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CONFIDENTIAL EXAM PAPER This paper is not to be removed from the exam venue Economics

EXAMINATION Semester 1 - Main, 2018

ECON1002 Introductory Macroeconomics ForExaminerUseOnly

EXAM WRITING TIME:

2 hours

READING TIME:

10 minutes

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EXAM CONDITIONS: This is a CLOSED book examination - no material permitted During reading time - writing is not permitted on the answer material(s), ONLY on the exam paper

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MATERIALS PERMITTED IN THE EXAM VENUE: (No electronic aids are permitted e.g. laptops, phones)

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MATERIALS TO BE SUPPLIED TO STUDENTS: Answer sheet: Chemistry MCQ Single (50) INSTRUCTIONS TO STUDENTS: 1. This is a closed book exam. 2. Electronic devices, apart from a simple non programmable calculator, are not permitted. 3. This exam contains two (2) SECTIONS (A and B). All questions must be answered. 4. For Section A, enter your answers onto the computer multiple choice answer sheet provided. 5. For Section B, answer all questions in the spaces provided on this question paper.

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6. Note that questions are of unequal value. The total mark of this exam paper is Total ________ 60. Section A consists of 30 multiple choice questions and is worth 30 marks. Section B consists of 2 conceptual/analytical/discussion problems and is worth 30 marks. Answer both questions in Section B.

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7. The whole exam is worth 50% of the final grade from this course. 8. This question paper must be returned at the end of the exam. 9. Take care to write legibly. Write your final answers in ink, not pencil. Please check your examination paper is complete (page numbers in footer of page) and indicate by signing below. I have checked the examination paper and affirm it is complete.

Student Signature: ______________________________ Date: ______________

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SECTIONA:MultipleChoiceQuestions(30marks) AnswerallquestionsontheAnswerSheetprovided.ForeachquestionchooseONLY ONEoftheoptions(a‐d)provided.Nomarkswillbedeductedforwronganswers.  1. Inaneconomywithoutmoney,economictransactionswouldhavetobeintheform ofbarter.Barterislessefficientthanmoneybecause: a. Thereisnowaytostorevalueinabartersystem b. Abartersystemcannotworkifthereisadoublecoincidenceofwants c. Moneyallowsindividualstoproduceallgoodsandservicesforthemselvesif theywish d. Itismoredifficulttocomparetheeconomicvalueofdifferentgoodsina bartersystem  2. Aninvestorhas$100toinvestforoneyearEITHERingovernmentbondsORTelstra shares(butnotboth).Assumegovernmentbondshaveacurrent(annual)coupon rateof10%.AlsoassumethatTelstrasharesarecurrentlyworth$4onthe AustralianStockExchangeandwillpayadividendof20centspershareinsix months’time.ThisinvestorshouldpurchaseTelstrasharesif,andonlyif,in12 months’time,sheexpectsthepriceofthesharestobegreaterthan a. $4 b. $4.20 c. $4.40 d. $5  3. Everythingelsebeingequal,ifamoreconvenientmeansofelectronicpaymentis introduced,themoneydemandcurve a. Doesnotmove b. Shiftstotheleft c. Shiftstotheright d. Becomeslesssteep  4. Everythingelsebeingequal,iftheratioofthemoneystocktorealGDPfallsfrom0.5 to0.25,thevelocityofmoney: a. Fallsby25% b. Fallsby50% c. Risesby25% d. Risesby100%    EXAMCONTINUESONNEXTPAGE

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5. InadditiontotheresponseoftheReserveBanktoinflation,theaggregatedemand curvecouldbedownwardslopingbecause: a. Householdpurchasingpowerriseswithinflation. b. Therealvalueoffixedincomepaymentsfallwithinflation. c. Lowerratesofinflationgeneratemoreuncertaintyforbusiness. d. Thepriceofdomesticgoodsandservicessoldoverseasdecreaseswith inflation.  6. Everythingelsebeingequal,anexogenousincreaseinconsumptionspendingdueto improvedconsumersentimentwould a. Shifttheaggregatedemandcurvetotheleft. b. Shifttheaggregatedemandcurvetotheright. c. Leavethepositionoftheaggregatedemandcurveunchangedbutleadtoa downwardmovementalongthecurve. d. Leavethepositionoftheaggregatedemandcurveunchangedbutleadtoan upwardmovementalongthecurve.  7. Inflationchangesslowlybecause: a. Expectationsofinflationcanbecomeself‐perpetuating b. Wagecontractssometimesinvolvecost‐of‐livingadjustments c. Expectationsofinflationdependonlyonarandomerrorterm d. Theunemploymentratemovesupanddowninrecessionsandexpansions  8. Everythingelsebeingequal,intheaggregatedemand–aggregatesupplymodel,a largedropinoilpriceswillinitially: a. Raiseinflationandraiseoutput b. Raiseinflationandloweroutput c. Lowerinflationandraiseoutput d. Lowerinflationandloweroutput  9. Assumeaneconomyisinitiallyatthefullemploymentequilibriumlevelofoutputin theaggregatedemand–aggregatesupplymodel.Everythingelsebeingequal,acut inmarginaltaxratesfromveryhighlevelscould: a. Temporarilyraiseoutputandhavenoeffectoninflation b. Permanentlyloweroutputandhavenoeffectoninflation c. Permanentlyraiseoutputandhaveanambiguouseffectoninflation d. Temporarilyloweroutputandhaveanambiguouseffectoninflation     EXAMCONTINUESONNEXTPAGE

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10. Inthe1970s“GreatInflation”,inflationwasincreasedbecause a. Policymakersthoughtpotentialoutputwashigherthanitactuallyturnedout tobeandpolicyshiftedtheADcurvetotheleft b. Policymakersthoughtpotentialoutputwaslowerthanitactuallyturnedout tobeandpolicyshiftedtheADcurvetotheleft c. Policymakersthoughtpotentialoutputwaslowerthanitactuallyturnedout tobeandpolicyshiftedtheADcurvetotheright d. Policymakersthoughtpotentialoutputwashigherthanitactuallyturned outtobeandpolicyshiftedtheADcurvetotheright  11. Ifacentralbanktargetsthelevelofinflationandconductsstabilisationpolicy: a. Itwilladjustthepolicyinterestratemoreforademandshockthanan inflationshock b. Itwilladjustthepolicyinterestratemoreforaninflationshockthana demandshock c. Itonlyneedstoadjustthepolicyinterestrateforaninflationshockbutnot forademandshock d. Itdoesnotneedtoadjustthepolicyinterestrateforeitherademandshock oraninflationshock  12. Acentralbankbecomeslessaggressive(i.e.moredovish)withrespecttofighting inflation.Ifweplottherealinterestrateontheverticalaxisandtheinflationrateon thehorizontalaxis,thisbank’spolicyreactionfunctionismostlikelyto: a. Shiftupwardsandbecomeflatter b. Shiftupwardsandbecomesteeper c. Shiftdownwardsandbecomeflatter d. Shiftdownwardsandbecomesteeper  13. Anaturaldisasterdestroysthree‐quartersofacountry’scapitalstock(andeverything elseremainsunchanged).Ifwagesdependonthemarginalproductoflabour,anda Cobb‐Douglasfunctionprovidesagooddescriptionofaggregateproductionthen: a. Themarginalproductofcapitalwouldfallandwageswouldfall b. Themarginalproductofcapitalwouldfallandwageswouldrise c. Themarginalproductofcapitalwouldriseandwageswouldfall d. Themarginalproductofcapitalwouldriseandwageswouldrise  14. IntheSolow‐Swanmodel,persistentincreasesinper‐capitaoutputcanonlybe explainedby: a. Populationgrowth b. Lowersavingsrates c. Higherdepreciationrates d. Greatertechnologicalprogress  EXAMCONTINUESONNEXTPAGE

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15. Consideraneconomy,withaproductionfunctiongivenby  . . .This economy’sannualGDPgrowthrateis5%.AlsoassumethatLandKarebothgrowing atannualratesof2%.Calculatethegrowthrateoftotalfactorproductivityforthis economy. a. 2.0% b. 3.0% c. 4.0% d. 5.0%  16. SupposeoutputisdeterminedbyaCobb‐Douglasproductionfunction     where0    1.Iftotalfactorproductivity(A)remainsconstant,butlabour(L) andcapital(K)inputsbothdouble,outputwill: a. Double b. IncreasebyA c. Increaseby2timesA d. Increaseby(1/2)timesA  17. IntheSolow‐Swanmodel,ifsavingislessthanreplacementinvestmentthen,other thingsbeingequal, a. Thecapital‐labourratiowillfallandthemarginalproductofcapitalwillfall b. Thecapital‐labourratiowillriseandthemarginalproductofcapitalwillfall c. Thecapital‐labourratiowillfallandthemarginalproductofcapitalwillrise d. Thecapital‐labourratiowillriseandthemarginalproductofcapitalwillrise  18. Considerasituationinwhichthecapitallabourratiosofallcountriesliebelowthe steadystatelevelintheSolowSwanmodel.Whichofthefollowingismostcorrect? a. Percapitaincomeincountrieswithdifferentcapital‐labourratiosandthe sametotalfactorproductivitygrowthratewillgrowatthesamerate b. Percapitaincomeincountrieswiththesamecapital‐labourratiosand differenttotalfactorproductivitygrowthrateswillgrowatthesamerate c. Anincreaseinthesavingratewillleadtoasmallerincreaseintherateofper capitaincomegrowthforacountrywithalowercapital‐outputratiothanfor acountrywithhighercapital‐outputratio d. Anincreaseinthesavingratewillleadtoabiggerincreaseintherateofper capitaincomegrowthforacountrywithalowercapital‐labourratiothan foracountrywithahighercapital‐labourratio     EXAMCONTINUESONNEXTPAGE

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19. ConsiderthefollowingSolow‐Swanmodelinwhichoutputpercapitaisgivenby  

 ,thetotalfactorproductivityparameteris2,thesavingsrateis50%,the depreciationrateis20%andthepopulationgrowthrateis5%.Thesteadystate valueoftheoutputpercapita,y,forthiseconomyis: a. 1 b. 4 c. 8 d. 16  20. Whichoffollowingbestdescribeswhenpurchasingpowerparitydoesanddoesnot hold? a. Acountrywithhigherinflationismorelikelytohaveitsexchangerate depreciateintheshortrunthanthelongrun b. Acountrywithhigherinflationismorelikelytohaveitsexchangerate appreciateintheshortrunthanthelongrun c. Acountrywithhigherinflationismorelikelytohaveitsexchangerate depreciateinthelongrunthantheshortrun d. Acountrywithhigherinflationismorelikelytohaveitsexchangerate appreciateinthelongrunthantheshortrun  21. IftheReserveBankreportsthatitislessconcernedaboutinflationandmore concernedaboutanimpendingrecessioninAustralia,whatislikelytohappeninthe foreignexchangemarket?  a. SupplyofAustraliandollarswillriseanddemandforAustraliandollarswill fall b. SupplyofAustraliandollarswillfallanddemandforAustraliandollarswillfall c. SupplyofAustraliandollarswillriseanddemandforAustraliandollarswill rise d. SupplyofAustraliandollarswillriseanddemandforAustraliandollarswill rise  22. IftheAustraliandollar–JapaneseYenexchangerateisgivenby$A1=80Yenand theMexicanPeso–Australiandollarexchangerateisgivenby1Peso=$A0.1.What istheJapaneseYen–MexicanPesoexchangerate? a. 0.125Yen=1Peso b. 0.125Pesos=1Yen c. 1Peso=800Yen d. 1Yen=800Pesos   EXAMCONTINUESONNEXTPAGE

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 23. Underafixedexchangerateregime,acentralbankcanmosteffectivelyrespondtoa speculativeattackby: a. Sellingforeignreservesandraisingthepolicyinterestrate b. Buyingforeignreservesandraisingthepolicyinterestrate c. Sellingforeignreservesandloweringthepolicyinterestrate d. Buyingforeignreservesandloweringthepolicyinterestrate  24. If the realinterest rate on internationalcapitalmarketsislowerthanthelevelthat wouldequateinvestmentandnationalsavingsinAustralia a. Australiawillhavecapitalinflowsandacurrentaccountdeficit b. Australiawillhavecapitalinflowsandacurrentaccountsurplus c. Australiawillhavecapitaloutflowsandacurrentaccountdeficit d. Australiawillhavecapitaloutflowsandacurrentaccountsurplus  25. AccordingtotheBankofEnglandreadingslistedinthecourseoutline,whichofthe followingfactorsdoNOTlimitmoneycreation? a. Competitionbetweenbanks b. Concernsaboutliquidityrisk c. Decisionsbymoneyholderstorepayloans d. Reservesheldbynon‐bankfinancialinstitutions  26. AccordingtotheBankofEnglandreadingslistedinthecourseoutline,ifabank issuesanewloan(i.e.amortgage)whichofthefollowingismostlikelytooccur beforetheloanisactuallyusedtobuyanasset? a. Thereisnoimpactonthecentralbank’sbalancesheet b. Theloancreatesanewassetonthebalancesheetoftheseller’sbank c. Theloancreatesanewliabilityonthebalancesheetoftheseller’sbank d. Thenewloanisaliabilityforthebuyer’sbankanditcreatesanewdepositof equalsizewhichisanassetforthebuyer’sbank.  27. AccordingtotheBankofEnglandreadingslistedinthecourseoutline,whichofthe followingmostaccuratelydescribeswhathappensunderquantitativeeasing? a. Thereisnoimpactonthecentralbank’sbalancesheet. b. Commercialbankbalancesheetsexpandastheyreceivedepositsinreturnfor sellinggovernmentbondstothecentralbank c. Thebalancesheetsofnon‐bankfinancialinstitutionsexpandastheyreceive depositsinreturnforsellinggovernmentbondstothecentralbank. d. Commercialbankbalancesheetsexpandastheyreceivereservesfromthe centralbanktomatchdepositsreceivedfromnon‐bankfinancial institutions EXAMCONTINUESONNEXTPAGE

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 28. WhathappenstotheAustraliancurrentandcapitalaccountsifaCanadianbank purchases$5,000AustraliandollarsfromanAustralianbankandthensellsthe $5,000AustraliandollarstoaCanadianwhospendsitallonasurfingholidayin Australia?Thereisa: a. Currentaccountdebitof$5,000andacapitalaccountdebitof$5,000 b. Currentaccountdebitof$5,000andacapitalaccountcreditof$5,000 c. Currentaccountcreditof$5,000andacapitalaccountdebitof$5,000 d. Currentaccountcreditof$5,000andacapitalaccountcreditof$5,000  29. Whichofthefollowingwouldnotincreaselabourproductivity? a. Pricesincrease b. Technologyincrease c. Humancapitalincreases d. Physicalcapitalincreases  30. WhichofthefollowingisthemostlikelyreasonAustraliawouldrunalargetrade deficit? a. AhighnationalsavingrateandalowAustraliandollar b. AlownationalsavingrateandahighAustraliandollar c. InternationallycompetitivegoodsandalowAustraliandollar d. InternationallycompetitivegoodsandahighAustraliandollar                     EXAMCONTINUESONNEXTPAGE

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SECTIONB:Essay/Short‐answer/AnalyticalQuestions(30marks) AnswerBOTHquestionsinthissection.Writeyouranswerstoeachquestioninthe spacesprovided.Showallworking. 1. (20marks)SupposetheAustralianeconomystartsinlong‐runequilibrium,butatrade warbetweentheUnitedStatesandChinabreaksout,triggeringaglobalrecessionand amassivepermanentfallinAustralianexportstoboththeUnitedStatesandChina.  (i)

Withtheaidofadiagram(s),andinwords,usetheAD‐ASmodeltoexplainwhat happenstotheAustralianeconomyinboththeshortandlongrunfollowingthis shock. Assumethe tradewar does not impactpotential GDP and thattheRBA leavestheeconomytoself‐correct.Labelyourdiagram(s)carefully.(8marks)   Afallinexportsisanegativedemandshockunrelatedtoinflation.So,itwilllead toanimmediateshiftintheADcurvetotheleft.Intheshortrun,theresponse oftheeconomywillbethesameasinFigure9.9inthetext.Thatis,outputwill fallbelowpotential(contractionaryoutputgap)andinflationwillfallbelowits expectedlevel.  WithoutdirectstabilisationpolicybytheRBA,thecontractionarygapwilllead inflationexpectationstofallandtheAScurvetoshifttotherightinthelongrun, asinFigure9.13inthetext.Inparticular,givenlowerinflation,theRBAfollows its monetary policy rule and lowers the policy interest rate. This stimulates consumption and investment spending, increasing output until the contractionarygapisclosedandtheeconomyreturnstopotential,butatalower levelofinflation.              

    EXAMCONTINUESONNEXTPAGE

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(ii)

Withthe aidofa diagram(s),and inwords, explainhow youranswertopart(i) changes if the trade war also lowers potential GDP by reducing total factor productivity due to less specialisation and fewer gains from trade? Although potentialGDPfalls,assumethetradewarhasalargereffectonADthanitdoeson AS.(6marks)  On its own, a decrease in potential GDP acts as a negative AS shock that permanentlylowersoutputandincreasesinflation,asinFigure9.16inthetext. However,thetradewaralsolowersAD,asinpart(i),whichlowersoutputfurther intheshortrunandlowersinflation,allelseequal.Theneteffectoftheleftward shiftinADandAScurvesoninflationwoulddependonwhichshiftsbymore.But output unambiguously falls. If we assume the decline in AD is greater, then inflation will still fall in the short run, as in part (i). This will lead to a fall in inflationexpectationsandarightwardshiftintheASinthelongrun.However, theshiftwillbetothenewlowerlevelofpotentialoutput.Therefore,compared topart(i),outputwillfallbymoreintheshortrunandremainbelowitsprevious equilibriumpriortothetradewarinthelongrun.Meanwhile,inflationwillnot fallbyasmuchasinpart(i).           

    EXAMCONTINUESONNEXTPAGE

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(iii)

Withtheaidofadiagram(s),andinwords,comparewhathappenstothepolicy rateandtheeconomyifthe tradewarleadstoadecreaseinAustralianexports withnochangeinpotentialGDP,asinpart(i),buttheRBAtriestostabiliseoutput andpursueitsinflationtargetinsteadoflettingtheeconomyself‐correct.Assume inflationwasatitstargetpriortotheoutbreakofthetradewar.(6marks)

 Theshortrunresponseisthesameasinpart(i).Thatis,thefallinexportsleads toaleftwardshiftintheADcurveandbothoutputandinflationfall.Inthiscase, though, the RBA does not just cutin policy interest rate based on in its usual responsetolowerinflation,butins...