MACROECONOMICS
MCD2090
Trimester Two 2020 Practice Examination
INSTRUCTIONS TO CANDIDATES
1.
Circle the best answer to QUESTIONS 1 to 20 (Section A) in the table below. Answer all
of the remaining questions in Section B and C in the question booklet.
2.
Give only ONE answer per question in the table below. Choosing more than one answer will
invalidate all answers to the question.
3.
Do NOT detach the first page. This will invalidate the test paper
Question
Answer
Question
Answer
1
True
False
11
a
b
c
d
2
True
False
12
a
b
c
d
3
True
False
13
a
b
c
d
4
True
False
14
a
b
c
d
5
True
False
15
a
b
c
d
6
True
False
16
a
b
c
d
7
True
False
17
a
b
c
d
8
True
False
18
a
b
c
d
9
True
False
19
a
b
c
d
10
True
False
20
a
b
c
d
TOTAL
SECTION A
True/False (10 marks)
Indicate whether the statement is true or false on the answer sheet.
1.
Gross Domestic Product (GDP) is not a good measure of economic wellbeing because people
prefer higher incomes to lower incomes.
2.
The accumulation of capital is not subject to diminishing returns in the short-run.
3.
The term money refers to the assets that people regularly use to buy goods and services.
4.
The long run aggregate supply curve is vertical as it is dependent on the price level.
5.
In an open economy, savings = investment.
6.
Most of the economy’s unemployment problem is attributable to the relatively few workers
who are jobless for long periods of time.
7.
Menu costs are costs of inflation limited to restaurants and fast food establishments.
8.
Other things being the same, an increase in a country’s real interest rate increases net foreign
investment.
9.
Commodity money has value independent of its use as money.
10. When the government chooses to raise revenue by printing money, it will lead to inflation.
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Multiple Choice (10 marks)
Identify the choice that best completes the statement or answers the question.
11. The natural rate of unemployment is:
a. unchanging
b. is known as full employment
c. short-term unemplyment
d. always increasing
12. Mary has been out of paid workforce in order to raise her children, now she decides to do
paid work and is looking for a job. Which of the following is the correct statement?
a. The number of unemployed increases, and the labour force increases.
b. The number of unemployed increases, and the labour force decreases.
c. The number of unemployed is unaffected, and the labour force increases.
d. The number of unemployed increases, and the labour force is unaffected.
13. A budget deficit:
a. shifts the supply curve for loanable funds to the left
b. lowers the interest rate
c. does not affect the interest rate
d. shifts the supply curve for loanable funds to the right
14. Establishing unions will:
a. raise the wage of the union workers
b. increase the demand for union workers
c. decrease the supply of labour in the non-unionised parts of the economy
d. none of the above
15. A rise in price level means a:
a. higher value of money
b. deflation
c. lower value of money
d. lower value of goods
16. When the money is neutral (real interest rate remains the same), an increase in the rate of
inflation from 2 percent to 5 percent will __________.
a.
b.
c.
d.
increase the real interest rate 3 percent
increase the nominal interest rate by 3 percent
decrease the nominal interest rate by 3 percent
increase the nominal interest rate by less than 3 percent
17. Which of the following explanations for the upward slope of the short-run aggregate-supply
curve is correct?
a. nominal wages will not adjust immediatly
b. prices are sticky or fixed
c. prices cannot be adjusted immeidatly due to menu costs
d. all of the above
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18. Consumption expenditure:
a. is spending on new capital equipment, inventories and structures including housing
b. is spending on goods and services by local, state and federal governments
c. is spending on domestically produced goods by foreigners minus spending on foreign
goods by domestic residents
d. is spending by households on goods and services
19. Suppose that the prices of imported consumption goods rose from the base year. Which is the most
accurate statement about the CPI and the GDP deflator?
a. The CPI rises but the GDP deflator doesn’t change
b. The GDP deflator rises but the CPI doesn’t change
c. Both the GDP deflator and the CPI rises
d. Both the GDP deflator and the CPI don’t change
20. The government has introduced the minimum wage law. The minimum wage is set at W1 as
shown in Graph 1 below. After introducing the minimum wage law, the quantity of labour
supplied is _______.
a. L0, the quantity of labour demanded is L0 and the amount of unemployed labour is zero
b. L0, the quantity of labour demanded is L1 and the amount of unemployed labour is L0 – L1
c. L2, the quantity of labour demanded is L1 and the amount of unemployed labour is L2 – L1
d. L2, the quantity of labour demanded is L0 and the amount of unemployed labour is L2 – L0
Graph 1
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SECTION B
Short Answer Questions (15 marks)
1. a) Define GDP (0.5 marks)
b) List the four components of GDP with examples. (1 mark)
c) List and explain three factors that can affect the consumption spending (1.5 marks)
2. Would the following events cause a shift in Aggregate demand or/and Short run Aggregate
supply curve. State the direction of shift of the curve. (3 marks)
a. An increase in interest rates.
b. A decrease in wages throughout the economy.
c. An increase in oil prices
d. A decrease in income taxes
e. An increase in household wealth
3. Use the dynamic model of aggregate demand and aggregate supply to illustrate a situation
where the economy is growing but do not experience inflation of deflation in the long run. (3
marks)
4. Use the following graph to answer the questions. (3 marks)
a. What is the value of equilibrium real GDP?
b. What is the value of the MPC?
c. What is the value of the multiplier?
d. What is the value of unplanned changes in inventories when real GDP has each of the following
values?
 $1000 billion
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 $1200 billion
 $1400 billion
5. Analyse the impact of imposing efficiency wages in a labour market. Draw a labour market
diagram and explain. (3 marks)
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SECTION C
Analytical Questions (25 marks)
Question 1
(13 marks)
Read the article below and answer the following questions.
Zaun, Todd. "Japan's Jobless Rate Jumps Unexpectedly." New York Times 28 Aug. 2004: C3. Academic
OneFile. Web. 25 Apr. 2016. (excerpt)
Japan's unemployment rate jumped unexpectedly in July while prices and consumer spending
continued to decline, raising a note of doubt on the strength of the economic recovery here.
Japan's unemployment rate rose for the first time this year, jumping to 4.9 percent for July from
4.6 percent for June. Economists had expected the rate to remain unchanged. Spending by
households of salaried workers fell 2.5 percent in July from a month earlier, the third consecutive
monthly decline.
''These numbers were generally on the weak side of expectations, so it does raise the question of
whether economic growth was as strong as the market would portray,'' said Ryo Hino, an
economist for J.P. Morgan in Tokyo.
A report earlier this month showed that Japan's economy grew at an unexpectedly weak annual
rate of 1.7 percent in the second quarter, sharply slowing from 6.6 percent in the first quarter and
7.4 percent in the last quarter of 2003.
Still, Mr. Hino and other economists cautioned against reading too much into Friday's figures
because other recent data, in particular strong exports and corporate profits, suggest Japan's
recovery remains intact even if growth has backed off the torrid pace seen earlier this year.
Traders seemed to share that view. Stock prices initially declined on the reports, but Japan's
benchmark Nikkei 225 stock average recovered to close up 0.7 percent, at 11,209.59.
Government officials and economists said the jump in the July unemployment rate was mostly a
result of an increase in the number of job seekers as the improved economy drew people who had
given up looking for work back into the job market. Some 90,000 new jobs were created in July,
not nearly enough to absorb an increase of 320,000 entrants to the labor force.
''The economic recovery may be prompting people to look for new or better jobs, and is one reason
the unemployment rate temporarily rose,'' Michio Matsumura, a statistics bureau official, told
reporters, according to Bloomberg News.
The drop in household spending in July was also worse than expected. The decline came as a
surprise to economists, who expected unusually hot summer weather to help spending. While sales
of air-conditioners and beer have been rising, the increases were not enough to offset declines in
spending on housing and entertainment.
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Policy makers are counting on a rebound in consumer spending to act as a counterweight to
exports, which have so far been the main driver of this recovery, now in its second year.
Consumer spending has been tepid amid a long decline in incomes. Although profits are growing
in corporate Japan, many companies have been reluctant to raise salaries to keep costs down. That
cost pressure stems in large part from Japan's six-year battle with deflation, which has limited
revenue growth at companies and forced them to cut costs to raise profits. …
Although Friday's reports suggest Japan's economy may not be as vigorous as previously thought,
other economic data paint a different picture. On Thursday, the government said the trade surplus
grew for the 13th consecutive month in July, rising to $10.3 billion. The trade surplus was larger
than expected, with exports to China and other Asian countries remaining high despite predictions
that they would begin to taper off. ….
a. Refer to the above article. What is the major factor that leads to an increase in unemployment
rate? (1 mark)
b. According to the article, what is the unemployment rate in June and July? (1 mark)
c. According to the article, what has happened to the economic growth rate per quarter in Japan?
How has it changed from the previous quarters? (1 mark)
d. “ The trade surplus was larger than expected…”
Assume that the economy is initially at its long run equilibrium. Using the Static Aggregate
Demand-Aggregate Supply (AD-AS) model, explain the possible effects of an increase in netexports on the price level and the output level in the short-run. (4 marks)
e. (i) “The drop in household spending is worst than expected…”
Assume that the economy is initially at its long run equilibrium. Using the Static Aggregate
Demand-Aggregate Supply (AD-AS) model, explain the possible effects of drop in household
spending on the price level and the output level in the short-run. (4 marks)
f. In response to part d), what policy can be pursued by the government to boost household
spending? How can the government implement this policy?
(2 marks)
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Question 2
(12 marks)
Read the article below and answer the following questions.
Federal budget 2016: Deficit $21b worse, despite iron ore rise, says Deloitte
Peter Martin , the Age, April 26. 2016 (excerpt)
The government's budget position has deteriorated $21 billion in the past four months, despite
the resurgent iron ore price, a new analysis has found.
The Deloitte Access Budget Monitor finds that a higher than expected dollar, more sluggish than
expected wage growth, and new spending commitments have detracted more from the budget
position than the higher iron ore price will add…..
"Yes the iron ore boost is welcome, but some of it may be temporary, and there are other
challenges. Total tax collections are expected to undershoot Treasury expectations by $3.5
billion in 2017-18, and then by a further $4.1 billion in 2018-19. And, in an election year, the
government has already reversed some previously announced spending cuts.
"So, based on newly announced policy, we expect spending to be around $1 billion more than
the official forecasts in 2017-18, growing to $2.5 billion in 2018-19."
Among the extra spending measures identified by Deloitte Access are an extra $2.9 billion over
four years in grants to the states for hospitals; $760 million in additional defence funding; $520
million and $580 million to retain the Clean Energy Finance Corporation and the Australian
Renewable Energy Agency; and $750 million to add hepatitis C medications to the
Pharmaceutical Benefits Scheme….
a. According to the article, what is the forecast on the total tax collection? (1 mark)
b. According to the article, what is the forecast on the government spending? (1 mark)
c. According to the article, what are the additional spending on hospitals and defence? (1 mark)
d. Keeping all other things constant, how does a larger budget deficit affect the following? (3
marks)
 Supply of loanable funds curve
 Demand for loanable funds curve
 Private savings
 Public savings
 Investment
 Interest rate
e. Use the loanable funds market diagram to demonstrate your answer. Assume that initially the
loanable funds market is in equilibrium. (4 marks)
f. How an increase in budget deficit can leads to a crowding out effect? (2 marks)
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