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UN
IVERSI
T PENTECOST UNIVERSITY COLLEGE

Y
FACULTY OF BIUSINESS ADMINISTRATION

NTECOST

COLLEGE
MID SEMESTER EXAMINATION 2014/2015
PE COURSE TITLE: MACROECONOMICS (REGULAR)
GHANA COURSE CODE: PUMT 206 TIME: 1.20 minutes
EM
POW
ERED TO SER
VE
LEVEL 200 VERSION 1 15/04/15

NAME…………………………………………………………….ID…………………

Programme…………………………………………………..School……………………..

INSTRUCTIONS

SECTION A Circle the correct option from the choices in each question on the question
paper. Answer all questions. Each question carries ½ a mark.

1 When the economy is performing well one of the variables to be assessed is

a) Potential output is the entire time equal to actual output
b) Avoiding extremes of macroeconomic performance
c) Ensuring that macroeconomic variables are not performing well
d) Savings is at the lowest level
e) Actual output is greater than potential output to give expansionary output gap

2 Which of the following is not a reason why households save?

I Life- Cycle saving II Precautionary saving III Bequest Saving
a) I only
b) II only
c) III only
d) I, II and III
e) None of the above

3 When can we say there is a recession in the economy, then there is

a) A fall in the GDP
b) A rise in the GDP
c) A large contraction in the GDP
d) Stable GDP for 6 months
e) Contraction of interest rate

4 Economic booms in an economy is likely to have

a) Unemployment usually decreases
b) Unemployment usually increases
c) Economic fluctuations are irregular
d) GDP will usually fall at a steady rate
e) GDP will rise at a steady rate

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5 In the calculations of GDP, why is that shadow economy is excluded?

a) It is shadow and does not exist.
b) It is usually over valued and distorts the GDP
c) It is cannot be easily determined.
d) It is output and very negligible
e) It does not add up all the time.

6 Which of the following equations is a likely representation of an expansionary gap in an

economy?
a) u – u* > 0
b) Y* > Y
c) u – u* < 0
d) Y* = Y
e) u – u* = 0

7 What relationship does the Okun’s law measure?

I Output II Employment III Unemployment IV Inflation
a) I and II only
b) I and III only
c) II and III only
d) I and IV only
e) II and IV only

Use the following information to answer questions 8 to 10

A K. Farms grows wheat and sells it to the K Miller for GHC750. K. Miller grinds the
wheat into flour and sells to the Royals for GHC1275 and the Royals makes the flour into
bread and sells it for GHC2,050

8 What is the value added by the Royals?

a) 775
b) 2025
c) 2800
d) 4070
e) None of the above

9 What is the value added by the farmer?.

a) 750
b) 775
c) 1275
d) 2050
e) None of the above

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10. Which of the economic actors added the highest value to the GDP?
a) A. K Farms
b) K Miller
c) The Royals
d) They did not add any value to the GDP
e) None of the above

11 One argument of classical economists is that

a) Excess production leads firms to cut prices to sell output.
b) There would be excess production because firms will never cut prices.
c) Prices would all the time rise because it is not flexible.
d) Output and price are unrelated.
e) Fluctuations in demand would never be accommodated by prices.

12. One major problem with the classical ideas is

a) There are never fluctuations in aggregate output and unemployment.
b) There will all the time be inflation in the economy as against classical views
c) There are fluctuations in aggregate output and unemployment against classical views.
d) Unemployed workers do cut their wages
e) Unemployment is natural unlike what the classical say.

13 According to Keynes,
a) Wages are flexible downwards and rigid upwards
b) Wages are flexible upwards and downwards
c) Wages are constant each year
d) Wages will only change when there is inflation
e) Wages are rigid downwards but flexible upwards

14 Which of the following truly represents the marginal propensity to consume (MPC) in
an economy?
a) MPC + MPS < 1
b) MPC – MPS = 1
c) MPC = 1 + MPS
d) 0 < MPC < 1
e) 0 < MPC + MPS < 1

15 In a typical Keynesian model, C is said to be an endogenous variable because

a) It is a function of income.
b) It has an autonomous component.
c) It will help to determine income.
d) It complements the equation to determine income.
e) It has several components in addition to the autonomous portion.

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16. The point where a given PAE line cuts the 45o line is where
a) Y – PAE is positive for the current spending plan
b)Y = PAE for the current spending plans of the groups in the economy.
c) Y> PAE for the current spending and will rise later
d) Y < PAE and have to rise
e) Y will be in equilibrium in the economy.

17 The PAE curve will undergo an upward parallel shift if there is an increase in the
following variables:
a) Government expenditure and taxes
b) Government expenditure and investment
c) Investment and taxes
d) Savings and taxes
e) Savings and tax rise

Use the diagram below to answer questions 18 to 20

PAE 450
PAE1
PAE2

B C

Y Y’

18 What gap is represented by B in the above diagram?

a) Output gap
b) Savings gap
c) MPC
d) Autonomous consumption
e) Autonomous expenditure by government

19 The gap A in the diagram could be possibly caused by a

a) Fall in interest rate
b) Rise in output
c) Fall in output
d) Rise in government expenditure
e) Fall in government expenditure

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20 What is represented by the gap label C in the diagram?

a) Contractionary gap
b) Expansionary Output
c) Expansionary gap
d) Inflation gap
e) Interest rate gap.

SOLUTIONS
SECTION A. OBJECTIVES

Question Answer
1 B
2 E
3 C
4 A
5 C
6 C
7 B
8 A
9 A
10 C
11 A
12 C
13 E
14 D
15 A
16 B
17 B
18 D
19 E
20 A

SECTION B ANSWER ALL QUESTIONS [10 MARKS]

Assume a two sector model in the economy of Kwabreland.
Derive the expression for equilibrium income for Kwabreland.

Solution
In a two sector model, there is no government expenditure and foreign sector so
The equilibrium income is given by
Y = PAE = C + IP or = C + I
Where C is consumption IP is investment 2 marks
But C= C + cY
Where C is autonomous consumption
c is marginal propensity to consume, and
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Y is income.
Since I = IP
Now substitute investment and consumption equations into the equilibrium condition
Y = PAE = C + IP = = C + cY + IP
Y = C + cY + IP 2 marks
Grouping like terms we have
Y – cY = C + I
Y(1-c) = C + I 2 marks

Dividing through by (1 – c) give

Y = 1/(1-c) * ( C + IP ) ---- the equilibrium income 2 marks

Where 1/(1-c) is the multiplier and ( C + IP ) is the exogenous components.