Student ID ________________

Semester Two Assessment, 2017

Faculty / Dept: FBE/Economics

Subject Number: ECON10003

Subject Name: Introductory Macroeconomics

Writing time: 2 hrs

Reading: 15 minutes

Open Book status: Closed Book

Number of pages (including this page): 8 pages

Authorised Materials:.
Students are allowed access to approved calculators and a printed dictionary that translates
English into another language.

Instructions to Students: This exam is worth 60 per cent of assessment in ECON10003. This
exam contains 60 marks. Please answer ALL questions.

Part A consists of 15 questions and constitutes 25 per cent of the total marks available for this
examination. Answers to these questions must be completed on the multiple choice answer sheet.

Part B contributes 75 per cent to the total marks available for the examination and questions
should be answered in the examination script booklet(s) provided.

Instructions to Invigilators: Students are to be provided with multiple choice answer sheets and
examination script booklets.

Paper to be held by Baillieu Library: yes

Extra Materials required (please supply): Multiple choice answer sheet

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Part A: This part contributes 25 per cent to the total marks for this examination. Each question
in this part is worth one mark.

Answer all questions. For each question, use a 2B pencil to fill in the appropriate small circle on
the multiple choice answer sheet.

An incorrect answer, no answer or more than one answer to the same question will all receive a
zero mark.

For each question, choose the response a, b, c, or d that best answers the question or
completes the statement.

A1. Gross domestic product is a measure of

a) the market value of final goods and services produced in a country during a given time period
b) the market value of intermediate goods and services produced in a country during a given time
period
c) the social value of final goods and services produced in a country during a given time period
d) the economic value of intermediate goods and services produced in a country during a given
time period

A2. For the Cobb-Douglas production function, Y = AK ↵ L1 ↵, the marginal product of labour is

a) ↵AK ↵ 1 L1 ↵

b) ↵
c) (1 ↵)K ↵ L ↵

d) none of the above

A3. The exact form of the Fisher equation is

1+r
a) 1 + ⇡ = 1+i
1+r
b) 1 + i = 1+⇡

1+i
c) 1 + r = 1+⇡

d) 1 + i = 1 ⇡ (1 + r)

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A4. In an open economy if imports exceed exports, then it must be the case that

a) national saving is greater than investment

b) national saving is less than investment
c) the nominal exchange rate is depreciating
d) the nominal exchange rate is appreciating

A5. If a firm is maximising profit in a competitive market, it will set employment so that

a) the value of the marginal product of labour equals the real wage
b) the value of the marginal product of labour equals the nominal wage
c) the marginal product of labour equals the nominal wage
d) the marginal product of labour equals the price of output

A6. In our four sector Keynesian model, an equilibrium in which leakages are equal to injections
can be described by:

a) S + T + M = I P + G + X
b) S + T + G = I P + M + X
c) S IP = X M
d) M V = P Y

A7. The sale of government securities in the unsecured overnight interbank market by the RBA
will typically the interest rate in this market, and economic activity

a) raise, decrease
b) raise, increase
c) lower, decrease
d) lower, increase

A8. Which of the following production functions does not feature constant returns to scale?

a) yt = kt0.4 lt0.6
b) yt = kt + lt
c) yt = 1.3kt + lt
d) yt = kt0.3 lt0.8

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A9. Suppose the government wishes to reduce output to eliminate an expansionary output gap.
To do so, it could government spending or shift the monetary policy reaction function
.

a) increase, upwards
b) decrease, upwards
c) increase, downwards
d) decrease, downwards

A10. If the real exchange rate in Australia appreciates, then

a) the nominal exchange rate in Australia must also be appreciating

b) the rate of domestic inflation in Australia must be greater than the rate of inflation overseas
c) the price of goods and services in Australia must be becoming relatively more expensive than
the price of goods and services overseas
d) none of the above

A11. In the steady state of the Solow-Swan model studied in lectures, the rate of growth in output
per capita is and the rate of growth in output equals the .

a) positive, saving rate

b) positive, population growth rate
c) zero, saving rate
d) zero, population growth rate

A12. Suppose a government decides to implement a fixed exchange rate with the value of domestic
currency above its equilibrium value. Further, assume that it does not restrict capital flows. In
that case, we would expect

a) a decrease in foreign currency reserves held by the government

b) an increase in foreign currency reserves held by the government
c) a high level of inflation in the domestic economy
d) a low level of cyclical unemployment

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A13. Suppose Buranda produces and consumes agricultural and manufacturing products and has a
comparative advantage in producing agricultural products relative to the rest of the world. Assume
that in trade equilibrium with the rest of the world Buranda is not fully specialised. When trading
with the rest of the world,

a) workers in both the agricultural and manufacturing sectors will benefit from trade
b) workers in the agricultural sector will benefit but workers in the manufacturing sector will be
harmed by trade
c) workers in the manufacturing sector will benefit but workers in the agricultural sector will be
harmed by trade
d) workers in both the agricultural and manufacturing sectors will be harmed by trade

A14. Please refer to Table 1 below.

Table 1: Number of minutes to produce one unit of a good. Assume an 8-hour day for both workers.
Beer Nuts
Elaine 10 15
Jerry 15 30

has the absolute advantage in producing nuts and has the comparative advantage
in producing nuts.

a) Elaine, Elaine
b) Elaine, Jerry
c) Jerry, Elaine
d) Jerry, Jerry

A15. Suppose there is an increase in demand for goods and services produced in Australia by con-
sumers in foreign countries. We would expect the quantity of transactions involving the Australian
dollar on the foreign exchange market to and the Australian dollar to .

a) increase, appreciate
b) increase, depreciate
c) decrease, appreciate
d) decrease, depreciate

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PART B: Answer all questions in the examination booklets provided. There are three
questions in this part. This part constitutes 75 per cent of the total marks for the examination.
Marks for each question are given below.

B1. Short-answer questions

a) During the last decade, the debt crisis in Europe has meant that many people have sought to
invest funds in Swiss banks and other Swiss investments. Use a supply and demand framework
to describe the e↵ect of the debt crisis on the value of the Swiss franc. What e↵ect will this
change in the value of the Swiss franc have upon the real economy? Suppose the Swiss central
bank wanted to limit the macroeconomic e↵ects of this change in the value of the currency.
Explain what actions the central bank could undertake to reduce any negative macroeconomic
e↵ects. (7 marks)

b) What is the multiplier in the context of a Keynesian model? Provide an intuitive explanation
for why the multiplier exists. Other things equal, explain what happens to the multiplier if
there is an increase in the marginal propensity to save. (5 marks)

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B2. Fiscal Policy in Keynesian Models of the Macroeconomy

Consider a four-sector model of the economy with fixed prices studied in lectures. To remind you,
recall that

C d = C̄ + c(Y T)
T = T̄ + tY
I P = I¯

and G and X are exogenous constants.

a) What is the equilibrium condition that is used in this simple Keynesian model? Why is this
condition reasonable? (2 marks)

b) Suppose that the government reduces the marginal rate of income tax. What e↵ect will this
have upon the equilibrium level of output? Describe the adjustment process from the initial
to the new equilibrium. Explain your reasoning in detail and use a relevant diagram(s). What
is the impact upon the overall tax revenue of the government? (6 marks)

Now consider the AD-AS model as discussed in lectures. Assume that an economy is initially in an
equilibrium in which inflation is equal to inflationary expectations and output is equal to potential
output.

c) Assume the government increases government spending while the tax system remains un-
changed. Explain what e↵ect this change will have upon the aggregate demand and aggregate
supply curves. Explain your reasoning in detail and use a relevant diagram(s). (5 marks)

d) What will happen to the equilibrium level of inflation and output in the short run? What will
happen to the equilibrium level of inflation and output in the long run? (3 marks)

e) In the long-run equilibrium, describe qualitatively how each component of expenditure has
changed. That is, how does the level of consumption, investment, government spending and
exports in the final long-run equilibrium compare to their initial values before the increase in
government spending? (4 marks)

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B3. The Solow-Swan Model

Consider the standard Solow-Swan model discussed in lectures. To remind you, recall that there is
an aggregate production function with constant returns to scale given by

yt = A · f (kt , lt ),

where kt is capital stock, lt is labour, and A is the level of total factor productivity at time t. The
capital stock evolves according to the following equation:

kt+1 = (1 d)kt + ✓yt ,

where d is the rate of depreciation and ✓ is the saving rate in this economy. Further, assume that
labour grows at an exogenous rate of n so that lt+1 = (1 + n)lt .

a) Use the above information to derive the following equation:

kt+1 kt ✓y k
= (d + n) .
lt+1 lt l l

Provide an economic interpretation of this equation. (5 marks)

b) Suppose the process of Brexit reduces immigration into the UK. Further, suppose that this
reduces the population growth rate. Examine what will be the e↵ect of reduced population
growth in the Solow-Swan model. In particular, what happens to the steady state level of
capital per worker and output per worker? Use a diagram to explain your reasoning. What
happens to the growth of output and output per capita in steady state? (4 marks)

c) Some argue that Brexit may also lead to a decrease in productivity in the UK economy. Examine
what will be the e↵ect of reduced total factor productivity in the Solow-Swan model. In
particular, what happens to the steady state level of capital per worker and output per
worker? Use a diagram to explain your reasoning. (4 marks)

End of Examination

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Library Course Work Collections

Author/s:
Economics

Title:
Introductory Macroeconomics, 2017, Semester 2, ECON10003

Date:
2017

Persistent Link:
http://hdl.handle.net/11343/213004

File Description:
ECON10003