SECTION I: Answer all 20 questions on the computer answer sheet.
1. Given the following data for an economy, compute the investment component of GDP:
Consumption expenditures
1000
Imports
600
Government purchases
700
Construction of new homes and flats
500
Sales of existing homes and flats
600
Exports
500
Government payments to retirees
200
Beginning-of-year inventories
500
End-of-year inventories
600
Business fixed investment
300
A. 300
B. 400
C. 800
D. 900
2. Every year the typical family on Planet Econ consumes ten pizzas, seven pairs of jeans and 20
litres of milk. In 2002 pizzas cost $10 each, jeans cost $40 per pair, and milk costs $3 per litre. In
2003, the price of pizzas went down to $8 each, while the price of jeans and milk remained the
same. Between 2002 and 2003, a typical family's cost of living:
A. increased by 4.5%
B. decreased by 4.5%
C. increased by 20%
D. decreased by 20%
3. Suppose the value of the CPI is 1.10 in year 1, 1.16 in year 2, and 1.27 in year 3. Assume also
that the price of computers increases by 3% between year 1 and year 2, and by another 3% between
year 2 and year 3. The price level is increasing, the inflation rate is _______, and the relative price
of computers is _________.
A. increasing; increasing
B. constant; increasing
C. constant; decreasing
D. increasing; decreasing
4. Use the following information about the economy to answer the question:
Household saving
$300
Business saving
$700
Government purchases
$1000
Government transfers and interest payments
$500
Government tax collections
$1500
GDP
$5000
Private saving is _____ and national saving is ______.
A. 300; -200
B. 700; 0
C. 1000; 1000
D. 1000; 1500
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5. On 1 January 2000, Anna invested $5000 at 5% interest for one year. The CPI on 1 January 2000
stood at 1.60. On 1 January 2001, the CPI was 1.68. The real rate of interest earned by Anna was
____ %.
A. -5
B. 0
C. 5
D. 8
6. If inflation is -10% (that is, deflation), then it is reasonable to expect:
A. the real interest rate to be at least 10%
B. the real interest rate to be zero
C. the real interest rate to be less than 10%
D. the nominal interest rate to be -10%
7. Holding other factors constant, if a tax cut moves the government budget from surplus to deficit,
then the real interest rate will ___ and the equilibrium quantity of national saving and investment
will ____.
A. increase; increase
B. increase; not change
C. increase; decrease
D. decrease; increase
8. The demand for labour depends on ______ and _______.
A. the marginal product of labour; the price of output produced
B. the supply of labour; the price of output produced
C. the rate of price inflation; the price of the output produced
D. the rate of price inflation; the marginal product of labour
9. Holding other factors constant, if a larger proportion of the population enters the labour force as a
result of a growing social acceptance of women working, then the real wages of workers will _____
and the participation rate will _____.
A. decrease; increase
B. increase; decrease
C. decrease; not change
D. decrease; decrease
10. Assume Okun's law as it applies to Australia finds β = 1.5, when cyclical unemployment
increases from 2 to 3 %, the contractionary gap increases from ___ %, measured in relation to
potential output:
A. 4.5 to 6
B. 0 to 3
C. 0 to 1.5
D. 3 to 4.5
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11. Use the following figure to answer the question:
Starting from an initial short-run equilibrium where output equals 10 000, if autonomous
consumption spending increases by 1000, then the new short-run equilibrium is at an output (Y)
equal to:
A. 3000
B. 4000
C. 7500
D. 12500
12. If planned aggregate expenditure (PAE) in an economy equals 1000 + .9Y and potential output
(Y*) equals 9000, then this economy has:
A. an expansionary gap
B. a contractionary gap
C. no output gap
D. no autonomous expenditure
13. In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a
contractionary gap resulting from a $1 billion decrease in autonomous consumption, government
purchases must be:
A. increased by $1 billion
B. decreased by $1 billion
C. increased by $2 billion
D. decreased by $2 billion
14. Assume 0<MPC<1. A $1 change in government purchases has a _____ impact on planned
aggregate expenditure, while a $1 change in exogenous taxation has a _____ impact on planned
aggregate expenditure.
A. $1; more than $1
B. $1; less than $1
C. less than $1; $1
D. greater than $1; less than $1
15. Which of the following fiscal policy combinations is most likely to eliminate an expansionary
gap?
A. A decrease in government purchases and a decrease in the tax rate.
B. A decrease in government purchases and an increase in the tax rate.
C. An increase in government purchases and a decrease in the tax rate.
D. An increase in government purchases and an increase in the tax rate.
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Refer to the following diagram in answering Question 16:
100
Proportion of
income (%)
Country A
Country B
0
Proportion of
households (%)
100
16. According to the above diagram, which of the following statements is most correct?
A. The income distribution is more equal in Country a than Country B.
B. The income distribution is less equal in Country A than Country B.
C. The income distribution is equally distributed in Country A and Country B.
D. The Gini coefficient is larger in Country A than in Country B.
17. Which of the following will reduce the money supply?
A. The Central Bank purchases financial assets from the banks.
B. An increase in notes and coins held by the public.
C. An increase in the reserve-deposit ratio.
D. A reduction in the number of banks resulting from the merger of existing banks.
18. What is the likely impact on the demand for and supply of 90-day bank bills if the Reserve Bank
of Australia reduces the Overnight Cash Rate?
A. Demand for and supply of 90-day bank bills increases.
B. Demand for and supply of 90-day bank bills decreases.
C. Demand for 90-day bank bills increases and the supply decreases.
D. Demand for 90-day bank bills decreases and the supply increases.
19. According to the Taylor Rule, the Central Bank is more likely to set a high real interest rate if:
A. The output gap is positive and inflation is high.
B. The output gap is positive and inflation is low.
C. The output gap is negative and inflation is high.
D. The output gap is negative and inflation is low.
20. Which of the following is most likely to result in the Central Bank’s policy reaction function
shifting down parallel?
A. There is an expansionary gap.
B. There is a contractionary gap.
C. The inflation rate rises.
D. The inflation rate falls.
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SECTION II:
Answer all parts of the question. When you answer using a diagram,
explain and label the axes carefully. Answers must be given only in the space provided below the
questions.
Question 1. For each question below show all working
An economy is described by the following equations:
𝐶 𝑑 = 8 + 0.8(Y – T)
IP = 20
G = 10
T  T  tY ,
tax function
where T = 10 and t = 0.
X = 0 (Assume it is a closed economy)
Y* = 150,
(i)
potential output.
What is the size of the multiplier in the above model economy? (2 marks)
1/(1-c)
= 1/(1-0.8)
=5
(ii)
Write down the algebraic condition for short run macroeconomic equilibrium. Determine
the equilibrium output in this economy AND the size of the output gap (8 marks)
PAE=8+0.8(Y-10)+20+10
PAE=30+0.8Y
In SR equil.
Y=PAE
Y=30+0.8Y
Y=5*30
Y=150
No output gap.
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(iii)
Suppose that government cuts both the exogenous component of taxes by lump sum
transfers and government purchases simultaneously by 5 units. Calculate the new
equilibrium output AND the resulting output gap, if any.
(6 marks)
PAE=8+0.8(Y-5)+20+5
PAE=29+0.8Y
In SR equil.
Y=PAE
Y=29+0.8Y
Y=5*29
Y=145
A contractionary output gap.
Y-Y*=5
(iv)
Briefly explain why an equal change in T and G leads to a change in income at all. (4 marks)
Refer lecture notes and Text book.
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