Professional Documents
Culture Documents
ECO2004S
Macroeconomics
Class Test
th
18 September 2009
INSTRUCTIONS
• Correct answers will be awarded 4 marks incorrect answers ‐1.
• Duration of the test: 90 minutes
Question 1
Consider two economies that are identical, with the exception that one has a high marginal
propensity to consume (MPC) and one has a low MPC. If the money supply is increased by
the same amount in each economy, the high MPC economy will experience
a) A larger increase in output and a smaller decrease in the interest rate.
b) A smaller increase in output and a smaller decrease in the interest rate.
c) A larger increase in output and a larger decrease in the interest rate.
d) A smaller increase in output and a larger decrease in the interest rate.
e) None of the above.
Question 2
Which of the following policy options would simultaneously increase interest rates and
decrease output?
a) The Reserve Bank sells bonds through open market operations.
b) The Government increases its defense purchases.
c) The Reserve Bank expands the money supply.
d) The Government increases the tax rate.
e) Actions described in both a) and d).
Question 3
Suppose an economy is running a government budget deficit. Assume that C = c0 + c1(Y‐T).
Which one of the following will cause this deficit to become larger?
a) Expansionary monetary policy.
b) An increase in exports.
c) A decrease in equilibrium GDP.
d) A decrease in taxes.
e) A decrease in government purchases.
Question 4
Consider a small economy where the total population is 10,000. The size of the labor force is
8,000, while the number of people employed is 7,000. What is the unemployment rate in
this economy?
a) 10%
b) 12.5%
c) 20%
d) 30%
e) 37.5%
Question 5
Assume that C = c0 + c1(Y‐T). Suppose that taxes increase and money supply increases in
such a way that output is constant in equilibrium (assume c1<1). These policy changes will
produce:
a) An increase in investment and a decrease in private consumption.
b) An increase in investment and a decrease in government spending.
c) An increase in investment and an increase in private saving.
d) A decrease in investment and an increase in public saving.
e) Uncertain.
Question 6
You are provided with the following information: C = 100 + 0.6 YD, I = 20 + 0.1 Y – 50i, T = 20
+ 0.2 Y, i = 0.1 and G = 150. Based on this information the equilibrium level of income is
a) 250.0
b) 457.7
c) 602.4
d) 843.3
e) 883.3
Question 7
Based on the information in Question 6, the multiplier in this economy is
a) 1.61
b) 2.38
c) 2.5
d) 3.33
e) not calculable
Question 8
If the equilibrium level of income is 750, and I = 20 + 0.1 Y – 50i, T = 20 + 0.2 Y, i = 0.1 and G
= 150, the quantity of public saving in this economy is
a) ‐20 (i.e. dissaving)
b) 20
c) 70
d) 90
e) 110
Question 9
Currently the South African economy is characterised by a ..............on the current account
and a .............
a) large deficit; small budget surplus
b) small surplus; small budget deficit
c) small deficit; small budget surplus
d) large deficit; large budget deficit
e) small deficit; large budget surplus
Question 10
The demand for money is negatively related to the interest rate because as the interest rate
increases
a) the opportunity cost of holding bonds increases
b) the opportunity cost of holding cash increases
c) people’s real income decreases and they wish to hold less money
d) the central bank has an incentive to reduce the supply of money through
contractionary open market operations
e) both B and C are correct
Question 11
If the central bank embarks on an expansionary monetary policy, it could
a) sell bonds to banks and the public
b) sell bonds to banks, but not to the public
c) sell bonds to the public, but not to banks
d) reduce the banks’ required reserve ratio
e) increase the interest it charges on money that it lends to the banks
Question 12
You are provided the following information: demand for currency = 30% of the demand for
money; required reserve ratio = 20%; nominal GDP = 2000; interest rate = 5% = 0.05;
liquidity preference is a linear function of the interest rate (L = a + bi); the high‐powered
base is equal to 300. If the banking system is in equilibrium, the money supply is
a) 681
b) 732
c) 1000
d) 1500
e) 6000
Question 13
Within the context of the simple model used to explain the financial markets, if the interest
rate were to increase from 5% to 10% we would expect
a) nominal GDP to increase
b) nominal GDP to decrease
c) the required reserve ratio to decrease
d) the demand for currency to decrease
e) both B and C to happen
Question 14
If the government embarks on an expansionary fiscal policy and the central bank imposes a
tighter monetary policy, the IS‐LM model predicts that real GDP would ........ and investment
spending would .........
a) increase; increase
b) be indeterminate; be indeterminate*
c) increase; decrease
d) be indeterminate; increase
e) decrease; be indeterminate
Question 15
Since the end of 2008, South Africa’s fiscal and monetary policy can best be represented as
a .......... shift of the IS curve and a .................. shift of the LM curve
a) rightward; downward*
b) leftward; downward
c) rightward; upward
d) leftward; upward
e) leftward; no change
Question 16
Assuming we start at the natural level of output, what is the expected effect on the short
run AS‐AD equilibrium if there is an increase in the savings rate?
a) No Change in Y, Decrease in P
b) No Change in Y, Increase in P
c) Decrease in Y, Decrease in P
d) Increase in Y, Decrease in P
e) Decrease in Y, No change in P
Question 17
Assuming we start at the natural level of output, what is the expected effect on the medium
run AS‐AD equilibrium is there is an increase in the savings rate?
a) No change in Y, Decrease in P
b) Increase in Y, Increase in P
c) Decrease in Y, Decrease in P
d) No change in Y, Increase in P
e) No change in Y, No change in P
Question 18
Why does an increase in expected inflation lead to an increase in actual inflation?
a) Wage setters will set a higher nominal wage
b) Firms will raise prices to cover costs
c) Higher inflationary expectations lead to a self‐fulfilling prophecy
d) All of the above
e) None of the above
Question 19
If ut‐1 = 18%, β = 0.6 and the growth rate in output is 5% above normal, what is the
unemployment rate this period?
a) 12%
b) 17.2%
c) 15%
d) 21%
e) 24.4%
Question 20
If α = 0.2, πt‐1 = 7%, un = 20% and ut = 22%, what is the inflation rate this period?
a) 7%
b) 6.6%
c) 7.4%
d) 5%
e) 9%
Question 21
Use the AS‐AD model to determine which of the following statements are correct
i) In the short run, output is always equal to its natural level
ii) In the short run, output is not necessarily equal to its natural level
iii) In the medium run, output is equal to its natural level
iv) In the medium run, output is not necessarily equal to its natural level
v) Actual Prices are equal to expected prices in the short run
a) i) and iv)
b) i) and iii)
c) ii) and iii)
d) ii), iv) and v)
e) ii), iii) and v)
Question 22
Given the following equation representing the aggregate demand relation,
which of the following statements are correct?
i) Output is an increasing function of taxes
ii) Output is a decreasing function of the price level
iii) Output is an increasing function of government spending
iv) Output is a decreasing function of the real money stock
a) i) and iv)
b) ii) and iii)
c) iii) and iv)
d) i), ii) and iv)
e) i), ii) and iii)
Question 23
Which of the following will cause the price‐setting curve to shift?
a) An increase in the unemployment rate
b) An increase in unemployment benefits
c) An increase in the mark‐up of prices over costs
d) An increase in employment protection for workers
e) An increase in the national minimum wage
Question 24
Assume that firms produce goods using labour as the only factor of production. The
production function can therefore be written as:
Y = AN
Where Y is output, N is employment and A is labour productivity
What does this production function imply about labour productivity?
i) Output per worker is constant
ii) There are constant returns to labour in production
iii) Labour productivity falls as production rises
iv) Labour productivity is driven by reservation wages
a) i) and iii)
b) ii) and iii)
c) iii) and iv)
d) i) and ii)
e) i), ii) and iv)
Question 25
The mark‐up of prices over costs is currently 5% in the economy of the country Flobbadob.
The wage setting relationship is given by W=Pe(1‐ 0.21u). What is the natural rate of
unemployment in the labour market? (you can assume that Pe=P)
a) 0.15
b) 0.19
c) 0.23
d) 0.32
e) 0.26