UNIVERSITI TUNKU ABDUL RAHMAN ACADEMIC YEAR 2016/2017 SEPTEMBER EXAMINATION UBEA1073 PRINCIPLES OF MACROECONOMICS WEDNESDAY, 21 SEPTEMBER 2016 TIME: 9.00 AM ~ 12.00 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 comprises TWO (2) sections. Section A:[Total: 40 marks] Compulsory section, Answer ALL the sub-questions, Section B: (Total: 60 marks} This section consists of THREE() questions, You are required to answer only TWO (2) questions. Each question carries an equal of THIRTY (30) marks. Note: Where the 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. This question paper consists of 4 questions on 4 printed pages.2 UBEA1073 PRINCIPLES OF MACROECONOMICS Section A [Total: 40 marks] This section consists of ONE (1) COMPULSORY question. a. @ © Given that Malaysian economy is described by the following models: Saving function $= -600+0,25Yd Investment Export 50 Import (0+0.25Yd Balanced budget with government spending G=2000 (i) Calculate the equilibrium output level for Malaysia, (4 marks) Gi) Compute the balance of trade when the economy is at equilibrium output? (2 marks) (iii) What level of output does Malaysia need to improve in order to maintain a balanced trade account? (3 marks) (iv) What are the values of government spending multiplier if Malaysia is an open economy and if Malaysia is a closed economy? Compute and compare both multipliers. (6 marks) (v) Using the multiplier approach, calculate the new equilibrium output level in an open economy if the government decreases its spending to 400 and increases tax by 500. (5 marks) In the 2016 Budget, the government of Malaysia stipulated that the minimum wage for workers in the private sector increased from RM 900 to RM 1000 per month in the peninsula, Using an appropriate diagram, discuss the short run and long run effect of this event on the price level and aggregate output. What policy should the government implement in order to restore the potential output? (10 marks) Suppose that the economy of Malaysia is operating at full capacity. Using ADI/AS approach and diagram, explain how the growth of money in Malaysia can lead to hyperinflation in the country (10 marks) [Total: 40 marks] This question paper consists of 4 questions on 4 printed pages.3 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B Fotal: 60 marks} Answer any TWO (2) out of the THREE (3) questions Qa. @ () (ec) @ @ (b) According to Malay mail online, the government of Malaysia is set to announce a slightly higher government spending for 2016 in order to boost the domestic economy. Given investment is imesponsive to the interest rate. Explain this phenomenon by using appropriate diagrams. (14 marks) Many economists believe that when a currency starts to depreciate, the balance of trade will be improved over the time. Do you agree? Kindly explain by using an appropriate diagram, (10 marks) If the government implements a spending and tax policy in Malaysia which it promises to neither increase nor decrease spending and taxes, is it still possible for the budget deficit to increase or decrease? Explain. (6 marks) [Total: 30 marks) Assuming that Malaysia is currently operating above the potential output level. As a committee member of the Bank Negara Malaysia (BNM), suggest to your Chairperson what policy should be implemented in order to restore Malaysia’s potential output level. Using appropriate diagrams, explain the effect of the policy on price and unemployment level in the short run and long run, (14 matks) ‘Suppose that the following are the data for Thailand’s balance of payment. ise imports Merchandise exports "Service imports { Service exports Outflow of Thailand capital Net unilateral transfer Inflow of foreign capital Calculate each of the following using the data above: (i) Merchandise trade balance (2 marks) Gi) Balance on good and services (2 marks) (ii) Balance on current account (2 marks) This question paper consists of 4 questions on 4 printed pages.4 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B Q2. (b) (Continued © (a) ©) (iv) Balance on capital account (2 marks) (v) Statistical discrepancy (2 marks) Some empirical trade economists have noted that for many products, countries are both importers and exporters. For example, Malaysia both imports and exports shirts. How do you explain this? (6 marks) [Total: 30 marks] Suppose Thailand and Indonesia can produce both cars and computers only. All information is given in the following table. Country ‘Output per worker ‘Number of worker _ cs Cars (Computers Cars___|_ Computers Thailand 200 S00 40 [eees0. Indonesia 500 400 | 80 ce (@ Explain absolute advantage and comparative advantage. Which country has an absolute advantage in the production of cars and computers? (6 marks) Gi) Suppose the two countries wish to specialize and trade. Specifically determine and explain which country enjoys comparative advantage in the production of cars and computers. (4 marks) (iii) Show the output after specialization, output after trade and gain or loss afier trade for Thailand and Indonesia in a table. Assume that the term of trade is one car exchanges for 1.2 computers and Thailand wants to import 16,000 cars from Indonesia. (6 marks) (iv) Draw Production Possibilities Frontier and Trading Possibilities Frontier for Thailand and Indonesia. (Note: Cars on the vertical axis and Computers on the horizontal axis) (6 marks) In Malaysia, the velocity of money is fairly constant, and in Singapore, the velocity of money fluctuates greatly. In which country would the quantity theory of money better explain changes in nominal GDP? Explain. (8 marks) [Total: 30 marks) ‘This question paper consists of 4 questions on 4 printed pages.