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Exam prep memo
Economics 2A (University of Johannesburg)
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EXAM PREPARATION QUESTIONS (2024)
Question 1
Hedonic pricing is
A) the way that luxury goods are priced in a market economy.
B) the tendency for the inflation rate to rise by greater and greater amounts.
C) the tendency for nominal GDP to rise when the price level rises.
D) the process of translating nominal GDP into real GDP.
E) the process of pricing individual characteristics of a good or service.
Question 2
Suppose nominal GDP in 2009 does not change (compared its previous level in
2008). Given this information, we know with certainty that
A) real GDP increased during 2009.
B) the GDP deflator increased during 2009.
C) both the GDP deflator and real GDP fell during 2009.
D) more information is needed to answer this question.
Question 3
Suppose the consumption equation is represented by the following: C = 250
+ .75YD. The multiplier in this economy is
A) .25.
B) .75.
C) 1.
D) 4.
E) 5.
Question 4
Which of the following occurs when disposable income is zero?
A) consumption must be zero
B) saving must be zero
C) saving must be positive
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D) consumption is negative
E) none of these
Question 5
Which of the following would tend to make the multiplier smaller?
A) an increase in the marginal propensity to consume
B) an increase in the marginal propensity to save
C) a reduction in taxes
D) a reduction in government spending
E) none of these
Question 6
Which of the following about capital income is not correct?
A) It refers to a firm's revenue.
B) It is also called profit income.
C) It goes to the firms.
D) It accounts for less than 35% of income in advanced countries
Question 7
An increase in the marginal propensity to save from .1 to .2 will cause
A) an increase in the multiplier and a given change in autonomous
consumption (c0) to have a smaller effect on output.
B) an increase in the multiplier and a given change in autonomous
consumption (c0) to have a larger effect on output.
C) a reduction in the multiplier and a given change in autonomous consumption
(c0) to have a smaller effect on output.
D) a reduction in the multiplier and a given change in autonomous consumption
(c0) to have a larger effect on output.
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Question 8
Suppose investment spending is not very sensitive to the interest rate. Given this
information, we
know that
A) the IS curve should be relatively flat.
B) the IS curve should be relatively steep.
C) the LM curve should be relatively flat.
D) the LM curve should be relatively steep.
E) neither the IS nor the LM curve will be affected
Question 9
Suppose the economy is currently operating on both the LM curve and the IS curve.
Which of the following is true for this economy?
A) Production equals demand.
B) The quantity supplied of bonds equals the quantity demanded of bonds.
C) The money supply equals money demand.
D) Financial markets are in equilibrium.
E) all of these
Question 10
Suppose there is an increase in consumer confidence. Which of the following
represents the complete list of variables that must increase in response to this
increase in consumer confidence?
A) consumption
B) consumption and investment
C) consumption, investment and output
D) consumption and output
E) consumption, output and the interest rate
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Question 11
Graphically derive the IS curve from the goods market equilibrium (10)
Question 12
Use the IS-LM model to answer the following question. Suppose there is a
simultaneous decrease in tax and a decrease in the Repo rate. Explain what effect
this particular policy mix will have on output and the interest rate. Based on your
analysis, do we know with certainty what effect this policy mix will have on output
and interest rate? Explain using a graph. (10)
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LM shifts from a change in interest rates
IS shifts from a change in taxes/ gov spending/ consumer confidence
Question 13
Using a graph, explain why monetary policy will become powerless if the interest rate
becomes equal to zero. (10)
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Question 14
Based on your understanding of the Phillips curve, explain what happens to
actual inflation (relative to expected inflation) when the actual unemployment rate is
either above or below the natural rate of unemployment. (5)
there is a negative relation between inflation and unemployment
When the actual unemployment rate is higher than the natural rate of unemployment,
the inflation rate decreases.
When the actual unemployment rate is lower than the natural rate of unemployment,
the inflation rate increases.
Question 15
Using the WS-PS relation explain the impact of a proposed Basic income grant,
thinking about the unemployment insurance in a society like South Africa (10)
A change in government spending: an increase in government spending would lead to an
increase in demand for goods, which results in an increase in equilibrium output. In other
words, The IS curve would shift to the right. LM remains constant as there is no change to
the interest rates. IS would shift right from IS – IS’. The IS-LM equilibrium would shift from A
– A’. This means that output would increase from Y – Y’
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Question 16
Graphically illustrate what would happen in the following scenario: Online and credit
card fraud increases the regularity with which people make transactions in cash (at
the ATM or inside the bank).
(10)
The increased demand for cash shifts the LM curve up. This happens because at
any given level of income & money supply, the interest rate necessary to equilibrate
the money market is higher. The upward shift in the LM curve lowers income &
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raises the interest rate. Consumption falls because income falls & investment falls
because the interest rate rises due to the increase in money demand. If the SARB
wants to keep output constant, then they must increase the money supply in order to
lower the interest rates & bring output back to its original level. The LM curve will
shift down & to the right & return to its original position. In this case nothing will
change
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