Midsummer Examinations 2013 No. of Pages: 7 No. of Questions: 34 Subject ECONOMICS Title of Paper 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 30 marks. The maximum mark for the entire paper is 100 (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. You will be credited 2.5 marks for each right answer, - 1.5 marks (this is a negative mark) for each wrong answer, and 0 mark if no answer is given. 1. Which of the following would reduce the natural rate of unemployment? a. The Internet provides more readily available information about available jobs. b. Parliament increases the minimum wage. c. Laws are passed that make it more difficult to monitor the efforts of workers. d. All of the above are correct Page 1 of 7
2. According to a utilitarian, total social utility will be maximized when marginal pounds are distributed to the people with the a. greatest need. b. highest marginal utility of income. c. highest total utility from their income. d. most productive labor resources. 3. If a bank receives a new demand deposit of 10,000, and the legal reserve requirement is 20 percent, then the bank can lend out a. 2,000. b. 10,000. c. 40,000. d. 8,000. 4. In the long run, large and continuing budget surpluses a. mean higher taxes and a lower standard of living. b. mean a larger money supply and higher interest rates. c. are a problem because they crowd out private spending. d. permit the government to lower taxes and to reduce national debt. 5. The irrelevance of monetary changes for real variables is called a. the classical dichotomy. b. the equation of exchange. c. monetary neutrality. d. hyperinflation. 6. Malthusian predictions of a decline in population turned out to be incorrect due to a. lower worker productivity. b. depleted natural resources. c. fixed supply of land. d. none of the above. 7. The wealth effect, interest rate effect, and foreign trade effect all explain why the aggregate a. demand curve shifts. b. supply curve shifts. c. supply curve is upward sloping. d. demand curve is downward sloping. 8. Which of the following will cause stagflation? a. an increase in the money supply b. an increase in oil prices c. a decrease in the money supply d. technical progress Page 2 of 7
9. The observed tradeoffs between the rates of unemployment and inflation during the 1970s and 1980s forced economists to reassess their earlier beliefs about the Phillips curve to conclude that: a. the Phillips curve was upward sloping, not downward sloping as first thought. b. rather than there being one Phillips curve, there is a set of such curves. c. the expected trade-offs did not occur, meaning that policy to lower unemployment rates would not cause inflation. d. the aggregate supply curve actually sloped downward because price levels fell when real GDP rose. 10. If the consumer price index has a value of 250 today and the base year is 2000, then it costs: a. 100 today to buy what cost 250 in the base year. b. 1 today to buy what cost 250 in the base year. c. 250 today to buy what cost 100 in the base year. d. 2 today to buy what cost 1 in the base year. 11. If the nominal interest rate is 12%, the expected rate of inflation is 9%, and the growth rate of the money supply is 7%, then the real interest rate is: a. -3%. b. -4%. c. 4%. d. 3%. 12. If taxes are reduced with no change in government spending, and people spend all the money from the tax cut on consumption then: a. the supply of loanable funds will increase and the interest rate will decrease. b. the demand for loanable funds will increase and the interest rate will decrease. c. the demand for loanable funds will decrease and the interest rate will increase. d. None of the above. 13. If the Chinese government wants to eliminate a trade surplus, it could 27 contrary a. increase tariffs. b. discourage imports. c. increase quotas on imports. d. appreciate the yuan. 14. If the Bank of England wanted to increase the money supply, it would make open market a. purchases and lower the discount rate. b. sales and lower the discount rate. c. purchases and raise the discount rate. d. sales and raise the discount rate. Page 3 of 7
15. Which of the following shifts aggregate demand right? a. The price level rises. b. The price level falls. c. The money supply falls. d. None of the above is correct. 16. If there is excess money supply, people will a. deposit more into interest-bearing accounts, and the interest rate will fall. b. deposit more into interest-bearing accounts, and the interest rate will rise. c. withdraw money from interest-bearing accounts, and the interest rate will fall. d. withdraw money from interest-bearing accounts, and the interest rate will rise. 17. Transfer payments are a. included in GDP because they represent income to individuals. b. not included in GDP because they are not payments for currently produced goods or services. c. included in GDP because the income will be spent for consumption. d. not included in GDP because taxes will have to be raised to pay for them. 18. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP deflator of 125 in 2002 and of 105 in 2001, then from 2001 to 2002 real output a. and prices both rose. b. rose and prices fell. c. fell and prices rose. d. and prices both fell. 19. Use the two graphs in the diagram below to answer the following questions. Page 4 of 7
(question 19): Refer to both diagrams to determine whether a decrease in aggregate demand moves the economy from c and 3 to: a. a and 1 in the short run, b and 2 in the long run. b. b and 2 in the short run, a and 1 in the long run. c. d and 4 in the short run, e and 5 in the long run. d. None of the above is correct. 20. The slope of the supply of loanable funds curve represents the a. positive relation between the real interest rate and investment. b. positive relation between the real interest rate and saving. c. negative relation between the real interest rate and investment. d. negative relation between the real interest rate and saving. 21. Which of the following is not true for the crowding-out effect? a. Government budget deficits increase interest rates, which reduces investment spending. b. Crowding out reduces the ability of fiscal policy to combat a recession. c. If the government spends more on education, ceteris paribus, households may be forced to spend less on new homes. d. Crowding out occurs especially when the economy is in a deep recession and people are not spending all the available money. 22. If you are convinced that stock prices are impossible to predict from available information, then you probably also believe that a. the efficient markets hypothesis is not a correct hypothesis. b. the stock market is informationally efficient. c. the stock market is informationally inefficient. d. there is no reason to establish a diversified portfolio of stocks. 23. The major advantage of mutual funds is that a. they allow people with limited funds to diversify. b. they encourage households to spend their money on current consumption. c. fund managers are replaced by household administrators. d. they always use index funds to limit investor risk. 24. A fall in government expenditure a. shifts the IS curve and lowers interest rates and lowers national income b. shifts the LM curve and lowers interest rates and increases national income c. shifts and IS curve and raises interest rates and increases national income d. shifts the LM curve and raises interest rates and increases national income Page 5 of 7
25. The Bank of England may use quantitative easing when a. interest rates are falling too rapidly. b. it thinks the unemployment rate is too high. c. aggregate demand needs to be stimulated. d. it thinks inflation is too high today, or will become too high in the future. 26. Net exports a. are always greater than net capital outflow. b. are always equal to net imports. c. are always equal to net capital outflow d. could be any of the above. 27. Currently, the U.K. government is running a budget deficit. This means that the a. supply of loanable funds has increased. b. supply of loanable funds has decreased. c. real interest rate has fallen. d. real exchange rate has fallen. 28. The effects of a lower than expected price level are shown by a. shifting the short-run aggregate supply curve right. b. shifting the short-run aggregate supply curve left. c. moving to the right along a given aggregate supply curve. d. moving to the left along a given aggregate supply curve. 29. The income level below which families are said to be poor is known as the a. poverty threshold. b. unemployment benefit. c. breadline. d. minimum wage. 30. One reason some economists argue for a credible monetary policy rule is a belief that such a rule could be used to: a. reduce inflationary expectations, and lower actual inflation permanently. b. reduce inflationary expectations, and lower actual inflation without raising the unemployment rate very much. c. reduce inflationary expectations, and lower actual inflation while the unemployment rate rises for only a short time period. d. return unemployment to its natural level. Page 6 of 7
SECTION B Answer one and only one of the questions numbered 31 to 34. The maximum number of marks awarded for this Section is 30. 31. Suppose that there is an excess supply of Economics lecturers. Should universities necessarily reduce salaries? What does standard economic theory say? What does efficiency-wage theory suggest? 32. The short run Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Explain. How do both curves change in the long run? 33. Answer both (a) and (b). (a) Suppose that money velocity and output are constant, and that the quantity theory and the Fisher effect both hold. What happens to inflation, real interest rates, and nominal interest rates when the money supply growth rate increases from 5 percent to 10 percent? (b) Suppose that a country has $120 billion of national savings, and $80 billion of domestic investment. Is this possible? Where did the other $40 billion of national savings go? 34. Answer both (a) and (b). (a) Economists agree that increases in the money supply growth rate increase inflation and that inflation itself is undesirable. So why have there been hyperinflations and how have they ended? (b) Suppose the Bank of England sells some treasury bonds. Use a graph of the money market to show what this does to the value of money. Page 7 of 7