UNIVERSITI TUNKU ABDUL RAHMAN, ACADEMIC YEAR 2017/2018 SEPTEMBER EXAMINATION UBEA1073 PRINCIPLES OF MACROECONOMI: WEDNESDAY, 6 SEPTEMBER 2017 TIME: 9.00 AM ~ 12.00 PM (3 HOURS) BACHELOR OF COMMERCE (HONS) ACCOUNTING OR 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) COMPU (40) marks. ORY question, The question carries FORTY 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 shalll be struck out and ignored. Marks will be awarded for clarity and logic of arguments. ‘This question paper consists of 4 questions on 4 printed pages.u A1073 PRI Section A {Total: 40 marks} Answer ALL sub-questions. (COMPULSORY) a (@) o) © Consider the following simple open economy model for the Wonderland economy: Consumption function C=600+0,75Yd Planned Investment Tax Export Import Budget surplus (@ Calculate the equilibrium level of income for this economy. (3 marks) (ii) Calculate the balance of trade when the economy is at equilibrium and interpret the answer. (3 marks) (ii) Calculate the level of output Wonderland needed to achieve in order to maintain a balanced trade account. (3 marks) (iv) Determine the values of government multiplier in open economy and closed economy for Wonderland. Compare and explain for open and closed economy multiplier for Wonderland (6 marks) (v) What would happen to the equilibrium output if government decides to implement contractionary fiscal policy and decrease the government spending by 400? Calculate your answer by using open economy multiplier approach, (5 marks) According to The Straits Times, Singapore dollar touched a record high against depreci the Malaysian ringgit on the Ist of March. Explain how currency ation will affect the Balance of Trade of Malaysia. (10 marks) Explain how the institutional structures can promote economic growth. (10 marks) [Total: 40 marks] This question paper consists of 4 questions on 4 printed pages.3 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B [Total: 60 marks] Answer any TWO (2) questions out of THREE (3) questions. a @ () © @. @) () () The Malaysian economy is currently operating at the natural level of output. Central Bank decides to decrease the interest from 3.25% to 3.1% in order to increase the economy growth. 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) ‘Assume that an economy is initially operating at the natural rate of output. Due to the decision of Oil Producing Export Country (OPEC) of reducing the supply of oil, it leads to increase in the price of oil, Illustrate the impact of the policy on price level and output with an appropriate diagram if the policy makers concern only on keeping the price level stable. (10 marks) Define trade feedback effect. Explain with an example. (6 marks) (Total: 30 marks} Graphically illustrate and explain the effects of an increase in government spending on the equilibrium interest rate, investment and equilibrium output. Assuming the interest rate is highly responsive to the interest rate and Central Bank does not alter the money supply. (14 marks) Suppose that Malaysia and Taiwan are trading partners. The exchange rate of Ringgit Malaysia and New Taiwan Dollar is floating freely. () What would happen to New Taiwan Dollar if Taiwanese spends their vacation in Malaysia? Discuss the effect by using an appropriate diagram, (5 marks) (i) What would happen to Ringgit Malaysia if Malaysian imports from Taiwan decrease dramatically due to the price of goods in Taiwan are more expensive than domestic goods? Illustrate with an appropriate diagram. (5 marks) Explain the protection of infant industry argument against the free trade and explain why the protection is important to domestic industry. (6 marks) [Total: 30 marks] This question paper consists of 4 questions on 4 printed pi4 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B (Continued) @. @ (b) © Information in the following table shows the number of labours required to produce a cloth and a shoe in Wonderland and Everland. [ Countr Goth Shoe ‘Wonderland 25 labours 10 labours Everland 15 labours: 15 labours Gi) If each country has 15,000 labour of which 60% of its labours is allocated to cloth sector and remaining allocate to the production of shoe, show the total production for each country’s output of the two productions in a table, and identify which country has an absolute advantage in the production of cloth and shoe (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 cloth and shoe. 4 marks) (ii) Now suppose each country decides to complete specialize in the production which has comparative advantage. The term of trade for these two countries is 1 cloth: 1.25 shoe, and Wonderland wishes to import 400 unit of cloth from Everland. 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 Wonderland and Everland. (Note: Cloth on the vertical axis and shoe on the horizontal axis). (6 marks) Discuss THREE (3) effects of modem economic growth, (6 marks) According to the Quantity Theory of Money, assuming the velocity of money (¥) is constant. Explain the impact of an increase in money supply if the economy is operating at: (@) Full capacity (2 marks) Gi) Below full capacity (2 marks) [Total: 30 marks] This question paper consists of 4 questions on 4 printed pages.