Exercise 1 – Macroeconomics – Chapters 4 and 5

Section A: Multiple Choice Questions (5 marks, 1 mark each)

1. Which of the following statements can explain why the short run aggregate supply curve is
upward sloping?
A. When the general price level increases, the real interest rate increases, which in turn raises
firms’ cost of production.
B. Output prices adjust faster than input prices.
C. After observing the decrease in the general price level, landlords raise rents when they
sign new contracts with tenants.
D. None of the above

2. Which of the following items is a non-price determinant of private consumption expenditure?

A. Domestic price level
B. Exchange rate of domestic currency against foreign currency
C. Domestic income level
D. Profit tax rate

3. The short run aggregate supply curve will shirt rightward if

A. oil prices decrease sharply.
B. there is a city-wide strike.
C. interest rates increase.
D. households become more pessimistic about economic performance.

4. Which of the following situation will change short run aggregate supply but not long run
aggregate supply?
A. There is a breakthrough in technology.
B. A coal mine has been discovered.
C. The domestic government imposes protectionist policies on its imported goods.
D. Firms expect there will be an increase in price level.

5. With an upward sloping short-run aggregate supply curve, an increase in exports will lead to
__________ in aggregate output and __________ in the price level.
A. an increase … an increase
B. an increase … a decrease
C. a decrease … a decrease
D. a decrease … an increase

END OF SECTION A

Macroeconomics – Chapters 4 and 5 Page 1 of 3

Section A: Multiple Choice Questions (5 marks, 1 mark each)
1. 2. 3. 4. 5.

Section B: Short Questions (20 marks)

1. Suggest ONE reason to explain why the aggregate output demanded increases when the price
level decreases. (3 marks)

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2. The government of Country H decides to increase its expenditure on retraining program for
unemployed persons. Explain, with the aid of a diagram, how it would affect the aggregate
output in the long run. (8 marks)

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Macroeconomics – Chapters 4 and 5 Page 2 of 3
3. Suppose Hong Kong was affected by a typhoon last week. With reference to the market
adjustment mechanism from the short run equilibrium to the long run equilibrium, explain the
long run effect of the above situation on the aggregate output with the aid of a diagram.
(9 marks)

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END OF PAPER
Macroeconomics – Chapters 4 and 5 Page 3 of 3