Midsummer Examinations 2012 No. of Pages: 6 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. A U.K. citizen buys a tea kettle manufactured in China by a company that is owned and operated by U.K citizens. In which of the following components of U.K. GDP is this transaction accounted for? a. consumption and imports b. consumption but not imports c. imports but not consumption d. neither consumption nor imports 2. Suppose, in country X in year Y, consumption was 5300, GDP was 8800, government purchases were 1800, imports were 500, and investment was 2000. What were exports in year Y? a. - 800 b. - 300 c. 200 d. 300 Page 1 of 6
3. Suppose you spent 32,000 in 2004 on goods and services and then 39,000 in 2009. The consumer price index was 192 for 2004 and 217 for 2009. Your 2004 spending in 2009 pounds is about a. 34,507. b. 35,667. c. 36,167. d. 37,578. 4. Jack loaned Jill 5,000 for one year at a nominal interest rate of 10 percent. After Jill repaid the loan in full, Jack complained that he could buy 4 percent fewer goods with the money Jill gave him than he could before he loaned Jill the 5,000. From this, we can conclude that the rate of inflation during the year was a. -4 percent. b. 4 percent. c. 6 percent. d. 14 percent. 5. Suppose a country imposes new restrictions on how many hours people can work. If these restrictions reduce the total number of hours worked in the economy, but all other factors that determine output are held fixed, then a. productivity and output both rise. b. productivity rises and output falls. c. productivity falls and output rises. d. productivity and output fall. 6. Other things equal, if a country raises its saving rate, when is productivity growth higher? a. as the economy moves toward the long run and in the long run. b. as the economy moves toward the long run, but not in the long run. c. in the long run, but not as the economy moves toward the long run. d. neither as the economy moves toward the long run, nor in the long run. 7. Interest rates fall and investment falls. Which of the following could explain these changes? a. The government goes from a surplus to a deficit. b. The government repeals an investment tax credit. c. The government replaces a consumption tax with an income tax. d. None of the above is correct. 8. Thomas Malthus predictions turned out to be wrong due to a. technological advances such as those during the Industrial Revolution. b. smaller populations now than in the time of Malthus. c. the effects of brain-drain. d. unlimited natural resources. 9. In a closed economy, what remains after paying for consumption and government purchases is a. national disposable income. b. national saving. c. public saving. d. private saving. Page 2 of 6
10. Suppose the economy is closed and consumption is 6,500, taxes are 1,500, and government purchases are 2,000. If national saving amounts to 1,000, then what is GDP? a. 9,500 b. 10,000 c. 10,500 d. 11,000 11. Imagine that someone offers you 100 today or 200 in 10 years. You would prefer to take the 100 today if the interest rate is a. 4 percent. b. 6 percent. c. 8 percent. d. All of the above are correct. 12. Unions a. do not affect the natural rate of unemployment. b. lower the wages of unionized workers. c. raise the profits of unionized firms. d. lower the wages of workers in industries without unions. 13 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. 14. Why do some policymakers support a consumption tax rather than an income tax? a. The average tax rate would be lower under a consumption tax. b. A consumption tax would encourage people to save earned income. c. A consumption tax would raise more revenues than an income tax. d. The marginal tax rate would be higher under an income tax. 15. The invisible hand of the marketplace acts to allocate resources a. efficiently but does not necessarily ensure that resources are allocated fairly. b. both fairly and efficiently. c. fairly but does not necessarily ensure that resources are allocated efficiently. d. neither fairly nor efficiently. 16. When the Bank of England buys government bonds, a. the money supply increases and the interest rate increases. b. the money supply increases and the interest rate decreases. c. the money supply decreases and the interest rate increases. d. the money supply decreases and the interest rate decreases. 17. A rise in government expenditure a. shifts the IS curve and lowers interest rates and increases national income Page 3 of 6
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 18. According to the classical dichotomy, which of the following is influenced by monetary factors? a. real GDP b. unemployment c. nominal interest rates d. All of the above are correct. 19. When inflation rises, the nominal interest rate a. rises, and people desire to hold more money. b. rises, and people desire to hold less money. c. falls, and people desire to hold more money. d. falls, and people desire to hold less money 20. The source of hyperinflations is primarily a. lower output growth. b. continuing declines in velocity. c. increases in money-supply growth. d. continuing increases in money demand. 21. Net capital outflow a. is always greater than net exports. b. is always less than net exports. c. is always equal to net exports. d. could be any of the above. 22. Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living? a. substitution bias. b. introduction of new goods. c. unmeasured quality change. d. unmeasured price change. 23. When a country s government budget deficit increases, a. the real exchange rate of its currency and its net exports increase. b. the real exchange rate of its currency and its net exports decrease. c. the real exchange rate of its currency increases and its net exports decrease. d. the real exchange rate of its currency decreases and its net exports increase. 24. The effects of a higher 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. Page 4 of 6
25. Which of the following would cause prices to rise and real GDP to fall in the short run? a. an increase in the expected price level b. an increase in the capital stock c. an increase in the quantity of labor available d. All of the above are correct. 26. Which of the following can explain the upward slope of the short-run aggregate supply curve? a. nominal wages are slow to adjust to changing economic conditions b. as the price level falls, the exchange rate falls c. an increase in the money supply lowers the interest rate d. an increase in the interest rate increases investment spending 27. The principal reason that monetary policy has lags is that it takes a long time for a. changes in the interest rate to change aggregate demand. b. changes in the money supply to change interest rates. c. the central bank to make changes in policy. d. the government to change the tax code. 28. Which of the following tends to make the size of a shift in aggregate demand resulting from a tax cut smaller than it otherwise would be? a. the multiplier effect b. the crowding-out effect c. the accelerator effect d. None of the above is correct. 29. The position of the long-run Phillips curve depends on a. the inflation rate and the natural rate of unemployment. b. the inflation rate but not the natural rate of unemployment. c. the natural rate of unemployment, but not the inflation rate. d. neither the natural rate of unemployment nor the inflation rate. 30. The natural rate of unemployment a. is constant over time. b. varies over time, but cannot be changed by the government. c. is the socially desirable rate of unemployment. d. does not depend on the rate at which the central bank increases the money supply. Page 5 of 6
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 a decrease in the demand for goods and services pushes the economy into recession. What happens to the price level? If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? 32. What conditions are important to the efficient market theory? List one implication of the efficient market theory. 33. Answer both parts (a) and (b). (a) Why might a favourable change in the economy, such as technological improvement or a decrease in the price of imported oil, be associated with an increase in frictional unemployment? (b) What policies could the government adopt to mitigate against these effects? 34. Answer both parts (a) and (b). (a) Suppose that a U.K. pound buys more gold in Australia than it buys in Russia. What does purchasing-power parity imply should happen? (b) Under what circumstances does purchasing-power parity explain how exchange rates are determined, and why is it not completely accurate? Page 6 of 6