UNIVERSITI TUNKU ABDUL RAHMAN, ACADEMIC YEAR 2017/2018 DECEMBER EXAMINATION UBEA1073 PRINCIPLES OF MACROECONOMICS FRIDAY, 8 DECEMBER 2017 TIME: 2.30 PM ~ 5.30 PM (3 HOURS) BACHELOR OF COMMERCE (HONS) ACCOUNTING BACHELOR OF BUSINESS ADMINISTRATION (HONS) BANKING & FINANCE BACHELOR OF ECONOMICS (HONS) FINANCIAL ECONOMICS BACHELOR OF MARKETING (HONS) Instructions to candidates: This paper comprises 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. Answer ANY 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/part answers shall be struck out and ignored. Marks will be awarded for clarity and logie of arguments. This question paper consists of 4 questions on 5 printed pages.2 UBEA1073 PRINCIPLES OF MACROECONOMICS, Section A [Total: 40 marks] Answer ALL sub-questions. (COMPULSORY) Ql (a) (b) ©) Consider the following simple open economy model for the Japan economy: Consumption function C=800+0.65Yd Planned Investment 1-400 Tax T=1030 Export EX=2000 Import IM=50+0.35Yd Budget surplus BD=200 (i) Calculate the equilibrium level of income for this economy. (3 marks) Gi) Gi) (yy ) Define Calculate the balance of trade when the economy is at equilibrium and interpret the answer. (3 marks) Calculate the level of output Japan needs to achieve in order to maintain a balanced trade account, (3 marks) Determine the values of government multiplier and tax multiplier in open economy for Japan. Explain which multiplier has greater impact on the economy. (6 marks) What would happen to the equilibrium output if government decides to implement expansionary fiscal policy by increasing the government spending by 6007 Calculate your answer by using open economy multiplier approach. (5 marks) Assume that an economy is initially below the natural rate of output, due to the stock market crash in 2008. Explain what policy the government can implement in order to return the output to the natural level by using appropriate diagram. (10 marks) economic growth, List and explain how the public policies can promote ‘economic growth, (10 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 any TWO (2) questions out of THREE (3) questions. Qa. @ (b) (©) @ ©) The Malaysian economy is currently operating at the natural level of output. In order to be a high-income country in 2020, government of Malaysia decides to increase the government spending. Discuss the effects of the event on the price level, unemployment and output in the long run and short run in Malaysia with appropriate diagrams, (Assumption: without government intervention) (14 marks) Explain how currency depreciation will affect export, import and the balance of trade of the country. (10 marks) Explain how human capital can lead to economic growth, (6 marks) (Total: 30 marks} ‘The money market and goods market are linked through the impact of the interest rate on investment. In 2017 the government decides to implement expansionary fiscal policy at the same time the central bank holds money supply fixed. Given that, the investment is highly elastic to the interest rate, Illustrate the impact of government actions with necessary diagrams and explanations. (14 marks) Suppose that the following table is the balance of payments of Mali { Merchandise imports $1250 Service imports crema |16500) Merchandise exports $2340 Service exports $700 Income received on Investment a $520 Income payments on investment $430 Foreign holding assets in Mali $2560 Mali holding assets in foreign countries $2478 ‘Net transfer $-168 This question paper consists of 4 questions on 5 printed pages.4 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B Q2. (b) Continued) Base on the table above, calculate each of the following: (@) Balance of trade (2 marks) Gi) Balance of services (2 marks) Gil) Net income investment (2 marks) (iv) Balance on current account (2 marks) (v) Balance on capital account (2 marks) (©) Define inflation and hyperinflation. Explain how the effect of inflation will affect the living standard of consumer. (6 marks) [Total: 30 marks] Q3. (a) Suppose China and South Aftica can produce only jade and diamond. All information is given in the following table. Current production level Country Tade [Diamond China 800 600 [South Afiica 500 1000 () Define terms of trade and identify which country has an absolute advantage in the production of jade and diamond. (4 marks) (ii) Suppose the two countries wish to specialize and trade. Specifically determine and explain which country enjoys comparative advantage in the production of jade and diamond. (4 marks) (ii) Now suppose each country decides to have complete specialization on in the production which has comparative advantage. The term of trade for these two countries is 1 diamond to 0.8 jade, and China wishes to import 700 unit of diamonds from South Affica. Show the output after specialization and output after trade, Would the two countries lose or gain after trade? Show your answer in a table. (6 marks) (iv) Draw Production Possibilities Frontier and Trading Possibilities Frontier for China and South Africa, (Note: Jade on the vertical axis and diamond on the horizontal axis). (6 marks) This question paper consists of 4 questions on 5 printed pages.5 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B Q3, (Continued (6) List and explain TWO (2) advantages and THREE (3) disadvantages of economic growth. (10 marks) [Total: 30 marks} ‘This question paper consists of 4 questions on 5 printed pages.