UNIVERSITY OF THE COMMONWEALTH CARIBBEAN

DEPARTMENT OF BUSINESS ADMINISTRATION

END OF SEMESTER ASSESSMENT/2021
 FALL  SPRING  SUMMER

CENTRE : ALL CAMPUSES/ONLINE

For Marker’s use only
Question # Marks
MODULE : ECN201 PRINCIPLES OF MACROECONOMICS 1
2
DATE : DECEMBER 17, 2021
3
TIME : 1:00 PM Total (70)
TOTAL 40%
DURATION : 2 HOURS (PLUS ½ HOUR FOR UPLOAD)

STUDENT ID #:

INSTRUCTIONS:

1. Please read all instructions carefully before attempting any question.

2. This paper consists of THREE (3) questions.
3. ONLINE STUDENTS: PLEASE DOWNLOAD THIS FILE AND COMPLETE ANSWERS IN
THE DOCUMENT. Diagrams, charts, illustrations and tables where applicable, can be drawn
in pencil, a high resolution photo taken and imported into the document.
4. Quantitative computations may be done by inserting a table or using Microsoft Excel and then
importing into the document.
5. PLEASE ANSWER ALL QUESTIONS.
6. This paper represents 40% of your total grade.
7. Total Marks on this paper is [70].
8. Please ensure that you number your questions correctly.
9. Write clearly the number of the question being answered on each of the additional pages.
10. Where questions have multiple parts, all parts must be answered.
11. ONLINE STUDENTS: PLEASE UPLOAD THE COMPLETED MICROSOFT WORD
DOCUMENT ONLY AT THE END OF THE ASSESSMENT PERIOD.

Write your REGISTRATION NUMBER clearly on each page of your attachments.

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 ACADEMIC INTEGRITY

You will be charged with plagiarism if you:

❖ Copy from published sources, including the internet.

❖ Purchase a pre-written paper (either by mail or electronically).

❖ Let someone else write this paper for you.

❖ Reproduce someone else’s assessment paper.

❖ Submit as your own, someone else’s unpublished work, either with or

without permission.

Consequences of Plagiarism
❖ If the final work you submit—all of it—is not yours, it does not matter how you
came by it. Charges of plagiarism are brought to the attention of Academic
Affairs, which initiates an investigation that may lead to formal charges.

❖ The process for the investigation and adjudication of charges may be accessed
at the Dean of Undergraduate Studies Office or designate.

❖ Plagiarism is a serious offense that can result in a variety of sanctions (for

example, failure of the course in which the plagiarism occurred and suspension
from UCC among them).

THERE SHOULD BE NO COLLABORATION AMONG STUDENTS

ABOUT THIS ASSESSMENT.

EVIDENCE OF COLLABORATION (INCLUDING SHARED

TEMPLATES) WILL RESULT IN A SCORE OF ZERO FOR THE
ASSESSMENT.

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QUESTION 1 – [CLO 2] - 20 MARKS- COMPULSORY

1) Consider economy T described by the parameters below:

C=1500+0.6Y
I = 1200
G=2500
X =500
M = 400
T = 1000

i) Identify the marginal propensity to consume (MPC) in T. (1 mark)

ii) What will be the value of the equilibrium GDP in economy T? (6 marks)

iii) Calculate the value of the multiplier for economy T. (3 marks)

iv) Is economy T experiencing a trade deficit or surplus?

Explain your answer. (2 marks)

v) Differentiate between the term’s leakages and injections, giving examples

to support your response. (4 marks)
vi) Discuss two (2) factors that may affect consumption in an economy. (4 marks

i) The marginal propensity to consume (MPC) in economy T is the coefficient of Y in the

consumption function. From the given consumption function C=1500+0.6Y, the MPC is 0.6.

ii) The equilibrium GDP in economy T can be found by setting total output (Y) equal to total
spending (C+I+G+X-M). Substituting the given values, we get Y = 1500+0.6Y + 1200 + 2500 +
500 - 400 - 1000. Solving for Y, we find Y = 5400.

iii) The value of the multiplier for economy T can be calculated using the formula: Multiplier = 1
/ (1 - MPC). Substituting the MPC value of 0.6, we get Multiplier = 1 / (1 - 0.6) = 2.5.

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iv) Economy T is experiencing a trade surplus because the value of exports (X = 500) exceeds
the value of imports (M = 400), resulting in a positive net export balance.

v) In the context of the circular flow of income, leakages refer to the withdrawal of income from
the flow, including saving (S), taxes (T), and imports (M). Injections, on the other hand, refer to
the introduction of income into the flow, including investment (I), government spending (G), and
exports (X). For example, when individuals save money (leakage), it reduces the amount of
money available for spending and investment. Conversely, when the government spends money
on infrastructure projects (injection), it adds to the total income in the economy.

vi) Two factors that may affect consumption in an economy are:

a) Disposable income: As people's disposable income increases, they tend to spend more,
leading to higher consumption. Factors such as changes in wages, taxes, and transfer payments
can influence disposable income.
b) Consumer confidence: The level of confidence that consumers have in the economy and
their own financial situation can impact their willingness to spend. Economic stability,
employment prospects, and future expectations can all affect consumer confidence and, in turn,
consumption levels.

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QUESTION 2 – [CLO 5] (20 MARKS)

The Economic Commission for Latin America and the Caribbean (ECLAC) says the region’s

foreign trade in 2020 had its worst performance since the global financial crisis of 2008-2009,

because of the economic crisis prompted by the global COVID-19 pandemic and the restrictions

imposed by governments to stop its spread. (Daily Gleaner, dated September 27, 2021)

a. List and explain three (3) benefits of international trade. (6 marks)

b. Outline two (2) trade restrictions the government could have implemented
to stop the spread of the virus.
(4 marks)

c. How can the restrictions stated in (b) above contribute to the “foreign trade
in 2020 having its worst performance.” (2 marks)

44d. Explain two (2) arguments in favor of free trade and two (2) arguments
against free trade. (8 marks)

a. Three benefits of international trade include:

1. Economic growth: International trade allows countries to specialize in the production of goods
and services in which they have a comparative advantage. This specialization leads to increased
efficiency and economic growth.

2. Increased consumer choices: International trade provides consumers with access to a wider
variety of goods and services at competitive prices, leading to better quality and lower costs for
consumers.

3. Foreign investment and job creation: International trade can attract foreign investment and
create job opportunities as businesses expand their operations to meet international demand for
their products and services.

b. Two trade restrictions the government could have implemented to stop the spread of the virus
include:

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1. Import/export bans: Governments could have imposed restrictions on the import and export of
certain goods and services to limit the movement of people and goods across borders, thereby
reducing the spread of the virus.

2. Quarantine measures for imported goods: Governments could have implemented quarantine
measures for imported goods and products to ensure that they are not carrying the virus, thereby
reducing the risk of transmission through international trade.

c. The restrictions stated in (b) above could contribute to the "foreign trade in 2020 having its
worst performance" by disrupting supply chains, reducing the volume of goods and services
traded, and increasing costs associated with international trade. Import/export bans and
quarantine measures could lead to delays, shortages, and increased expenses, ultimately
impacting the overall performance of foreign trade.

d. Arguments in favor of free trade include:

1. Economic efficiency: Free trade allows countries to specialize in the production of goods and
services in which they have a comparative advantage, leading to increased efficiency and
economic growth.

2. Consumer benefits: Free trade provides consumers with access to a wider variety of goods and
services at competitive prices, leading to better quality and lower costs for consumers.

Arguments against free trade include:

1. Job displacement: Free trade can lead to the displacement of domestic workers as industries
face competition from foreign producers with lower labor costs.

2. Loss of national sovereignty: Critics argue that free trade agreements can undermine a
country's ability to enact policies that protect domestic industries and workers, leading to
potential loss of control over economic decision-making.

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QUESTION 3 – [CLOs 4, 3] - 30 MARKS

(a) List and explain the four (4) main functions of money? (4 marks)
(b) If you were the Governor of the Bank of Jamaica (BOJ), state three (3)
monetary measures that could use to control money supply. (6 marks)
Three monetary measures that can be used to control the supply of money are:
1. in the economy.

(c) Explain the economic concept ‘run on a bank’ and provide one (1) possible
reason for such an event: (2 marks)

(d) Briefly outline four (4) of the seven (7) characteristics of money. (4 marks)

(e) In April 2020, the BOJ plans to set the Required Reserve Ratio (RRR) at 20%.
By how much will the money supply to increase, if a $10,000 deposit is made
immediately afterwards? (4 marks)

(a) The four main functions of money are:

1. Medium of exchange: Money facilitates the buying and selling of goods and services
by acting as a commonly accepted medium for trade.
2. Unit of account: Money provides a standard unit of measurement for comparing the
values of different goods and services.
3. Store of value: Money allows people to store purchasing power for future use, as it
retains its value over time.
4. Standard of deferred payment: Money enables contracts and debts to be expressed in
terms of a stable medium, allowing for transactions to occur over time.

(b) As the Governor of the Bank of Jamaica, three monetary measures that could be used
to control money supply are:
1. Open market operations: The central bank can buy or sell government securities to
influence the amount of money in the banking system.

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2. Reserve requirements: Adjusting the percentage of deposits that banks are required to
hold as reserves can impact the amount of money available for lending.
3. Discount rate: Changing the interest rate at which commercial banks can borrow from
the central bank can affect their willingness to lend and the overall money supply.

(c) A 'run on a bank' occurs when a large number of customers withdraw their deposits
from a bank due to concerns about its solvency, leading to a potential bank failure. One
possible reason for such an event could be widespread rumors or news about the financial
instability of the bank, causing a loss of confidence among depositors.

(d) Four of the seven characteristics of money are:

1. Durability: Money should be able to withstand wear and tear over time.
2. Portability: It should be easy to carry and transfer.
3. Divisibility: Money should be easily divisible into smaller units to facilitate
transactions of varying sizes.
4. Uniformity: Each unit of money should be the same in terms of value and quality.

(e) If the BOJ sets the Required Reserve Ratio (RRR) at 20% and a $10,000 deposit is
made immediately afterwards, the money supply will increase by $50,000. This is
calculated by taking the initial deposit amount and dividing it by the RRR (10,000 / 0.20
= 50,000).

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[CLO 4]

f. Outline the measures used by monetary and fiscal authorities to influence economic
growth. (4 marks)
g. If the central bank decides to make more money available to the public, what policy
tools does it have at its disposal?
(4 marks)

h. Define “inflation targeting” in your own words. (2 marks)

Inflation targeting is where the central bank specifies an inflation rate as a goal and adjust
monetary policy to achieve that rate. For example, the inflation rate would be 4-6% the
central bank will create monetary polies like RRR and discount rate to achieve this rate
either by increasing or decreasing the aforementioned policies.

f. Monetary and fiscal authorities use various measures to influence economic growth. Monetary
authorities can influence growth through policies such as adjusting interest rates, open market
operations, and reserve requirements. Fiscal authorities, on the other hand, can influence growth
through government spending, taxation, and public investment.

g. If the central bank decides to make more money available to the public, it can use policy tools
such as open market operations, lowering reserve requirements, and lowering the discount rate.
These tools can increase the money supply and make more funds available to the public for
borrowing and spending, thereby influencing economic activity.

h. Inflation targeting is a monetary policy strategy where the central bank sets a specific inflation
target and adjusts its monetary policy to achieve that target. This involves using tools such as
interest rate adjustments, open market operations, and reserve requirements to control the money
supply and influence inflation rates. The goal is to maintain a stable and predictable inflation rate
within the specified target range.
[CLO 3]

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END OF ASSESSMENT

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