No. of Pages: (A) 8 No. of Questions: 38 EC1001A vv MIDSUMMER EXAMINATIONS 2008 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 69 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. 3/(1.35) marks (this is 3 divided by 1.35) for each right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong answer, and Zero mark if no answer is given. 1. The 2002 CPI was 177 and the 1982 CPI was 96.5. If your parents put aside 1,000 for you in 1982, how much would you have needed in 2002 in order to buy what you could have with the 1,000 in 1982? a. 1,834.20 b. 1,777.77 c. 1,714.81 d. None of the above are correct. 2. A difference in wages that offsets differences in the nonpay features of two jobs is called a. a compensating differential. b. a wage adjustment. c. an efficiency wage. d. a minimum wage. 1
Use the figure below for the following questions. Figure 17-1 3. Refer to Figure 17-1. If the money supply is MS 2 and the value of money is 2, there is excess a. demand equal to the distance between A and C. b. demand equal to the distance between A and B. c. supply equal to the distance between A and C. d. supply equal to the distance between A and B. 4. If the Bank of England decides to sell 10 million in securities and the Paris National Bank writes out a 10 million check to purchase these securities, then the a. Paris National Bank now has 10 million more of excess reserves at the Bank of England. b. Paris National Bank now has 10 million fewer reserves at the Bank of England. c. Bank of England has increased its asset position by 20 million. d. money supply has increased. 5. Which of the following is the most liquid asset? a. capital goods b. stocks and bonds with a low risk c. stocks and bonds with a high risk d. funds in a checking account 6. You want to have $100,000 in five years. If the interest rate is 8 percent, about how much do you need to save today? a. $66,225.25 b. $67,556.42 c. $68,058.32 d. $71,428.57 7. An open market purchase occurs when a. the Bank of England buys government securities from a bank. b. a bank buys government securities from the Bank of England. c. a securities dealer buys shards of stock from the Bank of England. d. the Treasury buys government securities from the Bank of England. 2
8. Suppose the real exchange rate is 1/2 gallon of Canadian gasoline per gallon of U.S. gasoline, a gallon of U.S. gasoline costs $1.50 U.S., and a gallon of Canadian gas costs $3.90 Canadian. What is the nominal exchange rate? a..385 Canadian dollars per U.S. dollar b..65 Canadian dollars per U.S. dollar c. 1.30 Canadian dollars per U.S. dollar d. None of the above is correct. 9. A high proportion of the population under the age of 15 undermines economic growth because a. the young require more infrastructure than older people. b. the young require more capital goods than older people. c. they present such a huge increase in human capital. d. the young consume but they do not produce. 10. The country of Hykania does not trade with any other country. Its GDP is $20 billion. Its government purchases $3 billion worth of goods and services each year, collects $3 billion in taxes, and provides $2 billion in transfer payments to households. Private saving in Hyrkania is $4 billion. What is investment in Hyrkania? a. $4 billion b. $3 billion c. $2 billion d. There is not enough information to answer the question. 11. Suppose that the price of a bond is equal to the sum of the present value of its payments. Suppose further that the bond pays $50 today and $1,050 one year from today. What is the price of this bond if the interest rate is 5 percent? a. $1,100.00 b. $1,050.00 c. $1,047.62 d. $945.35 12. Which of the following shifts short-run, but not long-run aggregate supply right? a. a decrease in the price level b. a decrease in the expected price level c. a decrease in the capital stock d. an increase in the money supply 13. 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 3
14. You put money in an account and earn a real interest rate of 6 percent, inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 4.8 percent b. 3.2 percent c. 2.8 percent d. None of the above is correct. 15. The wealth effect, interest rate effect, and foreign trade effect all explain why the aggregate a. supply curve is horizontal. b. supply curve is vertical. c. supply curve is upward sloping. d. demand curve is downward sloping. 16. In the 1800s, Europeans purchased stock in American companies who used the funds to build railroads and factories. The Europeans made a. foreign portfolio investments. b. indirect domestic investments. c. foreign direct investments. d. foreign indirect investments. 17. Which of the following is correct? a. Stocks, bonds, and deposits are all similar in that each provides a medium of exchange b. Banks lend mostly to large and familiar companies rather than smaller local firms. c. Banks charge borrowers a slightly lower interest rate than they pay to depositors. d. None of the above are correct. 18. The multiplier effect is the multiplied impact on a. the money supply of a given increase in government purchases. b. tax revenues of a given increase in government purchases. c. investment of a given increase in interest rates. d. aggregate demand of a given increase in government purchases. 19. Suppose that France imposed an import quota on beef. Sales of French beef producers would a. rise and exports of other industries would increase. b. rise and exports of other industries would decline. c. not change, exports of other industries would increase. d. not change, exports of other industries would decline. 4
Figure 19-2 20. Refer to Figure 19-2. This figure depicts labor demand and supply in a nonunionized labor market. The original equilibrium is at point A. If a labor union subsequently establishes a union shop and negotiates an hourly wage of $20, then there will be an excess a. supply of 3,000 workers. b. demand of 7,000 workers. c. supply of 4,000 workers. d. supply of 7,000 workers. 21. The idea of paying workers an efficiency wage is that a. doing so is more efficient than paying them the market wage. b. paying workers less gives them the incentive to work harder. c. workers and management gain at the expense of the stockholders of the company. d. workers have the incentive to do high-quality work. 22. Ruth collected Social Security payments of $220 a month in 1985. If the price index rose from 90 to 105 during 1985 her Social Security payments for 1986 should have been about a. $252.43. b. $253.00. c. $256.67. d. None of the above are correct. 5
Use the pair of diagrams below to answer the following questions. Figure 22-1 23. Refer to Figure 22-1. If the economy starts at c and 1, then in the short run, a decrease in the money supply growth rate moves the economy to a. e and 1. b. d and 2. c. d and 3. d. None of the above is correct. 24. At which interest rate is the present value of $360 three years from today equal to about $320 today? a. 4 percent b. 4.5 percent c. 5 percent d. 5.5 percent 25. Jack and Jill are co-owners of the U.S. firm Wells Petroleum. Jack borrows money to build an oil well in Texas. Jill borrows money to build an oil well in Venezuela. a. Both Jack and Jill's purchase of capital count as demand for loanable funds in the U.S. market. b. Neither Jack nor Jill's purchase of capital count as demand for loanable funds in the U.S. market. c. Jack's purchase of capital counts as demand for loanable funds in the U.S. market; Jill's purchase does not. d. Jill's purchase of capital counts as demand for loanable funds in the U.S. market; Jack's purchase does not. 26. Aggregate demand would shift right if either a. the price level decreased, or government expenditures increased. b. the price level decreased, or the government instituted an investment tax credit. c. government expenditures or the money supply increased. d. All of the above are correct. 27. The national debt a. can be paid off without major economic effects. b. need never be paid off. c. is no more serious a problem than is a corporation's debt. d. should not exist during a period of economic prosperity. 6
28. Ceteris paribus, as the price level falls, a country's exchange rate a. and interest rates rise. b. and interest rates fall. c. fall and interest rates rise. d. rise and interest rates fall. 29. Vertical equity in taxation refers to the idea that people a. in unequal conditions should be treated differently. b. in equal conditions should pay equal taxes. c. should be taxed according to their age and experience. d. should receive government benefits according to how much they have been taxed. 30. The exchange rate is about 153 Kazakhstan tenge per dollar. According to purchasing-power parity, this exchange rate would rise if a. the price level in either the United States or Kazakhstan rose. b. the price level in either the United States or Kazakhstan fell. c. the price level in the United States rose or the price level in Kasakhstan fell. d. the price level in the United States fell or the price level in Kasakhstan rose. 31. According to purchasing-power parity theory, if a McDonald's Big Mac cost $2.50 in the United States and 5 euros in France, then the nominal exchange rate should be a. 2 euros per dollar. b. 1euro per dollar. c. 1/2 euro per dollar. d. None of the above is correct. 32. Kramer's Frozen Sandwiches is thinking of building a new warehouse. They believe that this will given them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, they would be willing to pay a. $140,000, but not $150,000. b. $150,000, but not $160,000. c. $160,000, but not $170,000. d. $170,000, but not $180,000. 33. 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. 34. Which list contains only actions that increase the money supply? a. raise the discount rate, make open market purchases b. raise the discount rate, make open market sales c. lower the discount rate, make open market purchases d. lower the discount rate, make open market sales 7
SECTION B Answer one and only one of the questions numbered 35 to 38. The maximum number of marks awarded for this Section is 33. 35. Answer both (a) and (b) (a) Demonstrate that whether you would prefer to have $225 today or wait five years for $300 depends on the interest rate. Show your work. (b) As the interest rate increases, what happens to the present value of a future payment? Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending. 36. Answer both (a) and (b). (a) Suppose that 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? 37. Suppose the UK independence party wins a general election and institutes a "Buy British" campaign, in order to encourage spending on domestic goods. What effect will this have on the UK trade balance? Describe carefully your argument. 38. GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Give some examples of such goods; explain why some final goods and services are not included, and carefully consider the difficulties in including them. 8
ID: A vv Answer Section MULTIPLE CHOICE 1. A 2. A 3. D 4. B 5. D 6. C 7. A 8. C 9. D 10. C 11. B 12. B 13. C 14. D 15. D 16. A 17. D 18. D 19. B 20. D 21. D 22. C 23. C 24. A 25. A 26. C 27. B 28. B 29. A 30. D 31. A 32. C 33. D 34. C 1
ID: A SHORT ANSWER 35. (a) For example at 3 percent the present value of $300 in five years is $300/(1.03) 5 = $258.78 but at 7 percent the present value of $300 in five years is $300/(1.07) 5 = $213.90. 36. (b) An increase in the interest rate reduces the present value of future payments. Investment spending is the purchasing of capital goods that are expected to raise future revenues. When interest rates rise, the present value of these future revenues decline so that fewer capital expenditures are likely to generate enough revenue to justify their price. (a) Inflation and nominal interest rates each increase by 5 percent points. There is no change in the real interest rate or any other real variable. (b) This is possible for an open economy. The remaining $40 billion is for net capital outflow in the form of purchases of foreign assets by U.S. residents. U.S. citizens can saving by buying U.S. assets or by buying foreign assets. 37. Such a campaign will increase the demand for domestically produced goods and hence decrease the demand for imports. This increases the demand for dollars in the market for foreign currency. The real exchange rate of the U.S. dollar will appreciate, and the net effect will be no change in the trade balance. The level of net exports ultimately depends upon domestic saving and investment, neither of which are affected by the campaign. 38. GDP excludes some products because they are so difficult to measure. These products include services performed by individuals for themselves and their families, and most goods that are produced and consumed at home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they can be measured because, by society's definition, they are bads, not goods. 2