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
Answer: C
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
Answer: B
3. At Sally’s new income level, what is her average propensity to consume?
A)
B)
C)
D)
0
0.33
0.66
1
Answer: D
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.
Answer: B
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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
Answer: A
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.
Answer: D
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.
Answer: B
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.
Answer: D
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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.
Answer: A
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.
Answer: C
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.
Answer: A
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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.
Answer: D
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.
Answer: B
14. If income is 100, what is aggregate expenditure?
A)
B)
C)
D)
160.
180.
200.
300.
Answer: A
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.
Answer: C
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16. What is equilibrium level of Y?
A)
B)
C)
D)
100
200
300
400
Answer: D
17. What is the value of the multiplier?
A)
B)
C)
D)
0.
1.
2.
5.
Answer: D
18. If investment rises from 60 to 100, how much does equilibrium GDP rise by?
A)
B)
C)
D)
0.
40.
80.
200.
Answer: D
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).
Answer: D
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.
Answer: C
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
Answer: There could be two approaches to this question- either through the AE
diagram or the AD-AS diagram. Both approaches are correct, but each will give
slightly different information.
In order to get full points, you needed to correctly draw the diagram (with labels on
the curves and the values before and after the change clearly indicated) plus provide a
brief explanation in text of what your diagram was showing.
AE
AE1
AE0
G
Y0
mG
Y1
Y
The AE form would mention that an increase in G will shift the AE curve up, as G is a
component of AE. Output will rise (and consumption will as well) as the equilibrium
value of output rises- should correctly indicate the intersection of 45 degree line and
the AE curve. Output will rise by more than the $600m change in G. For full credit
should indicate that output will rise by the multiplier times change in G.
ECO120 Macroeconomics
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The AD form should indicate the rise in both output and prices. The final change in
output will be less than the multiplier times change in G as the price rise causes
equilibrium Y to drop.
P
AS
P1
P0
AD1
AD0
Y0
Y1
Y
(b) the $600m in new income taxes the government will have to use to pay for the
ships.
Answer: This is simply the reverse of (a). Students should note that the shift is not
the multiplier times G as only the C function shifts down only by the MPC times
change in taxes.
You had to redraw the diagrams here to get full credit for Question 1. You could not
simply say “Re-label the points in the above diagram”.
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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.]
Answer: Comparing the PV of the two deals:
PV (Offer 1) = $6,000
PV (Offer 2) = $3,000/(1.1) + $3,000/(1.1)^2 + $3,000/(1.1)^3
= $2,727 + $2,479 + $2,254
= $7,460
You should take the “pay in cash now” offer as the PV of $6,000 is less than the PV
of $7,460 of the 3 year payment deal.
An alternative way of doing this would be to compare the amount in debt you would
be in 4 years time if you took out loans to pay all the costs.
Debt (Offer 1) = $6,000 x (1.1)^3 = $7,986
Vs
Debt (offer 2) = $3,000 x (1.1)^2 + $3,000 x (1.1) + $3,000 = $3,630 + $3,300 +
$3,000 = $9,930
The PV of Debt (Offer 1) = $6,000 and the PV of Debt (Offer 2) = $7,460, which is,
of course, the same answer.
You had to explain this VERY carefully to get full credit for doing a bank loan type
of answer.
ECO120 Macroeconomics
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