UNIVERSITI TUNKU ABDUL RAHMAN ACADEMIC YEAR 2019/2020 DECEMBER E: ‘AMINATION EA1073 PRINCIPLES OF MACROECONOMIC! TUESDAY, 17 DECEMBER 2019 ‘TIME: 9.00 AM — 12.00 PM (3 HOURS) BACHELOR OF COMMERCE (HONS) ACCOUNTING BACHELOR OF BUSINESS ADMINISTRATION (HONS) BANKING AND FINANCE BACHELOR OF ECONOMICS (HONS) FINANCIAL ECONOMICS BACHELOR OF MARKETING (HONS) BACHELOR OF BUSINESS ADMINISTRATION (HONS) RETAIL MANAGEMENT. Instructions to candidates: ‘This paper consists of TWO (2) sections. Section A: (Total: 40 marks] This section consists of ONE (1) COMPULSORY question. The question carries FORTY (40) marks. Section, (Total: 60 marks] This section consists of THREE (3) questions. Answer ANY TWO (2) questions. Each question carries THIRTY (30) marks. Marks will be awarded for clarity and logic of arguments. This question paper consists of 4 questions on 5 printed pages.2 UBEA1073 PRINCIPLES OF MACROECONOMICS Section A : 40 marks] This section consists of ONE (1) COMPULSORY question. Ql. (a) Assume that a country is currently operating at natural level of output. The ongoing economic recession has led investors to have an unfavorable expectation on the economic performance. Explain the effect of investors’ views on the price level and output in the short-run by using appropriate diagram. (7 marks) (b) Assuming a four sector economy is as follows: Saving function $=-1200 + 0.3Yd Investment 1=100 Government spending G= 700 Export EX = 500 Import IM=03Yd Budget deficit BD =500 () Calculate the equilibrium output level for this economy. (4 marks) ibrium. (4 marks) (i) Calculate the balance of trade when this economy is at eq Gili) Compute the value of the goverment spending multiplier and tax multiplier in an open economy. (Note: Answers should be round up to 2 decimal point) (4 marks) (iv) At what level of output will this economy achieve a balanced trade account? (G marks) (v) Using the multiplier approach, suppose government increases spending by $300 and decreases tax to $100. Calculate the new equilibrium output level. (6 marks) (©) “The shape of the aggregate demand curve is downward sloping”. State whether you agree or disagree with the statement. Give TWO (2) reasons to justify your answer with appropriate explanations. (8 marks) (@ Explain why the aggregate supply curve is relatively flat in the short-run and relatively steep in the long-run. (4 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] ‘This section consists of THREE (3) questions. Answer ANY TWO (2) questions. QI. (a) The gloomy economic outlook had persist for quite some time. Due to this, economists projected that people will have pessimistic projection on the economic performance. Assume that the economy is operating at the natural level of output. By using appropriate diagrams, discuss the effect of people’s 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) (6) Suppose the following is the data representing country Beta's balance of payment. All values are in millions of dollars. Foreign purchase of Beta’s assets $790 Net investment income $250 Merchandise import $1000 Services import $200 Merchandise export $1500 Services export $300 Beta purchase of assets abroad $250 Use the given data to calculate each of the following: (Balance on goods and services. (2 marks) (ii) Balance on current account. (2 marks) (ii) Merchandise trade balance. (marks) (iv) Capital account balance (2 marks) (©) Suppose that Malaysia and China are trading partners. The exchange rate of Malaysian Ringgit (MYR) for Renmimbi Yuan (RNB)) is floating freely. Malaysian had reduced their imports from China due to lack of demand for Chinese products. Explain what will happen to Malaysian Ringgit (MYR) by using an appropriate diagram. Give FIVE (5) reasons why demand for a foreign currency may increase. (10 marks) {Total: 30 marks} This question paper consists of 4 questions on 5 printed pages.4 UBEA1073 PRINCIPLES OF MACROECONOMICS, Section B (Continued) @. Q. @ (b) © @ Explain the cost-push inflation. By using an appropriate diagram, explain what will happen if the government implement expansionary fiscal policy when the economy is experiencing cost-push inflation. (10 marks) Explain the THREE (3) tools used by the central bank to implement monetary policy in order to decrease the money supply. (9 marks) Rising in unemployment problem had caused Japanese government to increase government spending in order to become a stimulus towards economic growth. At the same time, the central bank of Japan decided to implement expansionary monetary policy. Explain the effects on equilibrium output, equilibrium interest rate and investment by using appropriate diagrams. (11 marks) [Total: 30 marks} Suppose Vietnam and Indonesia can produce both wheat and cotton only. All, information is given in the following table. Country Current production level Wheat Cotton Vietnam 300 150 Indonesia 100 400 (Explain absolute advantage and comparative advantage. Which country has an absolute advantage in the production of wheat and in the production of cotton? (6 marks) (i) Determine which country enjoys comparative advantage in the production of wheat and cotton respectively. Support your answer by calculating the opportunity costs of each. (6 marks) Gi) Ina table show the output after specialization, output after trade, and gain or loss after trade for both Vietnam and Indonesia. Assume that the term of trade is 1 wheat exchange for 0.8 cotton and Indonesia wants to import 200 wheat from Vietnam. (6 marks) (iv) Evaluate the following statement. “Only if a country enjoys an absolute advantage in the production of a particular good will that country find it beneficial to trade it with another country”. State whether you agtee or disagree with the statement and explain. (4 marks) This question paper consists of 4 questions on 5 printed pages5 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B Q3. (Continued) ) Identify whether each of the following would lead to an appreciation or depreciation of the dollar. In each case, explain why the currency either appreciates or depreciates. (U.S. citizens switch from buying stock in British companies to buying stock in U.S. companies. (2 marks) Gi) The inflation rate in the United States increases relative to the inflation rate in England. (2 marks) (iii) The money supply is increased in the United States. (2 marks) (iv) Income in the United States increases. (2 marks) [Total: 30 marks} This question paper consists of 4 questions on 5 printed pages.