BSc (Hons) Actuarial Science Cohorts : BAS/10B/FT & BAS/13/FT Examinations for 2013/2014 Semester 2 MODULE: MACROECONOMICS MODULE CODE : ECON1101C Duration : 2 Hours 15 Minutes Reading Time: 15 Minutes Instructions to Candidates: 1. This paper contains two sections and five (5) questions 2. Section A is compulsory 3. Section B consists of four question to answer any three (3) 4. You are required to answer four (4) questions in all 5. Always start a new question on a fresh page. 6. All questions do not carry equal marks. 7. Total marks: 100. This question paper contains 5 questions and 12 pages. Page 1 of 12
SECTION A COMPULSORY (52 MARKS) QUESTION 1 PART A - Multiple Choice Questions (30 MARKS) Each question carries 1 mark and is followed by four or five responses a, b, c, d, and/or e. Choose the right answer for each question. 1.1 Which of the following does not represent a key macroeconomic variable? a) The unemployment rate. b) The inflation rate. c) Gross Domestic Product (GDP). d) Income distribution. e) The population growth rate. 1.2 Classical economists who preceded Keynes believed that; a) Increases in money supply could alter the level of production in the economy. b) As demand increases, supply increases. c) Markets that do not suffer from government interference to reach full employment equilibrium. d) Increases in government spending are necessary during times of recession. e) None of the above. 1.3 The inflation rate is measured by; a) The ratio of current year CPI to base year CPI. b) The percentage change in the CPI from one year to the next. c) The percentage change in GDP from one year to the next. d) The ratio of current year CPI to the next year s CPI. (e)the ratio of current year PPI to the next year s PPI. Page 2 of 12
1.4 Keynesians believe that the fluctuations in economic activity (business cycles); a) Are caused by external factors such as the inappropriate use of government policy. b) Are caused by changes in weather patterns. c) Are caused by structural or institutional changes. d) Occur naturally in economies and require government intervention. e) None of the above. 1.5 If the consumer price index at the end of 2010 was 100 and at the end of 2011 was 120, then the rate of inflation for 2011 was; a) 25%. b) 20%. c) 16.66%. d) 1.5%. e) 30%. 1.6 The phase of the business cycle at which almost all available resources in the economy are in use is referred to as; a) The recovery phase. b) The expansion phase. c) The peak or boom phase. d) The trough phase. e) None of the above. 1.7 During an economic downturn, sales fall and some workers lose their jobs. This unemployment is referred to as; a) Seasonal unemployment. b) Frictional unemployment. c) Cyclical unemployment. d) Structural unemployment. e) Technological unemployment. Page 3 of 12
1.8 Which of the following is not a source of economic growth? a) Saving and investment in new capital. b) The production function. c) Investment in human capital. d) Advancement in technology. e) Fostering of entrepreneurial talent. 1.9 Which of the following would not necessarily enhance economic growth a) Technological improvements b) Increased labour productivity through on-the-job training c) Higher levels of net investment in the economy d) Higher levels of government spending that raise local interest rates e) All of the above 1.10 Investment in human capital; a) Shifts the aggregate supply curve to the left b) Increases structural unemployment c) Increases labour productivity d) Shifts the Philips curve to the right e) None of the above 1.11 Which of the following was WW Rostow s final stage of growth? a) Age of high mass consumption b) Age of human development c) Age of take-off to sustained growth d) Age of maturity e) Age of pre-industrial society 1.12 During a recession, cyclical unemployment will.. and cyclical inflation will.. a) Decrease; decrease b) Decrease; increase c) Increase; increase d) Increase, decrease Page 4 of 12
e) None of the above 1.13 Capital widening refers to; a) A situation where capital replaces labour in the production process b) A situation where the capital to labour ratio in the economy increases c) A situation where additional purchases of capital are made in order to match a growing labour force d) A situation where labour replaces capital in the production process e) An increase in the current account deficit as more capital is imported 1.14 Import substitution involves; a) The reduction of import tariffs so that an economy can export goods that were previously imported. b) The use of import tariffs so as to encourage the local production of goods that were previously imported c) The protection of industries in which an economy would traditionally have enjoyed comparative advantage. d) The substitution of local labour with imported capital so as to reduce the costs of production and ensure the competitiveness of strategic industries. e) None of the above 1.15 According to Keynesian economists, during a boom in economic activity; a) Money supply should be increased b) Interest rates should be cut c) Government should increase its spending d) Tax rates should be raised e) All of the above should be undertaken 1.16 Which of the following factors has not contributed towards the slowdown in economic growth in Mauritius in the 1980 s a) The unionisation of labour and consequent b) Deterioration in the gold price c) The movement away from import substitution to export promotion d) The lack of entrepreneurial talent Page 5 of 12
e) Capital outflows as a result of political developments 1.17 Which of the following options is/ are true? At the equilibrium level of national income: (i) Aggregate spending equals aggregate production (ii) Aggregate spending equals aggregate income (iii) Aggregate income equals aggregate production (iv) Aggregate income equals aggregate production, but the level of aggregate spending is irrelevant 1. i b) ii c) iii d) i, ii and iii e) i and iv 1.18 In the simplest (or introductory) form of the Keynesian model, which of the following decisions can we analyse? a) Interest rate fluctuations b) Saving of households c) Investment by government d) Foreign investment by firms e) Wage levels in firms 1.19 Which of the following statements is/are true? If aggregate expenditure is equal to total income, this means; (i) Nothing, because they are always equal by definition (ii) The economy is in equilibrium because people are spending all they desire to spend (iii) Inventories will remain at their planned levels (iv) Investment will decrease to run down inventories (v) Investment will increase to build up inventories a) (i) b) (iii) c) (ii) and (iii) d) iv e) v 1.20 Equilibrium refers to change a situation where; a) The key quantities are equal b) All the variables balance out, i.e. their sum is zero c) All resources are fully employed d) No participant in the process desires to change his/her behaviour Page 6 of 12
e) Production equals income 1.21 According to the Keynesian model, the most important determinant of a household s consumption is; a) Its disposable income b) Its total wealth c) The number of persons in the household d) Its net wealth e) The ratio of wage to non-wage income the household earns 1.22 The MPC measures the relationship between; a) A change in consumption and a change in income b) A change in consumption and savings c) Changes in consumption and changes in savings d) The proportion of income to consumption at any given level of income e) The total level of consumption and the total level of saving 1.23 Suppose an economy s expenditures are equal to $7,000 billion. Income in the economy is: a. Less than $7,000 billion. b. More than $7,000 billion. c. Exactly $7,000 billion. d. Somewhere between $7,000 billion and $8,000 billion. 1.24 Spending on capital equipment, inventories, and structures is referred to as: a. Consumption expenditure (C). b.investment expenditure (I). c.government expenditure (G). d.expenditure on net exports (X M) Page 7 of 12
1.25 The record of a country s transactions in goods, services, and assets with the rest of the world is its: a. Capital account b. Current account c. Balance of trade d. Balance of payments 1.26 The difference between a country s merchandise exports and its merchandise imports is the: a. balance of payments b. capital account c. balance of trade d. current account 1.27 The price of one country s currency in terms of another country s currency is the: a. exchange rate b. balance of trade c. terms of trade d. currency valuation 1.30 Exchange rates that are determined by the unregulated forces of supply and demand are: a. floating exchange rates b. pegged exchange rates c. fixed exchange rates d. managed exchange rates Page 8 of 12
1.30 The fall in value of one currency relative to another is: a. a strengthening of a currency b. a depreciation of a currency c. a floating of the currency d. an appreciation of a currency 1.30 The rise in value of one currency relative to another is: a. a debasement of the currency b. a depreciation of the currency c. a weakening of the currency d. an appreciation of the currency Page 9 of 12
PART B - DATA RESPONSE & ANALYSIS (22 MARKS) The table below has the prices and production of apples, computers and pizza for three years: year apples computers pizza price quantity price quantity price quantity 1997 $0.45 475 $1100 70 $7 380 1998 $0.48 510 $1050 85 $8 390 1999 $0.50 500 $1000 100 $9 400 (a) Using information from the above table, calculate the (i) nominal GDP and (ii) the real GDP for each of the years from 1997 to 1999, using 1998 as the base year. (10 MARKS) (b) Explain the difference between nominal GDP with real GDP and comment on the results obtained, showing the rate of increase or decrease in GDP in between 1997 and 1999. (6 MARKS) (c) Explain using examples why GDP may not always be a useful measure of standard of living or welfare (6 MARKS) Page 10 of 12
SECTION B ANSWER ANY 3 OUT OF 4 QUESTIONS (48 Marks) QUESTION 2-16 MARKS Using examples where applicable, distinguish between any 4 of the followings: (a) Fiscal and Monetary policies (b) Fixed and flexible exchange rate (c) Cost push and demand pull inflation (d) Frictional and structural unemployment (e) Economic growth and economic development (4X4 MARKS) QUESTION 3-16 MARKS Using applicable examples, write short notes on any 4 of the followings: (a) 4 macroeconomic objectives of any country or government (b) National Income and its Key determinants (c) The different phases of an economic cycle (d) Economic effects of fall or rise in exchange rates (e) Policies to control inflation (4X4 MARKS) QUESTION 4-16 MARKS (a) Explain any 4 possible reasons for the rise in unemployment in your country in recent decades. (6 MARKS) (b) Using examples discuss the policies that the Government may adopt to reduce unemployment in your country (7 MARKS) (c) Using Philips Curve explain the significance of any relationship between unemployment and inflation (3 MARKS) Page 11 of 12
QUESTION 5 16 MARKS (a) Define terms of trade and using examples explain its significance (4 MARKS) (b) Using appropriate examples explain the law of comparative advantages and show how countries can benefit from international trade (8 MARKS) (c) Using examples distinguish between balance of trade and balance of payments (4 MARKS) ***END OF QUESTION PAPER*** Page 12 of 12