SUMMER EXAMINATIONS 2014

Transcription

1 SUMMER EXAMINATIONS 2014 MODULE TITLE LEVEL TIME ALLOWED Introduction to Macroeconomics Four Two hours Instructions to students: Enter your student number not your name on all answer booklets. SECTION A: Answer TWO out of three questions. This section carries 40% of the overall marks. SECTION B: Answer TWO out of four questions. This section carries 60% of the overall marks. The use of a non-programmable calculator is permitted. No. of Pages 5 No. of Questions 7 Page 1 of 5

2 SECTION A Answer TWO out of three questions. 1. A hypothetical country of Lahland produces only movies and popcorn. Quantities and prices of these goods for the last several years are shown below. The base year is Prices and Quantities Year Price of Movies Quantity of Movies Price of Popcorn Quantity of Popcorn a. Compute the following statistics for each year: nominal GDP, real GDP, and GDP deflator. b. By how much did nominal and real GDP grow over time? c. What does your answer to part 1.b indicate about the differences between nominal and real GDP? 2. In a simple economy, people consume only 2 goods; food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing. Food Clothing 2011 price per unit price per unit 6 20 a. What are the percentage increases in the price of food and in the price of clothing? b. If 2011 is the base year, calculate the CPI index. What is the percentage increase in the CPI? c. Do these price changes affect all consumers to the same extent? Explain. d. Explain the three major problems in using the CPI as a measure of the cost of living. Page 2 of 5

3 3. Consider the following labour market data for the hypothetical country of Tajnia: Number of adults employed 10,000 Number of adults unemployed 2,250 Number of adults not in the labour force 17,750 a. Calculate the following: Total adult population, the labour force, the labour force participation rate and the unemployment rate. b. What are the two explanations for the natural rate of unemployment? In your answer, explain how firms voluntarily contribute to unemployment. END OF SECTION A SECTION B FOLLOWS OVERLEAF Page 3 of 5

4 SECTION B Answer TWO out of four questions. 4. The following questions relate to money supply growth and inflation: a. Define each of the symbols and explain the meaning of M V = P Y. b. What assumptions are necessary to argue that the quantity equation implies that increases in the money supply lead to proportional changes in the price level? c. Economists agree that increases in the money-supply growth rate increase inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended? d. In recent years, India and South Africa have had much higher nominal interest rates than the United Kingdom while Malaysia has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why? 5. The following questions relate to an open economy that trades with the rest of the world: a. Why are net exports and net capital outflow always equal? b. Derive algebraically the relation between savings, domestic investment, and net capital outflow using the national income accounting identity. c. How do the nominal exchange rate and the real exchange rate differ? d. Suppose a kilo of cheddar cheese costs 20 euros in Germany and 11 pounds in the United Kingdom. If the exchange rate is 1.20 euros per, what is the real exchange rate? e. Suppose the pound exchange rate depreciated from 1 = 1.20 euros to 1 = 1.00 euros. How would this impact on UK trade balance and on German trade balance? Page 4 of 5

5 6. The following questions relate to the influence of monetary and fiscal policy on aggregate demand: a. Explain how an increase in government spending might lead to crowding out. b. Suppose that the government increases expenditures by 10 billion. If the MPC is.80 and there are no crowding out or accelerator effects, how much would aggregate demand increase by? Show this graphically. c. Suppose there is a crowding-out effect which exceeds the multiplier effect, will the aggregate demand curve shift to the right by more or less than 10 billion? Why? d. If the Bank of England wants to maintain constant interest rates, what should it do to in response the government s expansionary fiscal policy? Show this graphically. 7. The following questions relate to the monetary system and the Phillips Curve: a. If the reserve ratio is 20 percent, how much money can be created from 1,000 of reserves? Show your work. b. Explain in detail the three tools the Bank of England uses to alter the money supply? c. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss. d. Some countries have inflation around or in excess of 8 percent. Suppose that the sacrifice ratio is 2.5. What is the cost of reducing inflation from 8 percent to 2 percent? In your answer, define the sacrifice ratio and explain how you found the cost of inflation reduction. END OF SECTION B END OF PAPER Page 5 of 5