FACULTY OF COMMERCE
SPRING SESSION EXAMINATION ANSWERS 2007
ECO120 MACROECONOMICS
LECTURERS: RodDuncan
DAY & DATE: 4th September, 2007TIME: 1:00pm - 1:50pm
READING AND WRITING TIME: 50 Minutes
MATERIALS SUPPLIED BY UNIVERSITY:None
MATERIALS PERMITTED IN EXAMINATION: Pen or pencil
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.Write your answers for Part A in the boxes provided at the end of Part A. 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 bothof the questions (40 marks)
4.At the end of the exam, turn inyour exam paper.
STUDENT NAME: ...... / STUDENT NO.: ......STUDENT SIGNATURE: ......
ECO120 Macroeconomics CPage 1 of 9
PART A
Multiple Choice Questions
(60 marks – 3 marks each)
Answer all twenty (20) questions. Write your answers in the boxes provided at the end of Part A.
For Questions 1-8, use the following model of the economy:
C = 100 + 0.90Y
I = 200
AE = C + I
1. If income rises by $1, by how much does aggregate household consumption rise in this economy?
A)$0.10.
B)$0.90.
C)$1.
D)$10.
2. The marginal propensity to save in this economy is:
A)0.1.
B)0.9.
C)1.
D)10.
3. If income is 1000, how much is household consumption?
A)1000.
B)1100.
C)1200.
D)1600.
4.What is the equation for the AE curve in this model?
A)AE = 100 + Y.
B)AE = 200 + 0.1Y.
C)AE = 200 + 0.9 Y.
D)AE = 300 + 0.9Y.
5. Is Y = 1000 an equilibrium in this model of the economy? If not, what is the level of excess demand (AE – Y) at Y = 1000?
A)Yes.
B)No, excess demand is -100.
C)No, excess demand is -200.
D)No, excess demand is 200.
6. What is equilibrium level of Y?
A)1000.
B)2000.
C)3000.
D)4000.
7. What is the value of the multiplier?
A)0.
B)1.
C)2.
D)10.
8. If investment rises from 200 to 300, how much does equilibrium GDP rise by?
A)0.
B)100.
C)1,000.
D)10,000.
For Questions 9-15, please refer to the following AD-AS diagram. For each question we are assumed to start at the initial equilibrium marked with income at Y0 and prices at P0.
9.Which of the following would cause the economy to move to a new equilibrium marked E?
A)A rise in the price of electricity to businesses.
B)An increase in exports.
C)An improvement in production technologies.
D)An increase in income taxes on households.
10. Which of the following would cause the economy to move to a new equilibrium marked F?
A)A decrease in government purchases.
B)An increase in the price of oil that decreases aggregate supply.
C)An increase in the stock of capital that increases aggregate supply.
D)An increase in the value of real wealth of households.
11.Which of the following would cause the economy to move to a new equilibrium marked G?
A)A rise in the price of electricity to businesses.
B)An increase in exports.
C)An improvement in production technologies.
D)An increase in income taxes on households.
12. Which of the following would cause the economy to move to a new equilibrium marked H?
A)A decrease in government purchases.
B)An increase in the price of oil that decreases aggregate supply.
C)An increase in the stock of capital that increases aggregate supply.
D)An increase in the value of real wealth of households.
13. In the above diagram, the long-run AS curve would be drawn as:
A)A 45 degree line out of the origin.
B)A straight line at the level of GDP at Y0.
C)A straight line at the level of prices at P0.
D)The same line as the short-run AS curve.
14. If the economy is initially in a boom with unemployment at a record low then the long-run AS curve would be drawn:
A)To the right of Y0.
B)To the left of Y0.
C)Above P0.
D)Below P0.
15. If the economy is initially in a recession with unemployment at a record high then the long-run AS curve would be drawn:
A)To the right of Y0.
B)To the left of Y0.
C)Above P0.
D)Below P0.
16. Moving along which curve do the nominal wages of workers remain the same while prices of goods and services rise or fall?
A)The AD curve.
B)The short-run AS curve.
C)The long-run AS curve.
D)None of the above curves.
17. The slope of the aggregate consumption function is the:
A)Average propensity to consume.
B)Average propensity to save.
C)Marginal propensity to consume.
D)Marginal propensity to save.
18. One reason the AD curve is downward-sloping is because:
A)Supply of goods and services always exceeds demand for goods and services.
B)People’s consumption always rises when interest rates rise.
C)Employees work more when their wages rise.
D)Demand for goods and services rises when prices fall due to the wealth effect.
19. The short-run AS curve is upward-sloping because:
A)The money wage rate remains constant so the higher prices for their product makes it profitable for firms to expand production.
B)Each firm must keep its production level up to the level of its rivals, and some firms will expand production as the price level increases.
C)The higher prices allow the firm to hire more workers by offering higher wages, thereby increasing productivity and profits.
D)Firms can increase their profits by increasing their maintenance.
20. Which of the following reasons explains why the investment demand function is sloping downwards?
A)As price falls, people feel wealthier and so consume more goods.
B)As incomes rise, people feel wealthier and so consume more goods.
C)As interest rates fall, the NPV of investments increases, so investments rise.
D)As interest rates rise, people feel wealthier and so investment increases.
ANSWERS TO PART A
Write your answers to the multiple choice questions here. If the grader can not read your handwriting, you will be given zero marks.
1 / B2 / A
3 / A
4 / D
5 / D
6 / C
7 / D
8 / C
9 / A
10 / D
11 / D
12 / C
13 / B
14 / B
15 / A
16 / B
17 / C
18 / D
19 / A
20 / C
PART B
(40 marks – 20 marks each)
Answer both questions in the space provided.
QUESTION: B.1(10 + 10 = 20 marks)
The Chinese government is concerned about air pollution in China and demands that Chinese consumption of dirty coal decrease. Chinese demand for clean Australian coal exports rises in response by $300 million.
(a) Draw the initial equilibrium and the equilibrium after the rise in interest rates in an AE model for the Australian economy. Carefully label your axes and the important points.
Answer:
If net exports rise by $300m, then the AE curve shifts up by $300m (the vertical intercept rises by $300m). Equilibrium GDP rises from Y0 to Y1.
(b) Show where we would see the change in net exports as a distance on your AE diagram. Show where we would see the change in GDP as a distance on your diagram. What is the multiplier, and how could we see the multiplier as a distance (or a ratio of two distances) on your diagram?
Answer: The change in net exports is the change in the vertical intercept on our AE diagram. The change in equilibrium GDP is the distance between Y0 and Y1. The multiplier is the ratio of the change in GDP over the change in net exports, so the multiplier would be the ratio of those two distances. We could also say that if the change in the vertical intercept is the demand in net exports, then the change in Y is the multiplier times the change in net exports.
QUESTION: B.2(5 + 10 + 5 = 20 marks)
The following table lists the nominal GDP and the price level (or CPI) for the years 2004-2007.
Year / Nominal GDP / Growth in Nominal GDP (%) / Price Level (2000 = 100) / Inflation (%) / Real GDP (in Year 2000 Prices)2004 / $790 billion / na / 106 / na / 745
2005 / $805 billion / 1.90 / 108 / 1.89 / 745
2006 / $840 billion / 4.35 / 111 / 2.78 / 757
2007 / $910 billion / 8.33 / 113 / 1.80 / 805
(a) Fill in the entries in the three columns for Growth in Nominal GDP, Inflation and Real GDP. [Do this on the table itself.]
(b) Show how you calculated the 2007 entry for Growth in Nominal GDP, Inflation and Real GDP.
Answer: The 2007 entry for growth in Nominal GDP is the difference between the 2007 and 2006 entries for Nominal GDP divided by the 2006 entry for Nominal GDP.
The 2007 entry for Inflation is the difference between the 2007 and 2006 entries for Price Level divided by the 2006 entry Price Level.
The 2007 entry for Real GDP is the 2007 entry for Nominal GDP multiplied by the 2000 level for price Level (100) divided by the 2007 entry for Price Level.
(c) Calculate a growth rate for real GDP in 2007. Compare the growth of nominal GDP, inflation and the growth of real GDP in 2007. Do you see a relationship between the three numbers?
Answer: The 2007 entry for growth in Real GDP is the difference between the 2007 and 2006 entries for Real GDP divided by the 2006 entry for Real GDP. The Growth in Real GDP in 2007 was 6.42.
The relationship is: 8.33 – 1.80 is close to 6.42. The Growth in Nominal GDP minus Inflation almost equals the Growth in Real GDP.
ECO120 Macroeconomics CPage 1 of 9