Final Examination Semester 2 / Year 2012 COURSE : ECONOMICS COURSE CODE : ECON1023 TIME : 2 1/2 HOURS DEPARTMENT : IT AND JOURNALISM & COMMUNICATION STUDIES LECTURER : CHING YANN PENG Student s ID : Batch No : Notes to candidates: 1) The question paper consists of 2 sections and 7 pages 2) Answer ALL questions in Section A and Section B 3) Return the question paper with your answer booklet
Section A ECONOMICS Instruction: Answer ALL questions in this section This section carries a total of 40 marks (2 marks each question) Please write down your answers in the answer booklet 1) The level of long run aggregate supply is NOT affected by A) changes in technology B) changes in the capital stock C) changes in the price level D) changes in the number of workers 2) If technological change occurs in the economy, A) the long run aggregate supply curve will shift to the right B) the long run aggregate supply curve will shift to the left C) we will move up along the long run aggregate supply curve D) we will move down along the long run aggregate supply curve 3) Which of the following is NOT a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services? A) Contracts make prices and wages "sticky" B) Firms are often slow to adjust wages C) Menu costs make some prices sticky D) Unions are successful in pushing up wages 4) Long run macroeconomic equilibrium occurs when A) aggregate demand equals short run aggregate supply B) aggregate demand equals short run aggregate supply and they intersect at a point on the long run supply curve C) structural and frictional unemployment equals zero D) output is above potential GDP 1/7
5) An increase in aggregate demand causes an increase in only in the short run, but causes an increase in in both the short run and the long run A) the price level; real GDP B) real GDP; real GDP C) the price level; the price level D) real GDP; the price level 6) Because of a supply shock, in the short run A) aggregate supply shifts to the left B) the price level falls C) unemployment falls D) equilibrium real GDP rises 7) Stagflation occurs when A) inflation rises and GDP rises B) inflation falls and GDP rises C) inflation rises and GDP falls D) inflation falls and GDP falls 8) M2 includes A) M1 + currency in circulation + checking account balances at banks + the value of traveler's checks B) M1 + savings account balances + money market deposit accounts + small denomination time deposits + noninstitutional money market fund shares C) M1 + checking account balances + large denomination time deposits + noninstitutional money market fund shares D) M1 + currency in circulation + savings accounts + small denomination time deposits 9) If households in the economy decide to take money out of checking accounts and put money into savings accounts this will A) decrease M1 and increase M2 B) decrease M1 and decrease M2 C) decrease M1 and not change M2 D) increase M1 and decrease M2 2/7
Amount Component (billions of dollars) Currency 235 Checking deposits 570 Savings deposits 416 Traveler's checks 8 Time deposits 1,144 Money market mutual funds 930 Available credit on credit cards 675 10) According to the table above, the value of M1 is and the value of M2 is A) $813 billion; $2490 billion B) $805 billion; $2490 billion C) $813 billion; $3303 billion D) $1,488 billion; $3978 billion 11) When the Fed uses contractionary policy, A) the price level rises higher than it would if the Fed did not pursue policy B) the price level rises less than it would if the Fed did not pursue policy C) it does not change the price level D) it causes inflation 12) Inflation targeting is a framework for carrying out monetary policy whereby A) the central bank adopts a rigid target for inflation and ignores declines in output B) the central bank commits to achieving a publicly announced level of inflation C) the central bank commits to achieving a target level of inflation which is never announced publicly D) the central bank commits to a monetary growth rule 13) If the Fed pursues expansionary monetary policy then A) the money supply will decrease, interest rates will rise and GDP will fall B) the money supply will decrease, interest rates will fall and GDP will fall C) the money supply will increase, interest rates will rise and GDP will rise D) the money supply will increase, interest rates will fall and GDP will rise 3/7
14) Fiscal policy is defined as changes in federal and to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment A) taxes; interest rates B) taxes; the money supply C) interest rates; money supply D) taxes; purchases 15) Expansionary fiscal policy should A) shift the aggregate demand curve to the left B) shift the aggregate demand curve to the right C) shift the short run aggregate supply curve to the left D) shift the short run aggregate supply curve to the right 16) Decreasing government spending the price level and equilibrium real GDP A) decreases; increases B) increases; decreases C) increases; increases D) decreases; decreases 17) A(n) in private expenditures as a result of a(n) in government purchases is called crowding out A) increase; decrease B) decrease; decrease C) decrease; increase D) increase; increase 18) If policy makers implement expansionary fiscal policy and do not take into account crowding out, A) equilibrium GDP is likely to be at potential GDP B) equilibrium GDP is likely to be above potential GDP C) equilibrium GDP is likely to be below potential GDP D) equilibrium GDP is likely to cause an inflationary gap 4/7
19) If the federal government's expenditures are less than its tax revenues, then A) a budget surplus results B) a budget deficit results C) the budget is balanced D) the government is deficit spending 20) The federal government debt when the federal government runs a deficit and when the federal government runs a surplus A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases 5/7
Section B ECONOMICS Instruction: Answer ALL questions in this section This section carries a total of 60 marks Please write down your answers in the answer booklet 1 The diagram below illustrates an economy in long run equilibrium at a price level of 120 and a real GDP of $12 trillion Now assume that there is a rise in household wealth (a) What are two assumptions used when the economy is said to be in an initial long run equilibrium? (4 marks) (b) Use graph to describe the changes in aggregate demand and aggregate supply that resulted from the increase in household wealth and elaborate the impact on both short-run and long run equilibrium (Explanation required) (10 marks) 2 Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a supply shock (For example: increase in price of gasoline) (Explanation required) (10 marks) 3 What are the five criteria that make a good suitable for use as a medium of exchange? (10 marks) 6/7
4 (a) How are M1 and M2 calculated? (8 marks) (b) Based on the data in the table below, what is the value of M1? (c) Based on the data in the table below, what is the value of M2? (3 marks) (3 marks) Component Amount (billions of dollars) Currency 300 Checking deposits 600 Savings deposits 450 Traveler's checks 10 Time deposits 1,200 Money market mutual funds 1,100 Available credit on credit cards 900 5 What are the effects of expansionary and contractionary fiscal policies on AD curve, real GDP, and price level? Explain your answer with two diagrams (12 marks) 000 7/7