Mac Uni 2002 Exam

MID-YEAR EXAMINATIONS 2002 Unit: Date: Time Allowed: THREE (3) hours plus 10 minutes reading time Part A: 24; Part B: 2; Part C: 3; Part D: 2. Part A is worth 40 percent of exam marks, with all questions of equal value. Each question in Parts B, C and D is worth 20 percent of exam marks. ECON110 MACROECONOMIC PRINCIPLES Total Number of Questions: Marks per Question: Instructions: 1. 2. ANSWER ALL TWENTY FOUR (24) QUESTIONS IN PART A. ANSWER THREE (3) QUESTIONS FROM PARTS B, C AND D, AS FOLLOWS: ONE (1) ONLY FROM PART B, ONE (1) ONLY FROM PART C, AND, ONE (1) ONLY FROM PART D. PART A IS TO BE ANSWERED USING A 2B PENCIL ON THE ANSWER SHEET PROVIDED. EACH OF THE QUESTIONS IN PARTS B, C AND D MUST BE ANSWERED IN A SEPARATE EXAMINATION BOOK. RECORD THE NUMBER OF THE QUESTION ATTEMPTED IN PARTS B, C AND D IN THE DESIGNATED BOX ON THE COVER OF EACH EXAMINATION BOOK. ONLY THE USE OF NON-PROGRAMMABLE ELECTRONIC CALCULATORS IS PERMITTED. NO WRITING IS PERMITTED DURING READING TIME. DICTIONARIES ARE NOT PERMITTED. 3. 4. 5. 6. 7. 8. PART A: MULTIPLE CHOICE QUESTIONS Part A is worth 40 percent of exam marks. INSTRUCTIONS FOR COMPLETING PART A ONLY: 1. 2. ANSWER ALL TWENTY FOUR (24) QUESTIONS. COMPLETE THE REQUIRED IDENTIFICATION DETAILS ON THE ANSWER SHEET PROVIDED USING A 2B PENCIL. MARK YOUR ANSWERS USING A 2B PENCIL AGAINST QUESTIONS 1 TO 24 ON THE ANSWER SHEET. CHOOSE THAT ALTERNATIVE WHICH CORRECTLY, OR MOST CORRECTLY, ANSWERS THE QUESTION. 3. 4. 1. Economists use highly simplified models of reality because: A) B) C) D) policy-makers don’ care about the accuracy of their predictions. t they are paid too little to spend the time making more complicated models. reality is so complex that only by simplifying can useful theories be constructed. they are too poorly educated to handle complicated ideas. 2. In a three sector model, equilibrium requires that: A) planned leakages equals actual injections. B) actual saving plus taxation equals actual investment plus government expenditure. C) aggregate demand equals consumption plus investment plus government expenditure. D) planned saving equals planned investment. 3. If Gross National Expenditure equals Gross Domestic Product at Factor Cost, then: A) B) C) D) Net Exports are negative, and the Budget Surplus is positive. Compensation of Employees is less than Private Consumption. Gross Operating Surplus is greater than both Private and Government Investment. Net Exports equal Net Indirect Taxes. 2 4. An economy has the following characteristics: Co = 200 Mo = 20 Io = 112 b = 0.8 Go = 84 t = 0.2 To = 30 Xo = 60 m = 0.14 By banning all imports, the Government will increase equilibrium income (to the nearest dollar) by: A) B) C) D) 376. 320. 143. 40. 5. A firm is considering whether to buy a new machine that has an expected economic life of one year. The expected return is $7900, and the scrap value is expected to be $820. If the rate of interest is currently 9%, the maximum price that the firm should pay for the machine is A) B) C) D) $7900. $8000. $8720. $9505. 6. “Private investment rises in the face of expected interest rate cuts”. The immediate effect of such news on the money market will be: A) no change in any component of the demand for money. B) decreases in both the transactions demand and the speculative demand for money. C) an increase in the transactions demand for money and a fall in the speculative demand for money. D) an increase in the supply of money. 7. Assuming interaction between the goods market and the money market with an exogenous money supply, an increase in exogenous investment will result in: A) B) C) D) a rise in taxation. a rise in the speculative demand for money. a fall in imports. a fall in the transactions demand for money. 3 8. Assuming interaction between the goods market and the money market with an D exogenous money supply, a decrease in exogenous money demand ( M O ) will lead to: A) B) C) D) a fall in output and a rise in bond prices. a rise in imports and a rise in the transactions demand for money. a rise in investment and a fall in consumption. a rise in the speculative demand for money and a rise in saving. 9. Crowding out will be smallest if, ceteris paribus: A) B) C) D) e is lower and g is lower. e is higher and f is lower. f is lower and g is higher. f is higher and e is lower. 10. Economy X has a high e and low g compared to economy Z. If the same contractionary fiscal policy occurs in each economy, and each has an exogenous money supply, then, ceteris paribus: A) B) C) D) aggregate income will rise by more in Z than in X. aggregate income will fall by more in Z than in X. the interest rate will fall by more in Z than in X. bond prices will rise by more in Z than in X. 11. Given the following data concerning the Balance of Payments for one year: Exports of goods and services Imports of goods and services Private sector capital outflow Private sector borrowings from overseas Government repayment of foreign debt Government borrowing from overseas Income paid to overseas Income received from overseas Net current transfers to overseas Net capital transfers to overseas A) B) C) D) = = = = = = = = = = $2987 billion $1865 billion $1612 billion $5185 billion $762 billion $404 billion $6043 billion $1998 billion $561 billion $740 billion the current account deficit is $3484 billion and the capital account surplus is $3215 billion. the balance of payments in the economic sense is zero and the balance of trade surplus is $1122 billion. the current account deficit is $3663 billion and the capital account surplus is $2654 billion. the current account deficit is $3484 billion and the balance of payments deficit in the economic sense is $1009 billion. 4 12. If most market participants expect the US dollar to appreciate against the Australian dollar in the near future, then, in a floating exchange rate system: A) B) C) D) capital inflow will fall, the supply of A$ will rise, and the exchange rate will fall. the demand for A$ will rise, capital outflow will fall, and the exchange rate will rise. the demand for A$ will rise, the supply of A$ will be unchanged, and the exchange rate will rise. capital inflow will be unchanged, the supply of A$ will rise, and the exchange rate will fall. 13. If international speculators increase their purchases of the currency of a country with fixed exchange rates, then, assuming the fixed exchange rate initially equals the market-determined rate: A) B) C) D) the market has excess demand for the domestic currency and the domestic money supply will fall. the central bank will buy more foreign currency and the balance of payments will be in deficit. the balance of payments will be in surplus and the domestic money supply will rise. the exchange rate will fall and gold and foreign exchange reserves at the domestic central bank will rise. 14. The banking system has the following characteristics. The banks are required to hold 6% of their deposits as reserves with the central bank, the public wish to maintain a cash to deposits ratio of 10%, and banks choose to hold 4% of their deposits as excess reserves. The central bank buys $5,000 million government securities from the private sector. Assuming an unlimited demand for loans, the final result will be: A) B) C) D) the money base increases by $5,000m and total bank reserves increase by $1,000m. deposits increase by $2,500m and excess reserves held by the banks decrease by $1,500m. bank reserves at the central bank increase by $2,500m and currency held by the public increases by $2,500m. the money supply increases by $27,500m and total bank loans increase by $22,500m. 15. When monetary policy is tightened, the central bank: A) B) C) D) sells government securities and lowers their price. increases the money base by buying government securities. raises the price of government securities and decreases the money base. buys government securities and causes bank deposits to rise. 5 16. In an economy in which the central bank controls the interest rate, a reduction in the interest rate will, ceteris paribus, be associated with: A) B) C) D) a fall in speculative demand and a rise in the money supply. a rise in the money supply and a switch from bond-holding to money-holding. a fall in total money demand and a fall in the money supply. central bank sales of government securities and a rise in the price of government securities. 17. If a government initially has a budget deficit, and then increases the tax rate such that the budget deficit decreases, the outcome will be: A) B) C) D) a decrease in the structural deficit and a decrease in the cyclical deficit. a decrease in the budget deficit with the structural deficit remaining constant. a decrease in the structural deficit which is greater than the increase in the cyclical deficit. a decrease in the structural deficit which is smaller than the decrease in the budget deficit. 18. An increase in the monetary base will be brought about by: A) B) C) D) a budget deficit financed by a sale of government securities to the private sector. a budget deficit financed by a sale of government securities to the central bank. the net sale of foreign currencies by the central bank. a decreased demand for money under interest rate targeting. 19. A simple economy has two goods, food and housing, for which prices and quantities for the years 2000 and 2001 are as follows: 2000 Food Housing Price 48 112 Quantity 20 20 Price 64 128 2001 Quantity 120 140 The rate of inflation as measured by the CPI is: A) B) C) D) 25% 20% 1.25% 1.20% 6 20. When the inflation rate increases, the wealth of bond-holders will undergo: A) a real gain and a nominal gain. B) a real loss and a nominal loss. C) a nominal gain and a real loss. D) a real gain and a nominal loss. 21. If average money wages are increasing at 2% pa, average labour productivity is rising at 1.3% pa, the variable reflecting the non-labour share of aggregate income ( ? ) is growing at 6% pa, and the money supply is increasing at 8% pa, then the rate of inflation is: A) B) C) D) 0.7% pa 6.7% pa 8.0% pa 9.3% pa. 22. If the money supply is growing at 6% pa, real GDP is growing at 3% pa, nominal wages are growing at 4% pa, the size of the labour force is declining at 1% pa, average labour productivity is rising at 2% pa, and the velocity of circulation of money is declining by 2% pa, then: A) B) C) D) the inflation rate is 5% and the unemployment rate is increasing. the inflation rate is 1% and the unemployment rate is decreasing. the inflation rate is 6% and the unemployment rate is constant. the inflation rate is 3% and the unemployment rate is zero. 23. If the participation rate increases and the number of unemployed remains constant, then, ceteris paribus: A) B) C) D) the unemployment rate falls and the number of employed rises. the unemployment rate is constant and the number of employed rises. the unemployment rate rises and the number of employed falls. the unemployment rate is constant and the number of employed falls. 24. An economy is undergoing widespread technological change which results, among other things, in a rapid increase in the availability of all kinds of information. The most likely outcome will be: A) B) C) D) a fall in structural unemployment and a rise in frictional unemployment. a rise in structural unemployment and a fall in frictional unemployment. a rise in structural unemployment and a fall in demand-deficient unemployment. a fall in frictional unemployment and a rise in wage-induced unemployment. 7 PART B: LONG ANSWERS ANSWER ONLY ONE (1) QUESTION FROM THIS PART ANSWER THE QUESTION IN A SEPARATE EXAMINATION BOOK AND RECORD THE NUMBER OF THE QUESTION ATTEMPTED ON THE COVER OF THE EXAMINATION BOOK Each question is worth 20 percent of exam marks. The marks for each section of the question are as shown. 1. The strong economic growth figures for Australia in the December quarter 2001 were driven, in part, by strong growth in private consumption expenditure. Use the four-sector income expenditure model to illustrate the effect on equilibrium income of higher consumption expenditure at each level of aggregate income. (10 marks) If households subsequently decide to allocate a greater proportion of additional income to expenditure on imports, what will be the effect on equilibrium income? Demonstrate this effect using the four-sector income-expenditure model. (10 marks) In each case, explain fully the process through which the new equilibrium level of income is attained. Use diagrams in all your answers. 2. Write down the equation for total money demand. Define all coefficients and variables, and discuss their determinants. (6 marks) Show, graphically, the derivation of the demand for money schedule. Discuss fully the determination of the interest rate, assuming an exogenously determined money supply. (6 marks) Discuss separately the impact on the equilibrium interest rate of each of the following changes: (i) (ii) a general mood of pessimism regarding future bond prices. a plan to pay public servants daily through electronic transfers. (8 marks) Use diagrams in all your answers. 8 PART C: LONG ANSWERS ANSWER ONLY ONE (1) QUESTION FROM THIS PART ANSWER THE QUESTION IN A SEPARATE EXAMINATION BOOK AND RECORD THE NUMBER OF THE QUESTION ATTEMPTED ON THE COVER OF THE EXAMINATION BOOK Each question is worth 20 percent of exam marks. The marks for each section of the question are as shown. 3. Because of strong growth in the Australian economy, the Reserve Bank of Australia (the central bank) raises interest rates relative to those in the rest of the world. Explain the effects on the demand for, and supply of, Australian dollars in the foreign exchange market, ceteris paribus. (4 marks) Analyse, with diagrams, the consequences of the interest rate rise under (i) floating exchange rates, (ii) fixed exchange rates. In each case, explain any changes in the following six variables: (a) the exchange rate, (b) the money supply, (c) the gold and foreign exchange holdings of the central bank, (d) the current account, (e) the capital account, and (f) the balance of payments. (8 marks) (8 marks) 4. Outline two theories of the transmission mechanism of monetary policy. For each theory, discuss the relative magnitudes of relevant behavioural coefficients. (10 marks) For each of the above theories and their coefficients, use an interacting goods and money market model to determine the effects of an expansionary monetary policy on aggregate output. (10 marks) Use diagrams in all parts of your answer. 9 5. Suppose the global economy collapses and the Australian economy enters a deep recession. In response, the government decides to increase government spending, run a budget deficit, and finance the budget deficit by borrowing from the central bank. Using the Y-E model and FP line analysis, discuss the effects of the increase in government spending on (i) aggregate income, (ii) the budget deficit, (iii) the structural component of the budget, and (iv) the cyclical component of the budget. (9 marks) Assume the budget deficit, and the amount borrowed from the central bank, is $2400m. Using the money creation model, and assuming numerical magnitudes for its behavioural coefficients, explain the consequences for (i) the money base, (ii) the money supply, and (iii) bank lending. Calculate the magnitudes of these three variables at the end of the money creation process. (9 marks) Discuss whether or not such policies are likely to be inflationary. (2 marks) 10 PART D: LONG ANSWERS ANSWER ONLY ONE (1) QUESTION FROM THIS PART ANSWER THE QUESTION IN A SEPARATE EXAMINATION BOOK AND RECORD THE NUMBER OF THE QUESTION ATTEMPTED ON THE COVER OF THE EXAMINATION BOOK Each question is worth 20 percent of exam marks. The marks for each section of the question are as shown. 6. Comment on both the costs and benefits of inflation for the macroeconomy. (5 marks) Explain, in detail, the Monetarist theory of inflation. In your answer, discuss its underlying assumptions, its key ideas, and its main equation. (10 marks) Outline the policies that Monetarists advise the authorities to follow to reduce high inflation rates. (5 marks) 7. Briefly describe the four main types of unemployment and their causes. (5 marks) Suppose an economy which is just below full employment experiences a sudden fall in exogenous investment by firms. Using diagrams and Keynesian theory, explain in detail the resulting effects on the unemployment rate. (10 marks) Explain the anti-unemployment policies the government might pursue in this situation. (2 marks) If the growth rate of labour productivity is 1% pa and the growth rate of the labour force is 3% pa, explain how you would use Okun’ Law to inform the government of s the growth rates necessary to (i) reduce unemployment, and (ii) reduce unemployment by 1%. (3 marks) 11