MASTER OF BUSINESS ADMINISTRATION (MBA)

FACULTY OF COMMERCE AND MANAGEMENT STUDIES

UNIVERSITY OF KELANIYA
2016/2017 (11th Batch)

Model Questions - Macroeconomics

Introduction to macroeconomics/Macroeconomic data

1. What causes business cycles? Can the government smooth out business cycles by
stimulating the economy in times of recessions? Using the Keynesian cross model explain
your answer.
2. Suppose an economy produces only one good. In the base year, production was 8 units at
a price of US$10 each. The next year, production increased to 9 units and the price of the
good increased to US$12.

a. Find nominal GDP in years 1 and 2.

b. If the price index is 100 in the base year, what is the value of the price index in year
2?
c. Find real GDP in year 2.

3. Suppose a hypothetical national economy can be represented by the following data:

Price Index
Nominal (2000 = Real
Year GDP 100) GDP
2009 US$1536 128
2010 US$1663 132
2011 135 US$1274
2012 US$1792 140

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Find real GDP in years 2009, 2010, and 2012. And Find nominal GDP in year 2011.

4. Consider the following data for a hypothetical economy:

Year Real GDP Population

1 $50,000 200
2 $51,400 202

a. Calculate the growth rate of real GDP over the year.

b. At this rate of growth, approximately how many years will pass before real GDP
doubles?
c. Find real GDP per capita in each of the two years. Using these two values, calculate the
growth rate of real GDP per capita over the year
d. At this rate of growth, approximately how many years will pass before real GDP per
capita doubles?

4. Suppose an economy's real GDP is $5,000 billion. There are 125 million workers, each
working an average of 2,000 hours per year.

a. What is labor productivity per hour in this economy?

b. Suppose worker productivity rises by 5% over the following year and the labor force
grows by 1%. What is the projected value of real GDP?

Based on your previous answer, what is this economy's rate of growth?

05. a. Explain the effect of change in income tax and government expenditure on the circular
flows of income and expenditure
b. Describe briefly the key behavior of macroeconomic variables in Sri Lanka using
recent data of Sri Lanka.
06. a. What is meaning of consumption function?
b. How is the LM curve affected by the change in the money supply and demand for money.

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06. Suppose that you have been given the following information of a hypothetical economy as
follows.
Consumption (C) = 1500 + 0.8 Y
Investment (I) = 150
Government Expenditure (G) = 250
Government tax income (T) = 45 + 0.25Y
Export (X) = 320
Import (M) = 25 + 0.2Y
Where, Y and Yd are income and disposable income respectively.
You are required to Calculate:
a. The equilibrium level of income,

b. The level of consumption at equilibrium income,

c. The level of net export at equilibrium income,

By how much the equilibrium income changes if investment increases by Rs.100.

Unemployment

1. What are the three categories into which the department of census and statistic divides
everyone? How does the department of census and statistic compute the labor force and the
unemployment rate?

2. Is unemployment typically short term or long term? Explain.

3. Why is frictional unemployment inevitable? How might the government reduce the amount of
frictional unemployment?

4. Are minimum wage laws a better explanation for structural unemployment among teenagers or
among college graduates? Why?

5. How do Unions affect the natural rate of unemployment?

6. Are the following workers more likely to experience short term or long term unemployment?
Explain.
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 a. A construction worker laid off because of bad weather.
b. A manufacturing worker who loses her job at a plant in an isolated area.
c. A short order cook who loses his job when new restaurant opens across the street.
d. An expert welder with little formal education who loses her job when the company
installs automatic welding machinery.

7. The Department of census and statistic announced that in the second quarter of 2017,
employed population was 8,138,728. And 380,594 were unemployed. Use this information to
calculate:

a. the labor force

b. the labor force participation rate

c. the unemployment rate

8. Recent data for the U.S. reveal the following (all figures in millions).

Total population 307.0

Under 16 or institutionalized 69.3
Employed 139.1
Unemployed 14.6

Use the data to find the following:

a. The size of the labor force.

b. The number classified as "not in the labor force." And find the unemployment rate.

9. Suppose the natural rate of unemployment is 4.5% and the current unemployment rate is 6%.

a. According to Okun's law, what is the size of the GDP gap?

b. If potential GDP is $1,000 billion, how much output is being lost as a result of the
economy being below its potential?
c. Recent data for the U.S. showed an unemployment rate of 9.5%. Suppose the natural rate
at the time was 4.5%. What was the size of the GDP gap?

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10. Consider the following table

Sri Lanka India

Population over 16 years old 100000 2000000
employed 600000 1300000
Unemployed 60000 200000

What is the labor force participation rate in Sri Lanka and India?

What is the unemployment rate in Sri Lanka and India?

Money growth and Inflation

1. Explain how an increase in the price level affects the real value of money.

2. According to the quantity theory of money, what is the effect of an increase in the quantity
theory of money?

3. Explain the difference between nominal and real variables and give two example of each.
According to the principle of monetary neutrality, which variables are affected by changes in the
quantity of money?

4. In what sense is inflation like a tax? How does thinking about inflation as a tax help explain
hyperinflation?

5. According to the fisher effect, how does an increase in the inflation rate affect the real interest
rate and the nominal interest rate?

6. Suppose that this year’s money supply is $ 500 billion, nominal GDP is $10 trillion, and real
GDP is $ 5 trillion.

a. What is the price level? What is the velocity of money?

b. Suppose that velocity is constant and the economy’s output of goods and services
rises by 5 percent each year. What will happen to nominal GDP and the price level
next year if the Central Bank keeps the money supply constant?
c. What money supply should the Central Bank set next year if it wants to keep the
price level stable?

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 d. What money supply should the Central Bank set next year if it wants inflation of
10 percent?

7. Suppose that country’s inflation rate increases sharply. What happens to the inflation tax on
the holders of money? Why is wealth that is held in savings accounts not subject to the change in
the inflation tax? Can you think of any way holders of savings accounts are hurt by the increase
in the inflation rate?

8. Suppose that changes in bank regulations expand the availability of credit cards so that people
need to hold less cash.

a. How does this event affect the demand for money?

b. If the Central Bank does not respond to this event, what will happen to the price
level?
c. If the Central Bank wants to keep the price level stable, what should it do?

9. The Bureau of Labor Statistics reported the CPI (Consumer Price Index) stood at 215.9 in
December 2009, while one year earlier it was 210.2.

a. What was the annual rate of inflation measured from December to December?
b. At this rate of inflation, approximately how long will it take for the price level to double?

10. Consider the following table

year Nominal GDP Real GDP

2010 14958 Billion 14779
2011 15534 15052
2012 16245 15471
2013 16800 15761

What is the GDP price deflator for 2011?

Using the GDP deflator as price level, what was the inflation rate between 2011 and 2012?

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IS/LM MODEL – Application of fiscal and monetary policy

1. President and the parliament have initiated a series of tax cuts in recent years in order to
help get the economy out of recession as well as to respond to those who want to get the
government off our backs. Assuming the economy is initially in recession, what impact
would you expect a tax cut to have on y, P, r, c, i, x, and b? Use the model and explain.

2. Using the IS-LM model, explain what happens in the short run to the interest rate, income,
consumption, and investment under the following circumstances? (Assume everything
else is held constant.).

a. The central bank decreases the money supply.

b. The government decreases its level of expenditures.
c. The government imposes a new lower level of taxes.
d. The government increases government spending while at the same time it
increases taxes by exactly the same amount.

3. Define the crowding-out effect. Is the crowding-out effect likely to be larger during a
recession or when the economy is near full employment? Use the AD-AS model to
substantiate your answer.
4. i. Explain why the aggregate demand (AD) is downward-Slopping?

ii. Explain the factors that causes the shift of AD?

AD/AS Model

1. Use the AD-AS Model to answer this question. For each description assume that the AD-
AS Model is initially in long-run equilibrium.
a. Suppose that the government in this economy goes to war. Holding everything else
constant, what do you predict will happen to real GDP and the aggregate price level
in the short run? in the long run? Explain your answer.
b. Suppose that the price of oil increases in the economy. Holding everything else
constant, what do you predict will happen to real GDP and the aggregate price

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 c. Suppose that the government reduces taxes and at the same time an announcement
is made that a major new oilfield has been discovered and this oilfield is anticipated
to be so large that the country no long will need to import oil. Holding everything
else constant, what do you predict will happen to real GDP and the aggregate price
level in the short run? in the long run? Explain your answer.
d. Suppose invention of a new high speed computer chip, many firms decide to
upgrade their computer system

Fiscal and Monetary policy

1. Suppose an economy is in a recession and you have been asked by the President to come up
with a policy strategy that will accomplish the following four goals that are important to his
constituency—a quick end to the recession, lower tax rates, no increase in interest rates, and
an end to the nation's large trade deficit with respect to the rest of the world.

a. Can you come up with a fiscal policy that will reach all of goals simultaneously?

b. Could monetary policy be used to achieve these four goals simultaneously? Use the model
and explain why or why not

c. Is there some combination of fiscal and monetary policy that could reach these goals? Use the
model and explain

(ii). Businesses, fearful of a coming recession, suddenly decrease their spending on new capital
goods and autonomous net investment drops substantially. In combination with the interest rate
policy above, what impact would you expect this to have on y, P, and r? Explain.

02.

a) Illustrate how you come out from a recession using a fiscal policy.
(10 marks)
b) A country could select three alternative fiscal policies; balanced budget, Deficit budget or
Surplus budget. Recommend a type for Sri Lanka with reasons.

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 (10 marks)
c) A closed economy has the following consumption function.
(10 marks)

C= 150 + 0.75 y
Investment of the country and government expenditure respectively are 120 and 65
respectively.
i. Find the equilibrium level of GDP.
ii. Calculate the expenditure multiplier
iii. Suppose the government increases its government expenditure by 10. Calculate the
impact to the GDP.
(10 marks)
d) Illustrate how you deal with inflationary gaps and recessionary gaps using fiscal policy
with the help of diagrams.
(10 marks)

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