ECN102/ECON-202
(Practice Paper-FINAL-2014)
SECTION-1-MULTIPLE CHOICE:
1. If the number of people classified as unemployed is 20,000 and the number of people classified as
employed is 230,000, what is the unemployment rate?
(a) 8%
(b) 8.7%
(c) 9.2%
(d) 11.5%
2. If an individual who cannot find a job because his or her job skills have become obsolete this is an
example of
(a) frictional unemployment.
(b) structural unemployment.
(c) cyclical unemployment.
(d) seasonal unemployment.
3. The ratio of the change in the equilibrium level of income to a change in some autonomous increase in
spending is the
(a) elasticity coefficient.
(b) multiplier.
(c) automatic stabilizer.
(d) marginal propensity of the autonomous variable.
4. Which of the following represents an action by the Central Bank that is designed to decrease the money
supply?
(a) an increase in federal tax rates
(b) selling government securities in the open market
(c) a decrease in the Bank rate
(d) a transfer of government funds from the Bank of Canada to
private banks
5. If the interest rate falls, then
(a) bond prices will remain the same
(b) bond prices will rise
(c) bond prices will fall
6. When income increases, consumption;
(a) Increases
(c) Remains constant
(b) Decreases
(d) None of these
7. GDPMp is equal to:
(a) GDPpc + Net indirect tax
(c) GDPpc – Subsidies
(b) NDPrc + Indirect Tax
(d) None of these
8. The inflation rate can be found by
a) subtracting real income from nominal income.
b) subtracting last year's price index from this year's price index.
c) subtracting last year's price index from this year's price index and dividing this
difference by last year's price index.
d) none of these.
9. The value of APC before the break-even level of income is,
(a) > 1.
(b) <1
(c) = 1
(d) = 0
10. At the break-even level of income:
(a) Income = consumption
(c) Income > consumption
(b) Income < consumption
(d) None of above
11. Output in long run macroeconomic models
(a) are entirely demand determined.
(c) are entirely supply determined.
(b) are both demand and supply determined.
(d) None of these
12. If the quantity of money demanded is less than the quantity of money supplied, then the interest rate will:
(a) either increase or decrease, depending on the amount of excess demand.
(b) increase.
(c) decrease.
(d) not change.
13. Which of the following events will definitely lead to an increase in the equilibrium interest rate?
(a) a decrease in the level of output (real GDP)
(b) the purchase of government securities by the Bank of Canada
(c) an increase in the level of output (real GDP) and an increase in the money supply
(d) the sale of government securities by the Bank of Canada
14. The aggregate demand (AE) curve would shift down if:
(a) government spending were increased.
(b) taxes were increased.
(c) the money supply were increased.
(d) the interest rate decreased.
15. When economists refer to "tight" monetary policy, they mean that the Bank of Canada is taking actions that
will:
(a) increase the demand for money.
(b) decrease the demand for money
(c) expand the supply of money
(d) contract the supply of money
16. The output gap is the:
(a) measure of output that could have been produced if the economy were fully
employed.
(b) difference between Y and Y*.
(c) percentage change in real GDP.
(d) difference between nominal and real output.
17. GDP from the expenditure side is equal to the sum of
(a) Ca + Ia + Ga + (Xa - IMa).
(b) Ca + Ia + Ga + (IMa - Xa).
c) Ca + Ia + net exports.
(d) Ca + Ia + Ga - net exports.
18. An inflationary output gap occurs when
(a) demand for labor services is very low.
(c) nominal GDP exceeds real GDP.
(b) potential GDP exceeds actual GDP.
(d) actual GDP exceeds potential GDP.
19) Macroeconomics is mainly concerned with the study of
(a) fluctuations and trends in aggregated data.
(b) large economic units such as General Motors or Microsoft
(c) fluctuations and trends in disaggregated data.
(d) individual households and how they deal with problems like inflation and
unemployment.
20. In macroeconomics, the term "national income" refers to
(a) the value of the income generated by the production of total output.
(b) total current spending by all households.
(c) the value of a nation's total wealth.
(d) only those sales of currently produced goods sold to other nations.
Q.1. The concept of ‘Exogenous Change in Price’ means:
(a) Increase in P reduces the real value of money holding
(b) Decrease in P decrease the real value of money holding
(c) Change in P will not affect the real value of Money Holding
(d) None of above.
Q.2. The simple multiplier measures the:
(a) Vertical shift in the AD curve in response to a change in autonomous desired
expenditure
2
(b) Horizontal shift in the AD curve in response to a change in autonomous desired
expenditure
(c) Constant shift in the AD curve in response to a change in autonomous desired
expenditure
(b) Negative shift in the AD curve in response to a change in autonomous desired
expenditure
Q.3. Demand behavior is consistent with supply behaviour only at the intersection of the two
curves. The intersection point is known as:
(a) Disequilibrium point
(c) Dissatisfaction Point
(b) Equilibrium Point
(d) Optimum Point
Q.4. Refer the above diagram, identify the gap between Q1 and Q2. The gap is known as:
(a) Inflationary Gap
(b) Time Gap
(c) Recessionary Gap
(d) Price Gap
Q.5. The Phillips Curve summarizes the:
(a) Particular adjustment process — from input gaps to factor prices
(b) General adjustment process — from output gaps to factor prices
(c) General adjustment process — from input gaps to factor prices
(d) All the above
Q.6. When compared to a simple macroeconomic model (with only consumption and \
investment) adding government and foreign trade to the AE function causes:
(a) The AE function to become downward sloping.
(b) The AE function to become perfectly horizontal.
(c) The autonomous component of AE to fall.
(d) The autonomous component of AE to increase.
Q.7. Consider a simple macro model with government and foreign trade and where the price
level is taken as given. The simple multiplier is equal to
(a) 1/MPC.
(b) 1/(1- MPS - t).
(c) 1/(1-MPC). (d) 1/(1 - (MPC(1 - t)- m).
Q.8. Fiscal policy involves the government's use of ________ to affect economic outcomes.
(a) Private investment expenditures
(b) Exchange rate changes
(c) Interest rate changes
(d) Expenditures and taxation
3
Q.9. The concept of barter system refers to:
(a) Exchange of excess goods in terms of small money
(b) Exchange of less goods in terms of excess money.
(c) Exchange of goods in terms of goods.
(d) Exchange of money in terms of money.
Q. 10. Money retains same values when:
(a) There is high inflation in the market
(c) There is zero inflation in the market
(b) There is low inflation in the market
(d) None of above
Q.11. Fiat Money is:
(a) Neither backed by nor convertible into anything else
(c) Backed by Government bonds.
Q.12. The role of bank of the bankers played by:
(a) Commercial Banks
(c) Insurance intermediaries.
(b) Backed by precious metals
(d) None of above
(b) Central/ Federal Banks
(d) Financial institutions
Q. 13. The commercial banks do NOT have its functions as:
(a) Accepting deposits
(b) Making loans
(c) Providing credit-card service
(d) Varying interest rates
Q.14. The fraction of deposit liabilities that it actually holds as reserves either vault cash or
deposits with the central bank is:
(a) Reserve Ratio
(b) Cash/credit ratio
(c) Target reserve ratio
(d) All the above
Q.15. The fraction of deposits it wishes to hold as reserves either vault cash or deposits with the
central bank is:
(a) Reserve Ratio
(b) Cash/credit ratio
(c) Target reserve ratio
(d) All the above
Q.16. In the process of “money creation” any reserves in excess of target reserves are called:
(a) Shortage reserve
(b) Excess reserve
(c) Reserve ratio
(d) Target reserve ratio
Q.17. Liquidity preference curve is sometimes known as:
(a) Money supply curve (MS)
(b) Money Demand curve (MD)
(c) Money demand and money supply curve
(d) All the above
Q.19. Which of the following is correct equation for Money Demand?
(a)
(b)
(c)
Answer-(a)
(d)
4
Q.20. Money neutrality is the idea that changes:
(a) In the money supply there are real effects on the economy
(b) In the money supply do not have real effects on the economy
(c) The flow of money
(d) None of the above
Q.1. By varying the supply of bank reserves, the Central Bank is able to ensure the equilibrium of:
(a) Central Banks Fund Rates
(b) Central Banks Interest Rates
(c) Central Banks Reserve Rates
(d) None
Q.2. The supply curve in the Central Funds market is vertical because it is determined by:
(a) Commercial Banks
(b) Central Banks
(c) Local Banks
(d) All three banks
Q.3. The tools of Monetary Policy mostly used by Central Bank of any country is:
(a) Discount Rates
(b) Open Market Operation
(c) Cash Reserve Ratio
(d) Taxation
Q.4. If Monetary Policy and ______________ have been constant for several years, the expected rate of
inflation will tend to equal the actual rate of inflation
(a) Fiscal policy
(2) Interest Rate
(c) Cash Reserve Ratio
(d) Inflation
Q.5. The determinants of net effects of two forces acting on wages are:
(a) Output Gaps & Inflation Expectation
(b) Input Gaps and Disinflation expectation
(c) Disinflation and Output Gaps
(d) All of these
Q.6. In the absence of Supply Shocks, if expected inflation equals actual inflation, in case of:
(a) Variance in the actual and potential GDP
(b) The actual and potential GDP equals
(c) Actual GDP Exceed Potential GDP
(d) None
Q.7. People can specialize in production and satisfy each other needs by:
(a) Donating
(b) Supplying
(c) Demanding
(d) Trading
Q.8. If the country is gaining through ‘Specialization’ the theory is called as:
(a) Comparative Advantage
(b) Absolute Advantage
(c) Competitive Advantage
(d) Factor Endowment
Q.9. Countries have comparative advantages in the production of goods that use intensively the factors of
Production with which they are abundantly endowed-This theory is given by:
(a) David Ricardo
(b) Schumpter
(c) Hecksher-Ohlin (d) Marshall
Q.10. A rise in the countries Terms of Trade is beneficial because it expands the countries’:
(a) Saving Possibilities
(b) Consumption Possibilities
(c) Income Possibilities
(d) Output Possibilities
SECTION-B- FILL IN THE BLANKS:
1. The depreciation of nation’s currency is caused by _____________________________ monetary
policy.
2. The point that the AE function intersect with the 45 line is the ______________________
5
3. The GDP equation is GDP=_____________________________________
4. The AE equation is AE=_________________________________________
5. When AE is > Actual National Income firms ___________________ output
6. When AE<Actual National Income inventories are ___________________
7. When AE<Actual National Income firms ______________ output
8. When the consumption function shifts upward the saving function shifts __________
9. Other things being equal the three components of desired investment expenditure are
_______________ related to the real interest rate.
10. Changes in wealth, interest rate, and expectations causes a __________ to the consumption function.
11. The period of the business cycle in which real GDP is increasing is called the………………………
A) expansion
B) peak
C) recession
D) trough
12. If the nominal interest rate on a checking account is 2% and the inflation rate is 3% this year, the real
interest rate is……………………..
A) 5%
B) 2%
C) 2
D) –1%
13. If the United States dollar depreciates in the foreign-exchange market, ………………………..
A) the price level in the United States will decrease.
B) United States exports will increase.
C) goods produced in the United States will become more expensive in foreign countries.
D) the United States current account deficit will increase.
14. Inflation is………………………………………………………………………………
A) an increase in the overall level of economic activity
B) an increase in the overall price level.
C) a decrease in the overall price level.
D) a decrease in the overall level of economic activity.
15. Total value added in an economy is equal to the value of…………………………………
A) all inputs and outputs in the economy
B) all profits of all firms in the economy
C) all final goods produced
D) all final and intermediate goods produced
ANSWERS-SECTION-B –FILL IN THE BLANKS
1. Expansionary
2. AE = Y or Income equals to Expenditure
3. GDP = C + I + G + NX
4.
AE = C + I + G + NX
5. Increases
6. Increases
7. Decreases
8. Downward
9.
10. Change
11. Expansion
12. -1%
13. Goods produced in the United States will become more expensive in foreign countries.
14. An increase in the overall price level.
15. all final goods produced
6
Q.1. Because it causes _______________ shifts in both the nest export function and the consumption
function, an exogenous rise in the price level causes a downward shift in the AE curve.
[Answer- Downward-pp 563 text book-Change in equilibrium GDP-Chapt-23]
Q.2. For any given price level, the AD curve shows the level real GDP for which ____________ equal actual
GDP.
[Answer- Desired Aggregate Expenditure, pp. 564, textbook, The Aggregate Demand Curve- Chapt-23]
Q.3. When the simple multiplier measures the resulting horizontal shift in the AD curve. A change in
__________________ changes equilibrium GDP for any given Price level.
[Answer- Autonomous Expenditure, pp. 566, textbook, The Simple Multiplier and Shifts- Chapt-23]
Q.4. The actions of both price-taking and price-setting firms causes the price level and the supply of output
to be positively related –The aggregate supply (AS) curve is ______________ sloping.
[Answer-Upward, pp. 568, textbook, The aggregate supply Curve- Chapt-23].
Q.5. The AS curve is _________________ sloped, an indication that firms will provide more aggregate
output only at the higher price level.
[Answer-Positively, pp. 569, Shifts in the Aggregate Supply Curve- Chapt-23]
Q.6. The slump that is associated with a _____________ generates a set of conditions –low profits for firms
and low demand for labour –that tends to cause wages (and other factor prices) to fall.
[Answer- Recessionary gap, pp.588, textbook, Factor Prices and the Output Gap- Chapt-24]
Q.7. The adjustment in wages and other factor price eventually eliminates any boom caused by
______________ ; real GDP returns to its potential level.
[Answer- Demand Shock, pp. 593, textbook, Expansionary AD Shocks- Chapt-24]
Q.8. In the long run, real GDP is determined solely by Y*; the role of aggregate demand is only to determine
the ____________________ level.
[Answer-Price, pp. 597, textbook, Long-Run Equilibrium- Chapt-24]
Q.9. When the economy’s adjustment process is slow to operate, or produces undesirable side effects such as
rising prices, there is a potential ________________ role of fiscal policy.
[Answer- Stabilization, pp. 600, textbook, Basic Theory of Fiscal Stabilization- Chapt-24].
Q.10. Reduction in tax rates generate a short-run demand stimulus and may also generate a long run increase
in the level and growth rate of _____________.
[Answer-Potential Output, pp. 605, textbook, Reduction in Taxes- Chapt-24].
Q.11. _________________ law predicts that when two types of money are used side by side, the one with
the greater intrinsic value will be driven out of circulation.
[Answer-Gresham’s, pp. 664, textbook- Chapt-27- The Origin of Money]
Q.12. The _________________ needed to assure that depositors can withdraw their deposits on demand will
normally be quite small.
[Answer- Reserve, pp. 673, textbook - Chapt-27- Reserve]
7
Q.13. If ‘v’ is the target reserve ratio, a new deposit to the banking system will increase the total amount of
deposit by ______________ times the new deposit.
[Answer- 1/ v pp. 677, textbook - Chapt-27, The Creation of Deposit Money]
Q.14. The larger is the ____________________ from the banking system, the smaller will be the total
expansion of deposits created by a change in reserves.
[Answer- Cash Drain, pp. 680, textbook - Chapt-27, Excess Reserve and Cash Drain]
Q.15. ______________ does not happen automatically, it depends on the decisions of bankers. If banks do
not choose to lend their excess reserves, there will not be chances of ______________ expansion.
[Answer- Deposit Creation & Deposit, pp. 679, textbook - Chapt-27, Excess Reserve and Cash Drain]
Q.16. The present value of any bond that promises a future payment or sequence of future payments is
______________ related to the market interest rate.
[Answer- Negatively, pp. 690, textbook - Chapt-28, Present value and the Future Interest Rates]
Q.17. An increase in the market interest rate leads to __________ in the price of any given bond.
[Answer- Fall, pp. 691, textbook - Chapt-28, Present Value and Market price]
Q.18. Other things being equal, the demand for money is assumed to be _____________ related to the
interest rate.
[Answer- Negatively, pp. 693, textbook - Chapt-28, The Determinants of Money Demand]
Q.19. An increase in real GDP increases the volume of transactions in the economy and therefore leads to an
increase in _________________.
[Answer- Desired Money Holding, pp. 694, textbook - Chapt-28, Real GDP]
Q.20. _____________ equilibrium occurs when the rate of interest is such that the quantity of money
demanded equals the quantity of money supplied.
[Answer- Monetary, pp. 697, textbook - Chapt-28, Monetary Equilibrium]
SECTION-C- SHORT ANSWER: (Refere Book for Answers)
1. What is marginal propensity to consume (MPC)?
2. How do we calculate unemployment rate?
3. What is the gross domestic product (GDP)?
4. What is the difference between intermediate goods & final goods and services?
5. What is the difference between GDP & GNP?
6. How the consumer can get the optimal satisfaction?
7. What do mean by Supply & Demand Shocks?
8. What do you mean by Unemployment?
9. What is Average Propensity to Consume?
10. Define the structural unemployment.
1.
2.
3.
4.
5.
6.
7.
Define Aggregate Demand Shocks [Ref. pp. 572, textbook –Chapt-23]
Define Aggregate Supply Shock [Ref. pp. 575, textbook –Chapt-23]
What is Macroeconomic Equilibrium [Ref. pp. 570, textbook –Chapt-23]
Why AD curve slopes negatively [Ref. pp. 565, textbook –Chapt-23]
What happened to the multiplier when the price level varies? [Ref. pp. 572, textbook –Chapt-23].
Define Fiscal stabilization Policy [Ref. pp. 597, textbook –Chapt-24]
What is inflationary and recessionary gaps [Ref. pp. 589, textbook –Chapt-24]
8
8. Define the short-run versus long-run effects of AD and AS shocks [Ref. pp. 596, textbook –Chapt24]
9. Explain the concept of ‘Output Gap’ due to factor prices [Ref. pp. 587, textbook –Chapt-24]
10. What do mean by Phillips Curve? [Ref. pp. 589, textbook –Chapt-24]
11. What is Fiat Money? [Ref. pp. 666, textbook –Chapt-27]
12. What is the sole purpose for money demand? [Ref. pp. 661-663, textbook –Chapt-27]
13. What do you mean by target reserve and excess reserve? [Ref. pp. 674, textbook –Chapt-27]
14. Define the concept of deposit creation [Ref. pp. 675, textbook –Chapt-27]
15. Explain the concept of Money Supply [Ref. pp. 680, textbook –Chapt-27]
16. What do you mean by Money Neutrality? [Ref. pp. 703, textbook –Chapt-28]
17. Define the concept of Monetary equilibrium with diagram [Ref. pp. 696, textbook –Chapt-28]
18. What are the reasons for holding money? [Ref. pp. 692, textbook –Chapt-28]
19. Explain the concept of Investment Demand function [Ref. pp. 699, textbook –Chapt-28]
20. Describe the concept of Money Demand Function [Ref. pp. 695, textbook –Chapt-28]
1. Discuss the concepts of absolute advantage and comparative advantage trade theories. [Ref:
Textbook, pp. 817-818 CH-33]
2. How do you define the concept of Factor Endowment? [Ref: Textbook, pp. 824 CH-33]
3. Define the Law of One Price [Ref: Textbook, pp. 826 CH-33]
4. What should a country do when it have negative Terms of Trade? [Ref: Textbook, pp. 829 CH-33]
5. Define the term ‘Disinflation [Ref: Textbook, pp. 753 CH-30]
6. Elaborate the Expectation Augmented Phillips Curve [Ref: Textbook, pp. 751 CH-30]
7. Define the concept of Supply Shock Pressure on Inflation [Ref: Textbook, pp. 743 CH-30]
8. Elaborate the ‘Inflation Target’ [Ref: Textbook, pp. 731 CH-29]
9. What do you understand by Open Market Operation [Ref: Textbook, pp. 722 CH-29]
10. The central Bank used the Discount Windows, write the purpose and procedure.
SECTION-D- LONG QUESTION:
1. The following is the information from the national income accounts for a hypothetical
country:
GNP
Personal Disposable Income
Consumption
X-M
Govt. Budget Deficit
5000.00
4100.00
3800.00
50.00
200.00
Calculate Gross Investment and Government Expenditure
2. Why increase in interest rates discourage investment? Explain with graphical presentation.
3. The following is the information from the national income accounts for a hypothetical
country:
GDP
Gross Investment
Net Investment
6000.00
800.00
200.00
9
Consumption
Govt. purchases of goods & services
Govt. Budget Surplus
What is:
a) NDP
c) Govt. taxes minus transfers
f) Personal Saving.
4000.00
1100.00
30.00
b) Net exports
d) Disposable personal income
4. Assume that GDP is Rs. 6000, personal disposable income is 5100 & the Govt. Budget Deficit is
200, consumption is 3800 & trade deficit 1000. Calculate saving, investment & government
spending.
5. Discuss the three approaches of measuring national income? Show that these three approaches
give identical result
Q.6. If the interest rate is 10% and the bond pays SR 750 in 3 years, calculate the Present Value of that bond.
[Ref. pp. 689, textbook –Chapt-28]
Q.7. Explain the concept of Monetary Transmission Mechanism with the help of flow-chart. [Ref. pp. 697,
textbook –Chapt-28]
Q.8. What are the basic functions of Central / Federal Banks? [Ref. pp. 669, textbook –Chapt-27]
Q.9. Explain the Basic Theory of Fiscal Stabilization with the help of Diagram. [Ref. pp. 597-598, textbook
–Chapt-24]
Q.10. Define the concepts of Aggregate Demand and Aggregate Supply Shocks with the help of
graph/diagram. [Ref. pp. 572-577, textbook –Chapt-23]
10