Practice Exam 2019, questions and answers PDF

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Semester Two 2018 Examination Period Faculty of Business and Economics EXAM CODES:

ECC5953/ECF5953

TITLE OF PAPER:

Economics – Practice Exam Paper

EXAM DURATION:

2 hours writing time

READING TIME:

10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (tick where applicable)  Berwick  Clayton  Malaysia  Off Campus Learning  Caulfield  Gippsland  Peninsula  Monash Extension  Parkville  Other (specify)

 Open Learning  Sth Africa

During an exam, you must not have in your possession any item/material that has not been authorised for your exam. This includes books, notes, paper, electronic device/s, mobile phone, smart watch/device, calculator, pencil case, or writing on any part of your body. Any authorised items are listed below. Items/materials on your desk, chair, in your clothing or otherwise on your person will be deemed to be in your possession. No examination materials are to be removed from the room. This includes retaining, copying, memorising or noting down content of exam material for personal use or to share with any other person by any means following your exam. Failure to comply with the above instructions, or attempting to cheat or cheating in an exam is a discipline offence under Part 7 of the Monash University (Council) Regulations. AUTHORISED MATERIALS OPEN BOOK

 YES

 NO

CALCULATORS

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SPECIFICALLY PERMITTED ITEMS if yes, items permitted are:

 YES

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Candidates must complete this section if required to write answers within this paper STUDENT ID:

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DESK NUMBER:

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INSTRUCTIONS TO STUDENTS There are 6 questions carrying 60 marks in total. Students must answer ALL questions. Disclaimer: This exam paper is for “practice” only and may not be used as a strict reference of standard of the final exam

SECTION A (MICROECONOMICS) Page 1 of 5

Question 1 Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer. ANS: The loss and revenue are identified on the individual firm graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P 0 at output level Q0, the firm will remain in the market. If average variable cost is above P 0 at output level Q0, the firm will exit the market.

Question 2 In a small university town, four micro-breweries have opened in the last two years. We assume a monopolistically competitive market, and all existing firms are making short-run economic profits. These four existing micro-breweries are facing new market entrants. (1) Use a diagram to demonstrate the effect of these new market entrants on demand for existing firms (micro-breweries) that already served this market. (2 marks) (2) Use a diagram to demonstrate the effect of these new market entrants on profits for existing firms (micro-breweries) that already served this market. (3 marks) (3) Assume that the local community now places a prohibition on new liquor licenses for microbreweries. How will this prohibition affect the long-run profitability of existing firms? (5 marks) ANSWER: （1） The arrival of a new entrant should be graphically depicted by a leftward shift in the demand curves faced by all incumbent firms – 2 marks

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（2）

Existing brewery firms will suffer from the profit reduction and even making losses.

Students need to demonstrate their understanding of: (a) Draw the MR curve properly – 0.5 mark; (b) MR =MC to maximize profits – 0.5 mark; (c) Equilibrium price and quantity – 1 mark; (d) the relationship between P and AC – 1 mark

（3） If firms are able to make economic profits, these will be able to be maintained in the long run if new entrants are not allowed. Students need to mention a) the long-run equilibrium in a monopolistic competition market relies on the assumption of free entry/exit – 1 mark; b) The entry/exit will shift the demand curve and consequently, the long run equilibrium price must be equal to average total cost – 2 marks, c) the license is a barrier to entry which prevent the demand curve from shifting to the left – 1 mark; d) Existing firms might sustain long run profits, consequently – 1 mark.

SECTION B (MACROECONOMICS) Question 3 Explain what will happen to the money supply under each of the following circumstances: a. The public decides to increase the amount of currency it holds. b. Banks decide to hold fewer excess reserves. ANS:

a. If the public decides to hold more currency, it can do so only by taking reserves out of the banking system. With fewer reserves in the banking system, there will be less bank money, hence the money supply will fall. Page 3 of 5

b. If banks decide to hold fewer excess reserves, they will lend more reserves, lowering the reserve ratio and increasing the money multiplier. Additional bank money will be created, and the money supply will increase. Question 4

Suppose the economy is in long-run equilibrium. Draw appropriate diagrams to show the impact on aggregate demand, on short-run aggregate supply or long-run aggregate supply of each of the following, assuming they all happen, in the sequence they are listed: a. Demand for Australian iron ore and coal increases dramatically as the Chinese economies expand (5 marks) b. Reserve Bank of Australia decreases the cash rate by 25 basis points to combat the lower than expected growth rate (5 marks)

c. Australian dollar depreciates as demand for the Australian dollars decreases in the international markets (5 marks)

d. A new technology is perfected that lowers the cost of geo-sequestration, the process by which greenhouse gases are captured and stored deep underground (5 marks)

Answer a b. c. d.

if the demand for iron ore and coal increases dramatically, AD will shift to the right. Inflation rate will rise and output produced will be above the natural rate. RBA decrease the cash rate by 25 points, so AD will shift to the right. Inflation rate will increase and output will be above the natural rate Australian dollar depreciate will increase exports but reduce imports – next export will increase which shift the AD to the right Technology advancement that reduces costs throughout the economy will increase LAS as well as SAS – i.e. both will shift to the right. Long-run equilibrium will be restored.

Question 5 A. Distinguish between nominal and real GDP. Why is real GDP the relevant concept when

discussing economic growth? B.

Suppose you are given the following information about the economy, with the values in billions of dollars: Consumption Investment

$5000 $2000

Government Expenditure Net Export

$1000 $1000

What is the economy’s GDP? What is its national savings? C.

Suppose the economy is further characterised by the following information, with values in billions of dollars: Year 2004 2005 2006

Nominal GDP $5000 $6000 $7200

Real GDP $5000 $5455 $6000

What is the GDP deflator for the three years? D.

From the table in C, what is the growth rate of nominal and real GDP from 2004 to 2005? What is the growth rate of nominal and real GDP from 2005 to 2006? Which is growing faster, nominal or real GDP? Explain.

Answer: A. Nominal GDP uses current prices to value the economy’s production of goods and services. Real GDP uses constant base-year prices to value the economy’s production of goods and services. In the discussion of economic growth, we concern the real production, rather than price movement, so real GDP is a better measure.

Page 4 of 5

B. GDP = 5000+2000+1000+1000 = 9000 (billion dollars). In equilibrium, S=I, so its national saving = $2000 (billion dollars) C. GDP deflator = nominal GDP/real GDP*100%, so 2004: 100% 2005: 110% 2006: 120% D. growth rate = (GDP(2005) – GDP (2006))/GDP (2005) So, for nominal: growth rate = (6000-5000)/5000 = 20%; (7200-6000)/6000 = 20% For real growth: growth rate = (5455-5000)/5000=9.1%; (6000-5455)/5455 = 10%. Nominal GDP grows faster, because of the inflation. Question 6 Suppose that a firm is faced with an excess supply of workers. What would the firm do? Explain with standard economic theory and with efficiency wage theory. ANS:

a.

b.

Standard economic theory: assuming a firm maximises its profit, it should lower wages until the supply of workers is equal to the demand. This will reduce production costs and raise profits. Efficiency-wage theory suggests that it might be profitable for a firm to keep wages above the equilibrium level in order to reduce worker turnover, increase worker quality, increase worker effort, and perhaps to increase worker health and therefore worker productivity. *** END OF EXAMINATION ***

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