment associated with the changing of jobs in a changing economy. long-term unemployment unemployment associated with declining industries 22. If policy makers want to lower inflation, in the short run, unemployment will rise if interest rates are falling inflationary expectations are slow to adjust wage and price controls are implemented inflationary expectations adjust rapidly the lag for the effect of the policy on the economy is short but variable

6 O 106 (F) / Page 6 of The natural rate of unemployment is best defined as the rate of unemployment for which the labor market is in balance one for which the labor force grows at a constant rate. the rate of unemployment that matches the long-run rate of economic growth a rate of unemployment equal to 6% the unemployment rate consistent with constant real wages 24. If the S and the curve intersect at a level of real GP that exceeds potential GP, then the appropriate monetary policy is one that the interest rate and aggregate demand. raises; increases raises; decreases lowers; increases lowers; decreases lowers, does not change 25. If government spending increases by $20 billion, then aggregate demand increases by $20 billion increases by more than $20 billion decreases by $20 billion decreases by more than $20 billion decreases by less than $20 billion 26. When comparing a $100 billion increase in government spending to a $100 billion decrease in tax revenue, the magnitude of the increase in government spending on aggregate demand is the magnitude of the tax decrease. greater than equal to less than perhaps greater than or equal to perhaps less than or equal to 27. If the economy is in equilibrium with real GP less than potential GP, there is gap and a fiscal policy that aggregate demand is appropriate. an inflationary; increases an inflationary; decreases an expansionary, decreases a deflationary, increases a deflationary, decreases

7 O 106 (F) / Page 7 of If the multiplier is 5, the slope of the aggregate expenditure () curve in a closed economy is When disposable income increases the consumption function shifts upward. the economy moves upward along the consumption function but the consumption function does not shift there is no change to the consumption function the consumption function shifts downward the consumption function becomes steeper 30. Which of the following can be classified as inflation? 10 percent increase in food prices 20 percent increase in the price of gasoline 2 percent increase in the consumer price index oth and ll of the above 31. Which of the following would not be included in the labour force? homemaker looking for a job n unemployed person part time worker retired person ll of the above 32. The amount of reserves that a bank is required to hold equals to its total liabilities its demand deposits its total liabilities minus its demand deposit its required reserve ratio multiplied by its demand deposit None of the above is correct.

8 33. If people shift the funds from their checkable deposits to savings account, O 106 (F) / Page 8 of 11 M1 will rise, M2 will not change M1 will fall, M2 will not change M2 will rise, M1 will not change M2 will fall, M1 will not change oth M1 and M2 will rise 34. ecause money serves as a medium of exchange, it eliminates the need to write checks the need for specialization the use of commodities as money the need for work the need for a double coincidence of wants 35. The technical definition of M2 includes M1 money-market mutual funds small time deposits currency in circulation ll of the above 36. If everything is held constant, interest rates should increase if the demand for money curve shifts to the left the supply of money increases the central bank injects reserves into the economy the demand for money curve shifts to the right None of the above is correct 37. The lower is the required-reserve ratio the smaller must be the money supply the smaller is the multiple expansion of deposits from new reserves the larger is the multiple expansion of deposits from new reserves the lower is the fraction of deposits that can be loaned out the greater is the amount of vault cash or deposits at the Fed held by the commercial banking system

9 O 106 (F) / Page 9 of Which of the following is correct? entral banks are located in the central part of the country are necessary to economic development do not usually act as lenders of last resort to private banks have the control of the money supply as a primary function provide loans to businessmen only 39. If banks have reserve requirements of 20 percent of their demand deposits, $100 million in excess reserves allows the banking system to create at most additional $100 million $20 million $500 million $200 million $400 million 40. anks create money whenever they accept a deposit disburse funds in payment of a check receive monthly payments on their loans receive interest on existing loans lend excess reserves to a borrower STION Instructions: This paper consists of FIV (5) questions. nswer any THR (3) questions in the answer booklet provided. ll questions carry equal marks. Question 1 (a) What are the components of national income? (4 marks) (b) What adjustments need to be made to get GP from national income? (3 marks) (c) ifferentiate between nominal and real GP. (4 marks) (d) Year Price of orange juice Quantity of orange juice (bottles) Price of apple juice Quantity of apple juice (bottles) 2002 $ $ $ $ $ $ ompute the nominal GP, real GP and GP deflator for each year using 2002 as base year. (9 marks)

10 O 106 (F) / Page 10 of 11 Question 2 (a) omplete the accompanying table. (10 marks) Level of output and income (GP = I) onsumption Saving P PS MP MPS $100 $ $ (b) Show the consumption and saving schedules graphically. (4 marks) (c) What is the break-even level of income? (2 marks) (d) What is the effect of increase in wealth on the consumption schedule? Show the effect on the graph that you have drawn in (b). (4 marks) Question 3 (a) xplain THR factors that lead to downsloping ggregate emand curve. (6 marks) (b) (c) What is the effect on the aggregate demand curve from an increase in the price level? oes the aggregate demand curve shift leftward or rightward? (4 marks) xplain demand pull inflation with the aid of aggregate demand and aggregate supply curves. (10 marks) Question 4 (a) efine unemployment rate. (2 marks) (b) Suppose that the population in ountry X is 275 million. lso assume that the labor force is 135 million and 130 million people are employed. alculate the unemployment rate. (2 marks) (c) Why is there unemployment even when the country is at full employment? (6 marks) (d) What is meant by business cycle? Illustrate and explain the FOUR phases of business cycle. (10 marks)

11 O 106 (F) / Page 11 of 11 Question 5 (a) Use the graph below to answer the following questions. t is the transactions demand for money, m is the total demand for money, and S m is the supply of money. (i) What is the asset demand for money if the interest rate is 4%? (2 marks) (ii) (iii) (iv) (v) What will the equilibrium interest rate be for each of the different supply of money curves? (3 marks) ssume the economy was in equilibrium at m and S m1. If the central bank decides to change the money supply to S m2 and the interest rate stays the same, how much of a shortage or surplus in the money supply will there be? (2 marks) If the money market is in equilibrium at 6%, describe the change that must occur for the equilibrium rate to change to 4%. (3 marks) xplain how an increase in nominal GP would affect the demand curve for money. Show your answer on a diagram. (4 marks) (b) escribe any TWO functions of money. (6 marks) - The nd - eco106f/jan06/manjeet/lml