Exam 2012, Questions And Answers - Midterm Exam 1 &2 PDF

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Midterm exam 1 &2...

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Exams, Awards & Graduations

MIDTERM EXAM COVER SHEET NOTE: This midterm exam paper may be RETAINED by the student

EXAM DETAILS Course Code:

ECON1042

Course Description:

Macroeconomics 2

Date of exam:

15-Mar2012

Start time of 13h15 exam: PM

Total number of pages (incl. this cover sheet)

Duration of exam:

45min

7

ALLOWABLE MATERIALS AND INSTRUCTIONS TO CANDIDATES

1. Write your full name and student number on each exam booklet together with the number of exam books used. 2. Students must not write, mark in any way any exam materials, read any other text other than the exam paper or do any calculations during the reading time. 3. All mobile phones must be switched off and placed under your desk. You are in breach of exam conditions if it is on your person (i.e. pocket). 4. This is a CLOSED BOOK Midterm Exam. 5. Non-text storing calculators are allowed. 6. The midterm exam paper will be marked out of 20 marks and is worth 20 percent of your overall mark in this course. 7. Allocate your time carefully. 8. The midterm exam paper consists of 20 multiple-choice questions. Students must attempt all of these questions.

ECON1042 Macroeconomics 2 – Midterm Examination 1 – Semester 1, 2012.

Page 1 of 7

Student Name: …………………………………… Signature: …………………...…............ Student ID Number: …………………………….. Group: ………………….……………... Lecturer Name: ………………………………………………………………..….................... Total Marks: …………………………………………………………………………………..

ANSWERS TO MULTIPLE-CHOICE QUESTIONS Write the letter corresponding to your selected answer in the space provided below

1.

11.

2.

12.

3.

13.

4.

14.

5.

15.

6.

16.

7.

17.

8.

18.

9.

19.

10.

20.

ECON1042 Macroeconomics 2 – Midterm Examination 1 – Semester 1, 2012.

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1.

One way to view equilibrium in a simple Keynesian model without government spending and taxation is that: (A) Savings equals planned or intended investment. (B) Savings equals planned or intended expenditures. (C) Savings equals planned or intended autonomous spending. (D) all of the above.

2.

Assuming a simple Keynesian expenditure multiplier, and given an increase in planned investment of $200 million, the effect on total output will be greater than $200 million only if the (A) MPS is greater than zero. (B) MPC is zero. (C) MPS is less than zero. (D) MPC is greater than one.

3.

If the MPS is 0.1 and the income tax rate (or MRT) is 0.33, then the marginal induced leakage rate for a closed economy is (A) 0.033 (B) 0.23 (C) 0.43 (D) 0.397

4.

The establishment of an income tax, ceteris paribus, will result in (A) a lower expenditure multiplier. (B) a higher expenditure multiplier. (C) no change in the size of the multiplier. (D) none of the above.

ECON1042 Macroeconomics 2 – Midterm Examination 1 – Semester 1, 2012.

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5.

6.

When the marginal propensity to save declines, the (A)

multiplier becomes larger and the IS curve becomes flatter.

(B)

marginal propensity to consume increases and there is no effect on the IS curve.

(C)

multiplier becomes larger and the IS curve becomes steeper.

(D)

multiplier declines and the IS curve becomes steeper.

Which of the following would cause the IS curve to shift? (A) A change in the size of the multiplier. (B) A change in business and/or consumer confidence. (C) An increase in autonomous tax revenue. (D) All of the above.

7.

The IS curve represents (A) Investment and saving when the product or goods market are in disequilbrium. (B) Equilibrium in the product or goods market for every combination of interest rates and output. (C) The determination of the level of the interest rate. (D) The determination of the level of income and output.

8.

If the proportion of GDP that people choose to hold in the form of money balances is .25, then $100 increase in the money supply will lead to a rightwards shift in the LM curve to the extent of (A)

$400

(B)

$25

(C)

$75

(D)

$100

ECON1042 Macroeconomics 2 – Midterm Examination 1 – Semester 1, 2012.

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9.

If the demand for money was totally independent of the interest rate, the (A) LM curve would have a positive slope and the monetary policy would be strong. (B) LM curve would have a positive slope and monetary policy would be weak. (C) LM curve would be vertical and monetary policy would be quite strong. (D) LM curve would be vertical and monetary policy would be weak.

10.

If the interest rate were to rise, we would expect that (A) autonomous expenditures will rise. (B) the supply of money will fall. (C) the amount of money people want to hold will increase. (D) the amount of money people want to hold will decrease.

11.

Imagine that the Federal Government decided to increase its expenditures by $200 million and finances the resulting budget deficit by selling government bonds. As a result the LM curve will (A) shift to the right. (B) shift to the left. (C) become relatively flatter or more elastic. (D) none of the above.

12.

Which of the following statements would be true of an economy that can be described as being to the right of the relevant IS curve? (A) There is insufficient demand for products/services at the corresponding interest rate. (B) There will be a tendency for production or output to increase. (C) There will be an insufficient level of production/output at the corresponding interest rate. (D) There will be a tendency for interest rates to increase.

ECON1042 Macroeconomics 2 – Midterm Examination 1 – Semester 1, 2012.

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13.

If there is unplanned inventory or stock dis-investment or stock run-down then this indicates an excess (A) demand for bonds. (B) supply of bonds. (C) demand for goods and services. (D) supply of goods and services.

14.

A decrease in the money supply will (A) decrease the quantity of money held at every interest rate. (B) increase the quantity of money held at every interest rate. (C) shift the LM curve to the right. (D) none of the above.

15.

16.

A flat or relatively elastic LM curve implies that (A)

an increase in autonomous government expenditure will have a relatively small impact upon output.

(B)

a decrease in taxes will change output by a relatively small amount.

(C)

changes in both government spending and taxation will have a large multiple effect on output.

(D)

both A and B.

A steep or relatively inelastic IS curve implies that (A) an increase in money supply will change output by a relatively small amount. (B) a decrease in taxation will change output by a relatively small amount. (C) changes in the money supply will have a large multiplier effect upon output. (D) both A and B.

ECON1042 Macroeconomics 2 – Midterm Examination 1 – Semester 1, 2012.

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17.

Monetary policy will have a small income effect, provided the (A) IS curve is flat. (B) LM curve is steep. (C) IS curve is steep. (D) LM curve is flat.

18.

If spending is not responsive or sensitive to interest rate variations, then the (A) LM curve is vertical. (B) IS and LM curves are vertical. (C) IS curve is vertical. (D) IS curve is vertical and the LM curve is horizontal.

19.

If expenditure is not responsive to changes in the interest rate, then (A) the Central Bank is “weak” in monetary policy effectiveness terms. (B) taxation policy is “weak” in fiscal policy terms. (C) overall fiscal or budgetary policy is weak or impotent. (D) the Central Bank is “strong” in monetary policy effectiveness terms.

20.

The effect on the IS curve of an increase in taxation will be greater, the (A) flatter is the LM curve. (B) steeper is the LM curve. (C) greater is the extent of “crowding out”. (D) greater is the marginal propensity to save.

ECON1042 Macroeconomics 2 – Midterm Examination 1 – Semester 1, 2012.

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Exams, Awards & Graduations

MIDTERM EXAM COVER SHEET NOTE: This midterm exam paper may be RETAINED by the student

EXAM DETAILS Course Code:

ECON1042

Course Description:

Macroeconomics 2

Date of exam:

16-Apr2012

Start time of 13h15 exam: PM

Total number of pages (incl. this cover sheet)

Duration of exam:

45min

8

ALLOWABLE MATERIALS AND INSTRUCTIONS TO CANDIDATES

1. Write your full name and student number on each exam booklet together with the number of exam books used. 2. Students must not write, mark in any way any exam materials, read any other text other than the exam paper or do any calculations during the reading time. 3. All mobile phones must be switched off and placed under your desk. You are in breach of exam conditions if it is on your person (i.e. pocket). 4. This is a CLOSED BOOK Midterm Exam. 5. Non-text storing calculators are allowed. 6. The midterm exam paper will be marked out of 20 marks and is worth 20 percent of your overall mark in this course. 7. Allocate your time carefully. 8. The midterm exam paper consists of 20 multiple-choice questions. Students must attempt all of these questions.

ECON1042 Macroeconomics 2 – Midterm Examination 2 – Semester 1, 2012.

Page 1 of 8

Student Name: …………………………………… Signature: …………………...…............ Student ID Number: …………………………….. Group: ………………….……………... Lecturer Name: ………………………………………………………………..….................... Total Marks: …………………………………………………………………………………..

ANSWERS TO MULTIPLE-CHOICE QUESTIONS Write the letter corresponding to your selected answer in the space provided below

1.

11.

2.

12.

3.

13.

4.

14.

5.

15.

6.

16.

7.

17.

8.

18.

9.

19.

10.

20.

ECON1042 Macroeconomics 2 – Midterm Examination 2 – Semester 1, 2012.

Page 2 of 8

1. A short run equilibrium occurs/ exits in the macroeconomic when: a. AD is equal to SRAS and DL is equal to SL. This occurs when current real wage equals to the market clearing real wage. b. AD is equal to SRAS but DL is not equal to SL. This occurs when current real wage doesn’t equal to the market clearing real wage. c. AD is equal to SRAS but DL is not equal to SL. This occurs when the money wage doesn’t equal the market clearing money wage. d. AD is not equal to SRAS but DL is equal to SL. This occurs when the current real wage equals to the market clearing real wage. Answer: C

2. The term “deflationary impotent” refers to: a. Inability /failure of a fall in the price level to raise the level of output. b. Failure of fiscal policy to drive price down in a recession. c. A problem that economy faces when industries are not perfectly competitive and prices do not fluctuate. d. Failure of firm to lower price even when wages are falling. Answer: A

3. The Classical or Neo Classical Model doesn’t include: a. A transaction demand for money. b. An asset/speculative demand for money. c. Flexible wage rates in both directions. d. Balanced budget irrespective of the level of domestic unemployment. Answer:

4. If the price level is fixed, a recession will always be automatically corrected if there a. No liquidity trap and there is Pigou effect. b. Has both a Pigou and interest rate effect. c. Exists in interest rate effect and there is no liquidity trap. d. None of this insures nor guarantees that recession will be automatically corrected when the price level is fixed.

ECON1042 Macroeconomics 2 – Midterm Examination 2 – Semester 1, 2012.

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Answer: D

5. In relation to IS- LM model, the Monetarists believe that the LM schedule a. And the IS schedule are both very steep. b. Is very flat while IS schedule is very steep. c. Is very steep and the IS schedule is very flat. d. And the IS schedule are both very flat. Answer: C

6. An important distinction between Friedman and other view of demand for money is that, the former (Friedman) emphasizes on a. Substitution between money and bonds. b. Nominal rate of interest. c. Substitution between money and a wide range of alternative assets. d. Effects of wealth. Answer: C

7. A major difference between Keynessian and Monetarists viewpoint is a. Keynesians believe that the market economy is fundamentally stable, while Monetarists believe that counter-cyclical monetary policy is essential before stability can be achieved. b. Monetarists believe that the economy would be relatively stable if monetary policy were stable, while Keynesians believe that fiscal policy is necessary to offset movement in an inherently unstable economy. c. Monetarists believe that changes in investments must be offset by changes in government spending of equal magnitude but in opposite difference, while Keynesians believe that changes in investment are of little importance. d. Monetarists believe that small discretionary changes in the money supply are necessary to stabilize the economy while Keynesians believe the reverse. Answer: B

8. In FOOLING MODEL, output and employment increase above the full employment can be achieved as long as a. Pe > Pa

ECON1042 Macroeconomics 2 – Midterm Examination 2 – Semester 1, 2012.

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b. Pa > Pe c. W/Pa > W/Pe d. W/Pa = W/Pe Answer: B

9. A monetary expansion or increase in the Monetarist model will a. Raise real income but leave the price level unaffected in the long run. b. Raise both the price level and real income in the short run. c. Raise both the price level and real income in the long run. d. Leave both the price level and real income unaffected in the short run. Answer: B

10. If the actual real wage is above the equilibrium real wage rate a. Unemployment is below the natural rate. b. There will be pressure for the actual real wage to rise. c. The actual output level must exceed the natural level of output. d. None of the above. Answer: D

11. One of the major weaknesses of original or simple Keynesian approach to the business or trade cycle was a. The assumption that firms are perfectly competitive. b. The theoretical failure to explain why wages are rigid or sticky downwards. c. The acceptance of the existence of the Pigou effect. d. The assumption that the demand for labour depends on the real wage. Answer: B

12. According to the traditional Keynesian Model, an increase in Ms leads to decrease in i and an increase in MA and MT, but in this model, the decrease in i leads to a larger increase in MA and a smaller increase in MT and so V decreases. As a result a.

i and V are positively related and Ms and V are negatively related, in Keynesian model.

ECON1042 Macroeconomics 2 – Midterm Examination 2 – Semester 1, 2012.

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b. i and V are positively related and Ms and V are positively related, in Keynesian model. c. Regardless of the level of Y or RGDP, V and k, will both be constant in Keynesian Model. d. Both, i and V are positively related, and Ms and V are positively related, in Keynesian model. Answer: A

13. The original conventional or the simplest version of the Phillips Curve a. Shows an inverse relationship between the rate of increase of the price level and the unemployment rate. b. Makes it possible for the economy to achieve full employment and stable prices. c. Indicates that prices do not rise until full employment has been achieved. d. Slopes upward from left to right. Answer: A

14. A key difference between the original Keynesian and New Keynesian approaches to the labour market, is that in the original model, nominal or money wages, are ________, while in the New model, nominal wages are _______ a. Perfectly flexible, slow to adjust. b. Slow to adjust, perfectly flexible. c. Fixed, slow to adjust. d. Slow to adjust, fixed. Answer: C

15. The key idea distinguishing the “Efficiency Wage Model” is that the above average wage rate paid by Firm A, relative to the wages paid at other firms in the same industry, helps determine a. Firm A’s demand for labour. b. The amount of labour that Firm A can hire. c. The productivity level of Firm A’s workers. d. Firm A’s mark-up rate per item sold. Answer: C

ECON1042 Macroeconomics 2 – Midterm Examination 2 – Semester 1, 2012.

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16. As part of the New or Post Keynesian explanation of price stickiness or rigidity, “Menu cost” which can be best described as a. Any expense associated with replacing, maintaining and operating outdated, and/or less productive capital equipment. b. Any expense associated with changing wage rate including overtime rates, penalty rates and age rates. c. Any expense associated with drawing up or formulating staggered contracts for employees. d. Any expense associated with frequently changing prices including the costs of producing new catalogues, product lists and/or stock lists. Answer: D

17. Which of the following best describes “Policy Ineffectiveness Proposition” or PIP? a. Monetary policy cannot change real GDP in a regular or predictable way. b. Policy can be effective in changing real GDP only if people’s expectations are correct. c. Monetary policy can change real GDP only if the central bank pursues a consistent stable growth rate of the real money supply. d. Expansionary fiscal policy will increase real output but contractionary or tight fiscal policy will not reduce real output. Answer: A 18. If expectation are “Adaptive” or “Backward looking”, it means that the expected rate of inflation, Pe a. Depends on the past observed rate of inflation. b. Depends on one’s previously expected rate of inflation. c. Will be rising when inflation is rising. d. All of the above. Answer: D 19. Which of the following is not a criticism of the original Monetarist “Fooling Model” as created by Milton Friedman?

ECON1042 Macroeconomics 2 – Midterm Examination 2 – Semester 1, 2012.

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a. Workers and/or employees regularly buy goods and services on a weekly if not daily basis, and so should be aware of any price changes that occur. b. Price information is regularly published and widely available so expectations to current price changes should be correct. c. If an increase in Y or RGDP is typically associated with an increase in P or the general price level, then workers and/or employees seeing an economic expansion should be expect an increase in P and so demand an increase in W or the money wage rate. d. Workers and/or employees should know that in the long run, changes in money supply will lead to change in the price level, but ultimately have no effect upon real output and so will, in time, demand higher money wage rates. Answer: D 20. In the New Keynesian Model, the product and labour market are distinctive or ident...