T.J.

Dlamini - IDE ECO 102 - 2020

UNIVERSITY OF ESWATINI

INSTITUTE OF DISTANCE EDUCATION

COURSE CODE: ECO 102 TUTORIAL 1:

TOPIC: 1, 2 & 3

SECTION A

1. Write short explanatory notes on the following:

i) What is the main aim of the aggregate expenditure (Keynesian) model?
ii) What are the factors that influence the level of consumer spending?
iii) Present a consumption function in linear format and explain in detail the parameters
of the function.
iv) Define saving and present the saving function in linear format.
v) Differentiate between the average propensity to consume and the average
propensity to save.
vi) Outline the three main forms of investment spending.
vii) Present the investment function in linear format and explain in detail the
parameters of the function.
viii) Outline the general format of the aggregate expenditure /demand model
ix) Show mathematically how the equilibrium income (Y*) is attained in the product
market.
x) What is a multiplier?

2. Explain each of the components of aggregate expenditure. Explain their determinants, and
the role they play in determining the equilibrium level of national income (Y*).

3. Suppose that a hypothetical economy has the following data:

Y=C+I
C = 140 + 0.6 Yd
Yd = Y – T
I = 200
T = 150
i) Determine the Marginal Propensity to Save
ii) Calculate the equilibrium level of output/income (Y*).

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T.J. Dlamini - IDE ECO 102 - 2020

SECTION B

Attempt all question

1. An increase in which of the following will NOT increase output or production?

A. Money
B. Labour
C. Machinery
D. Land
E. Natural resources

2. The abstract model of the production possibilities curve that applies to the question of
allocating resources toward growth has what goods on its axes?
A. guns and butter
B. consumption goods and capital goods
C. physical capital and human capital
D. pizza and ice cream
E. domestic goods and imported goods

3. Which of the following does not represent a key macroeconomic variable

A. The unemployment rate
B. The inflation rate
C. Gross Domestic Product (GDP)
D. Income Distribution
E. The population growth rate

4. Which of the following does not represent a key macroeconomic variable

A. The unemployment rate
B. The inflation rate
C. Gross Domestic Product (GDP)
D. Income Distribution
E. The population growth rate

5. What is the opportunity cost of investing resources into new capital goods?
A. There is no opportunity cost for investment.
B. The goods and services that could have been produced with those resources and consumed
today.
C. The goods and services that will be produced and consumed in the future with the increased
capital stock.
D. The decrease in the capital stock.
E. The decrease in productivity in the future.

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6. Which of the following measures would NOT result in economic growth?

A. subsidizing loans for vocational training
B. government financing of primary education
C. government financing of scientific research in agricultural production
D. limiting fish yields to maintain sustainable fisheries that can reproduce to provide greater
future yields
E. limiting the amount of capital per worker

7. Which of the following is not an element of the business cycle?

A. Peak
B. Trough
C. Upswing
D. Downswing
E. Long-term trend

8. Which of the following is included as an addition to the GDP of country X during the 2015
year?
A. A social security payment to a retired teacher in country X in 2015.
B. Textiles produced during 2015 in country Z, by a firm owned by a resident of country X.
C. The value of topsoil lost in country X in 2015.
D. Canned soup produced in 2014 in country X but consumed in 2015.
E. Shoes produced in country X in 2015, but not sold or consumed in 2015.

9. For which of the following reasons does GDP per capita have limits as a measure of social
welfare for an ordinary person?
A. GDP does not consider the distribution of income and its inequality.
B. GDP includes investment by businesses, as well as by households.
C. GDP overstates the value of home-produced goods.
D. GDP does not count public goods like education.
E. GDP expenditures do not include imported goods.

10. Which of the following is NOT counted in GDP of country X during the 2015 year?
A. Automobiles produced in country X during 2015 but not purchased.
B. An export of computers made in country X to a firm in country Y.
C. Production in country Y by a firm owned by a resident of country X.
D. The government of country X hiring a contractor to build a bridge in country X
E. Production of t-shirts in country X by a firm owned by a resident of country A.

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11. Which of the following will increase the investment component of GDP, as measured from
the final goods approach, in a particular time period?
A. Shoes produced and sold to the government for use by the military.
B. New automobiles purchased by citizens.
C. Shoes produced within the country but not sold during the time period.
D. Transfer of funds from a parent to a child for educational expenses.
E. Selling of canned soup from a firm’s inventory.

12. Which statement concerning inclusion in GDP is correct?

A. Automobiles produced in country B but imported to country A will count in the GDP of
country A.
B. Imports of consumer goods are frequently counted as final consumption goods and must be
subtracted from GDP as part of net exports.
C. Goods produced in country A but exported to country B are not counted in the GDP of
country A; they are counted in the GDP of country B.
D. Net trade or imports minus exports are added to a country’s GDP. If imports exceed exports
GDP increases.
E. Only imports for private consumption are counted as part of a country’s GDP.

13. The population 16 years of age and over is 5000 in country X. Of these 5000 people: 200
are not working but actively looking for work; 3000 are working full time; 500 are working
part time and wanting to work part time; 300 are working part time and want to work full
time.
A. 3000
B. 5000
C. 8000
D. 11,000
E. Cannot be determined

14. What is the labour force participation rate in country X?

A. 5%
B. 10%
C. 25%
D. 80%
E. 100%

15. What is the unemployment rate in country X?

A. 4%
B. 5%
C. 6%
D. 20%
E. 25%

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16. Which of the following will add to unemployment in a country?

A. Lindiwe quits her job as a teacher to go to law school.
B. Sibusiso, a chef, is demoted from being a chef to being a waiter in a restaurant.
C. Sindi, having looked for work for two months, quits looking and decides to vacation.
D. Mandla, with a large family to support, has his hours of work cut from 40 to 20 per week.
E. Fezile, finishes nursing school, and begins to look for full time work.

17. When an individual who was unemployed finds work, which of the following is true?
A. The unemployment rates falls and the labour force participation rate falls.
B. The unemployment rate falls and the labour force participation rate increases.
C. The number of discouraged workers falls and the labour force participation rate increases.
D. The unemployment rate falls and the labour force participation rate remains unchanged.
E. The population increases and the labour force participation rate increases.

18. The Inflation Rate is measured by:

A. The ratio of current year CPI to base year CPI
B. The percentage change in the CPI from one year to the next
C. The percentage change in GDP from year one year to the next
D. The ratio of current year CPI to the next year’s CPI
E. The ratio of the current year PPI to the next year’s PPI

19. If the price level rises in year 2, from year 1 and the real GDP rises in the same period,
which of the following is true?
A. Real GDP will increase by more than nominal GDP does, from year 1 to year 2
B. Nominal and real GDP must change by the same percentages from year 1 to year 2.
C. Real GDP only increases because the price level increased.
D. Nominal GDP will increase by more than real GDP does, from year 1 to year 2.
E. Nominal GDP will fall from year 1 to 2.

20. If the nominal GDP increased by 15% from year 1 to year 2, and the price level changed
from 100 to 110 from year 1 to year 2, which of the following is true?
A. Real GDP increased between year 1 and year 2 by approximately 5%
B. Real GDP fell by 10% between the two years.
C. The rate of inflation was 15% between the two years.
D. Real GDP increased by 15% between year 1 and year 2.
E. The price level must have increased by 5% from year 1 to year 2.

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21. If checking accounts are equal to E1000, savings accounts equal to E2000, circulating cash
E750, and cash in banks E300, what is the value of the basic money supply, M1?
A. E750
B. E1050
C. E1750
D. E3750
E. E4050

22. If the velocity of money is constant and the economy is at full-employment, which of the
following is true?
A. Nominal GDP cannot increase, if real GDP cannot change.
B. The money supply cannot change if the velocity of money is constant.
C. A 5% increase in the money supply will increase nominal GDP by 2.5%.
D. A 5% increase in the money supply will increase the price level by 5%.
E. A constant velocity of money will imply that the price level must decrease each year.

23. If GDP by the income side is equal to E5000 and depreciation is E400, what it the value of
Net National Product?
A. E400
B. E4600
C. E5000
D. E5400
E. Cannot tell without knowing the GDP as calculated from the sum of final product
perspective.

24. If an individual becomes discouraged and stops looking for work, which of the following
will happen?
A. The labour force participation rate remains constant and the unemployment rate falls.
B. The labour force participation rate and the unemployment rate each remain constant.
C. The labour force participation rate falls, and the unemployment rate falls.
D. The labour force participation rate falls and the unemployment rate rises.
E. The labour force participation rate increases and the unemployment rate falls.

25. Which of the following is not in the labour force?

A. Samkelo, who wants to work but has given up looking for work until the weather improves.
B. Nolwazi, who works part-time but wishes for work full time.
C. Bheki, who has a graduate degree but is working as a waiter.
D. Zakhele, who does not have work but applied for work at a local factory.
E. Thulisile, who just graduated from business school and is currently seeking employment as
an accountant.

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26. The Net National Product of a country is E2500. If depreciation is E600 during this time
period, which of the following is true?
A. The sum of the values added of each firm in the country will equal E3,100
B. Net investment must be negative
C. Personal income must exceed E3,100
D. Gross domestic product must be E1,900
E. Net exports must be negative.

27. The value of which of the following is counted in the Eswatini gross domestic product?
A. Child care a father provides for his child
B. Sugar produced in South Africa by an Eswatini firm
C. Clean air
D. Sugar produced in Eswatini and sold in Europe
E. Medical services not provided due to preventative health care

28. Which of the following best explains why transfer payments are not included in the
calculation of gross domestic product?
A. Recipients of transfer payments have not produced or supplied goods and services in
exchange for these payments.
B. Transfer payments are a government expenditure, and government expenditures are
excluded from gross domestic product.
C. Transfer payments are used to pay for intermediate goods, and intermediate goods are
excluded from gross domestic product.
D. Recipients of transfer payments are usually children, and income earned by children is
excluded from gross domestic product.
E. Recipients of transfer payments are sometimes not citizens of Eswatini.

29. If the interest rate falls, then:

A. planned investment spending falls.
B. the opportunity cost of investment is less.
C. fewer investment projects have a rate of return greater than the interest rate.
D. GDP will fall.
E. consumers will save more money.

30. Which of the following is the accumulated value of a household’s savings?

A. Wealth
B. Income
C. both wealth and income
D. neither wealth nor income
E. none of the above

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31. If the nominal gross domestic product (GDP) of the nation of kaNgwane increased in 2007
relative to the previous year, it must be true that in kaNgwane in 2007:
A. Both the price level and the real GDP have increased.
B. Neither the price level nor the real GDP has increased.
C. The price level increased by a larger percentage than did the real GDP.
D. The price level increased by a smaller percentage than did real GDP.
E. The price level and/or the real GDP has increased.

32. The major difference between real and nominal gross domestic product (GDP) is that real
GDP:
A. excludes government transfer payments.
B. excludes imports.
C. is adjusted for price-level changes using a price index.
D. measures only the value of final goods and services.
E. measures the price of a market basket of goods purchased by a typical urban consumer.

33. Suppose a typical consumer buys the following quantities of three commodities in 2003
and 2004.

Commodity Quantity 2003 per-unit Price 2004 per-unit Price

Food 5 Units E6 E5

Clothing 2 Units E7 E9

Shelter 3 Unit E12 E19

34. Which of the following can be concluded about the consumer price index (CPI) for this
individual from 2003 to 2004?

[Hint: Calculate the consumer's total expenditures for this basket of goods in 2003 and 2004. Use
the change in expenditures to answer the question.]

A. It increased by 20%.
B. It increased by 25%.
C. It remained unchanged.
D. It decreased by 20%.
E. It decreased by 25%.

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35. If real gross domestic product (GDP) is increasing at 3 percent per year and nominal gross
domestic product is increasing at 7 percent per year, which of the following is necessarily
true?
A. The price level is increasing.
B. Unemployment is increasing.
C. Exports exceed imports.
D. The economy is in a recession.
E. The government is running a budget deficit.

36. If a worker’s nominal wage rate increases from E10 to E12 per hour and at the same time
the general price level increases by 10 percent, the worker’s real wage has:
A. approximately decreased by 10%.
B. approximately decreased by 20%.
C. approximately increased by 10%.
D. approximately increased by 20%.
E. not changed.

37. The annual inflation rate is expected to be 5 percent over the next 3 years. Mxolisi plans to
take out a 3-year loan to purchase a car. If Mxolisi decides not to take out a loan if the real
interest rate exceeds 3 percent, the highest nominal interest rate he is willing to pay is:
A. 2 percent
B. 3 percent
C. 8 percent
D. 15 percent
E. 25 percent

38. In the country of Mashonaland, banks charge 10 percent interest on all loans. If the
general price level has been increasing at the rate of 4 percent per year, the real rate of
interest in Mashonaland is:
A. 2.5%
B. 4%
C. 6%
D. 10%
E. 14%

39. The aggregate demand curve is downward sloping because as the price level increases the:
A. purchasing power of wealth decreases.
B. demand for imports decreases
C. demand for interest-sensitive expenditures increases.
D. demand for domestically produced substitute goods increases.
E. real value of fixed assets increases.

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40. Which of the following would be true if the actual rate of inflation were less than the
expected rate of inflation?
A. Inflation had been underpredicted.
B. The real interest rate had exceeded the nominal interest rate.
C. The real interest rate had been negative.
D. The economy would expand because of the increased investment and spending.
E. People who borrowed funds at the nominal interest rate during this time period would lose.

41. In macroeconomic policy debates, the Keynesian view and the Classical view differ about
whether the government should:
A. subsidize public goods.
B. enforce property rights.
C. reduce the deadweight loss caused by monopolies.
D. manage aggregate demand.
E. alleviate poverty.

42. If Aggregate expenditure is greater than total income:

A. Investment will decrease because such a high level cannot be sustained
B. Planned saving will decrease in line with investment
C. Output will increase to replenish depleted inventories
D. Investment will decrease to run down excessive inventories
E. There is an error since the two are the same by definition

43. The multiplier in the Keynesian model equals:

A. The equilibrium level of income for a given level of aggregate expenditure
B. The increase in autonomous expenditure brought about by a change in income
C. The equilibrium level of income divided by autonomous expenditure
D. The increase in equilibrium income when autonomous expenditure increases
E. The level of equilibrium output corresponding to a given level of aggregate spending

44. Consider the following information:

Marginal propensity to consume = 0.9

Investment = E200 Million

Autonomous Consumption = E70 Million

The equilibrium level of income is:

A. E300 Million
B. E700 Million
C. E20 00 Million
D. E2 700 Million
E. Cannot be determined using the given information

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45. Which of the following will not be affected by a change in the tax rate?
A. The level of autonomous spending
B. The equilibrium level of income
C. Disposable income
D. The multiplier
E. Consumption spending by households

46. Which one of the following will increase the size of the multiplier
A. Increase in government spending
B. Decrease in government spending
C. Increase in tax rate
D. Decrease in tax rate
E. None of the above

47. To reduce cyclical unemployment, the government needs to undertake public works
programs.
A. Cyclical unemployment exists because the wage is too low; the wage needs to be increased.
B. Deficient aggregate demand is a persistent problem, both in the short run and in the long
run.
C. Cyclical unemployment will eventually be reduced and eliminated with competitive, market-
clearing wages.
D. Say's Law is rejected, as it is demand that creates supply.

48. Which of the following hypothetical situations would lend support to the applicability of
the Keynesian view over that of the Classical view?
A. Unemployment rises briefly, but then settles back to a low and stable rate without any
government intervention.
B. Unemployment rises and stays high for a long period of time without any government
intervention.
C. Unemployment decreases briefly, but rises back to a low and stable rate without any
government intervention.
D. Unemployment stays at a stable and low rate for a long period of time without any
government intervention.
E. Unemployment rises when the government increases its spending.

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49. If the current wage or price of labour is above the equilibrium, which of the following is
true?
A. The economy is producing above its full employment level.
B. There is only structural unemployment.
C. Keynesians believe that wage rates are highly competitive and that the economy will soon
have only cyclical unemployment.
D. The economy is at full employment.
E. Classical economists would expect the wage rate to fall to a market-clearing level.

50. According to the short-run Phillips curve, a decrease in unemployment is expected to be

accompanied by:
A. higher labour-force participation rate
B. an increase in inflation
C. an increase in the productivity of capital
D. an increase in the government deficit
E. a decrease in real gross domestic product

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