FACULTY OF COMMERCE
SPRING SESSION EXAMINATION 2005
ECO120 MACROECONOMICS
LECTURERS: Rod Duncan
DAY & DATE: 30th August 2005
TIME: 1:50pm - 2:50 pm
WRITING TIME: 50 Minutes
READING TIME: 10 Minutes
MATERIALS SUPPLIED BY UNIVERSITY:
General Purpose Answer Sheer
MATERIALS PERMITTED IN EXAMINATION: 2B Pencil/Eraser
Battery/Solar Powered Calculator
(no printer, non-programmable)
NUMBER OF QUESTIONS:
Part A: 20;
Part B: 2
INSTRUCTIONS TO CANDIDATES:
1.
Enter your name and student number and sign in the space provided at the bottom of
this page.
2.
This is a closed book examination; therefore no written material, reference books or
notes will be permitted into the examination room.
3.
Circle your answers for Part A on the General Purpose Answer Sheet. For Part B,
write your answer in the space provided on this exam.
Part A (multiple choice): Answer all questions (60 marks)
Part B (short answer): Answer both of the questions (40 marks)
4.
At the end of the exam, turn in both your exam paper and your answer sheet.
STUDENT NAME: ............................................
STUDENT NO.: ........................
STUDENT SIGNATURE: .........................................................................................
ECO120 Macroeconomics
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PART A
Multiple Choice Questions
(60 marks – 3 marks each)
Answer all twenty (20) questions.
1. At an income level of $500 per week, Sally spent $600. Sally gets a raise to $800
per week and now spends $800 per week. What is Sally’s marginal propensity to
consume?
A)
B)
C)
D)
0
0.33
0.66
1
2. Using the same example as in Q1, what is Sally’s marginal propensity to save?
A)
B)
C)
D)
0
0.33
0.66
1
3. At Sally’s new income level, what is her average propensity to consume?
A)
B)
C)
D)
0
0.33
0.66
1
4. Which of the following reasons explains why the consumption function is sloping
upwards?
A)
B)
C)
D)
As price falls, people feel wealthier as so consume more goods.
As incomes rise, people feel wealthier and so consume more goods.
As interest rates fall, NPV of investments increases, so investments rise.
As the price of goods fall, people want to buy more of those goods.
5. Which of the following events would cause an increase in the size of the multiplier?
A)
B)
C)
D)
An increase in the marginal propensity to consume
An increase in the marginal propensity to save
A reduction in interest rates
A reduction in government spending
ECO120 Macroeconomics
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6. An increase in investment spending causes
A) a movement along the aggregate expenditure curve and a shift in the
aggregate demand curve.
B) a shift in the aggregate expenditure curve and a movement along the
aggregate demand curve.
C) a shift in the aggregate expenditure curve but has no effect on the aggregate
demand curve.
D) a shift in the aggregate expenditure and aggregate demand curves.
7. Suppose that the economy begins at an equilibrium. Which of the following would
cause the price level to rise and real GDP to decrease in the short run?
A)
B)
C)
D)
A decrease in government purchases.
An increase in the price of oil that decreases aggregate supply.
An increase in the stock of capital that increases aggregate supply.
An increase in the value of real wealth of households.
8. Suppose that the economy begins at an equilibrium. Which of the following would
cause the price level to rise and real GDP to rise in the short run?
A)
B)
C)
D)
A decrease in government purchases.
An increase in the price of oil that decreases aggregate supply.
An increase in the stock of capital that increases aggregate supply.
An increase in the value of real wealth of households.
9. The value of the multiplier in the economy illustrated in the figure above is
A)
B)
C)
D)
2.0.
2.5.
4.0.
10.0.
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10. Moving along which curve do the nominal wages of workers and prices of goods
and services move in the same proportion?
A)
B)
C)
D)
The AD curve.
The short-run AS curve.
The long-run AS curve.
None of the above curves.
11. The aggregate demand curve shows that, if other factors are held constant,
A) a higher price level will result in a decrease in the quantity of real GDP
demanded.
B) a higher price level will result in an increase in the quantity of real GDP
demanded.
C) a higher price level will result in a lower interest rate.
D) a lower price level will result in inflationary conditions.
12. An increase in occupational safety requirements on firms leading to a rise in
production costs will lead to a
A)
B)
C)
D)
shift in the AD curve.
shift in the short-run AS curve.
shift in the long-run AS curve.
shift in both the short-run and long-run AS curves.
For Questions 13-18, use the following model of the economy:
C = 20 + 0.8Y
I = 60
AE = C + I
13. The marginal propensity to consume is:
A)
B)
C)
D)
0
0.8
60.
200.
14. If income is 100, what is aggregate expenditure?
A)
B)
C)
D)
160.
180.
200.
300.
ECO120 Macroeconomics
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15. Is Y = 300 an equilibrium in this model of the economy? If not, what is the level
of excess demand (AE – Y) at Y = 300?
A)
B)
C)
D)
Yes.
No, excess demand is -60
No, excess demand is 20
No, excess demand is 60.
16. What is equilibrium level of Y?
A)
B)
C)
D)
100
200
300
400
17. What is the value of the multiplier?
A)
B)
C)
D)
0.
1.
2.
5.
18. If investment rises from 60 to 100, how much does equilibrium GDP rise by?
A)
B)
C)
D)
0.
40.
80.
200.
19. What is the present value of $1 in 1 year’s time if the interest rate is i?
A)
B)
C)
D)
1+i
1 - i.
1/i.
1/(1 + i).
20. Suppose a bond offers to pay $100 in one year and the current interest rate is 5%.
Given this information, the most you would pay for this bond would be (rounded):
A)
B)
C)
D)
$105.
$100.
$95.
$90.
ECO120 Macroeconomics
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PART B
(40 marks – 20 marks each)
Answer both questions in the space provided on this sheet.
QUESTION: B.1
The Howard government plans to spend $600m on new coast guard ships for the
Australian armed forces. These ships will be built in Tasmania. Explain (using both
a diagram and text based on what you have learned so far in class) how the
Australian economy will be affected by:
[Hints: Remember to draw the initial equilibrium before the new spending and new
taxes on your diagrams. Treat the new taxes and new spending as separate policies.]
(a) the $600m in new government purchases; and
(b) the $600m in new income taxes the government will have to use to pay for the
ships.
ECO120 Macroeconomics
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QUESTION: B.2
You are planning to buy a used car. The car dealer makes you an offer- either pay
$6,000 now or pay $3,000 each year for the next 3 years (starting next year). Assume
the current bank loan rate is 10%, carefully explain which is a better offer.
[Hint: Write up the NPV of each offer.]
ECO120 Macroeconomics
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