UNIVERSITI TUNKU ABDUL RAHMAN, ACADEMIC YEAR 2016/2017 DECEMBER EXAMINATION UBEA1073 PRINCIPLES OF MACROECONOMICS WEDNESDAY, 14 DECEMBER 2016 ‘TIME: 2.00 PM — 5.00 PM (3 HOURS) BACHELOR OF BUSINESS ADMINISTRATION (HONS) BANKING & FINANCE BACHELOR OF COMMERCE (HONS) ACCOUNTING BACHELOR OF ECONOMICS (HONS) FINANCIAL ECONOMICS BACHELOR OF MARKETING (HONS) Instructions to candidates: This paper is divided into TWO (2) sections. Section A: [Total: 40 marks} This section consists of ONE (1) COMPULSORY question. The question carries FORTY (40) marks. Section B: [Total: 60 marks] This section consists of THREE (3) questions. You are required to answer only TWO (2) questions. Each question carries THIRTY (30) marks. Note: Where candidates answer more than the required number of questions, only the first TWO (2) answers written under Section B in the answer booklet will be marked. The rest of the answers or part-answers shall be struck out and ignored. ~ This question paper consists of 4 questions on 5 printed pages.BEA1073 PRINCIPLES OF MACROECO! Section A 2 [Total: 40 marks] This section consists of ONE (1) COMPULSORY question. a. (a) &) © “Increase in the overall price level is one of the economists’ major concerns”. What is the specific term used in economies to describe the statement? Distinguish between the short-run and long-run Phillips curves and describe the shifting tradeoff between inflation and unemployment. (10 marks) “Depreciation of Malaysian Ringgit (RM) is believed by many economists to have a positive effect on country’s balance of trade over time”. Do you agree with the statement? Explain your answer by using an appropriate diagram. (10 marks) Assume a four sector economy as follows: Consumption function Investment Government Spending Export EX=400 Import IM-0.2Yd Budget deficit BD=300 (i) Calculate the equilibrium output level for this economy. (4 marks) Gi) Compute the value of the government spending multiplier and tax multiplier in an open economy. (4 marks) (ii) Calculate the balance of trade when this economy is at equilibrium. 3 marks) (iv) Whats the level of output to achieve a balanced trade account? (2 marks) (v) Using the multiplier approach, suppose government increases spending to 650 and decreases tax by 50, calculate the new equilibrium output level and the new balance of trade. (7 marks) [Total: 40 marks] This question paper consists of 4 questions on 5 printed pages.3 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B {Total: 60 marks} Answer TWO (2) out of THREE (3) questions. Ql (a) () Suppose South Korea and Japan can produce both smartphones and computer only. All information is given in the following table Country (Current production level Smartphones ‘Computer South Korea’ 400 300 Japan 250 300 (Define the terms of trade. (2 marks) (i) Explain absolute advantage and comparative advantage. Which Gy) w) country has an absolute advantage in the production of smartphones? Computers? (6 marks) Determine which country enjoys comparative advantage in the production of smartphones and computers respectively. Support your answer by calculating the opportunity costs of each. (4 marks) In a table, show the output after specialization, output after trade and gain or loss after trade for both South Korea and Japan, Assume that the term of trade is 1 computer exchange for 0.8 smartphone and South Korea wants to import 350 computers from Japan. (6 marks) Draw Production Possibilities Frontier and Trading Possibilities Frontier for South Korea and Japan. Clearly label the total output before specialization and total output after trade in the diagrams. (Note: Smartphones on the vertical axis and computers on the horizontal axis) (6 marks) Assume that Japan is currently operating at natural level of output. World economic recession has led investors to negat expectation on Japan’s economic performance. Explain the effect of investors’ negative view on the price level and output in the short-run by using appropriate diagrams. This question paper consists of 4 questions on 5 printed pages. (6 marks) {Total: 30 marks}4 UBEA1073 PI PLES OF MACROECONOMIK Section B (Continued) @ @ @ () © @ ‘Assume that the economy is operating at the natural level of output. Due to economic downtum in most of the countries, people are uncertain about the future. By using appropriate diagrams, discuss the effect of people's pessimistic view towards inflation rate and unemployment rate in the short-run and how does the economy achieve the long-run equilibrium if the government does nothing to restore the natural level of output. (12 marks) Indonesian government had decided to increase government spending in order to stimulate economic growth due to rising unemployment problem. At the same time, the Central Bank of Indonesia also decided to implement expansionary monetary policy. Explain the effects on equilibrium output, equilibrium interest rate and investment. (12 marks) Explain the THREE (3) tools used by central bank to implement monetary policy in order to increase the money supply. (6 marks) [Total: 30 marks) Suppose that the following is the data for country XYZ’s balance of payment. ‘XYZ purchase of assets abroad | $500 =) Services export $900 Services import $500 ‘Net investment income $2300 Foreign purchase of XYZ’s assets | $600 | ‘Merchandise import I $200 Merchandise export $380 J Use the data to calculate each of the following: (@ Balance on goods and services (2 marks) (i) Balance on current account (2 marks) (iii) Capital account balance (2 marks) (iv) Merchandise trade balance (2 marks) This question paper consists of 4 questions on 5 printed pages.UBEA1073 PRINC 5 PLES OF MACROECONOMICS Section B Q3. (Continued) ) © The fast growing economic growth enjoyed by the Netherland had caused the country to experience rising overall price level. What policy can be implemented by the Central Bank of the Netherland to curb this problem? Explain the effects of the policy on equilibrium interest rate, investment and equilibrium output by using appropriate diagrams given that investment is responsive to the interest rate. (14 marks) “Aggregate demand curve is downward sloping”. Do you agree with the statement? Give THREE (3) reasons to justify your answer with appropriate explanation. (8 marks) [Total: 30 marks] This question paper consists of 4 questions on 5 printed pages,