Office Use Only

Semester One 2017

Examination Period

Faculty of Business and Economics

EXAM CODES: ECC5953/ECF5953

TITLE OF PAPER: Economics – Practice Exam Paper

EXAM DURATION: 2 hours writing time

READING TIME: 10 minutes

THIS PAPER IS FOR STUDENTS STUDYING AT: (tick where applicable)

 Berwick  Clayton  Malaysia  Off Campus Learning  Open Learning
 Caulfield  Gippsland  Peninsula  Monash Extension  Sth Africa
 Parkville  Other (specify)

During an exam, you must not have in your possession any item/material that has not been authorised for
your exam. This includes books, notes, paper, electronic device/s, mobile phone, smart watch/device,
calculator, pencil case, or writing on any part of your body.  Any authorised items are listed below. 
Items/materials on your desk, chair, in your clothing or otherwise on your person will be deemed to be in
your possession. 

No examination materials are to be removed from the room. This includes retaining, copying, memorising
or noting down content of exam material for personal use or to share with any other person by any means
following your exam.
Failure to comply with the above instructions, or attempting to cheat or cheating in an exam is a discipline
offence under Part 7 of the Monash University (Council) Regulations.

AUTHORISED MATERIALS

OPEN BOOK  YES  NO

CALCULATORS  YES  NO

SPECIFICALLY PERMITTED ITEMS  YES  NO

if yes, items permitted are:

Candidates must complete this section if required to write answers within this paper

STUDENT ID: __ __ __ __ __ __ __ __ DESK NUMBER: __ __ __ __ __

Page 1 of 5
INSTRUCTIONS TO STUDENTS

There are 6 questions carrying 60 marks in total.

Students must answer ALL questions.

Disclaim: This practice exam paper is for “practice” only and may not be used as a strict reference of
standard of the final exam

SECTION A (MICROECONOMICS)
Question 1

Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are
experiencing economic losses. Identify costs, revenue and the economic losses on your graph. Using your graph,
determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer.

ANS:
The loss and revenue are identified on the individual firm graph. Total cost is equal to the sum of the losses and
revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of
average variable cost. If average variable cost is below P 0 at output level Q0, the firm will remain in the market. If
average variable cost is above P0 at output level Q0, the firm will exit the market.

Question 2

Use a graph to demonstrate why a profit-maximising monopolistically competitive firm must operate at excess
capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

ANS:
Competitive firms do not face downward-sloping demand. The graph shows the firm choosing a level of production
in which the intersection of marginal revenue and marginal cost occurs at an output level where average total cost is
decreasing. This profit-maximising output level is less than the efficient scale (minimum of average total cost) and
therefore the firm is said to be operating at excess capacity.

Page 2 of 5
SECTION B (MACROECONOMICS)
Question 3

A. Distinguish between nominal and real GDP. Why is real GDP the relevant concept when
discussing economic growth?

B. Suppose you are given the following information about the economy, with the values in
billions of dollars:

Consumption $5000 Government Expenditure $1000

Investment $2000 Net Export $1000

What is the economy’s GDP? What is its national savings?

C. Suppose the economy is further characterised by the following information, with values in
billions of dollars:

Year Nominal GDP Real GDP

2004 $5000 $5000
2005 $6000 $5455
2006 $7200 $6000

What is the GDP deflator for the three years?

D. From the table in C, what is the growth rate of nominal and real GDP from 2004 to 2005?
What is the growth rate of nominal and real GDP from 2005 to 2006? Which is growing
faster, nominal or real GDP? Explain.

Answer:

A. Nominal GDP uses current prices to value the economy’s production of goods and services. Real
GDP uses constant base-year prices to value the economy’s production of goods and services. In the
discussion of economic growth, we concern the real production, rather than price movement, so real
GDP is a better measure.
B. GDP = 5000+2000+1000+1000 = 9000 (billion dollars). In equilibrium, S=I, so its national saving
= $2000 (billion dollars)
C. GDP deflator = nominal GDP/real GDP*100%, so

Page 3 of 5
 2004: 100%
2005: 110%
2006: 120%

D. growth rate = (GDP(2005) – GDP (2006))/GDP (2005)

So, for nominal: growth rate = (6000-5000)/5000 = 20%; (7200-6000)/6000 = 20%
For real growth: growth rate = (5455-5000)/5000=9.1%; (6000-5455)/5455 = 10%.

Nominal GDP grows faster, because of the inflation.

Question 4

Suppose that a firm is faced with an excess supply of workers. What would the firm do? Explain with
standard economic theory and with efficiency wage theory.

ANS:
a. Standard economic theory: assuming a firm maximises its profit, it should lower wages
until the supply of workers is equal to the demand. This will reduce production costs
and raise profits.
b. Efficiency-wage theory suggests that it might be profitable for a firm to keep wages
above the equilibrium level in order to reduce worker turnover, increase worker quality,
increase worker effort, and perhaps to increase worker health and therefore worker
productivity.

Question 5

Explain what will happen to the money supply under each of the following circumstances:
a. The public decides to increase the amount of currency it holds.
b. Banks decide to hold fewer excess reserves.

ANS:
a. If the public decides to hold more currency, it can do so only by taking reserves out of
the banking system. With fewer reserves in the banking system, there will be less bank
money, hence the money supply will fall.
b. If banks decide to hold fewer excess reserves, they will lend more reserves, lowering the
reserve ratio and increasing the money multiplier. Additional bank money will be
created, and the money supply will increase.

Question 6

Suppose the economy is in long-run equilibrium. Draw appropriate diagrams to show the impact on
aggregate demand, on short-run aggregate supply or long-run aggregate supply of each of the
following, assuming they all happen, in the sequence they are listed:

a. Demand for Australian iron ore and coal increases dramatically as the Chinese economies
expand (5 marks)
b. Reserve Bank of Australia decreases the cash rate by 25 basis points to combat the lower than
expected growth rate (5 marks)
c. Australian dollar depreciates as demand for the Australian dollars decreases in the international
markets (5 marks)
d. A new technology is perfected that lowers the cost of geo-sequestration, the process by which
greenhouse gases are captured and stored deep underground (5 marks)

Answer

a if the demand for iron ore and coal increases dramatically, AD will shift to the right. Inflation rate will
rise and output produced will be above the natural rate.

Page 4 of 5
b. RBA decrease the cash rate by 25 points, so AD will shift to the right. Inflation rate will increase and
output will be above the natural rate
c. Australian dollar depreciate will increase exports but reduce imports – next export will increase which
shift the AD to the left
d. Technology advancement that reduces costs throughout the economy will increase LAS as well as SAS –
i.e. both will shift to the right. Long-run equilibrium will be restored.
*** END OF EXAMINATION ***

Page 5 of 5