Student ID ________________

Semester One Assessment, 2016

Faculty / Dept: FBE/Economics

Subject Number: ECON10003

Subject Name: Introductory Macroeconomics

Writing time: 2 hrs

Reading: 15 minutes

Open Book status: Closed Book

Number of pages (including this page): 7 pages

Authorised Materials:.
Students are allowed access to approved calculators and a printed dictionary that translates
English in to another language.

Instructions to Students: This exam is worth 60 per cent of assessment in ECON10003. This
exam contains 100 marks. Please answer ALL questions.

Part A consists of 15 questions and consists of 25 per cent of the total marks available for this
examination. Answers to these questions must be completed on the Response Sheet.

Part B questions contribute 75 per cent of the total marks available for the examination and should
be answered in the examination script booklets(s) provided.

Instructions to Invigilators: Students are to be provided with multiple choice answer sheets and
examination script booklets.

Paper to be held by Baillieu Library: yes __X__ No ____

Extra Materials required (please supply)

Graph paper _____ Multiple Choice form __X __

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Part A: This part contributes 25 per cent to the total marks for this examination. Each question
in this Part is worth one mark.

Answer all questions. For each question, use a 2B pencil, to fill in the appropriate small circle on
the RESPONSE SHEET.

Incorrect answers, no answer or more than one answer will all receive a zero mark.

For each question, choose the response a, b, c, or d, that best answers the question or
completes the statement.

A1. If potential output grows faster than actual output, we would expect

a) frictional unemployment to increase

b) cyclical unemployment to increase
c) structural unemployment to decrease
d) none of the above

A2. In a simple three sector Keynesian economy, the multiplier is larger the the marginal
propensity to consume and the the marginal rate of tax.

a) larger, larger
b) larger, smaller
c) smaller, larger
d) smaller, smaller

A3. In an open economy, if national savings exceeds investment, it implies that

a) net exports must be positive

b) consumption must be less than investment
c) government saving exceeds private saving
d) the currency must depreciate in the long run

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A4. Which of the following transactions would not affect the aggregate level of Australian GDP?

a) The purchase by an Australian citizen of shares in a telecommunications company

b) A consumer in New Zealand purchasing a car manufactured in Australia
c) An Australian firm that purchases some capital machinery that is produced domestically using
intermediate inputs from overseas
d) The government paying teachers for educating students

A5. Assume workers and firms agree to long-term wage contracts that are set in nominal terms. If
inflation is higher than expected, then workers will be off and firms will be off.

a) better, better
b) better, worse
c) worse, better
d) worse, worse

A6. In the context of the AD-AS model, which of the following events would be consistent with an
increase in inflation and an increase in output in the short run?

a) A reduction in consumer confidence due to uncertainty regarding the international economy

b) An increase in expectations regarding future inflation
c) A reduction in expectations regarding future inflation
d) An increase in optimism of firms regarding the profitability of future investments

A7. Consider the AD-AS model and assume an economy is initially in a long run equilibrium.
Suppose there is an increase in consumer demand due to an increase in optimism about the future
labour market conditions. In the final long run equilibrium we would expect inflation and
output.

a) lower, higher
b) lower, unchanged
c) higher, higher
d) higher, unchanged

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A8. In a perfectly competitive labour market, a decrease in the equilibrium wage and an increase
in equilibrium employment may arise due to

a) an increase in the number of people in the working age population

b) a reduction in the marginal product of labour due to the depreciation of capital goods
c) an improvement in technology that raises the marginal product of labour
d) a reduction in the willingness of individuals to work due to an increase in household wealth

A9. The monetary policy reaction function, as discussed in lectures, describes how

a) real interest rates react to unemployment and inflation

b) nominal interest rates react to the output gap and unemployment
c) real interest rates react to the output gap and inflation
d) nominal interest rates react to real interest rates and inflation

A10. The slope of the aggregate supply curve in (y, π)-space depends upon

a) the response of the central bank to inflation

b) the response of households to changes in the real interest rate
c) the response of firms to the output gap
d) all of the above

A11. Government regulation has some control over the reserve to deposit ratio that banks maintain.
Other things equal, an increase in this ratio will be expected to

a) have no effect upon the economy

b) increase the supply of money and increase the price level
c) reduce the supply of money and reduce the price level
d) none of the above

A12. Which of the following assumptions does a growth accounting exercise not rely upon?

a) constant returns to scale in the production function

b) competitive markets with factors of production paid their marginal value
c) a constant saving rate independent of the level of income
d) a production function that depends upon capital, labour, and technology.

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A13. Refer to Table 1 below. It describes the time in minutes required for George and Jerry to
produce one unit of Good A and Good B. George and Jerry each have 120 minutes to dedicate to
production.

Table 1: Time to produce each good

Good A Good B
George 15 12
Jerry 10 6

Which of the following statements is false?

a) The total amount of Good A that George and Jerry can produce given their time constraints
is 20 units.
b) The total amount of Good B that George and Jerry can produce given their time constraints
is 30 units.
c) Jerry has a comparative advantage in producing Good B
d) George has a comparative advantage in producing Good B

A14. Suppose some new products are developed overseas. If Australian consumers, as a result,
increase demand for goods produced overseas, we would expect the quantity of transactions on the
foreign exchange market to and the Australian dollar to .

a) increase, appreciate
b) increase, depreciate
c) decrease, appreciate
d) decrease, depreciate

A15. If the central bank raises the domestic real interest rate, we would expect the exchange rate
to and capital inflows to .

a) appreciate, decrease
b) appreciate, increase
c) depreciate, decrease
d) depreciate, increase

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PART B: Answer all questions in the examination booklets provided. There are three
questions in this part. This part contributes 75 per cent of the total marks of this section. Marks
for each question are given below.

B1. Short answer questions

a) In measuring GDP using the expenditure method, explain how inventories are treated. Why
are inventories treated in this manner? (3 marks)

b) What do we mean by the term real interest rate? How do changes in the real interest rate
affect consumption and investment? (3 marks)

c) The first order condition associated with a firm hiring labour in the labour market is below:

∂f (k, l)
p· − w = 0.
∂l
Provide an economic interpretation for this equation. (3 marks)

d) Describe the theory of Absolute Purchasing Power Parity. What is the rationale for this theory?
What are some of the possible explanations for the failure of this theory in reality? (3 marks)

B2. Business Cycle Fluctuations

Consider a four sector model of the economy and assume that

C d = C̄ + c(Y − T ) − γc r
T = T̄ + tY
I P = I¯ − γi r

and G and X are exogenous constants.

a) What is the economic interpretation we give to the parameter c and to the parameter γc ? (3
marks)

b) Derive an algebraic equation that describes the equilibrium level of output as a function of
exogenous variables. (3 marks)

c) Briefly, explain what happens if Y exceeds planned aggregate expenditure. What happens if Y
is less than planned aggregate expenditure? (3 marks)

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Now consider the AD-AS model as discussed in lectures. Assume that an economy is initially in an
equilibrium in which inflation is equal to inflationary expectations and output is equal to potential
output.

d) Suppose the invention of driverless cars leads to an increase in potential output. Use a dia-
gram to explain what will happen to this economy in the short run assuming that inflation
expectations are unchanged. (4 marks)

e) Use a diagram to explain what happens to this economy in the long run. What happens to
cyclical unemployment immediately after the increase in productivity? (4 marks)

B3. Economic Growth

Consider the following table:

Table 2: Output and Factor Inputs

Country Output Capital Labour
Lilliput 120 100 36
Brobdingnag 64 64 16

Assume that Lilliput and Brobdingnag produce output with the following production function,
Y = AK 0.5 L0.5 and that the level of productivity, A, is an exogenous constant. Finally assume
that both countries have identical saving rates of 9 per cent, a population growth rates of 4 per
cent and capital depreciates at 5 per cent.

a) What is the level of total factor productivity in Lilliput and in Brobdingnag? (4 marks)

b) Which country would you expect to grow faster in output per capita terms in the short run?
Explain your reasoning. (6 marks)

c) Suppose instead, that the saving rate in Lilliput is 5 per cent, the population growth rate is
2 per cent and capital depreciation is 4 per cent. Assume Brobdingnag is unchanged from
above. Which country would have a higher growth rate of output per capita? Which country
would have a higher rate of output growth? Explain your reasoning. (6 marks)

End of Examination

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Library Course Work Collections

Author/s:
Economics

Title:
Introductory Macroeconomics, 2016 Semester 1, ECON10003

Date:
2016

Persistent Link:
http://hdl.handle.net/11343/127687