No. of Pages: (A) 8No. of Questions: 35 EC1001A

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master 2007

MIDSUMMER EXAMINATIONS 2010

Subject ECONOMICS

Title of Paper EC1001 MACROECONOMICS

Time Allowed Two Hours (2 Hours)______________________________________________________________________________________________________

Instructions to candidatesThis paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 69 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).

______________________________________________________________________________________________________

SECTION A: Multiple ChoiceAll questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question.

The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong answer, and Zero mark if no answer is given.

1. Roger Red-Hat is a British citizen who lives in Iceland and purchases a snowmobile manufactured in the UK. This purchase isa. both a British and Icelandic export.b. both a British and Icelandic import.c. a British import and an Icelandic export.d. a British export and an Icelandic import.

2. Which of the following would reduce the natural rate of unemployment?a. The Internet provides more readily available information about available jobs.b. Congress increases the minimum wage.c. Laws are passed that make it more difficult to monitor the efforts of workers.d. All of the above are correct.

EC1001A - Macroeconomics I EC1001 A

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3. Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. This situation best represents which problem in the construction of the CPI?a. substitution biasb. introduction of new goodsc. unmeasured quality changed. income bias

4. The money supply in Freedonia is 100 billion Freedonian Marks. Nominal GDP is 800 billion Freedonian Marks and real GDP is 200 billionFreedonian Marks. What are the price level and velocity in Freedonia?a. Velocity is 2 and the price level is 1.b. Velocity is 4 and the price level is 8.c. Velocity is 8 and the price level is 4.d. There is insufficient information to answer the question.

5. Which of the following shifts money demand to the right?a. an increase in the price levelb. a decrease in the price levelc. an increase in the interest rated. a decrease in the interest rate

6. If you and your friends are still looking for a job eighteen months after graduation, even after lowering your wage expectations, you are probably in the business cycle phase of aa. recession.b. peak.c. boom.d. recovery

7. GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society isa. GDP per person.b. the consumption component of GDP.c. government expenditures per person.d. the level of business investment.

8. If Canada increases its budget deficit, it will reducea. private saving and so shift the supply of loanable funds left.b. investment and so shift the demand for loanable funds left.c. public saving and so shift the supply of loanable funds left.d. None of the above are correct.

EC1001A - Macroeconomics I EC1001 A

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Use the two graphs in the diagram to answer the following questions.

Figure 22-3

9. Refer to Figure 22-3. A decrease in aggregate demand moves the economy from c and 3 toa. a and 1 in the short run, b and 2 in the long run.b. b and 2 in the short run, a and 1 in the long run.c. d and 4 in the short run, e and 5 in the long run.d. None of the above is correct.

10. When a society cannot produce all the goods and services people wish to have it is said that the economy is experiencinga. scarcity.b. communism.c. externalities.d. market failure.

11. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect thata. every risk-averse person will earn a higher rate of return than every non-risk averse

person.b. every risk-averse person will earn a lower rate of return than every non-risk averse

person.c. the average risk-averse person will earn a higher rate of return than the average non-risk

averse person.d. the average risk-averse person will earn a lower rate of return than the average non-risk

averse person.

12. Ceteris paribus, as the price level falls, pounds becomea. more valuable, and interest rates rise.b. more valuable, and interest rates fall.c. less valuable, and interest rates rise.d. less valuable, and interest rates fall.

EC1001A - Macroeconomics I EC1001 A

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13. The Fisher effect says thata. the nominal interest rate adjusts one for one with the inflation rate.b. the growth rate of the money supply determines the inflation rate.c. real variables are heavily influenced by the monetary system.d. All of the above are correct.

14. Proponents of zero inflation argue that a successful program to reduce inflationa. eventually reduces inflation expectations.b. eventually raises real interest rates.c. permanently decreases output.d. permanently raises unemployment.

15. The slope of the supply of loanable funds curve represents thea. positive relation between the real interest rate and investment.b. positive relation between the real interest rate and saving.c. negative relation between the real interest rate and investment.d. negative relation between the real interest rate and saving.

16. If the Bank of England wanted to increase the money supply, it would make open marketa. purchases and lower the discount rate.b. sales and lower the discount rate.c. purchases and raise the discount rate.d. sales and raise the discount rate.

17. Retained earnings area. paid out as dividends.b. the amount of revenues a corporation receives for the sale of its products minus its costs

of production as measured by its accountants.c. the single most important piece of information about a stock.d. None of the above are correct.

EC1001A - Macroeconomics I EC1001 A

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Use the figure below to answer the following questions.

Figure 19-4

18. Refer to Figure 19-4. Which of the following shifts show the effects of an import quota?a. a shift of NCO0 to the right in Panel Bb. a shift from D0 to D1 in Panel Cc. a shift from D0 to D2 in Panel Cd. None of the above would show the effects of an import quota.

19. If the exchange rate is 125 yen = $1, a bottle of rice wine that costs 2,500 yen costsa. $20.b. $25.c. $22.d. None of the above is correct.

20. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?a. U.S. textile workers belong to a union.b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.c. Labor is more productive making cotton cloth with a mechanical loom than with a hand

loom.d. Bangladesh has a low-wage policy to make its textile industry more competitive in world

markets.

21. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP deflator of 125 in 2002 and of 105 in 2001, then from 2001 to 2002 real outputa. and prices both rose.b. rose and prices fell.c. fell and prices rose.d. and prices both fell.

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22. Transfer payments area. included in GDP because they represent income to individuals.b. not included in GDP because they are not payments for currently produced goods or

services.c. included in GDP because the income will be spent for consumption.d. not included in GDP because taxes will have to be raised to pay for them.

23. Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?a. There are risks in holding stocks, even in a highly diversified portfolio.b. Portfolios with smaller standard deviations have greater risk.c. Stocks with greater risks offer greater average returns.d. They all gave her correct advice.

24. Susan puts £125 into an account and one year later has £135; what was the interest rate?a. 5 percentb. 7 percentc. 8 percentd. 10 percent

25. Which of the following is an example of the "brain drain"?a. A country's most highly educated workers emigrate to rich countries.b. A country has such a poor educational system that knowledge is lost over time.c. The population of a country grows so fast that the educational system can't keep up.d. A country steals patented technology from another country.

26. Friedman and Phelps argued thata. as long as peoples' inflation expectations were fixed, an increase in the money supply

growth rate could not change output in the short or long run.b. if peoples' inflation expectations were fixed, in the short run, a decrease in the money

supply growth rate could raise output and unemployment.c. when the money supply growth rate changed, people would eventually revise their

inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.

d. None of the above is correct.

27. Per capita real GDP differs from per capita nominal GDP in that real GDPa. measures the opportunity cost of growth.b. has been adjusted for the time value of money.c. has been adjusted for inflation.d. has been discounted to the present.

28. If there is excess money supply, people willa. deposit more into interest-bearing accounts, and the interest rate will fall.b. deposit more into interest-bearing accounts, and the interest rate will rise.c. withdraw money from interest-bearing accounts, and the interest rate will fall.d. withdraw money from interest-bearing accounts, and the interest rate will rise.

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29. Which of the following is included in GDP?a. the sale of stocks and bondsb. the sale of used goodsc. the sale of services such as visits to a doctord. All of the above are correct.

30. The major advantage of mutual funds is thata. they allow people with limited funds to diversify.b. they encourage households to spend their money on current consumption.c. fund managers are replaced by household administrators.d. they always use index funds to limit investor risk.

31. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of moneya. increases, so the quantity of money demanded increases.b. increases, so the quantity of money demanded decreases.c. decreases, so the quantity of money demanded decreases.d. decreases, so the quantity of money demanded increases.

SECTION B

Answer one and only one of the questions numbered 32 to 35. The maximum number of marks awarded for this Section is 33.

32. Answer both questions.

a. Most spells of unemployment are short, and most unemployment observed at any given time is long term. How can this be?

b. Why might a favorable change to the economy such as technological change or a decrease in the price of imported oil be associated with an increase in frictional unemployment?

33. Answer both questions.

a. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?

b. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population growth?

EC1001A - Macroeconomics I EC1001 A

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34. Carefully explain how inflation is measured.

Next answer the following two questions:

a. Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain.

b. Would your answer be different in a country, such as Botswana, which produeces a very large amount of diamonds?

35. Answer both questions.

a. Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is you answer affected by the presence of the multiplier, crowding-out, and investment-accelerator effects?

b. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

ID: A

1

master 2007Answer Section

MULTIPLE CHOICE

1. D 2. A 3. A 4. C 5. A 6. A 7. A 8. C 9. B 10. A 11. D 12. B 13. A 14. A 15. B 16. A 17. D 18. B 19. A 20. C 21. C 22. B 23. B 24. C 25. A 26. C 27. C 28. A 29. C 30. A 31. D

SHORT ANSWER

32. a. Most unemployed people in the economy are unemployed for relatively short periods of time, while fewer people are unemployed for relatively long periods of time. If you were to track the labor hours lost due to unemployment, it is likely that most of them would be among those who are unemployed for long periods of time.

b. Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand of labor among different firms. For example a decrease in the price of imported oil would likely reduce the demand for U.S. oil workers and increase the demand for automobile workers. Technological progress makes some industries decline and others advance creating frictional unemployment.

ID: A

2

33. a. In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development.

b. Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing children would likely reduce population growth rates. In particular, women with the opportunity to receive a good education and desirable employment tend to want to have fewer children than do those with fewer opportunities outside the home. Hence, policies designed to increase educational and employment opportunities for women will likely reduce population growth rates without coercion.

34. Inflation is measured with the RPI or CPI or other indices. It would be good if the student expalained how these indices are calculated.

a. The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings.

b. Yes output does not affect consumption. 35. a. The increase in expenditures means that government spending rises. The aggregate demand curve shifts

to the right. Aggregate demand shifts farther if there is a multiplier effect or an investment accelerator and shifts less if there is crowding out.

b. The Phillips curve shows the relation between inflation and unemployment. The short-run aggregate-supply curve shows the relation between the price level and output. When aggregate demand increases, the price level and output rise. The rising price level means that inflation has increased. The rising level of output means that firms will hire more workers so that the unemployment rate falls. Thus, the model implies that inflation and unemployment are inversely related as the Phillips curve indicates.

No. of Pages: (B) 7No. of Questions: 35 EC1001 B

1

master 2007

MIDSUMMER EXAMINATIONS 2010

Subject ECONOMICS

Title of Paper EC1001 MACROECONOMICS

Time Allowed Two Hours (2 Hours)______________________________________________________________________________________________________

Instructions to candidatesThis paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 69 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).

______________________________________________________________________________________________________

SECTION A: Multiple ChoiceAll questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question.

The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong answer, and Zero mark if no answer is given.

1. The major advantage of mutual funds is thata. they allow people with limited funds to diversify.b. they encourage households to spend their money on current consumption.c. fund managers are replaced by household administrators.d. they always use index funds to limit investor risk.

2. If the exchange rate is 125 yen = $1, a bottle of rice wine that costs 2,500 yen costsa. $20.b. $25.c. $22.d. None of the above is correct.

EC1001 B - Macroeconomics I EC1001 B

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3. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP deflator of 125 in 2002 and of 105 in 2001, then from 2001 to 2002 real outputa. and prices both rose.b. rose and prices fell.c. fell and prices rose.d. and prices both fell.

4. Transfer payments area. included in GDP because they represent income to individuals.b. not included in GDP because they are not payments for currently produced goods or

services.c. included in GDP because the income will be spent for consumption.d. not included in GDP because taxes will have to be raised to pay for them.

5. Susan puts £125 into an account and one year later has £135; what was the interest rate?a. 5 percentb. 7 percentc. 8 percentd. 10 percent

6. Which of the following is an example of the "brain drain"?a. A country's most highly educated workers emigrate to rich countries.b. A country has such a poor educational system that knowledge is lost over time.c. The population of a country grows so fast that the educational system can't keep up.d. A country steals patented technology from another country.

7. If the Bank of England wanted to increase the money supply, it would make open marketa. purchases and lower the discount rate.b. sales and lower the discount rate.c. purchases and raise the discount rate.d. sales and raise the discount rate.

8. GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society isa. GDP per person.b. the consumption component of GDP.c. government expenditures per person.d. the level of business investment.

9. Which of the following is included in GDP?a. the sale of stocks and bondsb. the sale of used goodsc. the sale of services such as visits to a doctord. All of the above are correct.

EC1001 B - Macroeconomics I EC1001 B

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Use the two graphs in the diagram to answer the following questions.

Figure 22-3

10. Refer to Figure 22-3. A decrease in aggregate demand moves the economy from c and 3 toa. a and 1 in the short run, b and 2 in the long run.b. b and 2 in the short run, a and 1 in the long run.c. d and 4 in the short run, e and 5 in the long run.d. None of the above is correct.

11. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?a. U.S. textile workers belong to a union.b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.c. Labor is more productive making cotton cloth with a mechanical loom than with a hand

loom.d. Bangladesh has a low-wage policy to make its textile industry more competitive in world

markets.

12. If you and your friends are still looking for a job eighteen months after graduation, even after lowering your wage expectations, you are probably in the business cycle phase of aa. recession.b. peak.c. boom.d. recovery

13. When a society cannot produce all the goods and services people wish to have it is said that the economy is experiencinga. scarcity.b. communism.c. externalities.d. market failure.

EC1001 B - Macroeconomics I EC1001 B

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Use the figure below to answer the following questions.

Figure 19-4

14. Refer to Figure 19-4. Which of the following shifts show the effects of an import quota?a. a shift of NCO0 to the right in Panel Bb. a shift from D0 to D1 in Panel Cc. a shift from D0 to D2 in Panel Cd. None of the above would show the effects of an import quota.

15. If there is excess money supply, people willa. deposit more into interest-bearing accounts, and the interest rate will fall.b. deposit more into interest-bearing accounts, and the interest rate will rise.c. withdraw money from interest-bearing accounts, and the interest rate will fall.d. withdraw money from interest-bearing accounts, and the interest rate will rise.

16. Which of the following shifts money demand to the right?a. an increase in the price levelb. a decrease in the price levelc. an increase in the interest rated. a decrease in the interest rate

17. Per capita real GDP differs from per capita nominal GDP in that real GDPa. measures the opportunity cost of growth.b. has been adjusted for the time value of money.c. has been adjusted for inflation.d. has been discounted to the present.

18. Proponents of zero inflation argue that a successful program to reduce inflationa. eventually reduces inflation expectations.b. eventually raises real interest rates.c. permanently decreases output.d. permanently raises unemployment.

EC1001 B - Macroeconomics I EC1001 B

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19. The money supply in Freedonia is 100 billion Freedonian Marks. Nominal GDP is 800 billion Freedonian Marks and real GDP is 200 billionFreedonian Marks. What are the price level and velocity in Freedonia?a. Velocity is 2 and the price level is 1.b. Velocity is 4 and the price level is 8.c. Velocity is 8 and the price level is 4.d. There is insufficient information to answer the question.

20. The Fisher effect says thata. the nominal interest rate adjusts one for one with the inflation rate.b. the growth rate of the money supply determines the inflation rate.c. real variables are heavily influenced by the monetary system.d. All of the above are correct.

21. Friedman and Phelps argued thata. as long as peoples' inflation expectations were fixed, an increase in the money supply

growth rate could not change output in the short or long run.b. if peoples' inflation expectations were fixed, in the short run, a decrease in the money

supply growth rate could raise output and unemployment.c. when the money supply growth rate changed, people would eventually revise their

inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.

d. None of the above is correct.

22. Roger Red-Hat is a British citizen who lives in Iceland and purchases a snowmobile manufactured in the UK. This purchase isa. both a British and Icelandic export.b. both a British and Icelandic import.c. a British import and an Icelandic export.d. a British export and an Icelandic import.

23. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect thata. every risk-averse person will earn a higher rate of return than every non-risk averse

person.b. every risk-averse person will earn a lower rate of return than every non-risk averse

person.c. the average risk-averse person will earn a higher rate of return than the average non-risk

averse person.d. the average risk-averse person will earn a lower rate of return than the average non-risk

averse person.

24. Which of the following would reduce the natural rate of unemployment?a. The Internet provides more readily available information about available jobs.b. Congress increases the minimum wage.c. Laws are passed that make it more difficult to monitor the efforts of workers.d. All of the above are correct.

EC1001 B - Macroeconomics I EC1001 B

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25. If Canada increases its budget deficit, it will reducea. private saving and so shift the supply of loanable funds left.b. investment and so shift the demand for loanable funds left.c. public saving and so shift the supply of loanable funds left.d. None of the above are correct.

26. Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. This situation best represents which problem in the construction of the CPI?a. substitution biasb. introduction of new goodsc. unmeasured quality changed. income bias

27. Retained earnings area. paid out as dividends.b. the amount of revenues a corporation receives for the sale of its products minus its costs

of production as measured by its accountants.c. the single most important piece of information about a stock.d. None of the above are correct.

28. Ceteris paribus, as the price level falls, pounds becomea. more valuable, and interest rates rise.b. more valuable, and interest rates fall.c. less valuable, and interest rates rise.d. less valuable, and interest rates fall.

29. The slope of the supply of loanable funds curve represents thea. positive relation between the real interest rate and investment.b. positive relation between the real interest rate and saving.c. negative relation between the real interest rate and investment.d. negative relation between the real interest rate and saving.

30. Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?a. There are risks in holding stocks, even in a highly diversified portfolio.b. Portfolios with smaller standard deviations have greater risk.c. Stocks with greater risks offer greater average returns.d. They all gave her correct advice.

31. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of moneya. increases, so the quantity of money demanded increases.b. increases, so the quantity of money demanded decreases.c. decreases, so the quantity of money demanded decreases.d. decreases, so the quantity of money demanded increases.

EC1001 B - Macroeconomics I EC1001 B

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SECTION B

Answer one and only one of the questions numbered 32 to 35. The maximum number of marks awarded for this Section is 33.

32. Answer both questions.

a. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?

b. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population growth?

33. Carefully explain how inflation is measured.

Next answer the following two questions:

a. Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain.

b. Would your answer be different in a country, such as Botswana, which produeces a very large amount of diamonds?

34. Answer both questions.

a. Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is you answer affected by the presence of the multiplier, crowding-out, and investment-accelerator effects?

b. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

35. Answer both questions.

a. Most spells of unemployment are short, and most unemployment observed at any given time is long term. How can this be?

b. Why might a favorable change to the economy such as technological change or a decrease in the price of imported oil be associated with an increase in frictional unemployment?

ID: B

1

master 2007Answer Section

MULTIPLE CHOICE

1. A 2. A 3. C 4. B 5. C 6. A 7. A 8. A 9. C 10. B 11. C 12. A 13. A 14. B 15. A 16. A 17. C 18. A 19. C 20. A 21. C 22. D 23. D 24. A 25. C 26. A 27. D 28. B 29. B 30. B 31. D

SHORT ANSWER

32. a. In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development.

b. Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing children would likely reduce population growth rates. In particular, women with the opportunity to receive a good education and desirable employment tend to want to have fewer children than do those with fewer opportunities outside the home. Hence, policies designed to increase educational and employment opportunities for women will likely reduce population growth rates without coercion.

ID: B

2

33. Inflation is measured with the RPI or CPI or other indices. It would be good if the student expalained how these indices are calculated.

a. The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings.

b. Yes output does not affect consumption. 34. a. The increase in expenditures means that government spending rises. The aggregate demand curve shifts

to the right. Aggregate demand shifts farther if there is a multiplier effect or an investment accelerator and shifts less if there is crowding out.

b. The Phillips curve shows the relation between inflation and unemployment. The short-run aggregate-supply curve shows the relation between the price level and output. When aggregate demand increases, the price level and output rise. The rising price level means that inflation has increased. The rising level of output means that firms will hire more workers so that the unemployment rate falls. Thus, the model implies that inflation and unemployment are inversely related as the Phillips curve indicates.

35. a. Most unemployed people in the economy are unemployed for relatively short periods of time, while fewer people are unemployed for relatively long periods of time. If you were to track the labor hours lost due to unemployment, it is likely that most of them would be among those who are unemployed for long periods of time.

b. Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand of labor among different firms. For example a decrease in the price of imported oil would likely reduce the demand for U.S. oil workers and increase the demand for automobile workers. Technological progress makes some industries decline and others advance creating frictional unemployment.

No. of Pages: (C) 8No. of Questions: 35 EC1001C

1

master 2007

MIDSUMMER EXAMINATIONS 2010

Subject ECONOMICS

Title of Paper EC1001 MACROECONOMICS

Time Allowed Two Hours (2 Hours)______________________________________________________________________________________________________

Instructions to candidatesThis paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 69 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).

______________________________________________________________________________________________________

SECTION A: Multiple ChoiceAll questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question.

The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong answer, and Zero mark if no answer is given.

1. GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society isa. GDP per person.b. the consumption component of GDP.c. government expenditures per person.d. the level of business investment.

2. Which of the following shifts money demand to the right?a. an increase in the price levelb. a decrease in the price levelc. an increase in the interest rated. a decrease in the interest rate

EC1001C - Macroeconomics I EC1001 C

2

3. The major advantage of mutual funds is thata. they allow people with limited funds to diversify.b. they encourage households to spend their money on current consumption.c. fund managers are replaced by household administrators.d. they always use index funds to limit investor risk.

4. When a society cannot produce all the goods and services people wish to have it is said that the economy is experiencinga. scarcity.b. communism.c. externalities.d. market failure.

5. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?a. U.S. textile workers belong to a union.b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.c. Labor is more productive making cotton cloth with a mechanical loom than with a hand

loom.d. Bangladesh has a low-wage policy to make its textile industry more competitive in world

markets.

6. If the Bank of England wanted to increase the money supply, it would make open marketa. purchases and lower the discount rate.b. sales and lower the discount rate.c. purchases and raise the discount rate.d. sales and raise the discount rate.

7. The Fisher effect says thata. the nominal interest rate adjusts one for one with the inflation rate.b. the growth rate of the money supply determines the inflation rate.c. real variables are heavily influenced by the monetary system.d. All of the above are correct.

8. Transfer payments area. included in GDP because they represent income to individuals.b. not included in GDP because they are not payments for currently produced goods or

services.c. included in GDP because the income will be spent for consumption.d. not included in GDP because taxes will have to be raised to pay for them.

9. The money supply in Freedonia is 100 billion Freedonian Marks. Nominal GDP is 800 billion Freedonian Marks and real GDP is 200 billionFreedonian Marks. What are the price level and velocity in Freedonia?a. Velocity is 2 and the price level is 1.b. Velocity is 4 and the price level is 8.c. Velocity is 8 and the price level is 4.d. There is insufficient information to answer the question.

EC1001C - Macroeconomics I EC1001 C

3

10. The slope of the supply of loanable funds curve represents thea. positive relation between the real interest rate and investment.b. positive relation between the real interest rate and saving.c. negative relation between the real interest rate and investment.d. negative relation between the real interest rate and saving.

11. Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. This situation best represents which problem in the construction of the CPI?a. substitution biasb. introduction of new goodsc. unmeasured quality changed. income bias

12. Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?a. There are risks in holding stocks, even in a highly diversified portfolio.b. Portfolios with smaller standard deviations have greater risk.c. Stocks with greater risks offer greater average returns.d. They all gave her correct advice.

13. If the exchange rate is 125 yen = $1, a bottle of rice wine that costs 2,500 yen costsa. $20.b. $25.c. $22.d. None of the above is correct.

14. Proponents of zero inflation argue that a successful program to reduce inflationa. eventually reduces inflation expectations.b. eventually raises real interest rates.c. permanently decreases output.d. permanently raises unemployment.

EC1001C - Macroeconomics I EC1001 C

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Use the two graphs in the diagram to answer the following questions.

Figure 22-3

15. Refer to Figure 22-3. A decrease in aggregate demand moves the economy from c and 3 toa. a and 1 in the short run, b and 2 in the long run.b. b and 2 in the short run, a and 1 in the long run.c. d and 4 in the short run, e and 5 in the long run.d. None of the above is correct.

16. Retained earnings area. paid out as dividends.b. the amount of revenues a corporation receives for the sale of its products minus its costs

of production as measured by its accountants.c. the single most important piece of information about a stock.d. None of the above are correct.

17. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of moneya. increases, so the quantity of money demanded increases.b. increases, so the quantity of money demanded decreases.c. decreases, so the quantity of money demanded decreases.d. decreases, so the quantity of money demanded increases.

18. Which of the following would reduce the natural rate of unemployment?a. The Internet provides more readily available information about available jobs.b. Congress increases the minimum wage.c. Laws are passed that make it more difficult to monitor the efforts of workers.d. All of the above are correct.

EC1001C - Macroeconomics I EC1001 C

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19. Friedman and Phelps argued thata. as long as peoples' inflation expectations were fixed, an increase in the money supply

growth rate could not change output in the short or long run.b. if peoples' inflation expectations were fixed, in the short run, a decrease in the money

supply growth rate could raise output and unemployment.c. when the money supply growth rate changed, people would eventually revise their

inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.

d. None of the above is correct.

20. If you and your friends are still looking for a job eighteen months after graduation, even after lowering your wage expectations, you are probably in the business cycle phase of aa. recession.b. peak.c. boom.d. recovery

21. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect thata. every risk-averse person will earn a higher rate of return than every non-risk averse

person.b. every risk-averse person will earn a lower rate of return than every non-risk averse

person.c. the average risk-averse person will earn a higher rate of return than the average non-risk

averse person.d. the average risk-averse person will earn a lower rate of return than the average non-risk

averse person.

22. Which of the following is an example of the "brain drain"?a. A country's most highly educated workers emigrate to rich countries.b. A country has such a poor educational system that knowledge is lost over time.c. The population of a country grows so fast that the educational system can't keep up.d. A country steals patented technology from another country.

23. Susan puts £125 into an account and one year later has £135; what was the interest rate?a. 5 percentb. 7 percentc. 8 percentd. 10 percent

24. Ceteris paribus, as the price level falls, pounds becomea. more valuable, and interest rates rise.b. more valuable, and interest rates fall.c. less valuable, and interest rates rise.d. less valuable, and interest rates fall.

EC1001C - Macroeconomics I EC1001 C

6

Use the figure below to answer the following questions.

Figure 19-4

25. Refer to Figure 19-4. Which of the following shifts show the effects of an import quota?a. a shift of NCO0 to the right in Panel Bb. a shift from D0 to D1 in Panel Cc. a shift from D0 to D2 in Panel Cd. None of the above would show the effects of an import quota.

26. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP deflator of 125 in 2002 and of 105 in 2001, then from 2001 to 2002 real outputa. and prices both rose.b. rose and prices fell.c. fell and prices rose.d. and prices both fell.

27. Per capita real GDP differs from per capita nominal GDP in that real GDPa. measures the opportunity cost of growth.b. has been adjusted for the time value of money.c. has been adjusted for inflation.d. has been discounted to the present.

28. Roger Red-Hat is a British citizen who lives in Iceland and purchases a snowmobile manufactured in the UK. This purchase isa. both a British and Icelandic export.b. both a British and Icelandic import.c. a British import and an Icelandic export.d. a British export and an Icelandic import.

EC1001C - Macroeconomics I EC1001 C

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29. If Canada increases its budget deficit, it will reducea. private saving and so shift the supply of loanable funds left.b. investment and so shift the demand for loanable funds left.c. public saving and so shift the supply of loanable funds left.d. None of the above are correct.

30. Which of the following is included in GDP?a. the sale of stocks and bondsb. the sale of used goodsc. the sale of services such as visits to a doctord. All of the above are correct.

31. If there is excess money supply, people willa. deposit more into interest-bearing accounts, and the interest rate will fall.b. deposit more into interest-bearing accounts, and the interest rate will rise.c. withdraw money from interest-bearing accounts, and the interest rate will fall.d. withdraw money from interest-bearing accounts, and the interest rate will rise.

SECTION B

Answer one and only one of the questions numbered 32 to 35. The maximum number of marks awarded for this Section is 33.

32. Answer both questions.

a. Most spells of unemployment are short, and most unemployment observed at any given time is long term. How can this be?

b. Why might a favorable change to the economy such as technological change or a decrease in the price of imported oil be associated with an increase in frictional unemployment?

33. Carefully explain how inflation is measured.

Next answer the following two questions:

a. Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain.

b. Would your answer be different in a country, such as Botswana, which produeces a very large amount of diamonds?

EC1001C - Macroeconomics I EC1001 C

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34. Answer both questions.

a. Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is you answer affected by the presence of the multiplier, crowding-out, and investment-accelerator effects?

b. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

35. Answer both questions.

a. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?

b. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population growth?

ID: C

1

master 2007Answer Section

MULTIPLE CHOICE

1. A 2. A 3. A 4. A 5. C 6. A 7. A 8. B 9. C 10. B 11. A 12. B 13. A 14. A 15. B 16. D 17. D 18. A 19. C 20. A 21. D 22. A 23. C 24. B 25. B 26. C 27. C 28. D 29. C 30. C 31. A

SHORT ANSWER

32. a. Most unemployed people in the economy are unemployed for relatively short periods of time, while fewer people are unemployed for relatively long periods of time. If you were to track the labor hours lost due to unemployment, it is likely that most of them would be among those who are unemployed for long periods of time.

b. Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand of labor among different firms. For example a decrease in the price of imported oil would likely reduce the demand for U.S. oil workers and increase the demand for automobile workers. Technological progress makes some industries decline and others advance creating frictional unemployment.

ID: C

2

33. Inflation is measured with the RPI or CPI or other indices. It would be good if the student expalained how these indices are calculated.

a. The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings.

b. Yes output does not affect consumption. 34. a. The increase in expenditures means that government spending rises. The aggregate demand curve shifts

to the right. Aggregate demand shifts farther if there is a multiplier effect or an investment accelerator and shifts less if there is crowding out.

b. The Phillips curve shows the relation between inflation and unemployment. The short-run aggregate-supply curve shows the relation between the price level and output. When aggregate demand increases, the price level and output rise. The rising price level means that inflation has increased. The rising level of output means that firms will hire more workers so that the unemployment rate falls. Thus, the model implies that inflation and unemployment are inversely related as the Phillips curve indicates.

35. a. In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development.

b. Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing children would likely reduce population growth rates. In particular, women with the opportunity to receive a good education and desirable employment tend to want to have fewer children than do those with fewer opportunities outside the home. Hence, policies designed to increase educational and employment opportunities for women will likely reduce population growth rates without coercion.

No. of Pages: (D) 7No. of Questions: 35 EC1001D

1

master 2007

MIDSUMMER EXAMINATIONS 2010

Subject ECONOMICS

Title of Paper EC1001 MACROECONOMICS

Time Allowed Two Hours (2 Hours)______________________________________________________________________________________________________

Instructions to candidatesThis paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 69 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).

______________________________________________________________________________________________________

SECTION A: Multiple ChoiceAll questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question.

The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong answer, and Zero mark if no answer is given.

1. Roger Red-Hat is a British citizen who lives in Iceland and purchases a snowmobile manufactured in the UK. This purchase isa. both a British and Icelandic export.b. both a British and Icelandic import.c. a British import and an Icelandic export.d. a British export and an Icelandic import.

EC1001D - Macroeconomics I EC1001 D

2

Use the figure below to answer the following questions.

Figure 19-4

2. Refer to Figure 19-4. Which of the following shifts show the effects of an import quota?a. a shift of NCO0 to the right in Panel Bb. a shift from D0 to D1 in Panel Cc. a shift from D0 to D2 in Panel Cd. None of the above would show the effects of an import quota.

3. Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?a. There are risks in holding stocks, even in a highly diversified portfolio.b. Portfolios with smaller standard deviations have greater risk.c. Stocks with greater risks offer greater average returns.d. They all gave her correct advice.

4. Which of the following is included in GDP?a. the sale of stocks and bondsb. the sale of used goodsc. the sale of services such as visits to a doctord. All of the above are correct.

5. Friedman and Phelps argued thata. as long as peoples' inflation expectations were fixed, an increase in the money supply

growth rate could not change output in the short or long run.b. if peoples' inflation expectations were fixed, in the short run, a decrease in the money

supply growth rate could raise output and unemployment.c. when the money supply growth rate changed, people would eventually revise their

inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.

d. None of the above is correct.

EC1001D - Macroeconomics I EC1001 D

3

6. The Fisher effect says thata. the nominal interest rate adjusts one for one with the inflation rate.b. the growth rate of the money supply determines the inflation rate.c. real variables are heavily influenced by the monetary system.d. All of the above are correct.

7. Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. This situation best represents which problem in the construction of the CPI?a. substitution biasb. introduction of new goodsc. unmeasured quality changed. income bias

8. Which of the following is an example of the "brain drain"?a. A country's most highly educated workers emigrate to rich countries.b. A country has such a poor educational system that knowledge is lost over time.c. The population of a country grows so fast that the educational system can't keep up.d. A country steals patented technology from another country.

9. Per capita real GDP differs from per capita nominal GDP in that real GDPa. measures the opportunity cost of growth.b. has been adjusted for the time value of money.c. has been adjusted for inflation.d. has been discounted to the present.

10. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP deflator of 125 in 2002 and of 105 in 2001, then from 2001 to 2002 real outputa. and prices both rose.b. rose and prices fell.c. fell and prices rose.d. and prices both fell.

11. When a society cannot produce all the goods and services people wish to have it is said that the economy is experiencinga. scarcity.b. communism.c. externalities.d. market failure.

12. Retained earnings area. paid out as dividends.b. the amount of revenues a corporation receives for the sale of its products minus its costs

of production as measured by its accountants.c. the single most important piece of information about a stock.d. None of the above are correct.

EC1001D - Macroeconomics I EC1001 D

4

13. Proponents of zero inflation argue that a successful program to reduce inflationa. eventually reduces inflation expectations.b. eventually raises real interest rates.c. permanently decreases output.d. permanently raises unemployment.

14. Which of the following shifts money demand to the right?a. an increase in the price levelb. a decrease in the price levelc. an increase in the interest rated. a decrease in the interest rate

15. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect thata. every risk-averse person will earn a higher rate of return than every non-risk averse

person.b. every risk-averse person will earn a lower rate of return than every non-risk averse

person.c. the average risk-averse person will earn a higher rate of return than the average non-risk

averse person.d. the average risk-averse person will earn a lower rate of return than the average non-risk

averse person.

16. Ceteris paribus, as the price level falls, pounds becomea. more valuable, and interest rates rise.b. more valuable, and interest rates fall.c. less valuable, and interest rates rise.d. less valuable, and interest rates fall.

17. The money supply in Freedonia is 100 billion Freedonian Marks. Nominal GDP is 800 billion Freedonian Marks and real GDP is 200 billionFreedonian Marks. What are the price level and velocity in Freedonia?a. Velocity is 2 and the price level is 1.b. Velocity is 4 and the price level is 8.c. Velocity is 8 and the price level is 4.d. There is insufficient information to answer the question.

18. GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society isa. GDP per person.b. the consumption component of GDP.c. government expenditures per person.d. the level of business investment.

19. If Canada increases its budget deficit, it will reducea. private saving and so shift the supply of loanable funds left.b. investment and so shift the demand for loanable funds left.c. public saving and so shift the supply of loanable funds left.d. None of the above are correct.

EC1001D - Macroeconomics I EC1001 D

5

20. Which of the following would reduce the natural rate of unemployment?a. The Internet provides more readily available information about available jobs.b. Congress increases the minimum wage.c. Laws are passed that make it more difficult to monitor the efforts of workers.d. All of the above are correct.

21. The slope of the supply of loanable funds curve represents thea. positive relation between the real interest rate and investment.b. positive relation between the real interest rate and saving.c. negative relation between the real interest rate and investment.d. negative relation between the real interest rate and saving.

22. If the Bank of England wanted to increase the money supply, it would make open marketa. purchases and lower the discount rate.b. sales and lower the discount rate.c. purchases and raise the discount rate.d. sales and raise the discount rate.

23. Susan puts £125 into an account and one year later has £135; what was the interest rate?a. 5 percentb. 7 percentc. 8 percentd. 10 percent

24. If there is excess money supply, people willa. deposit more into interest-bearing accounts, and the interest rate will fall.b. deposit more into interest-bearing accounts, and the interest rate will rise.c. withdraw money from interest-bearing accounts, and the interest rate will fall.d. withdraw money from interest-bearing accounts, and the interest rate will rise.

25. The major advantage of mutual funds is thata. they allow people with limited funds to diversify.b. they encourage households to spend their money on current consumption.c. fund managers are replaced by household administrators.d. they always use index funds to limit investor risk.

26. Transfer payments area. included in GDP because they represent income to individuals.b. not included in GDP because they are not payments for currently produced goods or

services.c. included in GDP because the income will be spent for consumption.d. not included in GDP because taxes will have to be raised to pay for them.

EC1001D - Macroeconomics I EC1001 D

6

Use the two graphs in the diagram to answer the following questions.

Figure 22-3

27. Refer to Figure 22-3. A decrease in aggregate demand moves the economy from c and 3 toa. a and 1 in the short run, b and 2 in the long run.b. b and 2 in the short run, a and 1 in the long run.c. d and 4 in the short run, e and 5 in the long run.d. None of the above is correct.

28. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?a. U.S. textile workers belong to a union.b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.c. Labor is more productive making cotton cloth with a mechanical loom than with a hand

loom.d. Bangladesh has a low-wage policy to make its textile industry more competitive in world

markets.

29. If the exchange rate is 125 yen = $1, a bottle of rice wine that costs 2,500 yen costsa. $20.b. $25.c. $22.d. None of the above is correct.

30. If you and your friends are still looking for a job eighteen months after graduation, even after lowering your wage expectations, you are probably in the business cycle phase of aa. recession.b. peak.c. boom.d. recovery

EC1001D - Macroeconomics I EC1001 D

7

31. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of moneya. increases, so the quantity of money demanded increases.b. increases, so the quantity of money demanded decreases.c. decreases, so the quantity of money demanded decreases.d. decreases, so the quantity of money demanded increases.

SECTION B

Answer one and only one of the questions numbered 32 to 35. The maximum number of marks awarded for this Section is 33.

32. Answer both questions.

a. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?

b. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population growth?

33. Answer both questions.

a. Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is you answer affected by the presence of the multiplier, crowding-out, and investment-accelerator effects?

b. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

34. Answer both questions.

a. Most spells of unemployment are short, and most unemployment observed at any given time is long term. How can this be?

b. Why might a favorable change to the economy such as technological change or a decrease in the price of imported oil be associated with an increase in frictional unemployment?

35. Carefully explain how inflation is measured.

Next answer the following two questions:

a. Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain.

b. Would your answer be different in a country, such as Botswana, which produeces a very large amount of diamonds?

ID: D

1

master 2007Answer Section

MULTIPLE CHOICE

1. D 2. B 3. B 4. C 5. C 6. A 7. A 8. A 9. C 10. C 11. A 12. D 13. A 14. A 15. D 16. B 17. C 18. A 19. C 20. A 21. B 22. A 23. C 24. A 25. A 26. B 27. B 28. C 29. A 30. A 31. D

SHORT ANSWER

32. a. In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development.

b. Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing children would likely reduce population growth rates. In particular, women with the opportunity to receive a good education and desirable employment tend to want to have fewer children than do those with fewer opportunities outside the home. Hence, policies designed to increase educational and employment opportunities for women will likely reduce population growth rates without coercion.

ID: D

2

33. a. The increase in expenditures means that government spending rises. The aggregate demand curve shifts to the right. Aggregate demand shifts farther if there is a multiplier effect or an investment accelerator and shifts less if there is crowding out.

b. The Phillips curve shows the relation between inflation and unemployment. The short-run aggregate-supply curve shows the relation between the price level and output. When aggregate demand increases, the price level and output rise. The rising price level means that inflation has increased. The rising level of output means that firms will hire more workers so that the unemployment rate falls. Thus, the model implies that inflation and unemployment are inversely related as the Phillips curve indicates.

34. a. Most unemployed people in the economy are unemployed for relatively short periods of time, while fewer people are unemployed for relatively long periods of time. If you were to track the labor hours lost due to unemployment, it is likely that most of them would be among those who are unemployed for long periods of time.

b. Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand of labor among different firms. For example a decrease in the price of imported oil would likely reduce the demand for U.S. oil workers and increase the demand for automobile workers. Technological progress makes some industries decline and others advance creating frictional unemployment.

35. Inflation is measured with the RPI or CPI or other indices. It would be good if the student expalained how these indices are calculated.

a. The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings.

b. Yes output does not affect consumption.

No. of Pages: ( E ) 8No. of Questions: 35 EC1001 E

1

master 2007

MIDSUMMER EXAMINATIONS 2010

Subject ECONOMICS

Title of Paper EC1001 MACROECONOMICS

Time Allowed Two Hours (2 Hours)______________________________________________________________________________________________________

Instructions to candidatesThis paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 69 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).

______________________________________________________________________________________________________

SECTION A: Multiple ChoiceAll questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question.

The marking scheme is the following. 3/(1.35) marks (this is 3 divided by 1.35) for each right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong answer, and Zero mark if no answer is given.

Use the figure below to answer the following questions.

Figure 19-4

EC1001 E - Macroeconomics I EC1001 E

2

1. Refer to Figure 19-4. Which of the following shifts show the effects of an import quota?a. a shift of NCO0 to the right in Panel Bb. a shift from D0 to D1 in Panel Cc. a shift from D0 to D2 in Panel Cd. None of the above would show the effects of an import quota.

2. When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of moneya. increases, so the quantity of money demanded increases.b. increases, so the quantity of money demanded decreases.c. decreases, so the quantity of money demanded decreases.d. decreases, so the quantity of money demanded increases.

3. The slope of the supply of loanable funds curve represents thea. positive relation between the real interest rate and investment.b. positive relation between the real interest rate and saving.c. negative relation between the real interest rate and investment.d. negative relation between the real interest rate and saving.

4. Which of the following shifts money demand to the right?a. an increase in the price levelb. a decrease in the price levelc. an increase in the interest rated. a decrease in the interest rate

5. If Canada increases its budget deficit, it will reducea. private saving and so shift the supply of loanable funds left.b. investment and so shift the demand for loanable funds left.c. public saving and so shift the supply of loanable funds left.d. None of the above are correct.

EC1001 E - Macroeconomics I EC1001 E

3

6. The major advantage of mutual funds is thata. they allow people with limited funds to diversify.b. they encourage households to spend their money on current consumption.c. fund managers are replaced by household administrators.d. they always use index funds to limit investor risk.

7. Friedman and Phelps argued thata. as long as peoples' inflation expectations were fixed, an increase in the money supply

growth rate could not change output in the short or long run.b. if peoples' inflation expectations were fixed, in the short run, a decrease in the money

supply growth rate could raise output and unemployment.c. when the money supply growth rate changed, people would eventually revise their

inflation expectations so that any change in unemployment created by an increase in the money supply growth rate would be temporary.

d. None of the above is correct.

8. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP deflator of 125 in 2002 and of 105 in 2001, then from 2001 to 2002 real outputa. and prices both rose.b. rose and prices fell.c. fell and prices rose.d. and prices both fell.

9. Which of the following is included in GDP?a. the sale of stocks and bondsb. the sale of used goodsc. the sale of services such as visits to a doctord. All of the above are correct.

10. Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?a. There are risks in holding stocks, even in a highly diversified portfolio.b. Portfolios with smaller standard deviations have greater risk.c. Stocks with greater risks offer greater average returns.d. They all gave her correct advice.

11. If there is excess money supply, people willa. deposit more into interest-bearing accounts, and the interest rate will fall.b. deposit more into interest-bearing accounts, and the interest rate will rise.c. withdraw money from interest-bearing accounts, and the interest rate will fall.d. withdraw money from interest-bearing accounts, and the interest rate will rise.

12. GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society isa. GDP per person.b. the consumption component of GDP.c. government expenditures per person.d. the level of business investment.

EC1001 E - Macroeconomics I EC1001 E

4

13. Per capita real GDP differs from per capita nominal GDP in that real GDPa. measures the opportunity cost of growth.b. has been adjusted for the time value of money.c. has been adjusted for inflation.d. has been discounted to the present.

14. If the Bank of England wanted to increase the money supply, it would make open marketa. purchases and lower the discount rate.b. sales and lower the discount rate.c. purchases and raise the discount rate.d. sales and raise the discount rate.

Use the two graphs in the diagram to answer the following questions.

Figure 22-3

15. Refer to Figure 22-3. A decrease in aggregate demand moves the economy from c and 3 toa. a and 1 in the short run, b and 2 in the long run.b. b and 2 in the short run, a and 1 in the long run.c. d and 4 in the short run, e and 5 in the long run.d. None of the above is correct.

16. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?a. U.S. textile workers belong to a union.b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.c. Labor is more productive making cotton cloth with a mechanical loom than with a hand

loom.d. Bangladesh has a low-wage policy to make its textile industry more competitive in world

markets.

EC1001 E - Macroeconomics I EC1001 E

5

17. The money supply in Freedonia is 100 billion Freedonian Marks. Nominal GDP is 800 billion Freedonian Marks and real GDP is 200 billionFreedonian Marks. What are the price level and velocity in Freedonia?a. Velocity is 2 and the price level is 1.b. Velocity is 4 and the price level is 8.c. Velocity is 8 and the price level is 4.d. There is insufficient information to answer the question.

18. Which of the following is an example of the "brain drain"?a. A country's most highly educated workers emigrate to rich countries.b. A country has such a poor educational system that knowledge is lost over time.c. The population of a country grows so fast that the educational system can't keep up.d. A country steals patented technology from another country.

19. Retained earnings area. paid out as dividends.b. the amount of revenues a corporation receives for the sale of its products minus its costs

of production as measured by its accountants.c. the single most important piece of information about a stock.d. None of the above are correct.

20. Consumers begin purchasing houses incorporating steel studs instead of wooden studs after the price of lumber increases. This situation best represents which problem in the construction of the CPI?a. substitution biasb. introduction of new goodsc. unmeasured quality changed. income bias

21. Proponents of zero inflation argue that a successful program to reduce inflationa. eventually reduces inflation expectations.b. eventually raises real interest rates.c. permanently decreases output.d. permanently raises unemployment.

22. When a society cannot produce all the goods and services people wish to have it is said that the economy is experiencinga. scarcity.b. communism.c. externalities.d. market failure.

23. If the exchange rate is 125 yen = $1, a bottle of rice wine that costs 2,500 yen costsa. $20.b. $25.c. $22.d. None of the above is correct.

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24. Transfer payments area. included in GDP because they represent income to individuals.b. not included in GDP because they are not payments for currently produced goods or

services.c. included in GDP because the income will be spent for consumption.d. not included in GDP because taxes will have to be raised to pay for them.

25. Susan puts £125 into an account and one year later has £135; what was the interest rate?a. 5 percentb. 7 percentc. 8 percentd. 10 percent

26. Roger Red-Hat is a British citizen who lives in Iceland and purchases a snowmobile manufactured in the UK. This purchase isa. both a British and Icelandic export.b. both a British and Icelandic import.c. a British import and an Icelandic export.d. a British export and an Icelandic import.

27. The Fisher effect says thata. the nominal interest rate adjusts one for one with the inflation rate.b. the growth rate of the money supply determines the inflation rate.c. real variables are heavily influenced by the monetary system.d. All of the above are correct.

28. Which of the following would reduce the natural rate of unemployment?a. The Internet provides more readily available information about available jobs.b. Congress increases the minimum wage.c. Laws are passed that make it more difficult to monitor the efforts of workers.d. All of the above are correct.

29. Ceteris paribus, as the price level falls, pounds becomea. more valuable, and interest rates rise.b. more valuable, and interest rates fall.c. less valuable, and interest rates rise.d. less valuable, and interest rates fall.

30. If you and your friends are still looking for a job eighteen months after graduation, even after lowering your wage expectations, you are probably in the business cycle phase of aa. recession.b. peak.c. boom.d. recovery

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31. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect thata. every risk-averse person will earn a higher rate of return than every non-risk averse

person.b. every risk-averse person will earn a lower rate of return than every non-risk averse

person.c. the average risk-averse person will earn a higher rate of return than the average non-risk

averse person.d. the average risk-averse person will earn a lower rate of return than the average non-risk

averse person.

SECTION B

Answer one and only one of the questions numbered 32 to 35. The maximum number of marks awarded for this Section is 33.

32. Answer both questions.

a. Most spells of unemployment are short, and most unemployment observed at any given time is long term. How can this be?

b. Why might a favorable change to the economy such as technological change or a decrease in the price of imported oil be associated with an increase in frictional unemployment?

33. Carefully explain how inflation is measured.

Next answer the following two questions:

a. Which is likely to have the larger effect on the CPI, a 2 percent increase in food or a 3 percent increase in diamond rings? Explain.

b. Would your answer be different in a country, such as Botswana, which produeces a very large amount of diamonds?

34. Answer both questions.

a. Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is you answer affected by the presence of the multiplier, crowding-out, and investment-accelerator effects?

b. The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.

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35. Answer both questions.

a. In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?

b. Some economists argue that it is possible to raise the standard of living by reducing population growth. As an economist interested in incentives rather than coercion, what kind of policy would you recommend to slow population growth?

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master 2007Answer Section

MULTIPLE CHOICE

1. B 2. D 3. B 4. A 5. C 6. A 7. C 8. C 9. C 10. B 11. A 12. A 13. C 14. A 15. B 16. C 17. C 18. A 19. D 20. A 21. A 22. A 23. A 24. B 25. C 26. D 27. A 28. A 29. B 30. A 31. D

SHORT ANSWER

32. a. Most unemployed people in the economy are unemployed for relatively short periods of time, while fewer people are unemployed for relatively long periods of time. If you were to track the labor hours lost due to unemployment, it is likely that most of them would be among those who are unemployed for long periods of time.

b. Even generally favorable changes will usually involve some sort of sectoral shock that changes the demand of labor among different firms. For example a decrease in the price of imported oil would likely reduce the demand for U.S. oil workers and increase the demand for automobile workers. Technological progress makes some industries decline and others advance creating frictional unemployment.

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33. Inflation is measured with the RPI or CPI or other indices. It would be good if the student expalained how these indices are calculated.

a. The 2 percent increase in food will increase the CPI by more because the portion of the market basket that is for food is much larger than the portion for diamond rings.

b. Yes output does not affect consumption. 34. a. The increase in expenditures means that government spending rises. The aggregate demand curve shifts

to the right. Aggregate demand shifts farther if there is a multiplier effect or an investment accelerator and shifts less if there is crowding out.

b. The Phillips curve shows the relation between inflation and unemployment. The short-run aggregate-supply curve shows the relation between the price level and output. When aggregate demand increases, the price level and output rise. The rising price level means that inflation has increased. The rising level of output means that firms will hire more workers so that the unemployment rate falls. Thus, the model implies that inflation and unemployment are inversely related as the Phillips curve indicates.

35. a. In addition to investment in physical and human capital, a country might increase productivity by (a) specifying and enforcing property rights, (b) encouraging free trade, (c) controlling population growth, and (d) promoting research and development.

b. Since bearing a child has an opportunity cost, policies designed to increase the opportunity cost of bearing children would likely reduce population growth rates. In particular, women with the opportunity to receive a good education and desirable employment tend to want to have fewer children than do those with fewer opportunities outside the home. Hence, policies designed to increase educational and employment opportunities for women will likely reduce population growth rates without coercion.