UNIVERSITI TUNKU ABDUL RAHMAN, ACADEMIC YEAR 2014/2015 APRIL EXAMINATION UBEA1073 PRINCIPLES OF MACROECONOMICS THURSDAY, 30 APRIL 2015 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 of 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 (3) 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 5 printed pages.UBEA1073 PRINCIPLE! Section A F MACROECO! [Total: 40 marks] This section consists of ONE (1) COMPULSORY question. a (a) ) ©) Assuming that the economy is currently operating at the natural rate of output The Typhoon Hagupit hit Manila badly on December 2014, hence it destroyed some crops and drives up the cost of producing food products. Clearly illustrate the effect on the Philippine economy in the short run and long run and explain what policy the government should implement to restore the potential output (10 marks) Given that Malaysia economy is described by the following models: Consumption Investment Government Spending Export Import Budget surplus (Calculate the equilibrium output level for Malaysia, What is the balance of trade when the economy is at the equilibrium output? (6 marks) Gi) What level of output does Malaysia need in order to maintain a balance trade account? (3 marks) ii) Compute the value of government spending multiplier and tax multiplier in open economy. (4 marks) (iv) Using the multiplier approach, calculate the new equilibrium output level if the government implements expansionary fiscal policy and increases the government spending by 1650. What is the balance of trade? (7 marks) “The growth of money will always bring hyperinflation when the economy is operating near the full capacity °. Explain the statement by using AD/AS approach. (10 marks) {Total: 40 marks] This question paper consists of 4 questions on 5 printed pagesUBEA1073 PRINCIPLES OF MACROECONOMICS Section B [Total: 60 marks} Answer any TWO (2) out of the THREE (3) questions. Qa. @ (b) © b) ©) In order to achieve the Millennium goal of becoming the high income nation, Malaysian government has decided to increase the government spending to stimulate economic growth. However, the investment is highly responsive to the interest rate, Kindly explain this phenomenon by using appropriate diagram: (14 marks) Define economic growth and explain the public policies that promote economic growth, (10 marks) Some empirical trade economists have noted that countries are both importers and exporters for similar products. For example, Malaysia not only exports but also imports car. How do you explain this phenomenon? (6 marks) Total: 30 marks} According to the latest statistics, Malaysian ringgit (RM) went down by 6.2%, creating a new record of decline since the Asia Financial Crisis. Explain the effect of currency depreciation on trade balance by using an appropriate diagram. (10 marks) ‘The Singapore economy is currently operating at the potential output level. Tax policy is known as an integral part of fiscal policy. In order to achieve the objective of having substantial source of funding for government operations, the government decided to increase the tax rate. Discuss the effect of this policy on the price level, unemployment, and output in the short run and long run. (14 marks) Define property rights. Explain how could property rights promote economic growth. (6 marks) [Total: 30 marks} ‘This question paper consists of 4 questions on 5 printed pages.4 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B (Continued) @. @ Suppose Italy and Germany each produces only two goods namely, wine and beer. Assume that both goods are produced using labor alone. All information is shown below. Germany: 10 unit of labor required to produce 1 unit of wine Italy: @ i) (ii) (iv) w) 5 unit of labor required to produce I unit of beer Total labor force: 100,000 labors (Note: 60% of labors involved in the production of wine, remaining labors will involve in the production of beer.) 5 unit of labor required to produce 1 unit of wine 20 unit of labor required to produce | unit of beer Total labor force: 100,000 labors (Note: 60% of labors invoived in the production of wine, remaining labors will involve in the production of beer.) Briefly define what is meant by “absolute advantage” and “comparative advantage.” (4 marks) Based on the information above, specifically determine which country enjoys absolute advantage and comparative advantage in the production of wine and beer. (6 marks) Suppose each country decides to completely specialize in the good which each has comparative advantage. Show the output before specialization in a table. (2 marks) Suppose that the term of trade for these two countries is 1 wine: 1.5 beer and Germany wants to import 6500 units of wine from Italy. Show the output after specialization and output after trade, Would the two countries lose or gain after trade? Please show your answers in table form. (6 marks) Use an appropriate diagram to show the Production Possibilities Frontier and Trading Possibilities Frontier for Germany and Italy. (Note: Wine on the vertical axis and Beer on the horizontal axis). (6 marks) This question paper consists of 4 questions on 5 printed pages.5 UBEA1073 PRINCIPLES OF MACROECONOMICS Section B tinued) (b) Suppose there are two countries Freedonia and Carmona. The velocity of money in Freedonia is fairly constant, however in the nation of Carmona, the velocity of money is highly fluctuating. For each nation would the quantity theory of money better explain changes in nominal GDP? Explain. (6 marks) [Total: 30 marks] This question paper consists of 4 questions on 5 printed pages,