Midterm 23 August 2017, questions and answers PDF

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Last Name: __ First Name: __ Student Number: __UNIVERSITY OF SYDNEYECON1002 INTRODUCTORY MACROECONOMICSMid-semester Test13 September 2017Instructions: ___Time allowed: 60 minutes (plus 10 minutes reading time).The exam consists of 2 sections.Section I includes 20 multiple choice questions worth 1 ma...

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Last Name: ______________________________________________ First Name: ______________________________________________ Student Number: __________________________________________

UNIVERSITY OF SYDNEY ECON1002 INTRODUCTORY MACROECONOMICS Mid-semester Test 13 September 2017

Instructions: _______________________________________________________________________ Time allowed: 60 minutes (plus 10 minutes reading time). The exam consists of 2 sections. Section I includes 20 multiple choice questions worth 1 mark each. To answer in this section, mark the letter representing the best response on the accompanying multiple choice answer sheet. You must use a pencil for the machine to be able to read your answer. Section II includes 1 short answer question worth 20 marks in total. You should answer all parts of the question. Your answers should be given in the space provided right below the questions. Any answer written outside the space provided will not be marked. That is, your answers must be succinct (i.e. short and clear). This is a closed book test. Non-programmable calculators may be used. No other aides are allowed. This paper should be returned at the end of the exam. The exam may NOT be removed. ___________________________________________________________________________________

Good luck!

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SECTION I (20 marks): Answer all 20 questions on the computer answer sheet provided. 1. A person, aged 30, who has been actively seeking work, becomes discouraged at not being able to find a job and stops searching for work. The immediate impact of this decision will be: a. The unemployment and participation rates will both increase b. The unemployment and participation rates will both decrease c. The unemployment rate will increase and the participation rate will decrease d. The unemployment rate will decrease and the participation rate will increase

2. A retired worker, aged 60, is approached by her former employer to return to work in order to assist with the training of inexperienced staff. Assuming the worker accepts this job offer, which of the following statements, about the immediate impact of this decision, is most correct? a. The unemployment and participation rates will both fall b. The unemployment and participation rates will both rise c. The unemployment rate will fall and the participation rate will rise d. The unemployment rate will rise and the participation rate will fall

3. It used to be the case that workers had to (by law) retire at age 65. Now, there is no legal retirement age. Workers can work until whatever age they want. Using the model of the labour market discussed in class, and assuming that all other things remain unchanged, what is the most likely impact of this change in the law on the labour market equilibrium? a. The real wage and the number of workers employed both increase. b. The real wage and the number of workers employed both decrease. c. The real wage decreases and the number of workers employed increases. d. The real wage increases and the number of workers employed decreases.

4. Using the model of the national savings market discussed in class, and assuming all other things remain unchanged, what would be the most likely impact on equilibrium in the market for national savings, of the government moving from a budget deficit to a budget surplus? a. The real interest rate and the amount of national savings and investment all fall. b. The real interest rate and the amount of national savings and investment all rise. c. The real interest rate rises and the amount of national savings and investment falls. d. The real interest rate falls and the amount of national savings and investment rises.

5. Consider the model of the national savings market discussed in class. Imagine that we observe a decrease in both the equilibrium real interest rate and the equilibrium level of savings and investment. All other things being equal, this change is most likely to have been caused by: a. A reduction in bank lending b. A fall in the real interest rate c. A decrease in national savings d. An increase in national savings

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6. A government would like to implement a cost-of-living index that gives it an early warning of inflation. In calculating this cost-of-living index in practice a. GDP should be used to determine the consumption basket b. Consumer preferences rather than consumer purchases should be used. c. It should be assumed that the current year consumption basket will be purchased in the base year. d. It should be assumed that the base year consumption basket will be purchased in the current year.

7. Australian living standards are most likely to improve if a. Real GDP increases faster than inflation b. Nominal GDP increases faster than inflation c. Nominal GDP increases faster than population growth d. Real GDP per capita increases faster than population growth

The information in the following table should be used to answer both Question 8 AND Question 9. The table provides data for a hypothetical economy. Product Weight in household Price index Price Index consumption (%) 2016 2017 A 50 100 110 B 20 100 120 C 20 100 ? D 10 100 140 8. If the inflation rate for this economy, from 2016 to 2017, is zero then the price index value for Product C in 2017 is: a. 35 b. 65 c. 115 d. 130

9. Which of the following statements about the economy above is most correct? a. In 2016, all the products have the same price b. In 2017, Product D is the most expensive product and Product A is the cheapest c. Product A is relatively less expensive than Product D, in 2016 compared to 2017 d. Product B is relatively more expensive than Product A, in 2017 compared to 2016

10. In the 2-sector Keynesian model, if planned aggregate expenditure is less than output, then a. Savings equal planned investment b. Actual and planned investment are equal c. Actual investment is less than planned investment d. Actual investment is greater than planned investment

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11. Which of the following is most likely to lead to errors in the measurement of an economy’s GDP? a. Public goods are produced in the economy b. Some goods and services only comprise one stage of production c. Many transactions in the economy are carried out using credit cards d. The quality of goods and services typically does not change over time

12. In Year 1 (the base year) a household buys 80 bus trips at $3 per trip and 4 books at $50 each. In Year 2 the same household buys 80 bus trips at $4 per trip and 4 books at $52 each. The household earns nominal income of $600 in Year 1 and $690 in Year 2. Assuming that the household spends all its income only on bus trips and books (i.e. it does not save), its real income in Year 2 is: a. $500 b. $575 c. $720 d. $828

13. An example of the ‘demonstration effect’ on household behaviour is: a. Mr Brown learns that he owes money to the Australian Tax Office b. Suzy decides to go on an overseas holiday because her friends are travelling overseas c. John decides to save an extra $20 each week after his bank offers a better rate on savings deposits d. Mrs Brown buys a more expensive mobile phone after the previous one she bought breaks down soon after purchase

14. Which of the following is most likely to explain a simultaneous decline in household goods consumption and an increase in inventory investment? a. Firms believe that the economic slowdown will worsen b. Firms believe that the economic slowdown is temporary c. Firms respond to an economic slowdown by reducing production d. Firms respond to an economic slowdown by increasing production

15. Using the model of the national savings market discussed in class, and assuming all other things remain unchanged, what would be the most likely impact of a negative technology shock on equilibrium in the market for national savings? a. The real interest rate falls and the amount of investment increases b. The real interest rate rises and the amount of investment increases c. The real interest rate falls and the amount of investment decreases d. The real interest rate rises and the amount of investment decreases

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16. According to Okun’s Law, which of the following statements is most likely to be correct? a. A decrease in the cyclical unemployment rate will be associated with an increase in the size of a contractionary output gap b. An decrease in the cyclical unemployment rate will be associated with a decrease in the size of an expansionary output gap c. An increase in the cyclical unemployment rate will be associated with an increase in the size of an contractionary output gap d. An increase in the cyclical unemployment rate will be associated with an increase in the size of an expansionary output gap

17. Which of the following is most likely to reduce an economy’s Gini coefficient? a. Increased taxation rates on inherited wealth b. Reduced taxation rates on high income earners c. Increased government spending on national defence d. Reduced government spending on unemployment benefits

18. In order to close an expansionary output gap, the government can a. Reduce taxation b. Increase spending c. Reduce the marginal propensity to save d. Increase the marginal propensity to save

19. According to the balanced budget multiplier in the Keynesian model, a $100 million reduction in exogenous government spending offset by a $100 million reduction in exogenous taxation will lead to a. A decrease in planned aggregate expenditure b. An increase in planned aggregate expenditure c. An increase in planned aggregate expenditure only if the marginal propensity to consume is large enough d. An decrease in planned aggregate expenditure only if the marginal propensity to consume is large enough

20. An increase in the real wage increases the supply of labour because a. The opportunity cost of working is now higher b. More people offer to work at the higher wage c. The size of the working age population increases d. More people are prepared to work at every wage

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SECTION II (20 marks): Answer all parts of the question. When you answer using a diagram, explain and label the axes carefully. Answers must be given in the space provided below each question. Please show all working for each part of the question. Consider the Keynesian model discussed in class. (i)

Consider a 2-sector Keynesian economy which is initially in equilibrium and is characterised by the following PAE equation: Y =1000+ 0.5Y . Calculate the marginal propensity to consume (MPC), the multiplier and the equilibrium output. (4 marks)   

(ii)

MPC=0.5 (1 mark) Multiplier = 1/0.5=2 (1 mark) Y*=2000 (1 mark) + Y=PAE or some working (1 mark) Assume that, in the economy in part (i), exogenous expenditure is reduced to 500 but equilibrium output remains unchanged. Calculate the new MPC and multiplier. (4 marks)

  (iii)

Solve Y=PAE for c, setting Y=2000.  c=0.75 (2 marks) New multiplier = 1/0.25 = 4 (2 marks) Illustrate the equilibria calculated in parts (i) and (ii) on a Y-PAE diagram. Label the diagram carefully and show all working. (6 marks)

PAE =500+0.75 Y

PAE

PAE =1000+0.5 Y

0 (iv)

45°

Y 2000

Consider a 4-sector Keynesian economy which is equilibrium and is characterised by the following PAE equation: Y =1000+ 0.5Y . Note that this is the same PAE equation as characterised the 2-sector economy in part (i). Calculate the MPC for this economy if the economy is closed (i.e. imports and exports are both zero), the marginal rate of taxation is 50% and the multiplier is 2. Interpret the MPC value you calculate in words. (6 marks)

initially

in

1 [1−( c−m ) ( 1−t ) ]

1 [1−c ( 1−t ) ]



Multiplier =

  

MPM=0 (1 mark) MPC=1 (1 mark) Consumers spend all their income, they save nothing. (2 marks)

or

6

(2 marks)

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