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Week 1 Multiple Choice Questions Q1 The standard measure of economic growth in a country is given : (a) Real GDP divided total population (b) Nominal GDP divided the labour force (c) Growth rate of real GDP per capita (d) Growth rate of productivity (e) Growth rate of real consumption per capita Ans...

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Week 1 Multiple Choice Questions Q1 The standard measure of economic growth in a country is given by: (a) Real GDP divided by total population (b) Nominal GDP divided by the labour force (c) Growth rate of real GDP per capita (d) Growth rate of productivity (e) Growth rate of real consumption per capita Answer (c) It is conventional to measure economic growth by the growth rate of real GDP per capita. Formally if we let y = real GDP/Pop, then Growth rate = [(y(t) – y(t-1))/y(t-1)]*100 Q2 The following table presents some data for the two countries Ursa Major and Ursa Minor for 2015. Ursa Major Ursa Minor Real GDP growth rate 4.5% 4% Population growth rate 2.5% 1% Unemployment rate 6% 5% Inflation rate -10% 2% Public Debt-to-GDP ratio 20% 120% Investment-to-GDP ratio 5% 25% Based on the indicators of macroeconomic performance identified in BOF (the textbook) and the data provided in the above table, which of the following statements is correct? (a) Ursa Major is performing better than Ursa Minor on three of the indicators for which data are provided. (b) Ursa Major is performing better than Ursa Minor on only one of the indicators for which data are provided. (c) Ursa Minor is performing better than Ursa Major on all the indicators for which data are provided (d) Ursa Minor is performing better than Ursa Major on none of the indicators for which data are provided (e) Ursa Minor and Ursa Major are performing equally well according to the data provided Answer (b) Ursa Major has a lower (and more sustainable?) public debt to GDP ratio than Ursa Minor. However: Ursa Major has lower real growth rate of per-capita GDP (4.5-2.5 = 2%) than Ursa Minor (4 – 1 = 3%) Ursa Major has a higher unemployment rate (6%) than Ursa Minor (5%). Ursa Major has a very high rate of negative inflation (deflation) at -10% which is will lead to a greater change in the real value of its currency than Ursa Minor’s more moderate inflation rate of 2%. Ursa Major has relatively low rate of investment to GDP (5%) compared to Ursa Major (25%) and so Ursa Major is less likely to be providing a good balance between current consumption and future consumption.

Q3 Which of the following is a valid version of the expenditure-based national accounting identity? (a) Y = C + I + G (b) Y = C + I + G – NX (c) Y = C + I + G + X (d) Y + M = C + I + G + X (e) Y + M = C + I + G + NX Answer (d) If we subtract M from both sides of (d) we get the usual equation. Note that (b) is incorrect as it subtracts NX, rather than adding it. Q4 In 2015 a real estate agent sells an established house for $2 million and earns a commission of 2% of the sale price. This house had last sold for $1.5 million, two years earlier. What is the contribution to 2015 GDP of this economic activity? (a) $2.04 million (b) $2 million (c) $500,000 (d) $40,000 (e) $ 0 Answer (d) Comment: Since the house is not produced in 2015 it does not count in GDP, but the commission earned by the real estate agent for their services is part of 2015 GDP. Q5 Professor Zapp, an Australian academic, spends a 6 month sabbatical at the University of Rummage in the United Kingdom. During this time he teaches a course called Pride and Prejudice and Economics, for which he is paid 10,000 pounds. Which of the following statements is true? (a) The $A equivalent of 10,000 pounds should be counted in the income measure of Australian GDP (b) The 10,000 pounds and its $A equivalent should be counted in GDP for both Australia and UK (c) The 10,000 pounds should not be counted in GDP for the UK (d) The 10,000 pounds should be counted in GDP for the UK (e) None of the above. Answer (d) With GDP what matters is the location of the production of the good or service. The service of teaching the course is produced in the UK and so should be counted in GDP for the UK

Q6 Suppose that for the two years 2010 and 2011 the growth rate of real GDP is found to be 3% using 2010 prices and 5% using 2011 prices. Which of the following would be the growth rate of real GDP obtained from use of a chain-weighted approach? (a) 8% (b) 5% (c) 3% (d) 4% (e) Insufficient information to calculate Answer (d) The chain-weighted approach uses the average of the growth rates obtained from using 2010 and 2011 prices. Q7 The following table gives quantity and prices for the basket of goods used in the consumer price index. 2009 2010 Goods Quantity Price per Unit Quantity Price per Unit Coffee 100 cups $3 90 cups $5 Books 50 books $10 55 books $10 Assume 2009 is the base year. The change in the cost of living between 2009 and 2010 is: (a) (b) (c) (d) (e)

-25 percent -20 percent 0 percent 20 percent 25 percent

Answer (e) Since 2009 is the base year, we use the quantities of goods consumed in that year as our fixed basket. (The quantities for 2010 are just a distraction). The cost of the 2009 consumption basket in 2009 is $800, while in 2010 it is $1,000. So the change in the cost of living is 25%. Use the information below to answer questions Q8 and Q9. The following table shows the accounts for three businesses in an economy. All of the output of the bakery is sold to final consumers.

Wages Profit

Sales

Wheat Farm $ 60 $ 40

$100

Wages Wheat Profit Sales

Flour Mill $40 $100 $70 $210

Wages Flour Profit Sales

Bakery $30 $210 $120 $360

Q8 The value-added for the flour mill is ____ and the valued-added for the bakery is ____? (a) $100, $210 (b) $140, $240 (c) $100, $110 (d) $110, $150 (e) $210, $360 Answer (d) Value-added for a business is the value of its sales of output less the cost of any intermediate inputs purchased. Wheat is an intermediate input for the flour mill and flour is an intermediate input for the bakery. Q9 Assuming the production in the above table all occurs within a single period, what is the contribution to GDP made by the three businesses? (a) $720 (b) $670 (c) $570 (d) $460 (e) $360 Answer (e) The answer can be obtained in three ways: either by using the sales of the bakery or by adding up the value-added of each business or by adding-up the wages and profits paid by each firm. Q10 Homer and Barney only consume Duff. One week Homer finds he has no money to buy any Duff and so asks Barney for a loan to purchase his weekly consumption of 25 bottles. Barney - being a good friend – and noting that the price of a bottle of Duff at the beginning of the week is $4, offers to lend Homer $100 at a weekly interest rate of 1%. If Homer takes the loan from Barney and the price of a bottle of Duff increases by 10 cents during the week, what is the (approximate) ex-post weekly real interest rate that Homer will pay? (a) (b) (c) (d) (e)

-1.5 percent 1 percent 1.5 percent 2 percent 2.5 percent

Answer (a) The inflation rate for Duff over the week is 2.5 percent. So we can calculate the (ex-post) real interest rate as the nominal interest rate less the rate of inflation. This is just (1 - 2.5)%, so the real rate is -1.5%.

Week 2 Multiple Choice Questions Use the following information to answer questions Q1, Q2 and Q3. At the beginning of 2015, Alberto owned 100 Apple shares with a market value of $15,000, owned a car valued at $2,000, owed $5,000 on his credit card and had $3,000 in a bank account. During 2015 Alberto’s income was $50,000 and he spent $30,000 on consumption. Below is his balance sheet at the end of 2015. Alberto’s Balance Sheet (end 2015) Assets Value ($) Liabilities Value ($) Apple shares (100) 10,000 Credit Card Debit 1,000 Car 1,500 Bank Account _____ Q1 What is Alberto’s net worth (or net wealth) at the beginning of 2015? (a) $2,000 (b) $3,000 (c) $10,500 (d) $15,000 (e) $20,000 Answer (d) At the beginning of 2015 Alberto has total assets of (15,000 + 2,000 + 3,000) and total liabilities of 5,000, so his net wealth is 20,000 – 5,000 = $15,000. Q2 What is Alberto’s net worth (or net wealth) at the end of 2015? (a) (b) (c) (d) (e)

$29,500 $25,000 $15,000 $9,500 $5,000

Answer (a) We can use the equation for the evolution of net wealth; Wealth(end 2015) = Wealth(begin 2015) + Saving + Net Capital Gains Wealth(end 2015) = 15,000 + (50,000 – 30,000) + [(10,000 – 15,000) + (1,500-2,000)] Wealth(end 2015) = $29,500 Bank accounts and credit card balances are not subject to capital gains or losses.

Q3 Given the information provided what must be the (missing) value of Alberto’s bank account at the end of 2015 (a) $23,000 (b) $19,000 (c) $15,000 (d) $3,000 (e) $1,000 Answer (b) We know that Alberto saved 20,000 during 2015 and that it had to go somewhere. Since he reduced his credit card balance from 5000 to 1000, he must have used 4,000 of his saving to do that, and the rest must have gone into his bank account to give balance at end 2015 of (3,000 + 16,000) = $19,000. Q4 Which of the following is the correct measure for private saving? (a) Y – C – I – G (b) Y – C – I (c) Y – C – G (d) Y – T – C (e) Y – T – G Answer (d) Q5 Other things equal, a fall in the real interest rate: (a) will increase household saving (b) will increase precautionary saving (c) reduces the price of consumption today relative to consumption tomorrow (d) raises the price of consumption today relative to consumption tomorrow (e) will reduce current consumption and increase future consumption Answer (c) We can think of the real interest rate as the relative price of consuming today (present) verses consuming tomorrow (future). A fall in the real interest rate lowers the (relative) price of current consumption.

Q6 Donald Jr. is doing a one year MBA degree at UNSW and his parents lend him $1 million to buy an apartment, which Donald Jr. will sell at the end of his degree. The interest rate on the loan from his parents is 10% per annum and annual rate of physical depreciation on the apartment is 5%. If the price of new apartments increases by 2% over the year, which of the following figures is the best approximation to the annual user cost of capital for the apartment in dollars? (a) (b) (c) (d) (e)

$130,000 $120,000 $100,000 $50,000 $25,000

Answer (c) Since the question asks for an approximation we can just use our approximate formula; ∆𝑷𝒌 + 𝜹] 𝒖𝒄 = 𝑷𝒌 [𝒊 − 𝑷𝒌 uc = $1,000,000[0.1 – 0.02 + 0.05] uc = $130,000 Use the following information to answer Q7 and Q8 Beta is a closed economy. The levels of national saving (S) and investment (I) are determined by the following equations: 𝑆 = 5 + 0.5 𝑟 𝐼 = 10 − 0.5 𝑟 Q7 Which of the following is true for Beta in equilibrium? (a) r = 5 and I = 7.5 (b) r = 5 and S = 7.5 (c) S = 5 and I = 5 (d) both (a) and (b) (e) none of the above Answer (d) We can just equate S and I to get; 𝟓 + 𝟎. 𝟓 𝒓 = 𝟏𝟎 − 𝟎. 𝟓𝒓 𝒓=𝟓 𝑺 = 𝑰 = 𝟕. 𝟓

Q8 Suppose that the budget deficit in Beta is reduced, so that the level of public saving increases by 3. Which of the following is true? (a) national saving and investment both fall by 2 (b) national saving and investment both rise by 2 (c) national saving and investment both rise by 5 (d) the real interest rate rises to 7 (e) the real interest rate falls to 2 Answer (e) National saving increases by 3 𝑺 = 𝟖 + 𝟎. 𝟓 𝒓 so the new equilibrium real interest rate is 𝟖 + 𝟎. 𝟓 𝒓 = 𝟏𝟎 − 𝟎. 𝟓𝒓 𝒓=𝟐 𝑺=𝑰= 𝟗 Q9 Suppose a firm is deciding whether or not to purchase a new piece of capital equipment. Which of the following conditions would result in the firm deciding to undertake the purchase? (a) value of marginal product > price of the capital (b) value of marginal product < rate of inflation (c) value of marginal product = rate of depreciation (d) value of marginal product < user cost of capital (e) value of marginal product > user cost of capital Answer (e) Q10 In the closed-economy national saving and investment model, the concept of crowding out refers to which of the following? (a) a decline in public saving causes a rise in the real interest rate which increases the level of private investment (b) a decline in public saving causes a rise in the real interest rate which reduces the level of private investment (c) a rise in the real interest that causes the investment demand curve to shift inwards (to left) (d) a decline in the real interest rate that causes the national saving curve to shift outwards (to right) (e) the inability to get a seat in Macro 1 lectures Answer (b)

Week 3 Multiple Choice Questions Use the following information to answer questions Q1 and Q2. A business producing ice-cream can sell a kilo of Creamy Fudge for $10. It pays its workers a wage of $25 per hour. The business employs 5 workers and this is an optimal level of employment. Q1 What is the minimum value for the marginal product of the 5th worker? (a) (b) (c) (d) (e)

25 kilos per hour 10 kilos per hour 5 kilos per hour 2.5 kilos per hour 0.4 kilos per hour

(d) It is optimal for the firm to employ workers until VMPL >= W. The VMPL is p*MPL, so we have P*MPL >= W. With p=$10 and W=$25, the MPL has to be at least 2.5 kilos per hour for it to worthwhile to employ the 5th worker. Q2 Other things equal, suppose the market price for a kilo of Creamy Fudge falls to $5. (a) (b) (c) (d) (e)

The business would reduce employment until the MPL of its last worker was at least 5 The business would increase employment until the MPL of its last worker was at least 5 The business would reduce employment until the MPL of its last worker was at least 0.2 The business would increase employment until the MPL of its last worker was at least 0.2 The business would not change its level of employment

(a) The business would be willing to hire an additional worker provided their p*MPL >=W. With the fall in price, the MPL has to be higher and be at least 5 kilos per hour. Since the MPL is decreasing in the number or workers employed, the higher MPL requires less employment. Use the following information to answer questions Q3 and Q4. The labour supply and demand curves for an economy are given by Ld = 200 – 0.5(W/P) Ls = 20 + 2*(W/P) Q3 If there are no impediments to labour market equilibrium, what are the real wage and level of employment in equilibrium? (a) (b) (c) (d)

W/P = 72 and L = 64 W/P = 72 and L = 100 W/P = 70 and L = 160 W/P = 72 and L = 160

(e) W/P = 72 and L = 164 (e) To find the equilibrium real wage we just equate the labour demand and the labour supply curves and solve for (W/P). To get equilibrium employment we can substitute the equilibrium real wage into either the labour demand or the labour supply curve. Q4 Suppose a minimum real wage of 80 is introduced in the economy. What will be the quantity of labour demanded and the quantity of labour supplied? (a) (b) (c) (d) (e)

Ld = 180 and Ls = 160 Ld = 160 and Ls = 180 Ld = 160 and Ls = 160 Ld = 180 and Ls = 180 Ld = 165 and Ls = 180

(b) To find the quantity of labour demanded and supplied at the minimum real wage, just substitute 80 into the labour demand curve and then into the labour supply curve. Q5 Suppose the participation rate in an economy is 60 per cent. If the working-age population is 1 million, and 550,000 people are employed, what is the unemployment rate? (a) (b) (c) (d) (e)

5 per cent 6.2 per cent 8.3 per cent 9.2 per cent 10 per cent

(c) Since the participation rate equals the labour force divided by the working-age population (times 100) we can obtain the labour force figure of 600,000 and then find the number unemployed to be 50,000. This gives an unemployment rate = (50,000/600,000)*100.

Week 4 Multiple Choice Questions Q1 Which of the following represents a standard business cycle pattern? (a) (b) (c) (d) (e)

expansion, peak, trough, contraction peak, expansion, trough, contraction expansion, trough, contraction, peak peak, expansion, peak, contraction peak, contraction, trough, expansion

(e) Q2 A widely used “rule of thumb” definition of a recession is: (a) (b) (c) (d) (e)

The level of real GDP is below its previous peak for at least two consecutive quarters The growth rate of real GDP is below its previous peak for at least two consecutive quarters The level of real GDP is negative for at least two consecutive quarters The growth rate of real GDP is negative for at least two consecutive quarters The cyclical unemployment rate is negative for at least two consecutive quarters

(d) The correct definition is (d). Choice (a) might be consistent with (d) but does not have to be. Consider the following quarterly sequence for real GDP: 100, 80, 90. It satisfies (a) but not (d). Q3 Which of the following is consistent with their standard (Macro 1) definition? (a) (b) (c) (d) (e)

potential GDP = GDP + output gap GDP = potential GDP - cyclical unemployment rate output gap = cyclical unemployment rate GDP = potential GDP + output gap GDP = potential GDP - output gap

(d) Only (d) is correct. Using the standard symbols we have: Y=Y Then add and subtract Y*, to get Y = Y* + (Y – Y*).

Q4 In the country of Calisota the output gap is 100 and potential output is 1,000. The rate of cyclical unemployment is – 2 percent. If Okun’s law is true for Calisota, what is the value of the Okun coefficient? (a) (b) (c) (d) (e)

5 4 3 2 1

(a) The output gap is expansionary and equal to 10 percent (of potential output). Substituting what is known into Okun’s law, 10 = -β×(-2), implies β = 5. Q5 One interpretation of the Keynesian model is that firms hold their prices fixed and accommodate changes in the demand for their output by varying production. Which of the following can provide an explanation for why firms may choose to fix their prices? (a) (b) (c) (d) (e)

shoe-leather costs menu costs labour costs capital costs user costs

(b) Q6 Suppose that an economy has an aggregate consumption function of the following form. 𝐶 𝑑 = 20 + 0.8(𝑌 − 𝑇) If the average propensity to consume out of disposable income (APC) is 0.82, what is the value of 𝐶𝑑? (a) (b) (c) (d) (e)

1,000 820 800 600 None of the above

(b) The APC = 𝐂 𝐝 /(𝐘 − 𝐓) = 0.82. It is also true that 𝟐𝟎 𝐂𝐝 + 𝟎. 𝟖 = 𝐘−𝐓 𝐘−𝐓 Solving the above equation gives (Y-T) = 1,000 and then 𝐂 𝐝 = 820.

Use the following information to answer Q7 and Q8 Suppose that an economy has the following economic structure: 𝑃𝐴𝐸 = 𝐶𝑑 + 𝐼 𝑝 + 𝐺 + 𝑋 𝐶 𝑑 = 20 + 0.8(𝑌 − 𝑇) 𝐼 𝑝 = 𝐺 = 𝑋 = 𝑇 = 50 Q7 What is the value of exogenous (or autonomous) expenditure? (a) (b) (c) (d) (e)

210 170 150 130 100

(d)  − 𝒄 × 𝑻 + 𝑰𝒑 + 𝑮 + 𝑿]. If we substitute For this economy the exogenous component of PAE is [𝑪 from the above we get 130. Q8 What is the value of equilibrium GDP? (a) (b) (c) (d) (e)

650 600 550 500 400

(a) Equilibrium GDP is just (1/(1-c))×130 = 5×130 = 650.

Week 5 Multiple Choice Questions Q1 Which of following is consistent with equilibrium in the 2-sector Keynesian income-expenditure model? (a) 𝐶 + 𝐼 𝑝 = 𝑌 (b) 𝑆 − 𝐼 𝑝 = 0 (c) 𝑆 + 𝐼 𝑝 = 0 (d) both (a) and (b) (e) none of the above (d) Note that 𝑪 + 𝑰𝒑 = 𝑷𝑨𝑬 in the 2-sector model and (b) could be re-arranged to give 𝑺 = 𝑰𝒑 , saving equal to planned investment. Q2 In the standard income-expenditure diagram the 45-degree line represents; (a) (b) (c) (d) (e)

a situation where 𝑆 = 𝐼 𝑝 a situation where unplanned changes in inventories equal zero the equilibrium condition where PAE = Y all of the above both (b) and (c)

(e) Both (b) and (c) are equivalent and correct. Answer (a) would also have to hold in a 2-sector model, but does not need to be true in a 3 or 4-sector model (where the sum of planned injections equal the sum of planned withdrawals). Q3 For the following 2-sector model; 𝑆 = −100 + 0.2𝑌 𝐼 𝑝 = 200 calculate the equilibrium GDP. (a) (b) (c) (d) (e)

1,125 1,400 1,500 1,550 1,600

(c) For equilibrium we need; 𝑺 = 𝑰𝒑 −𝟏𝟎𝟎 + 𝟎. 𝟐𝒀 = 𝟐𝟎𝟎 𝟑𝟎𝟎 = 𝟏, 𝟓𝟎𝟎 𝒀𝒆 = 𝟎. 𝟐

Q4 The following table illustrates a few rounds of the multiplier process for a 2 sector economy for an initial increase in exogenous planned investment of 50. Rounds 1 2 3 4 ………. ΔPAE 50 35 24.5 17.15……. ΔY
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