ECO 112- BASIC MACROECONOMICS

SECTION- A (COMPULSORY)

QUESTION- 1

MULTIPLE CHOICE QUESTIONS

(Each question carries 1 Mark = Total 20 marks)

1. Government policies that focus on changing taxes and government

spending are referred to as:

a) Monetary policies
b) Supply side policies
c) Income policies
d) Fiscal policies

2. The primary purpose of fixing the reserve ratio is to:

a) Prevent banks from hoarding too much vault cash

b) Prevent commercial banks from earning excess profits
c) Provide a dependable source of interest income for commercial banks
d) Provide a means by which the central bank can influence the lending
ability of commercial banks

3. The Net Domestic Product (NDP) is given by:

a) Gross Domestic Product less indirect business taxes

b) Gross Domestic product plus Net Foreign Factor Income
c) Gross National Product less Net Foreign Factor Income
d) None of the above

4. Sales tax is a regressive tax because the:

a) Percentage of income paid, as sales tax, falls as income rises

b) Administrative costs associated with the collection of the tax are
relatively high
c) Percentage of income paid as taxes is constant as income rises
d) Tax tends to reduce the volume of consumption expenditures

5. A firm should engage in an investment project when:

a) The expected rate of return is less than the rate of interest

b) The operation and maintenance costs of the project are high
c) The expected rate of return is greater than the rate of interest
 d) The economy’s stock of capital is high

6. The labour force consists of:

a) All people, other than children who are below 16 years

b) All people aged 16 and above including those in institutions
c) All people aged 16 and above excluding those in institutions
d) All people aged 16 and above who are willing and able to work

7. Which of the following gives money its value?

a) Relative scarcity, legal tender and general acceptability

b) Legal tender, demand deposits and savings
c) Scarcity, acceptability and near monies
d) Near monies, fiat money and token money

8. With a progressive tax, the average tax rate increases as income:

a) Increases
b) Decreases
c) Either increases or decreases
d) Stays the same

9. Other things equal, if the supply of money is reduced:

a) The demand for money will increase

b) The interest rate will increase and bond prices will fall
c) Investment spending will increase
d) None of the above

10. Demand pull inflation arises when:

a) The economy is in recession

b) Aggregate spending exceeds the economy’s production capacity
c) There are supply shocks in the economy
d) Per unit production costs are rising

11. Which of the following are excluded in the calculation of GDP:

a) Stock market transactions and indirect business taxes

b) Interest payments on loans and private transfers
c) Public transfers and salaries of government employees
d) Purely financial transactions

12. Given that the nominal interest rate is 15% and the inflation rate is 7%,
the real interest rate is:
 a) 15%
b) 10%
c) 7%
d) 8%

13. The economy’s stock of capital declines when:

a) Net investment is positive

b) Net investment is negative
c) Net investment is zero
d) None of the above

14. The full employment unemployment rate is the unemployment rate at

which:

a) Structural and frictional unemployment exist, but cyclical

unemployment is zero
b) Structural and cyclical unemployment exist but frictional
unemployment is zero
c) Frictional and cyclical unemployment exist but structural
unemployment is zero
d) The natural rate of unemployment is positive and frictional
unemployment is zero

15. Monetary policy consists of:

a) Controlling taxes to influence consumer and business spending

b) Influencing the availability of bank credit by changing interest rates
c) Adjusting the level of government expenditures to stimulate economic
activity
d) All of the above

16. GDP tends to:

a) Overstate economic welfare because it does not include certain non

market activities such as productive work of housewives
b) Understate economic welfare because it includes expenditures
undertaken to offset or correct pollution
c) Understate economic welfare by ignoring leisure’s value
d) Overstate economic welfare because it does not reflect improvements
in product quality

17. Which of the following statements is true?

a) Interest rates and bond prices vary directly

 b) Interest rates and bond prices vary inversely
c) Interest rates and bond prices are unrelated
d) Interest rates and bond prices vary directly during fluctuations and
inversely during recessions

18. The amount of money that society wishes to hold as an asset:

a) Varies directly with the interest rate

b) Varies inversely with the interest rate
c) Varies inversely with nominal GDP
d) Is independent of the rate of interest

19. Which of the following statements is true?

a) Inflation is defined as a continual increase in the money supply

b) Inflation is a condition of continually rising price level
c) Inflation is a continual increase in the price of certain products
d) None of the above

20. The demand for ice-cream in Gaborone is lower in the winter causing
lower ice-cream sales. If those selling ice-cream cannot find other work,
this is called:

a) Seasonal unemployment
b) Supply unemployment
c) Regional unemployment
d) Natural unemployment
 SECTION- B
Answer any TWO Questions

QUESTION- 2

A) Distinguish between the following:

i) Net foreign factor income earned and consumption of fixed capital

ii) Demand pull inflation and Cost push inflation
iii) Structural unemployment and frictional unemployment
(3 Marks each)

B) What is a tax? Explain the basic principles of taxation. (3 Marks)

C) Indicate how each of the following individuals would be affected by

unanticipated inflation in Botswana?

i) A pensioned BTC worker

ii) An indebted farmer
iii) A fixed deposit holder in Barclays bank
iv) A public servant working in the Ministry of Finance and Planning
(1 Mark each)
D) Explain why the following items are not included in the National income
accounts of a country
i) Transactions made in stock market
ii) Income earned by the foreign-owned resources used in the country
iii) The value of intermediate goods and
iv) Transfer payments (1 Mark Each)

QUESTION- 3

A) What is ‘Okun’s law’? How is it useful in explaining the economic costs of

unemployment? [4 marks]

B) Discuss any four problems encountered in the measurement of GDP of a

country. [4 marks]
C) Explain any four functions of commercial banks. How do the commercial
banks create money? (6 Marks)

D) Discuss the incidence of taxation and how it is shifted (3 Marks)

E) Define the term national budget and distinguish between a budget

surplus and a budget deficit. (3 Marks)
QUESTION- 4

A) Explain the relationship between general price level and the value of
money. Supposing the price index in Botswana has increased from 100
in 2008 to 118 in 2009, what is the value of one Pula in 2009 compared
to the value of Pula in 2008? (5 Marks)

B) Given the following model for the economy of Botswana

Y = C + Ig +G + Xn
Where C = 180 + 0.8Y; Ig = 270; G = 320 and X = 150; M = 120

Calculate the following:

i) Equilibrium income level [3 marks]

ii) Equilibrium consumption level [2 marks]
iii) Savings level [1 mark]

C) What is money? How is money supply defined in Botswana? (4 Marks)

D) What is credit control? Explain any four credit control measures used by
the central bank of a country (5 Marks)

QUESTION- 5

A) Distinguish between the following

i) Gross investment and net investment

ii) Nominal GDP and real GDP
iii) Monetary policy and fiscal policy (3 Marks each)

B) Explain the difference between direct and indirect taxes. Discuss any one
advantage and one disadvantage of each tax. (6 Marks)

C) Suppose that Botswana has an MPC of 0.85 and the real GDP of P450
billion. If its investment spending decreases by P45 billion, what will be
the new level of real GDP of Botswana? (4 Marks)

D) What is the influence of consumer expectations on current consumption

level of households? (1 Mark)