I IHITIIBIFI UFIIVERSITY. 0F SCIEI ICE nnd TECHNOLOGY FACULTY OF MANAGEMENT SCIENCES COURSE NAME: PRINCIPLES OF MACROECONOMICS

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1 I IHITIIBIFI UFIIVERSITY 0F SCIEI ICE nnd TECHNOLOGY FACULTY OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE QUALIFICATION: BACHELOR OF ECONOMICS QUALIFICATION CODE: 07BECO LEVEL: 7 COURSE CODE: PMA51ZS COURSE NAME: PRINCIPLES OF MACROECONOMICS SESSION: NOVEMBER 2017 PAPER: THEORY DURATION: 2 HOURS MARKS: 100 FIRST OPPORTUNITY EXAMINATION QUESTION PAPER EXAMINERIS) Mr Eslon Ngeendepi Mr Daniel Kavishe Dr Tafirenyika Sunde Miss Elina Mwatondange Mr Mekukuye Mbaha Miss Kasnath Kavezeri MODERATOR: Mr. Imanuel Nashivela INSTRUCTIONS Answer ALL the questions. NP P PS UNI Write clearly and neatly. Number the answers clearly. This question paper is made up of four (4) sections. Answer Section A and B on the attached answer sheet. Answer ALL the questions and in blue or black ink. Start each question on a new page in your answer booklet. THIS QUESTION PAPER CONSISTS 0F 12 PAGES (Including this front page)

2 M, SECTION A 20 Marks Instructions: Answer all the questions All answers should be on the answer sheet on page 11. Tear the page offand place it inside your examination script. QUESTION If we were to add up the value of output of all firms in the economy, we would: obtain GDP at factor cost obtain GDP at market prices obtain GDP using the income method overestimate the value of production taking place in the economy. 1.2 Potential GDP is the: the value of production with fully employed resources current value of production value of production when the economy is in a recession value of production when the economy is at a peak. 1.3 Which of the following relationships is correct? Nominal GDP (GDP deflator/ = Real GDP) x 100 Real GDP = (Nominal GDP x GDP deflator) / 100 GDP Deflator = (Nominal GDP / Real GDP) x 100 Real GDP = Nominal GDP x The labor force is the sum of the: working age population and the number of unemployed people number of employed people and the working-age population number of employed people and the number of unemployed people total population and the number of unemployed people. 1.5 If GDP = C + l + G + X - production method expenditure method income method value-added method. then the GDP has been measured by using the: 1.6 The quantity of money demanded for transactions and precautionary purposes is related to the: interest rate level of income in the economy inflation rate None of the above.

3 1.7 If the commercial banking system receives a deposit of N and the cash reserve requirement is 8%, maximum deposit expansion for the commercial banking system is: N$ N N N$ If the bank of Namibia sets the required reserve ratio at 5 percent, the value of the credit multiplier is: A commercial bank is able to create money by: issuing cheques to depositors printing it creating a demand deposit as it extends a new loan maintaining reserves Which of the following is not a function of the Bank of Namibia: holding reserves for depository institutions regulates depository institutions regulating the quantity of money lending funds to creditworthy private firms The supply of money is determined by: the demand for money the supply curve the interest rates the monetary authority Autonomous consumption: varies with income is independent of the prices in the market does not vary with income levels is not equal to autonomous dissaving Namibia has a comparative (relative) advantage over Botswana in the production of maize if it: produces maize with fewer material inputs than Botswana can produce maize with the same resources as Botswana but faster has an absolute advantage over Botswana produces maize at a lower opportunity cost than Botswana The most important fiscal policy instrument is: quotas Repo rate taxes budget

4 1.15 Indirect tax such as Value-added tax (VAT) can be classified as: progressive taxes proportional taxes regressive taxes per capita taxes If Namibian imports significantly increase from the USA, we can expect that the: demand for dollars will increase and the NS depreciate demand for dollars will increase and the NS will appreciate supply of NS will increase and the dollar will depreciate supply of dollars will increase and the NS will appreciate Inflation caused by rises in the price of inputs is known as: demand-pull inflation cost-push inflation inertial inflation CPI 1.18 If the government imposes a tariff on an imported product, we would expect local production to and imports to ' increase; increase increase; decrease decrease; increase decrease; decrease 1.19 Simon resigns hisjob as an economist in Windhoek and moves to Swakopmund to be closer to his parents. It takes Simon three months to find new employment as an economist in Swakopmund. During these three months, Simon was: structurally unemployed seasonally unemployed casually unemployed frictionally unemployed 1.20 (0!) Stagflation is when? prices and wages rise because of a slowdown in the economy where there is both rising inflation and unemployment where inflation rises inexplicably where unemployment rises because of oil price hikes.

5 SECTION B 20 Marks Instructions: Answer all the questions All answers should be on the answer sheet on page 12. Tear the page out and place it inside your answer book. QUESTION 1 [20 marks] 1.1 As money moves from households to firms and back, some leaks out in the form of saving, taxation and imports. 1.2 To avoid double counting in national income accounts, only intermediate goods and services should be counted. 1.3 A student buys a second hand car from a dealer in Windhoek. The value of the car is included in this year s GDP. lt/f] 1.4 Imports are recorded in the current account of the balance of payments and exports in the capital account. 1.5 The quantity theory of money suggests that an increase in the money supply would lead to an increase in the price level, and therefore increases in the money supply are simply inflationary. 1.6 When interest rates are high, the opportunity cost of holding money is high, therefore people 1.7 will rather buy bonds or other interest bearing assets. When the Bank of Namibia sells bonds, the money supply increases. 1.8 A tax is proportional if the percentage of income paid as tax remains the same irrespective ofthe level of income. 1.9 Government could use the budget to try to influence variables such as total production, income 1.10 and employment and to redistribute income in the economy. A sales tax on necessities is usually regressive When a German company invests in a vehicle manufacturing operation in Namibia, the amount concerned is entered as an inflow in the capital account of the Namibian balance of payments. [T/Fl The balance of payments is a summary of government income and expenditure. A specific import tariff is a fixed amount that is levied on each unit of an imported good. lt/f]

6 1.14 A flexible (floating) exchange rate system is one where the value of a currency is determined by supply and demand for foreign currency and there is no interference by monetary authorities According to John Maynard Keynes, total demand in the economy can never be insufficient 1.16 because supply creates its own demand. If Ca = 80 and c = 0.8, then C = 880 at an income level of Demand-pull inflation raises the price level while at the same time reducing the level of production or income in the economy Changes in the consumer price index (CPI) reflect changes in the purchasing power of a fixed 1.19 amount of money. Demand-pull inflation can be combated by expansionary monetary policy A trough in the business cycle occurs when employment and income reach their lowest levels.

7 SECTION C 40 Marks QUESTION 1 [10 marks] Data in table 1 below have been extracted from the National Income and Products Accounts of a simple economy where all the income is either compensation of employees or profits, there are no indirect taxes. Table 1: National Income and Product Account Amount (NS Million) Consumption 5000 Investment 1000 Depreciation 600 Profits 900 Exports 500 Compensation of Employees 5300 Government purchases 1000 Direct taxes 800 Saving 1100 Imports Calculate the Gross Domestic Product at current prices for this simple economy using the expenditure and income approach. (10) QUESTION 2 [14 marks] Table 2: Labour Statistics data Category Number (millions) Working age population Labor force Employment a) Determine the number of people who are unemployed. (4) b) Calculate the number of people who are not part of the labor force. (5) c) Calculate the unemployment rate. (5)

8 QUESTION 3 [10 marks] Assume that autonomous consumption expenditure is 60, the MPC is 0.75 and the disposable Income (Yd) is 180. Calculate induced consumption. (2) Derive the consumption function. (2) (c) Derive the saving function. (2) Calculate the value of the multiplier. (2) What is the value of the Marginal Propensity to Save (MP5). (2) QUESTION 4 [6 marks] Table 3 below provides the Nominal and Real GDP figures for country 2. Use these statistics to answer questions 4.1 and 4.2. Round off your answers to two decimal places. Table 3 Year Nominal GDP Real GDP CPI/ GDP-deflator Copy Table 3 into your answer book and complete the missing figures. (3) 4.2 Calculate the inflation rate for (3)

9 SECTION D 20 Marks QUESTION 1 [6 marks] The following assumptions are made where Namibia trades with Botswana. Labour is the only input and Beef and Millet are the only products produced by Namibia and Botswana. Table 4, provides a summary of production of beef and millet between Angola and Namibia. Table 4: Product Namibia (tons/hour of labour) Botswana (tons/hour of labour) Millet Beef 1 2 a) Determine which country has an absolute advantage in the production of Beef? (1) b) Determine which country has an absolute advantage in the production of Millet? (1) c) Determine which country has a comparative advantage in the production of Beef? (2) d) Determine which country has a comparative advantage in the production of Millet? (2) QUESTION 2 [4 marks] Complete the table below by indicating whether the Namibian Dollar/ US Dollar exchange rate appreciates or depreciates in the following scenarios: Table 5 Change Impact on the N$/US$ exchange rate NS USS Demand for Dollars increases because Namibian firms purchase more US capital goods. Supply of dollars increases because the gold price increases. Supply of dollars decreases because gold price falls Demand for dollars decreases because of a recession in Namibia.

10 QUESTION 3 [10 marks] Assume that it is the aim of the Bank of Namibia (BoN) to stimulate the economy. The BoN has decided to use its open-market transaction activities to achieve its aim. What type of monetary policy is the BoN likely to adopt? (2) (c) Explain briefly how the BoN would implement this policy? (2) Briefly explain the impact of the BoN s action on the: l. interest rate, (1) ll. market price of bonds and, (1) III. money supply. (1) (e) List three major shortcoming of fiscal policy. (3) TOTAL MARKS FOR PAPER: 100

11 Student number:... ANSWER SHEET FOR SECTION A Mark the correct answer with an X. A B C

12 Student number:... ANSWER SHEET FOR SECTION B Mark the correct answer with an X. True False