CONFIDENTIAL Infrastructure ARES FINAL EXAMINATION SEPTEMBER/OCTOBER SEMESTER 2018 MACROECONOMICS (ECON 1310) (TIME : 3 HOURS) MATRIC NO. IC. / PASSPORT NO. : LECTURER : MOHD AZHAR HAMZAH (GENERAL INSTRUCTIONS 1. This question booklet consists of 14 printed pages including this page 2. Answer ALL questions inthe ANSWER BOOKLET. CONFIDENTIAL Page 1 of 4INSTRUCTIONS: ‘Time: s0uRs SECTION A (GO MARKS) ‘There are FORTY (40) question Booklet this section. Answer ALL Questions inthe Answer firms set pices and then keep them fixed for period of time, their fixed prices ‘imply that ‘A) the aggregate price level is fixed and that aggregate demand determines the ‘Quanity of goods and services sold. B) prices are set by agaregate demand and supply. ) the aggregate price level adjusts continuously 1) the agaregte price levels fixed and that aggregate supply determines the quantity of goods and services sold. 2. A consumption funetion shows 8; ‘A) negative (inverse) relationship between consumption expenditure and saving. B) postive (direct relationship between consumption expenditure and pie eve C) negative (inverse relationship between consumption expenditure end dsposa ) positive (tect) relationship between consumption expenditure and disposable 3, A movement along the consumption function to higher levels of consumption expenditure arises because; ‘A)the level of disposable income decreases B) household wealth rises. (the evel of disposable income increases D) the level of desired saving rises. 4. Suppose that in 2010, firms discover that their inventories are fling below their target levels. Which ofthe following statements is CORRECT? 'A) The level of aggregate savings mst equal the level of desired investment B) Even though firms are tying, they are unable to maximize profits (C) Aggregate demand i es than ageregate supply. _D) Real GDP i less than equilibrium expenditure KONTO C08 & Leys gee araReiGpP[¢_ [7 G@_[ ax 2300 | 1430_[540_| 400 | 90. "2400 —|~1360— | 340—[ 400 | 100. 2300 | 1290 | s40—| «00 | 110. 2200 | 1290 s40—[ 400 | 120. ‘2100 | 1150 | 580 | 400_—_[ 130 5, Inthe above table, C is consumption expenditure, Is investment, G is government ‘expenditure, and AXis net exports. Al entries are in dollars. The equlium level of real GDP is; A) $2,500. 1B) $2,400. ©)$2,300, 1) $2,200. i Fs 4 0) F Felor tae 200 don In the above figure, irs! GDP is greater than $200 bilion, inventories will be; ‘A) below target level so firms increase production. 'B) below target levels 0 firms decrease production. ©) above target levels so firms increase production D) above target levels so firms decrease production. BCONTSTOSepi0e201 Page of 1‘i 258 | i | 7. The figure shows Tropical Islés aggregate planned expenditure curve. When ‘aggregate planned expenditure is $2 willon, aggregate planned expenditure is than real GDP, firms! inventories ‘and firms their rodocton ‘A) greater, increase; decrease B) less; decrease; increase (© less; increase; decrease D) geste; decrease; increase 8. Inthe ove figure the economy is initally at point 4 on aggregate expenditure curve ‘ABD, Suppose firms expect profits to increase and decide to increase investment. AS @ result 'A) the AE curve shifts upward toa curve such as ABD. B) the AE curve shifts dovmward toa curve such as AB}, CC) there ia movement along AB} to point suchas B. D) there isa movement along 42| toa point such as C. ECONTSTOS@poOCEOTE ge of 149, Suppose thatthe slope ofthe AE curve is 0.75, Ten a $100 increas in autonomous spending causes equlirium expenditure to; AA) decrease by $400, B) increase by $400, ©) doerease by $750. ) increase by $750. 10, An economy saves 20 percent of any increase in income and there ae no income taxes or imports. Then, an increase in investment of $2 billion ean produce a short run inrease in real GDP of as much as; ‘A)S2billon. B) $10 bilon. €) $04 billion D)S1-6billion 11, Whenever the federal government spends more than it receives in tax revenue, then by definition it ‘A)runsa budget surplus. 1B) operates a balanced budget. ‘Chins a budget deci 'D) increases economic growth, 12, Suppose the only revenue taken in by the goverment isin the form cF income tax, tnd the tax rate is 10 percent. If aggregate income is $800 billion, and government ‘outlays are $100 billion then the government budget has; ‘A)a deficit of $20 billion, ') a surplus of $20 billion (© neither «surplus nor a deficit, 15. Suppose «county hs bean running perisen goverment bus ef Ite is reduced, but remains positive $5 goverment Se wl nee 'B) government debt wil decrease ) the county wil experience a budget surplus. _D)imterest payments on the debt immediatly wll decrease 14, When interest income i axed an the inflation rate rises, the tax revenue collected by the government; A) increases. B) doesnt change ©) decreases, 1) could either increase or decrease ECONTSTOSepT0e201S Page Sof 1415, The Laffer curve shows that increasing increases, when ow. ‘wax revenue; potential GDP; tax revenue is 'B) ax rates tax revenue; tax ates re C) potential GDP; tax revenue; tax even is 1D) None of the above answers is correct. 16 The amount by which a change in government expenditures on goods and services is multiplied to determine the change in aggregate demand that it generates isthe ‘Ay goods and services multiplier 'B) government expenditure multiplier ©) slope ofthe AE curve D) increase in teal GDP 17, Theefects of change in government expenditures is multiplied throughout an economy; ‘A)only when there isan increase in expenditure B) only when there is derease in expenditure. CC) because government expenditure generates changes in consumption expenditure. D) becouse taxes are left unchanged. 18, A.change in autonomous taxes multiplier effect because it ‘which, in turn, constimpiion ependiure. 1A ereates; changes disposable income; changes ') cannot create; doesnot affect disposable income; cannot change () ereates; changes investment, changes ‘D)eannot create; cannot change investment; cannot change 19, An economy has real GDP of $300 bilion and potential GDP of $240 billion. To ‘move the economy to potential GDP, the government should taxes andor ‘government expenditure ‘Ay evease: increase B) increase; decrease ) decrease increase ) decrease; decrease “BOONTSTI Sepa naae 3 20. Inthe above figure ifthe economy is initially at point D and taxes ae cu, if potential ‘GDP does not change then the economy will move to poi A) move to point C: BB) move to point 4. ) move to point B. D) stay at point D. 21, The most direct way in which money eliminates the ned fora double coincidence of wants is through its use as 3; ‘A) medium of exchange 1B) standard of deferred payment (© store of value. Dy unit of account. 22, After you finish your degree, suppose your salary is $52,000 per year. This is an ‘example of using the function of money known as; ‘A) medium of exchange B) aunit of account. Castor of value, D)MI 23, Iman economy, there is $200 million in currency held outside banks, $100 milion in travelers checks, $250 million in curency held inside the banks, $800 milion in checking deposits, and $600 million in savings deposits. The value of MI is $750 million $1,200 milion $1,150 milion 1D) $600 milion (i :24, Suppose you cash in a Certificate of Deposit (a small time deposit) to acquire the teaveler’s checks youl need for your vacation. What happens to MI and M2? 'A) MI and M2 both increase B) MI stays the same and M2 increases. (C) MI increases and M2 decreases. 1D) MI increases and M2 stays the same. a “Amount ‘omponent | cilions of dollars) iareney 235 heeking deposi 370) Savings deposits a6 ravers checks 3 [Time deposis Tia ney market mutual Funds oa vailable ere on era en 6s 25. According tothe table above, the value of MI is nd the value of M2 is ‘BY SBIB Pilon; $2490 bition ) $805 billion; $2490 billion ©) $813 billion; $9303 billion 1) 51,488 billion; $3978 26, Which of the following statements concerning commercial banks is TRUE? ‘A)Banks need to maintain cash reserves equal to ther deposits. BB) Most banks maintain cash reserves equa toa fraction of deposit (©) Cash reserves ear the highest rate of return of any asset fora bank. ) Since the sdvent of the Federal Reserve, banks do not need to maintain cash 27. Te Bank of Japan is Japans central bank. As part of is duties, the Bank of Japan would; ‘A) provide banking services to Japan's citizens and firms. 5) provide banking services to foreigners. (© contol the quantity of money in cicultion in Japan D) change tax rates, ‘ECONTST@Sep/0@20IS SS SSSCé ge28. The minimum percentage of deposits that a depository in cannot use for lending is known asthe; ‘A) minimum rat. B) required reserve rato, (©) money multiplier. D) discount rate 29, bank with $100 millon in deposits has $15 million of cash inthe bank, $10 milion in deposits withthe Fed, and $15 milion in government securities in its vault ts total reserves equal )S10 milion 1B) $15 milion ©) $25 milion 1D) $40 million. 30, The commercial banks on Sunny Island have checking deposits of $4 million, reserves of $600,000, and loans of $2.4 million. The desired reserve ratio is 10 peteent. The banks have of desired reserves and ‘of excess ‘A) $600,000; $0 'B) $400,000; $200,000 ©) $400,000; $600,000 ) $600,000; $200,000 31, When the output gap is po itrepresens ep. ‘A)a recessionary an inflationary 'B) an inflationary; an employment ©) an inflationary; areeesionary 'D)an employment; an unemployment Je it represents ‘gap, and when tis negative, 32, Monetary policy produces ripple effects, some of which happen quickly and some that can take years to produce change. Which ofthe following takes the longest to change? ‘Inflation rte 'B) Federal funds rate (©) Exchange rate D) Monetary base ECONTSTOSepI08ROIS——SS*~S*«S ge DT33. An increas in the quantity of eserves leads to; ‘Ayan excess demand for reserves and a decreas 'B) an inerease in the federal fds ate ‘Cha movement down along the demand curve for reserves to lower federal funds Da leftward shift of the demand curve for reserves and a lower federal fund rae the federal funds eat, 34. The central bank of Cobra sells securities in an open market operation. Inthe short un, aggregate demand real GDP ‘and the price level ‘A) does not change; increase; falls B) dereases; decrease; falls €) increases increases; rises 1D) does not change; decreases; ses 35. Inthe above figure, ifthe economy is intially at point athe short-run effect of a cut inthe federal funds rate is given by movement rom point; ‘A)arto point 5, increasing output andthe unemployment rate. 'B)ato poin by ineeasing output and decreasing the unemployment r=. ‘©)at point decreasing output and ineteasing the unemployment ras 1D) ato point c, keeping output and the unemployment rate constant 36. In the short run, lowering the federal funds rate real GDP and the price level 1) increases; raises B) doesnot change; lowers ) decreases uses ) decreases; lowers "ONTSTOSepTORHOTS Page 10 of 1437. Which ofthe following describes the chain of events the Fed uses to fight recession? |A) Raise the federal funds rate target, sell government securities, decrase reserves and loans, increase aggregate demand, B) Raise the federal funds rate target, buy government securities, increase reserves ‘and loans, decrease aggregate demand. (©) Lower the federal funds rate target, Buy government securities, decmase reserves and loans, decrease aggregate demand, 1) Lower the federal funds rate targes, buy government securities, inctease reserves and loans, increase aggregate demand, 38, Ifthe Fed is concerned with inflation it il the federal funds ate in order to fsggrgate demand, ) raise; decrease D) lower; decrease 39. Inthe above figure, suppose point Cis the original equilibrium. I the Fe hikes the federal fans rate, the new equilibrium is given by point; AA BB. {©)C thas, he equilibrium does nt change). DD. ECONTSTOSepi0e201S Page 11 ofiS sas “ SAS: ISK IIS ; 2 Ht i 1 310 Reo . Figure cova Figue B fool cor ‘Which agereatesuply-aguregste demand diagram above shows the effect on rel ODP and te price level of moncary policy when le used to fight recession? ‘) Only Figure A B)oniy Figure B {C)Both Figure A and Figue B D) Neither Figure A nor FguteB ECONTSTOSepTOe01R Page IZof14SECTION B (MARKS) ‘There are FOUR (4) questions in this section, Answer ALL questions in the Answer Booklet. ‘QUESTION 120 MARKS) Inthe economy of Jokey Islnd, autonomous consumption expendi the marginal propensity to consume is 0.6. Investment is $110 million, goverment texpenditure is $70 million, and there sre no income taxes. Invesiment and government fxpenditure are constant-they do not vary with income. The island does not trade withthe rest ofthe world 8) Draw the aggregate expenditure curve [CLO2:PLON:C3]S marks) 1), What isthe island's autonomous aggregate expenditure? {CLO2:PLO1:C3}@ marks) ©) Whats the sizeof the multiplier in Jokey Island's economy’? [CL02:PLO1:C3}6 marks) 8) What is the island's aggregate planned expenditure and what is happening to inventories when real GDP is $800 million? [CLO2-PLO:C31S marks) ©) Whatisthe economy's equilibrium aggregate expenditure? [CLO2-PLON:Cay(S marks) ‘FCONTSTOSep7OROE SSCS ge STQUESTION 2 18 MARKS) Fisheia is @ country in which the quantiy theory of money operates. The country has @ constant population, capital stock, and technology. In 2015, eal GDP was $300 milion, the ‘Guanity of money was $60, andthe velocity of ciculetion of money was 10. In 2016, the Drive level rose by 20 percent. 8) What was the price level in 2015? [CLO3:PLO1:C3}¢ marks) 1) What was real GDP in 2016? Explain [CLOS:PLOI:C3}5 marks) ©) What was the velocity of eirulation in 20167 Explain, [CLO03:PLO1:C31@ marks) 8) What was the quantity of money in 2016? Explain, [CLO3:PLO1:C3}S marks) QUESTION 3 (11 MARKS) ‘Aslongas supply-side effets are ignored, the balanced budget multiplier I ial 0 er.” Is the previous statement corret or incorect? Define the balanced budget multpier and then explain your answer. [CL03:PLO1:C4](1 marks) SSTION 4 (11 MARKS) Explain how the Fed's response to inflation works its through the economy to ultimately affecting real GDP and the pice level, [CLO3:PLOI:C4}(11 marks) ‘2 END OF QUESTIONS *** ‘ECONTSIOSepvOa20IB——SSSCSCSC~*~C~C:SCé ge