Exam 2017, questions PDF

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Warning: TT: undefined function: 32School of Social SciencesDepartment of EconomicsBSc Financial Economics, BSc Economics and Accountancy, BScEconomics, BSc Mathematical Science with Finance and Economics,BSc Mathematics and Finance, BSc Sociology, BS Journalism andEconomics, BSc PsychologyEC1009 In...

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School of Social Sciences Department of Economics BSc Financial Economics, BSc Economics and Accountancy, BSc Economics, BSc Mathematical Science with Finance and Economics, BSc Mathematics and Finance, BSc Sociology, BS Journalism and Economics, BSc Psychology

EC1009

Introduction to Macroeconomics

Part 1 Examination

Sample for Exam Paper for Academic Year 2017 INSTRUCTIONS TO CANDIDATES The exam is divided into two sections. Section A contains 20 multiple choice questions ALL of which must be answered. Please ensure you answer the multiple choice questions in the answer book provided. Section B contains 10 short answer questions of which ONLY 6 must be answered. Note if you answer more than 6 then only your first 6 answers will be marked. One answer book to be provided. Only Casio FX83/85 MS/ES calculators are permitted. English and translation dictionaries are permitted. Exam papers may not be removed from the exam room.

Internal Examiner: Professor Keith Pilbeam External Examiner: Professor Hashimzade

Answer all 20 MCQ Questions in part A (2 marks each) and 6 out of 10 Questions in part B 10 marks each. Answer all multiple choice questions in the answer book provided! Part A: Answer all 20 of the following multiple choice questions. No marks are deducted for an incorrect response. Each correct answer is awarded 2 marks, only one response is correct in each question. Question 1 Assume that the total output of goods and services is held constant and the price level increases. Which one of following observations concerning Gross Domestic Product (GDP) is FALSE ? A B C D

Nominal GDP increases. Real GDP remains constant. Nominal GDP rises while real GDP falls. Nominal GDP changes by more than real GDP.

Question 2 According to Keynesian analysis, once a closed economy is in macroeconomic equilibrium such that planned savings equals planned investment then: A B C D

there will be no unemployment in the economy. the marginal propensity to consume must be greater than the marginal propensity to save. consumption will be equal to or greater than income. there may or may not be unemployment.

Question 3 If national income is £500 billion and the level of planned spending by households and businesses is £600 billion then there will be an: A B C D

accumulation of inventories and output will rise. accumulation of inventories and output will fall. unplanned reduction in inventories and output will fall. unplanned reduction in inventories and output will rise.

Question 4 The monetary base is £200 billion, the public's cash to deposit ratio is 0.5 and the broad money supply is £400 billion. This means that the reserve to deposit ratio of the banking system is: A B C D

2 0.25 0.5 1

Question 5 An increase in the general price level with no change in the money supply will: A B C D

increase the demand for money and increase aggregate demand decrease the demand for money and increase aggregate demand increase the demand for money and decrease aggregate demand decrease the demand for money and decrease aggregate demand

Question 6 If the government imposes a minimum wage that is above the market equilibrium wage then one would expect: A B C D

an increase in the quantity of labour demanded. the supply of labour curve to shift to the left. an increase in the quantity of labour supplied. the demand for labour curve to shift to the left.

Question 7 Which one of the following statements is NOT associated with the monetarist argument concerning the so called "vertical" long run Phillips curve ? A B C D

At a given rate of unemployment there will be a unique rate of inflation. If the actual rate of unemployment rate is above the natural rate, then we would expect to observe a decrease in the rate of wage and price inflation. If the actual rate of unemployment rate is below the natural rate of unemployment, then we would expect to observe an increase in wage and price inflation. In the long run, the government can influence the rate of inflation.

Question 8 The marginal propensity to consume in a closed economy with no government sector is 0.9 and planned investment is £50 billion. The equilibrium level of national income is: A B C D

£500 billion £95 billion £45 billion indeterminate from the information given.

Question 9 If a country has a current account deficit then: A B C D

Gross Domestic Product is greater than Gross National Income Gross Domestic Product is less than Gross National Income Gross Domestic Product is the same as Gross National Income we cannot say whether Gross Domestic Product differs from Gross National Income from this information

Question 10 A country has a population of 25 million of whom 10.5 million are in employment and 1.5 million are unemployed, what is the rate of unemployment? A B C D

6% 10.3% 12.5% 14.3%

Question 11 Given the Gross Domestic Product (GDP) at basic prices we can calculate the GDP at market prices by: A B C D

adding indirect taxes and adding subsidies. adding indirect taxes and subtracting subsidies. subtracting indirect taxes and subtracting subsidies. subtracting indirect taxes and adding subsidies.

Question 12 The "crowding out" effect associated with an increase in government borrowing could be reduced or eliminated by an accommodating increase in: A B C D

government expenditure. taxation. money supply. marginal propensity to save.

Question 13 The business cycle is defined as: A B C D

the annual cycle of output. the long run trend path of output after removing short run variations. the short run path of output around the long run trend. none of the above.

Question 14 You are given the following data for an economy:

Consumer expenditure (including indirect taxes) Investment Government expenditure (including transfer payments) Exports Imports Net income from abroad Indirect taxes Capital depreciation Transfer payments

£ millions 120 60 70 40 30 20 10 20 10

The value of the economy’s Gross National Income at market prices is: A B C D

£250 million £260 million £270 million £280 million

Question 15 The marginal propensity to consume is 0.7 and the tax rate is 25 per cent of all income. The government decides to increase public spending by £100 million. According to simple Keynesian multiplier analysis, what is likely to be the total change in national income resulting from this increase government expenditure (to nearest million)? A B C D

£121 million £190 million £211 million £333 million

Question 16 The nominal rate of interest is 9% and the expected rate of inflation is 7%. Which one of the following is TRUE? A B C D

The real rate of interest is negative. The rate of inflation is less than the real rate of interest. The real rate of interest is 16%. The nominal rate of interest exceeds the real rate of interest.

Question 17 In a simple economy, consumption is given by the relationship C = 0.75 Y Where C is consumption expenditure and Y is Gross Domestic Product. If government expenditure is £150 million, investment is £50 million and there is no taxation or international trade, what will be the equilibrium value of Gross Domestic Product of the economy? A B C D

£200 million £312.5 million £1,000 million £800 million

Question 18 To obtain a measure of Net National Income from Gross Domestic Product it is necessary to: A B C D

add net income from abroad and add capital depreciation. add net income from abroad and deduct capital depreciation. deduct net income from abroad and add capital depreciation. deduct net income from abroad and deduct capital depreciation.

Question 19 In Country A, government expenditure is £250 billion, tax revenue is £275 billion, aggregate saving is £300 billion and aggregate investment is £250 billion. The net exports of Country A are equal to a: A B C D

surplus of £25 billion. deficit of £75 billion. surplus of £75 billion. deficit of £25 billion.

Question 20 Which one of the following is likely to lead to cost push inflation? A B C D

A decrease in trade union powers. A depreciation of the domestic currency's exchange rate. A rise in labour productivity. A fall in the profit margins applied by firms.

Section B: Answer 6 of the following 10 questions numbered 21 to 30 all questions are 10 marks each. The marks of each sub-question are indicated in brackets. Do not answer more than 6 questions. If you answer more than 6, only the first six will be marked.

Question 21 You are given the following data on an economy: National Income 400 500 600 700 800

Planned Planned Government Consumption Investment Expenditure 280 120 60 350 120 60 420 120 60 490 120 60 560 120 60

Note: All figures in £'millions (i)

Calculate the value of planned consumption at the equilibrium level of national income. (2 marks)

(ii)

Calculate the value of planned savings at the equilibrium level of national income. (2 marks)

(iii)

Calculate the value of unplanned additions (+) or falls (-) in stocks if national income is £750 million. (2 marks)

(iv)

Calculate the equilibrium level of national income if planned investment w ere to rise from £120 million to £150 million. (2 marks)

(v)

Calculate the planned aggregate expenditure at the equilibrium level of national income. (2 marks) [Total 10]

Question 22 (i) Briefly explain with the aid of two diagrams: one showing the money market and the second the Treasury bill market, how a Central bank conducts a contractionary open market operation in the money market. In your exposition, be careful to make clear the implications of the operation for the price of Treasury bills and the short term rate of interest. (6 marks) (ii) Write down the equation for the money multiplier that shows the link between the narrow money supply and the broad money supply. Your equation must include the following variables and notation; c for the proportion of deposits held by the public as cash and r for the proportion of deposits held by the banks as cash. (2 marks) (iii) If the narrow money supply rises by 9 per cent and the money multiplier is 3 then by what percentage does the broad money supply rise? (2 marks) [Total 10] Question 23

The government in a closed economy undertakes expenditure on goods and services of £200 million, investment expenditure is £100 million, and the rate of direct taxation is 25 percent of all income. The consumption function is given by the equation: C = 0.8 Yd Where C is planned consumption Yd is disposable income (i.e. after deduction of income tax)

(i)

Calculate the level of national income at which the government has a balanced budget. (3 marks)

(ii)

Calculate the government budget deficit/surplus if national income were £600 million. (3 mark)

(iii)

Calculate the level of government expenditure required to achieve the full-employment level of income of £900 million. (4 marks) [Total 10]

Question 24 Using the supply and demand of labour and the accepted jobs schedule, explain the difference between voluntary and involuntary unemployment, when the wage rate is set above its equilibrium level because of trade unions asking for too high a real wage. [Total 10]

Question 25 Read parts (i) to (iii) before answering. Answer all three parts on a single diagram. Assume that the economy experiences no change in productivity, money demand or its natural rate of unemployment in either the short or long run. The inflation rate responds immediately to correspond to the money supply growth rate. However, wage rate inflation adjusts to changes in the inflation rate with a time lag. (i) Draw a diagram with inflation on the vertical axis and the unemployment rate on the horizontal axis that illustrates the Phillips curve relationship in the short run. Label the curve as PC1. Mark a point N on the horizontal axis that represents the natural rate of unemployment. (4 marks) (ii) Assume that the economy is initially on the curve PC1 at the natural rate of unemployment, with a 5 % rate of increase in the money supply and a 5% inflation rate. Mark point A on the curve PC1 which you would expect to observe if there was an unexpected increase in the rate of growth of the money supply to 10%. (2 marks) (iii) Assume that the new 10% rate of growth in the money supply in part (ii) turns out to be a permanent increase in the rate of growth of the money supply. Draw a new short run curve PC2 which you would expect to observe in the long run. Mark point B on the new curve PC2 that a monetarist would expect to observe in the long run, other things being equal. Also show the long run Phillips curve LRPC. (4 marks) [Total 10]

Question 26 The consumption function for a closed economy with no government sector is given by the equation: C = £200 million + 0.8 Y Where: C is aggregate consumption Y is national income (i)

Calculate the value of aggregate savings if the level of national income is £2000 million. (2 marks)

(ii)

Calculate the equilibrium level of national income, if the level of planned investment is £300 million. (2 marks)

(iii)

Calculate the level of aggregate consumption at the equilibrium level of national income, if the level of planned investment is £500 million. (3 marks)

(iv)

Calculate the change in national income if planned investment rose from £300 million to £400 million. (3 marks) [Total 10]

Question 27 (i)

Explain the relationship between the current account balance given by exports (X) minus imports (M) and the following four variables: private investment (I), private savings (S), Taxes (T) and government expenditure on goods and services (G). (3 marks)

(ii)

Explain the difference between a closed economy fiscal multiplier and an open economy fiscal multiplier giving the appropriate equations. In both cases incorporate a government sector with an income tax rate given by t. (4 marks)

(iii) Explain what is meant by the current account multiplier in relation to a fiscal expansion, giving the appropriate equation. (3 marks) [Total 10]

Question 28 (i) Using IS/LM curves diagram explain the likely effects of a fiscal expansion financed by government borrowing on both the domestic interest rate and the level of economic activity. (5 marks) (ii) Briefly explain what is the national debt and why keeping the national debt down as a percentage of GDP can be a good thing. (5 marks) [Total 10]

Question 29 (i) Using aggregate supply and demand curves illustrate the different effects on output of demand – pull and cost-push inflation. (5 marks) (ii) Show using an aggregate supply and demand curve diagram, how an initial increase in aggregate demand though monetary policy may have no effect on output if workers with “rational expectations” seek wage rises to compensate for the expected higher price level. [Total 10] Question 30 Explain the term “crowding out” giving five examples of “crowding out” effects. [Total 10]...