MIDSUMMER EXAMINATIONS 2006

Transcription

1 No. of Pages: (A) 7 No. of Questions: 29 EC1001A ' MIDSUMMER EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1001 MACROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 75 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded). SECTION A: Multiple Choice All questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question. The marking scheme is the following. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. 1. Ultimately, the short-run reduction in unemployment associated with an increase in inflation is due to a. the shape of the long-run aggregate supply curve. b. unanticipated inflation, not inflation per se. c. rational expectations. d. anticipated changes in the price level. 2. Which of the following is not included in the M1 money stock? a. small time deposits. b. demand deposits. c. travelers' checks. d. cash in the hands of the public. 7

2 EC1001 A - Macroeconomics I EC1001 A Table 23-1 An economy produces only two goods, oranges and VCRs. The quantities and prices for the years 1998 and 1999 are shown in the table. The base year is Price Quantity Price Quantity Oranges 2 5, ,000 VCRs 400 1, , Refer to Table The rate of inflation in 1999 was about a. -48 percent. b. -24 percent. c. 33 percent. d. 67 percent. 4. World Wide Delivery Service Corporation develops a way to speed up their deliveries and reduce their costs. We would expect that this would a. raise the demand for existing shares of the stock, causing its price to rise. b. decrease the demand for existing shares of the stock, causing its price to fall. c. raise the supply of the existing shares of stock, causing its price to rise. d. raise the supply of the existing shares of stock, causing its price to fall. 5. In 1969, Don bought a Ford Capri for 2,500. He drove this car until 2003 when he bought a Lotus Elise for 18,000. If the price index in 1969 was 36.7 and the price index in 2003 is 180, what's the price of the Ford Capri in 2003 prices? a. 3,583 b. 4,500 c. 9,762 d. 12, The case for income inequality is supported by which of the following arguments? a. personal misfortune being a random event b. economic efficiency c. Rawls' maximin policy d. Utilitarianism 7. Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as a. quantity of output supplied = natural rate of output + a(actual price level - expected price level). b. quantity of output supplied = natural rate of output + a(expected price level - actual price level). c. quantity of output supplied = a(actual price level -expected price level) - natural rate of output. d. quantity of output supplied = a(expected price level - actual price level) - natural rate of output. 2

3 EC1001 A - Macroeconomics I EC1001 A 8. Which of the following is included in the investment component of GDP? a. purchases of newly constructed homes b. purchases of foreign capital goods such as industrial equipment c. changes in inventory d. All of the above are correct. 9. Y/L is a. productivity. b. output. c. the availability of natural resources. d. the amount of human capital. 10. Which part of real GDP fluctuates most over the course of the business cycle? a. consumption b. government expenditures c. investment d. net exports 11. In the long run when money is neutral, which of the following increases when the money supply growth rate increases? a. real output growth b. real interest rates c. nominal interest rates d. the money supply divided by the price level 12. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to a. decrease consumption, shown as a movement to the left along a given aggregate demand curve. b. increase consumption, shown as a movement to the right along a given aggregate demand curve. c. decrease consumption, shifting the aggregate demand curve to the left. d. increase consumption, shifting the aggregate demand curve to the right. 13. After reunification, Germany experienced a tremendous increase in the demand for loanable funds as many rebuilding projects were initiated. As a result, interest rates a. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate fell. b. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. c. fell, there was an increase in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. d. fell, there was an increase in net capital outflow, there was an increase in the supply of marks, and the real exchange rate fell. 3

4 EC1001 A - Macroeconomics I EC1001 A 14. M1 is a. smaller and less liquid than M2. b. smaller but more liquid than M2. c. larger than and less liquid than M2. d. larger than but more liquid than M Profits not paid out to stockholders are a. retained earnings. b. known as dividends. c. the denominator in the price-earnings ratio. d. All of the above are correct. 16. The producer price index measures the cost of a basket of goods and services a. typical of those produced in the economy. b. produced for a typical consumer. c. sold by producers. d. bought by firms. 17. According to classical macroeconomic theory, in the long run a. monetary growth affects both real and nominal variables. b. the only real variable affected by monetary growth is the unemployment rate. c. factors that affect unemployment are influenced by monetary growth. d. monetary growth affects only nominal variables. 18. Brittany wants to have about $250,000 when she retires in 10 years. She has $100,000 to deposit now. Which of the following interest rates would get her within $100 of $250,000? a. 9.6 percent b. 9.8 percent c. 10 percent d percent 19. The fall in investment due to government borrowing is called a. the Barro Reduction. b. the Solow Residual. c. the Ricardian Principle. d. crowding out. 20. HydroGrow is considering building a new building in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project a. falls, and so Hydro Grow is less likely to build the building. b. falls, and so HydroGrow is more likely to build the building. c. rise, and so HydroGrow is less likely to build the building. d. rise, and so HydroGrow is more likely to build the building. 4

5 EC1001 A - Macroeconomics I EC1001 A 21. Ceteris paribus, as the price level falls, a. the money supply falls. b. interest rate rise. c. dollars become more valuable. d. the aggregate demand curve shifts right. 22. Babe Ruth, the famous baseball player, earned $80,000 in Today, the best baseball players can earn 200 times as much as Babe Ruth in However, prices have also risen since We can conclude that a. the best baseball players today are about 200 times better off than Babe Ruth was in b. because prices have also risen, the standard of living of baseball stars hasn't changed since c. one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. d. one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since A favorable supply shock will cause the price level a. and output to rise. b. and output to fall. c. to rise and output to fall. d. to fall and output to rise. 24. When the price level falls, the interest rate a. rises. When the money supply falls, the interest rate rises. b. rises. When the money supply falls, the interest rate falls. c. falls. When the money supply falls, the interest rate rises. d. falls. When the money supply falls, the interest rate falls. 25. A minimum wage imposed above a market's equilibrium wage will result in the quantity a. supplied of labor being greater than the quantity demanded of labor and unemployment will occur. b. demanded of labor being greater than the quantity supplied of labor and unemployment will occur. c. supplied of labor being greater than the quantity demanded of labor and a shortage of workers will occur. d. demanded of labor being greater than the quantity supplied of labor and a shortage of workers will occur. 5

6 EC1001 A - Macroeconomics I EC1001 A SECTION B Answer one and only one of the questions numbered 26 to 29. The maximum number of marks awarded for this Section is Answer both part (a) and (b). (a) Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain. (b) Explain what the productivity slowdown and speedup are. What do economists believe was the cause of the slowdown? 27. The market for insurance is very large, amounting to several percentage points of GDP. Why do you think a market for insurance exists at all? Students sitting this exam had the possibility of purchasing grade insurance, by sacrificing one mark with certainty, and increasing their mark by two should their (unadjusted) mark be below the median mark. If there are two groups of students, confident and worried, which of the two groups of students is more likely to purchase the insurance? What would a regression line with (unadjusted) mark on the horizontal axis and a dummy taking value 1 if the student has purchased insurance and 0 otherwise look like? Explain. 28. The following outline, illustrates a circular-flow diagram. Using it as a template, draw on your answer book (do not draw or write on the question paper itself) a circular flow diagram representing the interactions between households and firms in a simple economy. Explain carefully the various parts of the diagram, paying particular attention to whether equalities are identities or equilibrium conditions. 6

7 EC1001 A - Macroeconomics I EC1001 A 29. Answer both part (a) and part (b). (a) Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? (b) Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will stop U.S. citizens from investing in foreign companies and increase the value of the dollar. Evaluate this promise. 7

8 ID: A ' Answer Section MULTIPLE CHOICE 1. B 2. A 3. B 4. A 5. D 6. B 7. A 8. D 9. A 10. C 11. C 12. C 13. B 14. B 15. A 16. D 17. D 18. A 19. D 20. A 21. C 22. D 23. D 24. C 25. A SHORT ANSWER 26. (a) The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings. (b) From 1959 to 1973 U.S. productivity grew at a rate of about 3.2 percent. From 1973 to 1995 it grew by about 1.5 percent. This lead to slower growth in real GDP per person, which would have been 50 percent higher if the slowdown had not occurred. Although the evidence is not decisive, it appears that the slowdown was due to a slowdown in technological progress. It is also possible that the period was simply a time of extraordinary growth. However, productivity growth has been higher at 2.6 percent since 1995, which corresponds with the growth of information technology and the internet. 27. Becasue people are risk averse (marginal decreasing utility of income) and insurance companies risk neutral (reasons include their better ability to diversify). worried students (either risk averse or not so bright) are more likely to purchase. The regression line should have negative slope.. 1

9 ID: A 28. This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of the meaning of each flow and each market. It is important that the student understands that the inner loop represents the flow of real goods and services and that the outer loop represents the corresponding flow of payments. 29. (a) Typically, the government in countries that had hyperinflation started with high spending, inadequate tax revenue, and limited ability to borrow. Therefore, they turned to the printing press to pay their bills. Massive and continued increases in the quantity of money led to hyperinflation, which ended when the governments instituted fiscal reforms eliminating the need for the inflation tax. (b) An increase in the government budget surplus will cause U.S. interest rates to fall. The decline in interest rates will increase domestic investment, but it will also cause Americans to look for higher returns abroad, which means that net capital outflow rises rather than falls as promised. To take advantage of these higher returns, Americans will supply more dollars in the foreign-currency exchange market and the dollar will depreciate rather than appreciate as promised. 2

10 No. of Pages: (B) 6 No. of Questions: 29 EC1001 B ' MIDSUMMER EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1001 MACROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 75 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded). SECTION A: Multiple Choice All questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question. The marking scheme is the following. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. 1. Babe Ruth, the famous baseball player, earned $80,000 in Today, the best baseball players can earn 200 times as much as Babe Ruth in However, prices have also risen since We can conclude that a. the best baseball players today are about 200 times better off than Babe Ruth was in b. because prices have also risen, the standard of living of baseball stars hasn't changed since c. one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. d. one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since

11 EC1001 B - Macroeconomics I EC1001 B 2. Ultimately, the short-run reduction in unemployment associated with an increase in inflation is due to a. the shape of the long-run aggregate supply curve. b. unanticipated inflation, not inflation per se. c. rational expectations. d. anticipated changes in the price level. 3. World Wide Delivery Service Corporation develops a way to speed up their deliveries and reduce their costs. We would expect that this would a. raise the demand for existing shares of the stock, causing its price to rise. b. decrease the demand for existing shares of the stock, causing its price to fall. c. raise the supply of the existing shares of stock, causing its price to rise. d. raise the supply of the existing shares of stock, causing its price to fall. 4. Ceteris paribus, as the price level falls, a. the money supply falls. b. interest rate rise. c. dollars become more valuable. d. the aggregate demand curve shifts right. 5. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to a. decrease consumption, shown as a movement to the left along a given aggregate demand curve. b. increase consumption, shown as a movement to the right along a given aggregate demand curve. c. decrease consumption, shifting the aggregate demand curve to the left. d. increase consumption, shifting the aggregate demand curve to the right. 6. Which part of real GDP fluctuates most over the course of the business cycle? a. consumption b. government expenditures c. investment d. net exports 7. Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as a. quantity of output supplied = natural rate of output + a(actual price level - expected price level). b. quantity of output supplied = natural rate of output + a(expected price level - actual price level). c. quantity of output supplied = a(actual price level -expected price level) - natural rate of output. d. quantity of output supplied = a(expected price level - actual price level) - natural rate of output. 8. Which of the following is included in the investment component of GDP? a. purchases of newly constructed homes b. purchases of foreign capital goods such as industrial equipment c. changes in inventory d. All of the above are correct. 2

12 EC1001 B - Macroeconomics I EC1001 B 9. A minimum wage imposed above a market's equilibrium wage will result in the quantity a. supplied of labor being greater than the quantity demanded of labor and unemployment will occur. b. demanded of labor being greater than the quantity supplied of labor and unemployment will occur. c. supplied of labor being greater than the quantity demanded of labor and a shortage of workers will occur. d. demanded of labor being greater than the quantity supplied of labor and a shortage of workers will occur. 10. In 1969, Don bought a Ford Capri for 2,500. He drove this car until 2003 when he bought a Lotus Elise for 18,000. If the price index in 1969 was 36.7 and the price index in 2003 is 180, what's the price of the Ford Capri in 2003 prices? a. 3,583 b. 4,500 c. 9,762 d. 12, A favorable supply shock will cause the price level a. and output to rise. b. and output to fall. c. to rise and output to fall. d. to fall and output to rise. 12. The producer price index measures the cost of a basket of goods and services a. typical of those produced in the economy. b. produced for a typical consumer. c. sold by producers. d. bought by firms. 13. According to classical macroeconomic theory, in the long run a. monetary growth affects both real and nominal variables. b. the only real variable affected by monetary growth is the unemployment rate. c. factors that affect unemployment are influenced by monetary growth. d. monetary growth affects only nominal variables. 14. The fall in investment due to government borrowing is called a. the Barro Reduction. b. the Solow Residual. c. the Ricardian Principle. d. crowding out. 15. Brittany wants to have about $250,000 when she retires in 10 years. She has $100,000 to deposit now. Which of the following interest rates would get her within $100 of $250,000? a. 9.6 percent b. 9.8 percent c. 10 percent d percent 3

13 EC1001 B - Macroeconomics I EC1001 B 16. After reunification, Germany experienced a tremendous increase in the demand for loanable funds as many rebuilding projects were initiated. As a result, interest rates a. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate fell. b. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. c. fell, there was an increase in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. d. fell, there was an increase in net capital outflow, there was an increase in the supply of marks, and the real exchange rate fell. 17. Which of the following is not included in the M1 money stock? a. small time deposits. b. demand deposits. c. travelers' checks. d. cash in the hands of the public. 18. HydroGrow is considering building a new building in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project a. falls, and so Hydro Grow is less likely to build the building. b. falls, and so HydroGrow is more likely to build the building. c. rise, and so HydroGrow is less likely to build the building. d. rise, and so HydroGrow is more likely to build the building. 19. Y/L is a. productivity. b. output. c. the availability of natural resources. d. the amount of human capital. 20. The case for income inequality is supported by which of the following arguments? a. personal misfortune being a random event b. economic efficiency c. Rawls' maximin policy d. Utilitarianism 21. Profits not paid out to stockholders are a. retained earnings. b. known as dividends. c. the denominator in the price-earnings ratio. d. All of the above are correct. 22. When the price level falls, the interest rate a. rises. When the money supply falls, the interest rate rises. b. rises. When the money supply falls, the interest rate falls. c. falls. When the money supply falls, the interest rate rises. d. falls. When the money supply falls, the interest rate falls. 4

14 EC1001 B - Macroeconomics I EC1001 B 23. M1 is a. smaller and less liquid than M2. b. smaller but more liquid than M2. c. larger than and less liquid than M2. d. larger than but more liquid than M2. Table 23-1 An economy produces only two goods, oranges and VCRs. The quantities and prices for the years 1998 and 1999 are shown in the table. The base year is Price Quantity Price Quantity Oranges 2 5, ,000 VCRs 400 1, , Refer to Table The rate of inflation in 1999 was about a. -48 percent. b. -24 percent. c. 33 percent. d. 67 percent. 25. In the long run when money is neutral, which of the following increases when the money supply growth rate increases? a. real output growth b. real interest rates c. nominal interest rates d. the money supply divided by the price level SECTION B Answer one and only one of the questions numbered 26 to 29. The maximum number of marks awarded for this Section is Answer both part (a) and (b). (a) Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain. (b) Explain what the productivity slowdown and speedup are. What do economists believe was the cause of the slowdown? 5

15 EC1001 B - Macroeconomics I EC1001 B 27. The following outline, illustrates a circular-flow diagram. Using it as a template, draw on your answer book (do not draw or write on the question paper itself) a circular flow diagram representing the interactions between households and firms in a simple economy. Explain carefully the various parts of the diagram, paying particular attention to whether equalities are identities or equilibrium conditions. 28. Answer both part (a) and part (b). (a) Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? (b) Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will stop U.S. citizens from investing in foreign companies and increase the value of the dollar. Evaluate this promise. 29. The market for insurance is very large, amounting to several percentage points of GDP. Why do you think a market for insurance exists at all? Students sitting this exam had the possibility of purchasing grade insurance, by sacrificing one mark with certainty, and increasing their mark by two should their (unadjusted) mark be below the median mark. If there are two groups of students, confident and worried, which of the two groups of students is more likely to purchase the insurance? What would a regression line with (unadjusted) mark on the horizontal axis and a dummy taking value 1 if the student has purchased insurance and 0 otherwise look like? Explain. 6

16 ID: B ' Answer Section MULTIPLE CHOICE 1. D 2. B 3. A 4. C 5. C 6. C 7. A 8. D 9. A 10. D 11. D 12. D 13. D 14. D 15. A 16. B 17. A 18. A 19. A 20. B 21. A 22. C 23. B 24. B 25. C SHORT ANSWER 26. (a) The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings. (b) From 1959 to 1973 U.S. productivity grew at a rate of about 3.2 percent. From 1973 to 1995 it grew by about 1.5 percent. This lead to slower growth in real GDP per person, which would have been 50 percent higher if the slowdown had not occurred. Although the evidence is not decisive, it appears that the slowdown was due to a slowdown in technological progress. It is also possible that the period was simply a time of extraordinary growth. However, productivity growth has been higher at 2.6 percent since 1995, which corresponds with the growth of information technology and the internet. 1

17 ID: B 27. This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of the meaning of each flow and each market. It is important that the student understands that the inner loop represents the flow of real goods and services and that the outer loop represents the corresponding flow of payments. 28. (a) Typically, the government in countries that had hyperinflation started with high spending, inadequate tax revenue, and limited ability to borrow. Therefore, they turned to the printing press to pay their bills. Massive and continued increases in the quantity of money led to hyperinflation, which ended when the governments instituted fiscal reforms eliminating the need for the inflation tax. (b) An increase in the government budget surplus will cause U.S. interest rates to fall. The decline in interest rates will increase domestic investment, but it will also cause Americans to look for higher returns abroad, which means that net capital outflow rises rather than falls as promised. To take advantage of these higher returns, Americans will supply more dollars in the foreign-currency exchange market and the dollar will depreciate rather than appreciate as promised. 29. Becasue people are risk averse (marginal decreasing utility of income) and insurance companies risk neutral (reasons include their better ability to diversify). worried students (either risk averse or not so bright) are more likely to purchase. The regression line should have negative slope.. 2

18 No. of Pages: (C) 6 No. of Questions: 29 EC1001C ' MIDSUMMER EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1001 MACROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 75 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded). SECTION A: Multiple Choice All questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question. The marking scheme is the following. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. 1. M1 is a. smaller and less liquid than M2. b. smaller but more liquid than M2. c. larger than and less liquid than M2. d. larger than but more liquid than M2. 2. In the long run when money is neutral, which of the following increases when the money supply growth rate increases? a. real output growth b. real interest rates c. nominal interest rates d. the money supply divided by the price level 1

19 EC1001 C - Macroeconomics I EC1001 C 3. After reunification, Germany experienced a tremendous increase in the demand for loanable funds as many rebuilding projects were initiated. As a result, interest rates a. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate fell. b. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. c. fell, there was an increase in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. d. fell, there was an increase in net capital outflow, there was an increase in the supply of marks, and the real exchange rate fell. 4. According to classical macroeconomic theory, in the long run a. monetary growth affects both real and nominal variables. b. the only real variable affected by monetary growth is the unemployment rate. c. factors that affect unemployment are influenced by monetary growth. d. monetary growth affects only nominal variables. 5. Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as a. quantity of output supplied = natural rate of output + a(actual price level - expected price level). b. quantity of output supplied = natural rate of output + a(expected price level - actual price level). c. quantity of output supplied = a(actual price level -expected price level) - natural rate of output. d. quantity of output supplied = a(expected price level - actual price level) - natural rate of output. 6. A favorable supply shock will cause the price level a. and output to rise. b. and output to fall. c. to rise and output to fall. d. to fall and output to rise. 7. Profits not paid out to stockholders are a. retained earnings. b. known as dividends. c. the denominator in the price-earnings ratio. d. All of the above are correct. 8. Brittany wants to have about $250,000 when she retires in 10 years. She has $100,000 to deposit now. Which of the following interest rates would get her within $100 of $250,000? a. 9.6 percent b. 9.8 percent c. 10 percent d percent 2

20 EC1001 C - Macroeconomics I EC1001 C 9. The case for income inequality is supported by which of the following arguments? a. personal misfortune being a random event b. economic efficiency c. Rawls' maximin policy d. Utilitarianism Table 23-1 An economy produces only two goods, oranges and VCRs. The quantities and prices for the years 1998 and 1999 are shown in the table. The base year is Price Quantity Price Quantity Oranges 2 5, ,000 VCRs 400 1, , Refer to Table The rate of inflation in 1999 was about a. -48 percent. b. -24 percent. c. 33 percent. d. 67 percent. 11. Y/L is a. productivity. b. output. c. the availability of natural resources. d. the amount of human capital. 12. Ceteris paribus, as the price level falls, a. the money supply falls. b. interest rate rise. c. dollars become more valuable. d. the aggregate demand curve shifts right. 13. Babe Ruth, the famous baseball player, earned $80,000 in Today, the best baseball players can earn 200 times as much as Babe Ruth in However, prices have also risen since We can conclude that a. the best baseball players today are about 200 times better off than Babe Ruth was in b. because prices have also risen, the standard of living of baseball stars hasn't changed since c. one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. d. one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since

21 EC1001 C - Macroeconomics I EC1001 C 14. In 1969, Don bought a Ford Capri for 2,500. He drove this car until 2003 when he bought a Lotus Elise for 18,000. If the price index in 1969 was 36.7 and the price index in 2003 is 180, what's the price of the Ford Capri in 2003 prices? a. 3,583 b. 4,500 c. 9,762 d. 12, HydroGrow is considering building a new building in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project a. falls, and so Hydro Grow is less likely to build the building. b. falls, and so HydroGrow is more likely to build the building. c. rise, and so HydroGrow is less likely to build the building. d. rise, and so HydroGrow is more likely to build the building. 16. World Wide Delivery Service Corporation develops a way to speed up their deliveries and reduce their costs. We would expect that this would a. raise the demand for existing shares of the stock, causing its price to rise. b. decrease the demand for existing shares of the stock, causing its price to fall. c. raise the supply of the existing shares of stock, causing its price to rise. d. raise the supply of the existing shares of stock, causing its price to fall. 17. Ultimately, the short-run reduction in unemployment associated with an increase in inflation is due to a. the shape of the long-run aggregate supply curve. b. unanticipated inflation, not inflation per se. c. rational expectations. d. anticipated changes in the price level. 18. Which part of real GDP fluctuates most over the course of the business cycle? a. consumption b. government expenditures c. investment d. net exports 19. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to a. decrease consumption, shown as a movement to the left along a given aggregate demand curve. b. increase consumption, shown as a movement to the right along a given aggregate demand curve. c. decrease consumption, shifting the aggregate demand curve to the left. d. increase consumption, shifting the aggregate demand curve to the right. 20. The producer price index measures the cost of a basket of goods and services a. typical of those produced in the economy. b. produced for a typical consumer. c. sold by producers. d. bought by firms. 4

22 EC1001 C - Macroeconomics I EC1001 C 21. The fall in investment due to government borrowing is called a. the Barro Reduction. b. the Solow Residual. c. the Ricardian Principle. d. crowding out. 22. When the price level falls, the interest rate a. rises. When the money supply falls, the interest rate rises. b. rises. When the money supply falls, the interest rate falls. c. falls. When the money supply falls, the interest rate rises. d. falls. When the money supply falls, the interest rate falls. 23. A minimum wage imposed above a market's equilibrium wage will result in the quantity a. supplied of labor being greater than the quantity demanded of labor and unemployment will occur. b. demanded of labor being greater than the quantity supplied of labor and unemployment will occur. c. supplied of labor being greater than the quantity demanded of labor and a shortage of workers will occur. d. demanded of labor being greater than the quantity supplied of labor and a shortage of workers will occur. 24. Which of the following is not included in the M1 money stock? a. small time deposits. b. demand deposits. c. travelers' checks. d. cash in the hands of the public. 25. Which of the following is included in the investment component of GDP? a. purchases of newly constructed homes b. purchases of foreign capital goods such as industrial equipment c. changes in inventory d. All of the above are correct. SECTION B Answer one and only one of the questions numbered 26 to 29. The maximum number of marks awarded for this Section is Answer both part (a) and part (b). (a) Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? (b) Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will stop U.S. citizens from investing in foreign companies and increase the value of the dollar. Evaluate this promise. 5

23 EC1001 C - Macroeconomics I EC1001 C 27. The following outline, illustrates a circular-flow diagram. Using it as a template, draw on your answer book (do not draw or write on the question paper itself) a circular flow diagram representing the interactions between households and firms in a simple economy. Explain carefully the various parts of the diagram, paying particular attention to whether equalities are identities or equilibrium conditions. 28. The market for insurance is very large, amounting to several percentage points of GDP. Why do you think a market for insurance exists at all? Students sitting this exam had the possibility of purchasing grade insurance, by sacrificing one mark with certainty, and increasing their mark by two should their (unadjusted) mark be below the median mark. If there are two groups of students, confident and worried, which of the two groups of students is more likely to purchase the insurance? What would a regression line with (unadjusted) mark on the horizontal axis and a dummy taking value 1 if the student has purchased insurance and 0 otherwise look like? Explain. 29. Answer both part (a) and (b). (a) Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain. (b) Explain what the productivity slowdown and speedup are. What do economists believe was the cause of the slowdown? 6

24 ID: C ' Answer Section MULTIPLE CHOICE 1. B 2. C 3. B 4. D 5. A 6. D 7. A 8. A 9. B 10. B 11. A 12. C 13. D 14. D 15. A 16. A 17. B 18. C 19. C 20. D 21. D 22. C 23. A 24. A 25. D SHORT ANSWER 26. (a) Typically, the government in countries that had hyperinflation started with high spending, inadequate tax revenue, and limited ability to borrow. Therefore, they turned to the printing press to pay their bills. Massive and continued increases in the quantity of money led to hyperinflation, which ended when the governments instituted fiscal reforms eliminating the need for the inflation tax. (b) An increase in the government budget surplus will cause U.S. interest rates to fall. The decline in interest rates will increase domestic investment, but it will also cause Americans to look for higher returns abroad, which means that net capital outflow rises rather than falls as promised. To take advantage of these higher returns, Americans will supply more dollars in the foreign-currency exchange market and the dollar will depreciate rather than appreciate as promised. 1

25 ID: C 27. This diagram should duplicate the essential characteristics of the diagram in the text, with an explanation of the meaning of each flow and each market. It is important that the student understands that the inner loop represents the flow of real goods and services and that the outer loop represents the corresponding flow of payments. 28. Becasue people are risk averse (marginal decreasing utility of income) and insurance companies risk neutral (reasons include their better ability to diversify). worried students (either risk averse or not so bright) are more likely to purchase. The regression line should have negative slope (a) The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings. (b) From 1959 to 1973 U.S. productivity grew at a rate of about 3.2 percent. From 1973 to 1995 it grew by about 1.5 percent. This lead to slower growth in real GDP per person, which would have been 50 percent higher if the slowdown had not occurred. Although the evidence is not decisive, it appears that the slowdown was due to a slowdown in technological progress. It is also possible that the period was simply a time of extraordinary growth. However, productivity growth has been higher at 2.6 percent since 1995, which corresponds with the growth of information technology and the internet. 2

26 No. of Pages: (D) 6 No. of Questions: 29 EC1001D ' MIDSUMMER EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1001 MACROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 75 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded). SECTION A: Multiple Choice All questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question. The marking scheme is the following. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. 1. Brittany wants to have about $250,000 when she retires in 10 years. She has $100,000 to deposit now. Which of the following interest rates would get her within $100 of $250,000? a. 9.6 percent b. 9.8 percent c. 10 percent d percent 2. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to a. decrease consumption, shown as a movement to the left along a given aggregate demand curve. b. increase consumption, shown as a movement to the right along a given aggregate demand curve. c. decrease consumption, shifting the aggregate demand curve to the left. d. increase consumption, shifting the aggregate demand curve to the right. 1

27 EC1001 D - Macroeconomics I EC1001 D 3. Babe Ruth, the famous baseball player, earned $80,000 in Today, the best baseball players can earn 200 times as much as Babe Ruth in However, prices have also risen since We can conclude that a. the best baseball players today are about 200 times better off than Babe Ruth was in b. because prices have also risen, the standard of living of baseball stars hasn't changed since c. one cannot make judgments about changes in the standard of living based on changes in prices and changes in incomes. d. one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since The case for income inequality is supported by which of the following arguments? a. personal misfortune being a random event b. economic efficiency c. Rawls' maximin policy d. Utilitarianism 5. When the price level falls, the interest rate a. rises. When the money supply falls, the interest rate rises. b. rises. When the money supply falls, the interest rate falls. c. falls. When the money supply falls, the interest rate rises. d. falls. When the money supply falls, the interest rate falls. Table 23-1 An economy produces only two goods, oranges and VCRs. The quantities and prices for the years 1998 and 1999 are shown in the table. The base year is Price Quantity Price Quantity Oranges 2 5, ,000 VCRs 400 1, , Refer to Table The rate of inflation in 1999 was about a. -48 percent. b. -24 percent. c. 33 percent. d. 67 percent. 7. After reunification, Germany experienced a tremendous increase in the demand for loanable funds as many rebuilding projects were initiated. As a result, interest rates a. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate fell. b. rose, there was a decrease in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. c. fell, there was an increase in net capital outflow, there was a decrease in the supply of marks, and the real exchange rate rose. d. fell, there was an increase in net capital outflow, there was an increase in the supply of marks, and the real exchange rate fell. 2

28 EC1001 D - Macroeconomics I EC1001 D 8. Ultimately, the short-run reduction in unemployment associated with an increase in inflation is due to a. the shape of the long-run aggregate supply curve. b. unanticipated inflation, not inflation per se. c. rational expectations. d. anticipated changes in the price level. 9. Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as a. quantity of output supplied = natural rate of output + a(actual price level - expected price level). b. quantity of output supplied = natural rate of output + a(expected price level - actual price level). c. quantity of output supplied = a(actual price level -expected price level) - natural rate of output. d. quantity of output supplied = a(expected price level - actual price level) - natural rate of output. 10. In 1969, Don bought a Ford Capri for 2,500. He drove this car until 2003 when he bought a Lotus Elise for 18,000. If the price index in 1969 was 36.7 and the price index in 2003 is 180, what's the price of the Ford Capri in 2003 prices? a. 3,583 b. 4,500 c. 9,762 d. 12, Which of the following is not included in the M1 money stock? a. small time deposits. b. demand deposits. c. travelers' checks. d. cash in the hands of the public. 12. Y/L is a. productivity. b. output. c. the availability of natural resources. d. the amount of human capital. 13. A favorable supply shock will cause the price level a. and output to rise. b. and output to fall. c. to rise and output to fall. d. to fall and output to rise. 14. M1 is a. smaller and less liquid than M2. b. smaller but more liquid than M2. c. larger than and less liquid than M2. d. larger than but more liquid than M2. 3

29 EC1001 D - Macroeconomics I EC1001 D 15. Which of the following is included in the investment component of GDP? a. purchases of newly constructed homes b. purchases of foreign capital goods such as industrial equipment c. changes in inventory d. All of the above are correct. 16. According to classical macroeconomic theory, in the long run a. monetary growth affects both real and nominal variables. b. the only real variable affected by monetary growth is the unemployment rate. c. factors that affect unemployment are influenced by monetary growth. d. monetary growth affects only nominal variables. 17. Profits not paid out to stockholders are a. retained earnings. b. known as dividends. c. the denominator in the price-earnings ratio. d. All of the above are correct. 18. Which part of real GDP fluctuates most over the course of the business cycle? a. consumption b. government expenditures c. investment d. net exports 19. The producer price index measures the cost of a basket of goods and services a. typical of those produced in the economy. b. produced for a typical consumer. c. sold by producers. d. bought by firms. 20. In the long run when money is neutral, which of the following increases when the money supply growth rate increases? a. real output growth b. real interest rates c. nominal interest rates d. the money supply divided by the price level 21. The fall in investment due to government borrowing is called a. the Barro Reduction. b. the Solow Residual. c. the Ricardian Principle. d. crowding out. 4

30 EC1001 D - Macroeconomics I EC1001 D 22. World Wide Delivery Service Corporation develops a way to speed up their deliveries and reduce their costs. We would expect that this would a. raise the demand for existing shares of the stock, causing its price to rise. b. decrease the demand for existing shares of the stock, causing its price to fall. c. raise the supply of the existing shares of stock, causing its price to rise. d. raise the supply of the existing shares of stock, causing its price to fall. 23. Ceteris paribus, as the price level falls, a. the money supply falls. b. interest rate rise. c. dollars become more valuable. d. the aggregate demand curve shifts right. 24. A minimum wage imposed above a market's equilibrium wage will result in the quantity a. supplied of labor being greater than the quantity demanded of labor and unemployment will occur. b. demanded of labor being greater than the quantity supplied of labor and unemployment will occur. c. supplied of labor being greater than the quantity demanded of labor and a shortage of workers will occur. d. demanded of labor being greater than the quantity supplied of labor and a shortage of workers will occur. 25. HydroGrow is considering building a new building in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project a. falls, and so Hydro Grow is less likely to build the building. b. falls, and so HydroGrow is more likely to build the building. c. rise, and so HydroGrow is less likely to build the building. d. rise, and so HydroGrow is more likely to build the building. SECTION B Answer one and only one of the questions numbered 26 to 29. The maximum number of marks awarded for this Section is Answer both part (a) and part (b). (a) Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? (b) Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will stop U.S. citizens from investing in foreign companies and increase the value of the dollar. Evaluate this promise. 5

31 EC1001 D - Macroeconomics I EC1001 D 27. Answer both part (a) and (b). (a) Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain. (b) Explain what the productivity slowdown and speedup are. What do economists believe was the cause of the slowdown? 28. The following outline, illustrates a circular-flow diagram. Using it as a template, draw on your answer book (do not draw or write on the question paper itself) a circular flow diagram representing the interactions between households and firms in a simple economy. Explain carefully the various parts of the diagram, paying particular attention to whether equalities are identities or equilibrium conditions. 29. The market for insurance is very large, amounting to several percentage points of GDP. Why do you think a market for insurance exists at all? Students sitting this exam had the possibility of purchasing grade insurance, by sacrificing one mark with certainty, and increasing their mark by two should their (unadjusted) mark be below the median mark. If there are two groups of students, confident and worried, which of the two groups of students is more likely to purchase the insurance? What would a regression line with (unadjusted) mark on the horizontal axis and a dummy taking value 1 if the student has purchased insurance and 0 otherwise look like? Explain. 6