College of Business, Hospitality and Tourism Studies

School of Economics, Banking and Finance Department of

Economics
ECN501-Macroeconomics I
Final Examination: Trimester II, 2014
QUESTION PAPER
Instructions Read the following instructions before writing
1.
2.
3.
4.

Time Allowed: 3 hours with additional 10 minutes reading time.

All answers are to be written in the Answer Booklet.
Write your ID Number on all the sheets of paper in your Answer Booklet that you use.
Students must get a minimum of 30% percent in the final exam in order to pass should
their final mark is 50%.

5. There are hundred marks for this paper which account for 60% of the final course grade.
6. All the sections and questions in the paper are compulsory.
. Sections

Question

Section A: Multiple Choice

20 Questions.

20

Section B: Short Answers Questions

7 Questions.

30

Section C: Calculation Questions

4 Questions.

30

Section D: Essay

1 Question.

20

Total

Marks

100

Section A

Multiple Choice

20 Marks

(Write the letter that represents the most appropriate answer in the Answer book.)
1. The balance of payments is divided into three major accounts, the:
A. current account, capital account, and cash account.
B. current account and the reserve account and cash at bank.
C. current account, trade account and capital account.
D. trade account, capital account and cash account.
2. An efficiency wage is designed to
A. induce more work effort.
B. keep the minimum wage from rising.
C. keep the minimum wage from falling.
D. to induce more employment.
3. Which of the following shifts the AD curve to the right?
A. Contractionary fiscal policy and contractionary monetary policy.
B. expansionary fiscal policy and contractionary monetary policy.
C. Expansionary fiscal policy and expansionary monetary policy.
D. Contractionary fiscal policy and expansionary monetary policy.
4. Assume the economy has only households and firms, and the saving function is
S= -20+.3Y, then consumption at an income level of $114m would be
A. $99.8m.
B. $90m.
C. $110m.
D. $50m.

5. The Phillips curve relates to the

A. expected inflation to the producers' mark-up.
B. unemployment rate to the expected inflation rate.
C. inflation rate to the unemployment rate.
D. unemployment rate to the producers' mark-up.
6. The types of transactions that give rise to the demand for foreign exchange are:
A. domestic residents purchasing foreign goods.
B. foreign residents transferring income to domestic residents.

E.

C. domestic residents transferring income to residents in foreign countries.

D. both A and C
7. Macroeconomics is the branch of economics that deals with:
A. the economy as a whole.
B. the functioning of individual industries and the behavior of individual decisionmaking units - business firms and households.
C. imperfectly competitive markets.
D. only the long run adjustments to equilibrium in the economy.
8. Which of the following is (are) part of the definition of money?
(i) store of value
(ii) medium of exchange
(iii) unit of account
(iv) backed by gold
A. and (ii) only
B. (i), (ii), and (iii) only
C. (i), (ii), (iii), and (iv)
D. and (iii) only
9. Which of the following is not a reason for increase in trend real GDP?
A. Growing labour force.
B. Growing stock of capital equipment.
C. Advances in technology.
D. Inefficient use of currently available resources.
10. In calculating GDP, economists use the value of final goods and services because
A. by using final goods and services, they avoid double counting
B. final goods can be exported to other countries.
C. intermediate goods are imported from other countries.
D. GDP is underestimated if intermediate goods are used instead.
11. Consider three consumer goods: 100 of Good A, 100 of Good B, and 100 of Good C. In
the base year, Good A sold at a price of $1, Good B sold at a price of $1, and Good C sold
at a price of $1. In the current year, Good A sold at a price of $3, Good B sold at a price
of $5, and Good C sold at a price of $10. The Consumer Price Index (CPI) for the
current year is:
A. 100
B. 300
C. 500
D. 600

12. Full employment occurs when there is

A. no cyclical unemployment.
B. no frictional unemployment.
C. no seasonal unemployment.
D. no structural unemployment.

13. Workers who are unemployed because they lack the skills needed by employers are called
A. frictionally unemployed.
B. cyclically unemployed.
C. seasonally unemployed.
D. structurally unemployed.

14. Changes in the money wage rate and other input prices affects
A. the long run Aggregate Supply
B. the short run Aggregate Supply
C. aggregate demand.
D. none of the above.
15. Which of the following is an example of a normative economic statement?
A. The retirement age should be raised to 70 to combat the effects of our ageing population.
B. Resources are best allocated by allowing the market mechanism to work freely.
C. The government should enforce minimum prices for beers and lagers sold in
supermarkets and off-licences in a bid to control alcohol consumption.
D. All of the above.
16. The multiplier is a number that represents

A. how much real GDP changes when autonomous expenditure changes.

B. how much consumption changes when aggregate expenditure change.
C. how much investment changes when aggregate expenditure change.
D. how much investment changes when aggregate wage changes.

17. Which factor is depicted as the y-intercept for a typical consumption function?
A. Induced consumption.
B. Parameters.
C. Constant.
D. Autonomous consumption.
18. During times of high inflationary gap, the government can get rid of the inflationary gap
and stabilize the economy by
A. increasing the money supply and decreasing the interest rates.
B. decreasing government expenditure and increasing taxes.
C. increasing government expenditure and decreasing the tax rates.
D. decreasing the money supply and decreasing the tax rates.
19. Suppose saving is $2000 when income is $10,000 and MPC equals 0.8. When
income increases to $15,000, saving is
A. $4,000
B. $3,000
C. $2,400
D. $5,000
20. Suppose actual investment is greater than planned investment. Given this information,
we know with certainty that
A. the economy is in equilibrium.
B. firms inventories are not changing.
C. output will tend to fall.
D. saving is negative (S < 0).

Section B

Short Answer Questions

30 Marks

(All questions in this section are compulsory.)

1. Assume that the real GDP of Fiji is currently below potential GDP. The government now
fears recession. How can the government fight recession to restore the real GDP back to
potential GDP?

[5 marks ]

2. Explain why demand curve slopes downwards.

[4 marks ]

3. Describe the crowding out effect with reference to an appropriate diagram.

[6.5 marks]

4. During any phase of the business cycle, two variables always seem to increase. Name the
two.

[1 mark

5. List all the steps involved in a money creation process.

[4.5marks]

6. Describe the law of Demand for foreign exchange with the aid of a diagram.

[4 marks ]

7. Demand pull inflation is inflation that results from an initial increase in aggregate
demand.Suppose there is an increase in government purchases that had led to an
increase in aggregate demand.
Explain how this may eventually lead to demand-pull inflation spiral.
[5 marks ]

Section C

Calculations and Analysis

30 Marks

(There are 4 questions in this section and all are compulsory. Clearly show all working in the
Answer Booklet)
1. The structure of the economy of England is given below. All values are in millions of
dollars.
C= 1200+0.7YD
YD=Y-NT
NT=75+O.2Y
1=200
G= 350
X=200
IM= 90+0.1Y
a. What is the fraction of the change in income that is saved?

[0.5 mark ]

b. Use the above information to derive Autonomous and induced expenditure.

[4 marks ]

c. Find equilibrium level of real GDP.

[2.5 marks]

d. What is the value of the government expenditure multiplier?

[2 marks ]

e. Suppose government expenditure decreases by $10 million. What will be the new equilibrium
level of real GDP?

[4 marks ]

f. Suppose Autonomous consumption increases by $70 million. Derive the savings function for
this economy.

[2 marks ]

2. An economy produces two goods: Television and Tables. Quantities and prices per unit for
years 2008 and 2009 are as follows:

Television
Table

2008
Quantity Price
10
$1500
7

2009
Quantity Price
14
$2000

$500

$750
a. Calculate the nominal GDP

in 2008 and 2009.

[2 marks]
b. Using 2008 as the base year, what is Real GDP in 2008 and 2009?
[2 marks]
c. Calculate the GDP Deflator for each year and the rate of inflation from 2008 to2009.
[4 marks]
3. The Reserve banks sells $12 million of securities to Westpac. Enter the transactions that take
place to show changes in the balance sheet of Reserve Bank and Westpac.

[4 marks]

4. Assume that in country A, the quantity theory of money operates. The economy is at full
employment. Real GDP is $400 million, price level is 200 and the velocity of circulation is
20. Calculate the quantity of money.

Section D

[3 marks]

Essay

20 marks

There is only one compulsory question in this section. Write an essay of approximately 300
350 words to answer the question. Note that 1 mark is allocated for the structure and the style of
the essay.

Question
The primary meaning of business cycle refers to fluctuations in economic output in a country or
countries, characterized by different phases of a business cycle. Discuss each phase of the
business cycle in detail.
Discuss the major economic variables that change during each phase of business cycle.