Department of Business Studies Bachelor of Business Year 1 Principles of Macroeconomics ECO102 Tutorial Question

ECO102 Principles of Macroeconomics –Tutorial questions
Department of Business Studies
Bachelor of Business Year 1

PRINCIPLES OF MACROECONOMICS
ECO102
TUTORIAL QUESTION
1
Chapter 23: Measuring a Nation’s Income
Section A (MCQ)
1. When a firm sells a good or a service, the sale contributes to the nation’s income
a. only if the buyer of the good or service is a household.
b. only if the buyer of the good or service is a household or another firm.
c. whether the buyer of the good or a service is a household, another firm, or the
government.
d. We have to know whether the item being sold is a good or a service in order to
answer the question.
2. Estimates of the values of which of the following non-market goods or services are
included in GDP?
a. the value of unpaid housework
b. the value of vegetables and other foods that people grow in their gardens
c. the estimated rental value of owner-occupied homes
d. All of the above are included.
3. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these
two practices, which of the following statements is correct?
a. Only Ralph’s payments are included in GDP.
b. Ralph’s payments as well as the estimated value of Mike’s mowing services are
included in GDP.
c. Neither Ralph’s payments nor the estimated value of Mike's mowing services is
included in GDP.
d. Ralph’s payments are definitely included in GDP, while the estimated value of
Mike’s mowing services is included in GDP only if Mike voluntarily provides his
estimate of that value to the government.
4. During the third quarter of 2006, a firm produces consumer goods and adds some of
those goods to its inventory. During the fourth quarter of that year, the firm sells the
goods at a retail outlet, with the result that the value of its inventory at the end of the
fourth quarter is smaller than the value of its inventory at the end of the third quarter.
These actions affect which component(s) of fourth-quarter GDP?
a. These actions affect only consumption, and they affect consumption positively.
b. These actions affect only investment, and they affect investment positively.
c. These actions affect consumption positively and investment negatively.
d. These actions affect both consumption and investment positively.
5. To encourage formation of small businesses, the government could provide subsidies;

these subsidies
a. would not be included in GDP because they are transfer payments.
b. would be included in GDP because they are part of government expenditures.
c. would be included in GDP because they are part of investment expenditures.
d. would not be included in GDP because the government raises taxes to pay for
them.
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6. For an economy as a whole,

a. income is greater than expenditure
b. expenditure is greater than income.
c. income is equal to expenditure.
d. GDP measures income more precisely than it measures expenditure.
7. Gross domestic product is defined as

a. the market value of all final goods and services produced within a country in a
given period of time.
b. the market value of all tangible goods produced within a country in a given
period of time. X
c. the quantity of all final goods and services supplied within a country in a given
period of time. X
d. the quantity of all final goods and services demanded within a country in a given
period of time. X
8. If a government made a previously-illegal activity such as gambling or prostitution legal,

then, other things equal, GDP
a. necessarily decreases.
b. necessarily increases.
c. doesn't change because both legal and illegal production is included in GDP.
d. doesn't change because these activities are never included in GDP.
9. Unemployment compensation is
a. part of GDP because it represents income.
b. part of GDP because the recipients must have worked in the past to qualify.
c. not part of GDP because it is a transfer payment. (not a payment made for a
currently produced good or service.)
d. not part of GDP because the payments reduce business profits.
10. In a certain economy in 2005, GDP amounted to $5,000; consumption amounted to

$3,000; government purchases were equal to investment; and the value of imports
exceeded the value of exports by $200. It follows that government purchases amounted
to
a. $900.
b. $1,100.
c. $1,250.
d. $1,325.
3
Section B (Short answer questions)
1. Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
o Real GDP is not affected by changes in prices, so it replects only changes in the amount
being producted.
o It cannot be determined if a arise in nominal GDP has been caused by increase
production or highr prices.
o Nominal GDP is the production of good s and services valued at current prices.
o Real GDP is the production of goods and services valued at the constant prices.
o Real GDP is better measure if economic well-being because it reflects the economy’s
ability to satify people’s needs and desires.
o Thus, a rise in GDP means people have produced more goods and services, but a rise in
nominal GDP could occur either because of increased production or because of higher
prices.
2. Below are some data from the land of milk and honey.
Year Price of Milk Quantity of Milk Price of Honey Quantity of Honey

2001 $1 100 $2 50
2002 $1 200 $2 100
2003 $2 200 $4 100
Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2001 as the base
year.
Nominal GDP:
2001: $1 x 100 + $2 x 50 = $200
2002: $1 x 200 + $2 x 100 = $400
2003: $2 x 200 + $4 x 100 = $800
Real GDP:
*Using 2001 as the base year
2001: $1 x 100 + $2 x 50 = $200
2002: $1 x 200 + $2 x 100 = $400
2003: $1 x 200 + $2 x 100 = $400
GDP Deflator:
FORMULA : GDP Deflator = 100 x (Nominal GDP/ Real GDP)
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2001: 100 x ($200/$200) = 100.0

2002: 100 x ($400/$400) = 100.0
2003: 100 x ($800/$300) = 200.0
3. Consider the following data on a country’s GDP:

Year Nominal GDP Deflator
GDP (base year: 1992)
(billions)
1996 $7,662 110
1997 $8,111 112
a. What was the growth rate of nominal GDP between 1996 and 1997?
Nominal GDP in 1996: $7662 (Old)

Nominal GDP in 1997: $8111(New)
Growth Rate of nominal GDP between 1996 and 1997

FORMULA:
Growth Rate = (New – Old)/ Old x 100
= $8111 - $7662
= $449
= $449 / $7662 x 100
= 5.86%
b. What was the growth rate of GDP deflator between 1996 and 1997?
GDP Deflator in 1996: $110 (Old)

GDP Deflator in 1997: $112 (New)
Growth Rate of GDP deflator between 1996 and 1997

FORMULA:
= $112 - $110
= $2
= $2/ $110 x 100
= 1.82%
c. What was real GDP in 1996?
FORMULA:
GDP Deflator = 100 x (Nominal GDP/ Real GDP)
110 = 100 x ($7662/ Real GDP)
1.1 = $7662/ Real GDP
Real GDP = $6965.45
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d. What was real GDP in 1997?
FORMULA:
GDP Deflator = 100 x (Nominal GDP/ Real GDP)
112 = 100 x ($8111/ Real GDP)
1.12 = $8111/ Real GDP
Real GDP = $7241.96
e. What was the growth rate of real GDP between 1996 and 1997?
Real GDP in 1996: $6965.45 (Old)

Real GDP in 1997: $7241.96 (New)
Growth Rate of real GDP between 1996 and 1997

FORMULA:
= $7241.96 - $6965.45
= $276.51
= $276.51/ $6965.45 x 100
= 3.97%
f. Was the growth rate of nominal GDP higher or lower than the growth rate of real
GDP? Explain.
o Growth rate of nominal GDP = 1.82% ; Growth rate of real GDP = 3.97%
o Yes, growth rate of nominal GDP higher than the growth rate of real GDP.
o The change in nominal GDP reflects both prices and quantities.
o The change in real GDP is the amount that GDP would change if prices were
constant.
o Hence, real nGDP is corrected for inflation.
o Growth rate of nominal GDP higher than the growth rate of real GDP because of
the inflation.
***Extra Info:
GDP = BASED ON THE DOMESTIC
GNP = BASED ON THE NATIONAL/ CITIZEN
4. Some countries emphasized on GNP rather than GDP as a measure of economic well-being.
Which measure should the government prefer if it cares about the total income of their
citizens? Which measure should it prefer if it cares about the total amount of economic
activity occurring in the country?
6
Section C (Essay Questions)
Question 1
a Describe the methods by which Gross Domestic Product can be measured.
) o GDP is measured by taking the quantities of all goods and services produced, multiplying
it by the prices and summing the total.
o GDP can be measured either by the sum of what is purchased in the conomy or by what is
produced.
o Demand can be divided into comsumption, investment, government, exports and imports.
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b) To what extent can Gross Domestic Product be used as a reliable indicator of living standards?
9
Chapter 24 : Measuring the cost of living

Section A (MCQ)
1. The first step in measuring the CPI is to

a. select the market basket.
b. conduct a monthly survey.
c. collect prices for the basket of goods and services.
d. interview businesses.
2. If the CPI is 120, this means that COB (This year)/ COB (Last Year)
a. prices are 120 percent higher than in the reference base period.
b. prices are 0.12 times higher than in the reference base period.
c. prices are 20 percent higher than in the reference base period.
d. the inflation rate must be positive.
3. Which of the following means that the CPI overstates the actual inflation rate?
a. New goods bias.
b. Quality change bias.
c. Outlet substitution bias.
d. All of the above cause the CPI to overstate inflation.
4. Economists use the term inflation to describe a situation in which

a. some prices are rising faster than others. (Substitution bias) NOT ONLY SOME
PRICES
b. the economy's overall price level is rising.
c. the economy's overall price level is high, but not necessarily rising.
d. the economy's overall output of goods and services is rising faster than the
economy's overall price level. X (CHAPTER 1)
5. What basket of goods is used to construct the CPI?

a. A random sample of all goods and services produced in the economy. * NOT
REPRESENTIVE
b. The goods and services that are typically bought by consumers as determined by
government surveys.
c. Only food, clothing, transportation, entertainment, and education.
d. The least expensive and the most expensive goods and services in each major
category of consumer expenditures X
6. In the CPI, goods and services are weighted according to

a. how long a market has existed for each good or service.
b. the extent to which each good or service is regarded by the government as a
necessity.
c. how much consumers buy of each good or service.
d. the number of firms that produce and sell each good or service.
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7. Substitution bias in the CPI refers to the fact that the CPI
a. takes into account the substitution of goods by consumers when relative
prices change.
b. substitutes quality changes whenever they occur without taking account of
the cost of the quality changes.
c. substitutes relative prices for absolute prices of goods.
d. takes no account of the substitution of goods by consumers when relative
prices change.
8. The goal of the consumer price index is to measure changes in the

a. costs of production (Principle micro)
b. cost of living.
c. relative prices of consumer goods.
d. production of consumer goods.
9. Which of the following is not a widely acknowledged problem with the CPI as a
measure of the cost of living?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. unmeasured price change
10. If the prices of Australian-made shoes imported into the United States increase, then, as
a result,
a. both the GDP deflator and the consumer price index increase.
b. neither the GDP deflator nor the consumer price index increases.
c. the GDP deflator increases but the consumer price index does not increase.
d. the consumer price index will increase, but the GDP deflator will not increase.
“Australian made shoes is a imported goods”
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1. Economists and policymakers monitor both the GDP deflator and the consumer price
index to gauge how quickly prices are rising. However, these two statistics may not
always tell the same story. Discuss two important differences that can cause them to
diverge.
Defined GDP Deflator and CPI.

The problems with CPI.,
2. Calculate the consumer price index and the rate of inflation if given a fixed basket of
goods of 4 hamburgers and 2 apples by taking the year 2001 as the base year.
Year Price($)
Hamburger Apple
2001 $1 $0.50
2002 $2 $1.00
2003 $3 $1.50
COB = Cost of H + Cost of A

= (H Price x H Quantity) + (A Price x A Quantity)
COB in 2001 = 4 x $1 + 2 x $0.5 = $5

COB in 2002 = 4 x $2 + 2 x $1.0 = $10
COB in 2003 = 4 x $3 + 2 x $1.5 = $15
CPI = COB2/ COB (Base year) x 100
CPI in 2001 = $5/ $5 x 100 = 100

CPI in 2002 = $10/ $5 x 100 = 200
CPI in 2003 = $15/ $5 x 100 = 300
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Inflation rate = [CPI (New) – CPI (Old)]/ CPI (Old) x 100
Inflation rate (2001 - 2002)

= (200 – 100)/ 100 x 100
= 100%
Inflation rate (2002 - 2003)

= (300 – 200)/ 200 x 100
= 50%
:. The purchasing power is growing. Higher purchasing power.
3. Describe the three problems that make the consumer price index an imperfect measure of
the cost of living.
The consumer price index is an imperfect measure of the cost of living for the following
three reasons:
substitution bias,
the introduction of new goods, and
unmeasured changes in quality.
Because of measurement problems, the CPI overstates annual inflation by about 1
percentage point.
4. Convert the salary of Mr. A in the year 1930 to dollars in the year 2000 by using the
following information.
a. A’s salary in the year 1930 was $80,000
b. The price level in the year 2000 was 160
c. The price level in the year 1930 was 52
Mr A’s Salary in 1930 = $80,000

CPI in 2000 = 160
CPI in 1930 = 52
Amount in Tday’s ($) = Amount in before ($) x (Price level Tday/ Price level in before)
Tday’s Salary = Salary1930 (CPI2000/ CPI1930)
Amount in year 2000 ($) = $80000 x (160/ 52) = $246153.85
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14
Chapter 25 : Production and Growth
Section A (MCQ)
1. Consider two countries. Country A has a population of 1,000, of whom 800 work 8
hours a day to make 128,000 final goods. Country B has a population of 2,000 of whom
1,800 work 6 hours a day to make 270,000 final goods
a. Country A has higher productivity and higher real GDP per person than country
B.
b. Country A has lower productivity and lower real GDP per person than country B.
c. Country A has higher productivity, but lower real GDP per person than country
B.
d. Country B has lower productivity, but higher real GDP per person than country
B.
COUNTRY A = FG/ L = 128000/ 800 x 8hrs = 20
COUNTRY B = FG/L = 270000/ 1800 x 6hrs = 25
COUNTRY A = FG/Population =128k/ 1000 = 125

COUNTRY B = 270k/2000 = 135
2. Real Foods produced 300,000 boxes of organic spiral noodles in 2014 and produced
360,000 boxes in 2015. They used the same total hours of work in each year. In 2015
their productivity
a. fell.
b. was the same as in 2014.
c. rose 20%.
d. rose 30%.
3. A nation's standard of living is determined by

a. its productivity.
b. its gross domestic product.
c. its national income.
d. how much it has relative to others.
4. If a production function has constant returns to scale, output can be doubled if

a. labor alone doubles.
b. all inputs but labor double.
c. all of the inputs double.
d. None of the above is correct.
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5. Suppose that there are diminishing returns to capital. Suppose also that two
countries are the same except one has more capital and so more real GDP per
person than the other. Finally, suppose that the saving rate in both countries
increases from 5 percent to 6 percent. Over the next ten years we would expect
that
Rich country = Started from the 2nd stage/ 3rd stage (MAX)
Poor country = Started from the 1st stage .. (Still got space to growth; will growth
faster than the rich country)
a. the growth rate will not change in either country.

b. the country that started with less capital will grow faster.
c. the country with started with more capital will grow faster.
d. both countries will grow at the same rate.
6. The aggregate production function is graphed as

a. a downward sloping curve.
b. an upward sloping straight line.
c. an upward sloping line that becomes flatter as the quantity of labor
increases.
d. an upward sloping line that becomes steeper as the quantity of labor
increases.
7. If real GDP is $13,000 billion and aggregate labor hours used in the production are
270 billion, labor productivity equals
a. $6.50 per hour.
b. $45 per hour.
c. $48 per hour.?lfghjkiopujhg.
d. $650 per hour.
8. A recent survey by India's central bank reported that spending plans by firms on
large new projects fell by 46 percent in the year ending March 2016, compared
with the prior year. This decrease will most directly impact
a. physical capital growth.
b. human capital growth.
c. technological change.
d. population growth.
9. The aggregate production function shows how ________ varies with ________.
a. leisure time; labor
b. labor; leisure time
c. real GDP; labor
d. labor; capital
10. Labor productivity is defined as

a. total output attributable to labor.
b. total real GDP.
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c. the growth rate of the labor force.

d. real GDP per hour of labor.
Section B ( Short answer questions)
Question 1
List and describe four determinants of productivity.
Question 2
Why is productivity related to the standard of living? In your answer, be sure to explain what is
meant by productivity and standard.
Question 3
Why does a nation’s standard of living depend on property rights?
Property rights are an importnact pre requisite for the price system to work in a market
economy. If an individual or company is not confident that cclaims over property or over
the income form property can be protected or that contrcts can be enforeced, there will be
little incentive for foreigner to invest in the real or financial assests of the country. The
distortion of incentives will reduce effiencieny in resources allocation and will reduce
saving and investment which in turn will reduce saving and investment which in turn will
return the standard of living.
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Chapter 26 : Saving, Investment, and Financial System
Section A (MCQ)
1. In a closed economy, a nation's investment must be financed by
a. private saving only.
b. the government's budget deficit.
c. borrowing from the rest of the world only. (x transaction from rest of the
world)
d. national saving.
2. National saving is defined as the amount of

a. business saving.
b. household saving.
c. business saving and household saving.
d. private saving and public saving.
3. The nominal interest rate minus the real interest rate approximately equals the
a. rate of increase in the amount of investment.
b. inflation rate.
c. rate of increase in the income.
d. rate the bank receives to cover lending costs.
Calculation : Real interest rate = 8-3% = 5%; $1000 x 5% = $50
4. Assume you save $1,000 in a bank account that pays 8 percent interest per year
and the inflation rate is 3 percent. At the end of the year you have earned
a. a nominal return of $50.
b. a negative real return.
c. a real return of $50.
d. a real return of $80.
5. The demand for loanable funds is the relationship between loanable funds and the
________ other things remaining the same.
a. real interest rate
b. Income level
c. inflation rate
d. price level
6. A rise in the real interest rate (Interest increase ; Quantity(Cost of borrow)

decrease)
a. shifts the demand for loanable funds curve rightward.
b. shifts the demand for loanable funds curve leftward.
c. creates a movement upward along the demand for loanable funds curve.
d. creates a movement downward along the demand for loanable funds curve.
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7. Investment is financed by which of the following?

I. Government spending (Expenditure)
II. National saving
III. Borrowing from the rest of the world
a. I, II, and III
b. I and II only
c. I and III only
d. II and III only
8. Which of the following explains why the demand for loanable funds is negatively
related to the real interest rate?
a. A lower real interest rate makes more investment projects profitable.
b. Consumers are willing to spend less and hence save more at higher real
interest rates. (Saving will decrease)
c. Interest rate flexibility in financial markets assures an equilibrium in which
saving equals investment.
d. All of the above are reasons why the demand for loanable funds is
negatively related to the real interest rate.
9. All of the following are sources of loanable funds EXCEPT

a. business investment.
b. private saving.
c. government budget surplus.
d. international borrowing.
10. Suppose the market for loanable funds is in equilibrium. If the expected profit
falls, the equilibrium real interest rate ________ and the quantity of loanable funds
________.
a. rises; decreases
b. rises; increases
c. falls; decreases
d. falls; increases
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Section B
1) What is national saving, private and public saving?How these three variables are related.
National savings = Private savings + Government savings
National saving refers to the amount of the national income which is not spent on the
government's purchases or consumptions.
Private savings is defined as the income left for the households after their consumption and
payment of taxes. Privare Saving = (Y-T-C)
Public Saving = (T-G)

Public saving is the amount of tax revenue that the government has left after paying for its
spending. The three variables are related because national saving equals private saving plus
public saving.
2) What is investment? How is it related to national saving.

Investments in an economy means the total expenditure made by public and private sector on
economic activities, to create infrastructure, businesses…
3) What is government budget deficit? How does it affect interest rate, investment, and
economic growth?
A budget deficit can lead to higher levels of borrowing, higher interest payments, and low
reinvestment.
4) Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public
saving is $0.2 trillion. Assuming the economy is closed, calculate consumption, government
purchases, national saving and investment.
National saving = Public saving + Private saving

National Saving = $0.2 + $ 0.5.
National saving = $0.7 = Investment
Private saving = Y – T – C
$0.5 = $8 - $1.5 - C
C = $6
Public Saving = T – G
$0.2 = $1.5 – G
G = $1.3
5) Suppose that intel is considering building a new-chip making factory.

a. Assuming that Intel needs to borrow money in the bond market, why would an increase
in the interest rate affect Intel’s decision about whether to build the factory?
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b. If Intel has enough of its own funds to finance the new factory without borrowing, would
an increase in interest rates still affect Intel’s decision about whether to build the factory?
Explain.
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Section C(Essay questions)
Question 1
Examine the impact of the following events on the equilibrium interest rates, saving and
investment using the market for loanable fund model.Each event is treated independently :
a) Investors are highly optimistic about the economic outlook and they want to expand their
business.
b) Government budget change from a balanced budget to a deficit budget.
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Chapter 28 : Unemployment 22/2
Section A (MCQ)
1. Cyclical unemployment is closely associated with

a. long-term economic growth.
b. short-run ups and downs of the economy.
c. fluctuations in the natural rate of unemployment.
d. changes in the minimum wage.
2. The labor force equals the

a. number of people who are employed.
b. number of people who are unemployed.
c. number of people employed plus the number of people unemployed.
d. adult population.
3. A college student who is not working or looking for a job is counted as

a. neither employed nor part of the labor force.
b. unemployed and in the labor force.
c. unemployed, but not in the labor force.
d. employed and in the labor force.
4. Tom loses his job and immediately begins looking for another. Other things the
same, the unemployment rate
a. increases, and the labor-force participation rate decreases.
b. increases, and the labor-force participation rate is unaffected.
c. is unaffected, and the labor-force participation rate increases.
d. decreases, and the labor-force participation rate is unaffected.
5. The natural rate of unemployment is the

a. unemployment rate that would prevail with zero inflation.
b. rate associated with the highest possible level of GDP.
c. difference between the long-run and short-run unemployment rates.
d. amount of unemployment that the economy normally experiences.
6. Sam just lost his job, but isn't yet looking for a new one. Sam is
a. counted as unemployed and part of the labor force.
b. counted as unemployed, but not part of the labor force.
c. not counted as unemployed, but counted as part of the labor force.
d. No counted as unemployed, and not in the labor force.
7. Suppose the working age population in Tiny Town is 100 people. Suppose 25 of these
people are NOT in the labor force, the ________ equals ________.
LF = 100 - 25 = 75
a. unemployment rate; 25/100 × 100
b. unemployment rate; 25/75 × 100
c. labor force; 75
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d. labor force; 25/100 × 100
8. The ________ is the total number of people aged 16 years and older (and not in jail,
hospital or institutional care) while the ________ is the number of people employed and
the unemployed.
a. labor force; working-age population
b. labor force participation rate; labor force
c. working-age population; labor force
d. working-age population; labor force participation rate
9. Using the definition of unemployment, which of the following individuals would be

unemployed?
a. A full-time student quits school, enters the labor market for the first time, and
searches for employment. (Frictional unemployemnt)
b. Because of the increased level of automobile imports, an employee of General
Motors is laid off, but expects to be called back to work soon (Structural
umemployment)
c. Because of a reduction in the military budget,.your next door neighbor loses her
job in a plant where nuclear warheads are made and must look for a new job.
(Structural umemployment)- government changed the sector
d. All of these individuals are unemployed.
10. The unemployment rate equals

a. (number of people employed/working age population) × 100.
b. (number of people unemployed/labor force) × 100.
c. (labor force/working age population) × 100.
d. (number of people employed/number of people age 16 and over) × 100.
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1. The Bureau of Labour Statistics announced that in December 1998, of all adult Americans,
138,547,000 were employed, 6,021,000 were unemployed, and 67,723,000 were not in the
labour force. How big was the labour force? What was the labour-force participation rate?
What was the unemployment rate?
LF
= 138,547,000 + 6,021,000
= 144,568,000
LFPR
= LF/ Adult Population x 100
*AP = LF + NLF
= [144,568,000/ + (144,568,000 + 67,723,000)] x 100
= 68.10%
U rate
= U/ LF x 100
= (6,021,000/ 144,568,000) x 100
= 4.16%
2. The breakdown of the population in 2001 for Country X are as follows:

Category In Million
Employed 135.1
Unemployed 7.2
Not in labour force 7.2
Determine:
a. the unemployment rate
U rate
= U/ LF x 100. *LF = 135.1m + 7.2m =142.3m
= [7.2 m/ (135.1m + 7.2m)] x100
= 5.06%
b. the labour force participation rate
LFPR
= LF/ Adult Population x 100 *AP = LF + NLF = 135.1m + 7.2m + 7.2m = 149.5
= [142.3m/ 149.5] x 100
= 95.18%
c. employment-to-population ratio
= U/P
=135.1/149.5 x 100%
= 90.36%
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3. Using a diagram of the labour market, show the effect of an increase in the minimum wage
on the wage paid to workers, the number of workers supplied, the number of workers
demanded, and the amount of unemployment.
4. Why is frictional unemployment inevitable? How might the government reduce the amount
of frictional unemployment?
5. What claims do advocates of unions make to argue that unions are good for the economy?
6. Explain four ways in which a firm might increase its profits by raising the wages it pays.
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Section C (Essay question)
Question 1
Discuss the four ways in which a firm might increase its profits by raising the wages it pays.
Question 2
Consider an economy with two labour markets, neither of which is unionized. Now suppose a
union is established in one market.
a. Show the effect of the union on the market in which it is formed. In what sense is the
quantity of labour employed in this market an inefficient quantity?
Wage
Unemployment SL
W2
W0
DL
L0 L2
b. Show the effect of the union on the nonunionized market. What happens to the equilibrium
wage in this market?
Wage
SL
W0
DL
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L0
Chapter 29 : The Monetary System
Section A (MCQ)
1. Money
a. is more efficient than barter.
b. makes trades easier.
c. allows greater specialization.
d. All of the above are correct.
2. Changes in the quantity of money affect

a. interest rates.
b. Prices.
c. Production.
d. All of the above are correct
3. Which of the following best illustrates the medium of exchange function of

money?
a. You keep some money hidden in your shoe.
b. You keep track of the value of your assets in terms of currency.
c. You pay for your double latte using currency.
4. Liquidity refers to
a. the ease with which an asset is converted to the medium of exchange.
b. a measurement of the intrinsic value of commodity money.
c. the suitability of an asset to serve as a store of value.
d. how many time a dollar circulates in a given year.
5. Which type of currency has intrinsic value?

a. Commodity money.
b. Fiat money.
c. Both commodity money and fiat money.
d. Neither commodity money nor fiat money.
6. M1 equals currency + demand deposits +

a. nothing else.
b. other checkable deposits.
c. traveler's checks + other checkable deposits.
d. traveler's checks + other checkable deposits + savings deposits.
7. You get money for babysitting the neighbors' children. This best illustrates which
function of money?
a. medium of exchange
b. unit of account
c. store of value
d. Liquidity
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8. The supply of money is determined by

a. the price level.
b. the Treasury and Congressional Budget Office.
c. the Federal Reserve System.
d. the demand for money
9. Which of the following is correct?

a. If the Fed purchases bonds in the open market, then the money supply curve
shifts right. A change in the price level does not shift the money supply
curve.
b. If the Fed sells bonds in the open market, then the money supply curve
curve.
c. If the Fed purchases bonds, then the money supply curve shifts right. An
increase in the price level shifts the money supply curve right.
d. If the Fed sells bonds, then the money supply curve shifts right. A decrease
in the price level shifts the money supply curve right.
10. Which of the following is a tool that is used by the Fed to control the quantity of
money?
a. open market operations
b. government expenditure multiplier
c. excess reserves
d. real interest rate
Section B (Short answer question)
1. Why don’t banks hold 100 percent reserves? How is the amount of reserves banks hold
related to the amount of money the banking system creates?
2. Suppose that the T-account for First National bank is as follows:
Assets Liabilities
Cash $500,000 Deposits $500,000
(a) If the Central Bank requires banks to hold 5% of deposits as reserves, how much in
excess reserves does First National now hold?
(b) What will be the total money supply?
3. Suppose that the reserve requirement for checking deposits is 10 percent and that banks do
not hold any excess reserves.
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(a) If the Central Bank sells $1 million of government bonds, what is the effect on the
economy’s reserves and money supply?
(b) Now suppose the Central Bank lowers the reserve requirement to 5%, but banks choose
to hold another 5% of deposits as reserves. Why might banks do so? What is the overall
change in the money multiplier and the money supply as a result of these actions?
Question 1
Assume that Miss A deposits RM50,000 with Bank Y. Assume also that required reserves are 20
percent of checking deposits, and that banks hold no excess reserves and households hold no
currency. Explain the detailed process of money creation in the economy and calculate the size
of the money multiplier. Demonstrate your answers using banks’ T-account.
Question 2
a) What are the tools of monetary control used by central banks and explain how central banks
use them to control money supply?
b) Why is the central banks unable to fully control the money supply?
30
Chapter 30 : Money Growth and Inflation
Section A (MCQ)
1. What will happen to the price of bonds when the interest rate falls?
a. Bond prices will remain the same.
b. Bond prices will rise.
c. Bond prices will fall.
d. Ambiguous.
2. What will happen to the interest rate if the quantity of money demanded is less
than the quantity of money supplied?
a. Either increase or decrease, depending on the amount of excess demand.
b. Increase.
c. Decrease.
d. Unaffected.
3. What causes 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 Fed.
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 Fed.
4. Which of the following is NOT a monetary policy tool of the Federal Reserve?
a. Changes in required reserves.
b. Last resort loans.
c. Deposit insurance.
d. Open market operations.
5. The minimum percentage of deposits that a depository institution must hold and
cannot use for lending is known as the
a. Minimum rate.
b. required reserve ratio.
c. money multiplier.
d. discount rate.
6. The required reserve ratio

a. is the amount of money that banks require borrowers to reserve in their accounts.
b. is the fraction of a bank's total deposits that is required to be held in reserves.
c. increases when withdrawals from a bank are made.
d. is higher for banks that make riskier loans.
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7. If the desired reserve ratio is 3 percent and deposits totaled $575 billion, banks would
hold
a. $534.75 in reserves.
b. $17.25 billion in excess reserves.
c. $1,725 billion in currency.
d. $17.25 billion in reserves.
8. An increase in the price level makes the value of money

a. increase, so people want to hold more of it.
b. increase, so people want to hold less of it.
c. decrease, so people want to hold more of it.
d. decrease, so people want to hold less of it.

a. If the Fed purchases bonds in the open market, then the money supply curve
curve.
b. If the Fed sells bonds in the open market, then the money supply curve
curve.
c. If the Fed purchases bonds, then the money supply curve shifts right. An
increase in the price level shifts the money supply curve right.
d. If the Fed sells bonds, then the money supply curve shifts right. A decrease
in the price level shifts the money supply curve right.
10.
Refer to the above figure. If the money supply is MS2 and the value of money is 2,
a. the value of money is less than its equilibrium level.
b. the price level is higher than its equilibrium level.
c. the quantity of money demanded is greater than the quantity of money
supplied.
d. the quantity of money supplied is greater than the quantity of money
demanded.
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1. Explain the difference between nominal and real variables, and give two examples of each.
According to the principle of monetary neutrality, which variables are affected by changes in
the quantity of money?
2. In what sense is inflation like a tax? How does thinking about inflation as a tax help explain
hyperinflation?
3. According to Fisher effect, how does an increase in the inflation rate affect the real interest
rate and the nominal interest rate?
4. Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion, and real
GDP is $5 trillion.
I) What is the price level? What is the velocity of money?
II) Suppose that velocity is constant and the economy’s output of goods and services
rises by 5% each year.
a. What will happen to nominal GDP and the price level next year if the
Reserve Bank keeps the money supply constant?
b. What money supply should the Reserve Bank set next year if it wants to
keep the price level stable?
c. What money supply should the Reserve Bank set next year if it wants
inflation of 10%?
Section C (Essay Question)
Question 1
Explain the six costs of inflation.
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Chapter 31 : Open Economy Macroeconomics : Basic Concept

Section A (MCQ)
1. When Safeway supermarkets in the United States buys strawberries from Mexico
a. it uses dollars to pay Mexican farmers.
b. it uses pesos to pay Mexican farmers.
c. it may use any currency it chooses.
d. the transaction shows up in the U.S. capital account.
2. When the value of one currency falls relative to another currency, the exchange
rate for the first currency has Eg; 1USD = RM5; Now 1USD = RM4
a. depreciated. (Decreasing; Export more, Import less)
b. appreciated.
c. demanded.
d. revalued.
3. Sonya, a citizen of Denmark, produces boots and shoes that she sells to department
stores in the United States. Other things the same, these sales Denmark Exprt
goods to US = US import goods from Denmark
a. increase U.S. net exports and have no effect on Danish net exports.
b. decrease U.S. net exports and have no effect on Danish net exports.
c. increase U.S. net exports and decrease Danish net exports.
d. decrease U.S. net exports and increase Danish net exports.
4. Which of the following is an example of U.S. foreign portfolio investment?

a. Ruth, a U.S. citizen, buys bonds issued by a German corporation.
b. Larry, a citizen of Ireland, opens a fish and chips restaurant in the United
States. foreign direct investment, NCO for US Decrease I>O
c. Albert, a German citizen, buys stock in a U.S. computer companyforeign
Portfolio investment, NCO for US increase O>I
d. Dustin, a U.S. citizen, opens a country-western tavern in New Zealand.
foreign direct investment, NCO for US Increase O>I
5. If a country changes its corporate tax laws so that domestic firms build and
manage more firms overseas, then this country will
a. increase foreign direct investment which increases net capital outflow.
b. increase foreign direct investment which decreases net capital outflow.
c. increase foreign portfolio investment which increases net capital outflow.
d. increase foreign portfolio investment which decreases net capital outflow.
6. Which of the following would be U.S. foreign portfolio investment?

a. Disney builds a new amusement park near Barcelona, Spain., FDI, NCO
increase Out>In
b. A U.S. citizen buys stock in companies located in Asia.
c. A Dutch hotel chain opens a new hotel in the United States. FDI, NCO
decrease In>Out
d. A citizen of Singapore buys a bond issued by a U.S. corporation. FPI, NCO
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decrease (Because outflow for US) I>O
7. A German company sells computers to a retailer in the United States. These sales
by themselves
a. have no affect on U.S. net exports and increase German net exports.
b. decrease U.S. net exports and increase German net exports.
c. increase U.S. and German net exports.
d. increase U.S. net exports and decrease German net exports.
8. When the New Paradigm (an American company) buys shares of BMW stock (a
German company) for its pension fund, U.S. net capital outflow
a increases because an American company makes a portfolio investment in
Germany.
b. declines because an American company makes a portfolio investment in
Germany.
c. increases because an American company makes a direct investment in
Germany.
d. declines because an American company makes a direct investment in
Germany.
9. Greg, a U.S. citizen, opens an ice cream store in Bermuda. His expenditures are
U.S.
a foreign portfolio investment that increase U.S. net capital outflow.
b. foreign portfolio investment that decrease U.S. net capital outflow.
c. foreign direct investment that increase U.S. net capital outflow.
d. foreign direct investment that decrease U.S. net capital outflow.

a NCO = NX
b. NCO + I = NX
c. NX + NCO = Y
d. Y = NCO - I

1) Define net exports and net capital outflow. Explain how and why they are related.
2) Explain the relationship between saving, investment and net capital outflow.
3) How would the following transactions affect U.S. exports, imports, and net exports?
a. An American art professor spends the summer touring museums in Europe.

When an American art professor spends the summer touring museums in Europe,
he spends money buying foreign goods and services, so U.S. exports are
unchanged, imports increase, and net exports decrease
b. Students in Paris flock to see the latest movie from Hollywood.
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When students in Paris flock to see the latest movie from Hollywood, foreigners
are buying a U.S. good, so
U.S. exports rise,
imports are unchanged, and
net exports increase.
4) How would the following transactions affect U.S. net capital outflow? Also state whether
each involves direct investment or portfolio investment.
a. An American cellular phone company establishes office in the Czech Republic.
When an American cellular phone company establishes an office in the Czech
Republic,
U.S. net capital outflow increases, because the U.S. company makes a direct
investment in capital in the foreign country.
b. Harrod’s of London sells stock to General Electric pension fund.

When Harrod's of London sells stock to the General Electric pension fund,
U.S. net capital outflow increases, because the U.S. company makes a portfolio
investment in the foreign country.
5) A can of soda costs $0.75 in the U.S and 12 pesos in Mexico. What would the peso –
dollar exchange rate be if the purchasing-power parity holds? If a monetary expansion
causes all prices in Mexico to double, so that soda rose to 24 pesos, what would happen
to the peso-dollar exchange rate?
If purchasing-power parity holds, then 12 pesos per soda divided by $0.75 per soda
equals the exchange rate of 16 pesos per dollar. If prices in Mexico doubled, the
exchange rate will double to 32 pesos per dollar.
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6) If a Japanese car cost 500,000 yen, a similar American car cost $10,000, and a dollar can
buy 100 yen, what are the nominal exchange rate and real exchange rate?
Nominal exchange is 100yen per dollar.
Real exchange rate = (Nominal exchange rate x Domestic price) / Foreign price
= 100 x ($10000 per American car )/500,000yen per Japanese car
= 2 Japenese cars : 1 American car.
37
Chapter 32: A Macroeconomic Theory of The Open Economy
Section A (MCQ)
1. A country has $100 million of net exports and $170 million of saving. Net capital
outflow is 170 = 100 +I + NCO
a. $70 million and domestic investment is $170 million.
b. $70 million and domestic investment is $270 million.
c. $100 million and domestic investment is $70 million.
2. In an open economy, the market for loanable funds equates national saving with
a. domestic investment.
b. net capital outflow.
c. the sum of national consumption and government spending.
d. the sum of domestic investment and net capital outflow.
3. Other things the same, a higher real interest rate raise the quantity of
a. domestic investment.
b. net capital outflow.
c. loanable funds demanded.
d. loanable funds supplied.
4. An increase in the U.S. real interest rate induces

a. Americans to buy more foreign assets, which increases U.S. net capital
outflow.
b. Americans to buy more foreign assets, which reduces U.S. net capital
outflow.
c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.
d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.
5. When a French vineyard establishes a distribution center in the U.S., U.S. net
capital outflow NCO Decrease
a. increases because the foreign company makes a portfolio investment in the
U.S.
b. declines because the foreign company makes a portfolio investment in the
U.S.
c. increases because the foreign company makes a direct investment in capital
in the U.S.
d. declines because the foreign company makes a direct investment in capital
in the U.S.
6. Which of the following equations is always correct in an open economy?

a. I=Y-C
b. I=S
c. I = S - NCO
d. I = S + NX
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7. If interest rates rose more in France than in the U.S., then other things the same
a. U.S. citizens would buy more French bonds and French citizens would buy
more U.S. bonds.
b. U.S. citizens would buy more French bonds and French citizens would buy
fewer U.S. bonds.
c. U.S. citizens would buy fewer French bonds and French citizens would buy
more U.S. bonds.
d. U.S. citizens would buy fewer French bonds and French citizens would buy
fewer U.S. bonds.
8. How much is the saving of a country with a $50 million of domestic investment
and net capital outflow of $15 million? S =I +NCO 50m + 15m = 65m
a. -$35 million.
b. $35 million.
c. -$65 million.
d. $65 million.
9. Which of the following increases when the real interest rate decreases, ceteris
paribus?
a. Domestic investment.
b. Net capital outflow.
c. Loanable funds supplied.
d. Loanable funds demanded.
10. The amount of dollars demanded in the market for foreign-currency exchange at a
given real exchange rate increase if
a. either U.S. imports decrease or U.S. exports increase.
b. either U.S. imports increase or U.S. exports decrease.
c. either U.S. imports or exports decrease.
d. either U.S. imports or exports increase.

1. Describe the supply and demand in the market for loanable funds and the market for
foreign currency exchange. How are these markets linked?
The supply of loanable funds comes from national saving; the demand for loanable funds comes
from domestic investment and net capital outflow. The supply of dollars in the market for foreign
exchange comes from net capital outflow; the demand for dollars in the market for foreign
exchange comes from net exports. The link between the two markets is net capital outflow.

1. Why are budget deficits G > T and trade deficits X< M sometimes called the twin
deficits?
The real interest rate is determined in the market for loanable funds.This real interest rate
determines the level of net capital outflow. Because net capital outflow must be paid for with
foreign currency, the quantity of net capital outflow determines the supply of dollars.The
39
equilibrium real exchange rate brings into balance the quantity of dollars supplied and the
quantity of dollars demanded.
Thus, the real interest rate and the real exchange rate adjust simultaneously to balance
supply and demand in the two markets. As they do so, they determine the levels of national
saving, domestic investment, net capital outflow, and net exports.
Buy more exports

2. Suppose that the government is considering an investment tax credit, which subsidies
domestic investment.How does this policy affect national saving, domestic saving,
domestic investment, net capital outflow, the interest rate, the exchange rate and the trade
balance.
A government budget deficit occurs when the government spending exceeds government
revenue. Because a government deficit represents negative public saving, it lowers national
saving. This leads to a decline in the supply of loanable funds.
The real interest rate rises, leading to a decline in both domestic investment and net
capital outflow.Because net capital outflow falls, people need less foreign currency to buy
foreign assets, and therefore supply fewer dollars in the market for foreign-currency exchange.
The real exchange rate rises, making U.S. goods more expensive relative to foreign
goods. Exports will fall, imports will rise, and net exports will fall.
40
In an open economy, government budget deficits raise real interest rates, crowd out domestic
investment, cause the dollar to appreciate, and push the trade balance toward deficit. Because
they are so closely related, the budget deficit and the trade deficit are often called the twin
deficits. Note that because many other factors affect the trade deficit, these “twins” are not
identical.
Chapter 28 (Parkin) :Expenditure Multipliers : The Keynesian Model
Section A(MCQ)
1. The Keynesian model of aggregate expenditure assumes that

a. individual firms' prices are flexible but the price level is fixed.
b. both individual firms' prices and the price level are flexible.
c. both individual firms' prices and the price level are fixed.
d. individual firms' prices are fixed but the price level is flexible.
2. An increase in real GDP leads to

a. a decrease aggregate planned expenditure.
b. no change in aggregate planned expenditure.
c. an increase in aggregate planned expenditure.
d. a change in aggregate planned expenditure but whether the change is an
increase or a decrease depends on whether nominal GDP increases or
decreases.
3. The consumption function relates consumption expenditure to More income more

consumption
a. the interest rate.
b. disposable income.
c. saving.
d. the price level.
4. Autonomous consumption is equal to

a. consumption when disposable income is zero.
b. saving when consumption equals disposable income.
c. consumption caused by an increase in disposable income.
d. dissaving when disposable income is greater than zero.
5. The marginal propensity to consume refers to

a. the ratio of total consumption expenditure to total disposable income.
b. the additional saving that occurs out of an additional dollar of disposable
income.
c. the additional consumption expenditure that occurs out of an additional
dollar of investment.
d. the additional consumption expenditure that occurs out of an additional
dollar of disposable income.
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6. Real GDP equals $20 billion and aggregate planned expenditure is $30 billion.
There is an unplanned ________ in inventories of ________ and real GDP will
________.
a. increase; $10 billion; increase
b. increase; $50 billion; decrease
c. decrease; $10 billion; increase
d. decrease; $10 billion; decrease
7. When autonomous expenditure increases, equilibrium aggregate expenditure

a. decreases by an equal amount to offset the unplanned portion.
b. increases by an equal amount.
c. decreases by a greater amount due to the multiplier.
d. increases by a greater amount due to the multiplier.
8. If investment increases by $300 and, in response, equilibrium aggregate

expenditure increases by $600, then the multiplier must be 600/300
a. 0.2.
b. 0.5.
c. 2.
d. 5.
9. An increase in the price level results in a

a. downward shift in the AE curve and a movement up along the AD curve.
b. downward shift in both the AE and AD curves.
c. downward shift in the AD curve and a movement down along the AE curve.
d. leftward movement along both the AE and AD curves.
10. In general, an increase in autonomous expenditure that is NOT created by a change

in the price level results in a
a. rightward shift of the AD curve.
b. movement upward along the AD curve.
c. movement downward along the AD curve.
d. leftward shift of the AD curve.
Question 1
In an economy, autonomous consumption expenditure is $50 billion, investment is $200 billion,

and
government expenditure is $250 billion. The marginal propensity to consume is 0.7 and net taxes
are $250 billion. Exports are $500 billion and imports are $450 billion. Assume that net taxes
and
imports are autonomous and the price level is fixed.
a) What is the consumption function?
42
b) What is the equation of the AE curve?

c) Calculate equilibrium expenditure.
d) Calculate the multiplier.
e) If investment decreases to $150 billion, what is the change in equilibrium expenditure?
f) Describe the process in part (e) that moves the economy to its new equilibrium expenditure.
Question 2
Real GDP C I G
(billions of (billions of (billions of (billions of
2009 dollars) 2009 dollars) 2009 dollars) 2009 dollars)
100 150 150 150
200 200 150 150
300 250 150 150
400 300 150 150
500 350 150 150
600 400 150 150
700 450 150 150
800 500 150 150
900 550 150 150
The above table gives information for the nation of North Hampton. There are no imports to or
exports from North Hampton.
a) Find aggregate planned expenditure for each level of real GDP.
b) What is the equilibrium level of real GDP?
SECTION C
Question 1
An increase in the price level shifts the aggregate expenditure curve downward and results in a
movement along the aggregate demand curve. Why does an increase in the price level result in a
shift in the aggregate expenditure curve rather than a movement along it?
Question 2
How does the economy adjust so that aggregate planned expenditure equals real GDP?
43
Chapter 33 : Aggregate Demand and Aggregate Supply
Section A (MCQ)
1. An aggregate supply curve depicts the relationship between
a. the price level and the quantity of nominal GDP supplied.
b. household expenditures and household income.
c. the price level and the quantity of real GDP supplied.
d. the money wage rate and the quantity of real GDP supplied.
2. In the macroeconomic long run

a. real GDP equals potential GDP.
b. the economy is at full employment.
c. regardless of the price level, the economy is producing at potential GDP.
3. The short-run aggregate supply curve is upward sloping because in the short run
the
a. money wage rate changes but the price level does not.
b. price level changes but the money wage rate does not.
c. both the money wage rate and the price level change.
d. neither the money wage rate nor the price level can change.
4. Which of the following changes does NOT shift the long-run aggregate supply
curve?
a. a decrease in the labor force Shift to the right
b. a fall in the price level
c. a rise in number of college graduates in the labor force Shift to the left
d. a tax hike that reduces the capital stock Shift to the right
5. Moving along the aggregate demand curve, a decrease in the quantity of real GDP
demanded is a result of
a. an increase in the price level.
b. a decrease in the price level.
c. an increase in income. Shift to the left
d. a decrease in income.
6. Which of the following can start an inflation?

a. An increase in aggregate demand.
b. An increase in aggregate supply.
c. A decrease in aggregate supply.
d. Both answers A and C are correct.
7. Demand pull inflation can be started by

a a decrease in the quantity of money.
b. an increase in government expenditure.
c. a decrease in net exports.
44
d. an increase in the price of oil.
8. A leftward shift in the short run aggregate supply curve

a. is the result of the Fed increasing the quantity of money.
b. is the result of a rise in the price of a key resource.
c. is the result of consumer expenditures exceeding available output.
d. increases both the price level and real GDP.
9. Suppose that the money prices of raw materials increase so that short-run
aggregate supply decreases. If the Federal Reserve does not respond, the higher
money price of raw materials will
I. repeatedly shift the aggregate demand curve rightward and raise the price level.
II. shift the aggregate demand curve rightward and the aggregate supply curve
leftward, raising prices.
III. result initially in lower employment and a higher price level.
a. I only
b. both I and II
c. both II and III
d. III only
10. The wealth effect, interest rate effect, and exchange rate effect are all explanations
for
a. the slope of short-run aggregate supply.
b. the slope of long-run aggregate supply.
c. the slope of the aggregate demand curve.
d. everything that makes the aggregate demand curve shift.
Question 1
Suppose the aggregate demand and short-run aggregate supply schedules for an economy whose
natural output equals $2,700 are given in the table.
Aggregate Quantity of Goods and Services

Price Level Demanded Supplied
0.50 $3,500 $1,000
0.75 3,000 2,000
1.00 2,500 2,500
1.25 2,000 2,700
1.50 1,500 2,800
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a) Draw the aggregate demand, short-run aggregate supply, and long-run aggregate supply
curves.
b) State the short-run equilibrium level of real GDP and the price level.
c) Characterize the current economic situation. Is there an inflationary or a recessionary
gap? If so, how large is it?
d) Explain how the economy will achieve its long run equilibrium with and without
government intervention.
1. Suppose the Central Bank expands the money supply, but because the public expects this
action, it simultaneously raises its expectation of the price level. What will happen to output
and the price level in the short run? Compare this result to the outcome if the Central Bank
expanded the money supply, but the public didn’t change its expectation of the price level.
2. For each of the following events, explain the short-run and long-run effects on output and the
price level.
(a) The stock market declines sharply, reducing consumers’ wealth
(b) The federal government increases spending on national defence
(c) A technological improvement raises productivity
(d) A recession overseas causes foreigners to buy fewer US goods.
46
Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
Section A(MCQ)
1. All of the following are part of fiscal policy EXCEPT

A) setting tax rates.
B) setting government spending.
C) choosing the size of the government deficit.
D) controlling the money supply.
2. A budget surplus occurs when government
A) spending exceeds tax revenues.
B) tax revenues exceeds spending.
C) tax revenues equals spending.
D) tax revenues equal Social Security expenditures.
3. When the economy is hit by spending fluctuations, the government can try to
minimize the effects by
A) changing government expenditures on goods.
B) changing taxes.
C) changing government expenditures on services.
D) all of the above
4. The key goal of monetary policy is to
A) reverse the productivity growth slowdown.
B) keep the budget deficit small and/or the budget surplus large.
C) lower taxes.
D) maintain low inflation.
5. Monetary policy affects real GDP by

a. changing aggregate supply.
b. creating budget surpluses.
c. changing aggregate demand.
d. creating budget deficits.
6. Liquidity preference refers directly to Keynes' theory concerning

a. the effects of changes in money demand and supply on interest rates.
b. the effects of changes in money demand and supply on exchange rates.
c. the effects of wealth on expenditures.
d. the difference between temporary and permanent changes in income.
7. According to the liquidity preference theory, an increase in the overall price level
of 10 percent
a. increases the equilibrium interest rate, which in turn decreases the quantity
of goods and services demanded.
b. decreases the equilibrium interest rate, which in turn increases the quantity
of goods and services demanded.
c. increases the quantity of money supplied by 10 percent, leaving the interest
rate and the quantity of goods and services demanded unchanged.
d. decreases the quantity of money demanded by 10 percent, leaving the

interest rate and the quantity of goods and services demanded unchanged.
8. If expected inflation is constant and the nominal interest rate increases by 3.5
percentage points, then the real interest rate
a. increases by 3.5 percentage points.
b. increases, but by less than 3.5 percentage points.
c. decreases, but by less than 3.5 percentage points.
d. decreases by 3.5 percentage points.
9. When the interest rate increases, the opportunity cost of holding money
a. increases, so the quantity of money demanded increases.
b. increases, so the quantity of money demanded decreases.
c. decreases, so the quantity of money demanded increases.
d. decreases, so the quantity of money demanded decreases.
10. If the interest rate increases

a. or if the price level increases, then people will want to hold more money.
b. or if the price level increases, then people will want to hold less money.
c. or if the price level decreases, then people will want to hold more money.
d. or if the price level decreases, then people will want to hold less money.

Question 1
a) Distinguish between a multiplier effect and a crowding out effect.
b) The economy is in recession. Shifting the AD curve rightward by $200b would
end the recession.
i) If MPC = 0.8 and there is no crowding out, how much should the government
increase its spending (G) to end the recession?
ii) If there is crowding out of $20b, how much should the government increase its
spending to end the recession.

Question 1
a) Explain the reasons why the aggregate demand (AD) curve slopes downward.
b) What are fiscal and monetary policies? Do they have an immediate effect on the
AD curve or the short run aggregate supply (SRAS) curve?
48
Chapter 35 : The Short-Run Tradeoff between Inflation and Unemployment
Section A(MCQ)
1. One determinant of the natural rate of unemployment is the

a. rate of growth of the money supply.
b. minimum wage rate.
c. expected inflation rate.
2. In the short run,

a. unemployment and inflation are positively related. In the long run they are
largely unrelated problems.
b. and in the long run inflation and unemployment are positively related.
c. unemployment and inflation are negatively related. In the long run they are
largely unrelated problems.
d. and in the long run inflation and unemployment are negatively related.
3. In the long run, which of the following depends primarily on the growth rate of the
money supply?
a. the natural rate of unemployment and the inflation rate
b. the natural rate of unemployment but not the inflation rate
c. the inflation rate but not the natural rate of unemployment
d. neither the natural rate of unemployment nor the inflation rate
4. The short-run Phillips curve shows the combinations of

a. unemployment and inflation that arise in the short run as aggregate demand
shifts the economy along the short-run aggregate supply curve.
b. unemployment and inflation that arise in the short run as short-run
aggregate supply shifts the economy along the aggregate demand curve.
c. real GDP and the price level that arise in the short run as short-run
aggregate supply shifts the economy along the aggregate demand curve.
5. If a central bank decreases the money supply, then

a. prices, output, and unemployment rise.
b. prices and output rise and unemployment falls.
c. prices rise and output and unemployment fall.
d. prices and output fall and unemployment rises.
6. In the long run, policy that changes aggregate demand changes

a. both unemployment and the price level.
b. neither unemployment nor the price level.
c. only unemployment.
d. only the price level.
49
7. As the aggregate demand curve shifts leftward along a given aggregate supply
curve,
a. unemployment and inflation are higher.
b. unemployment and inflation are lower.
c. unemployment is higher and inflation is lower.
d. unemployment is lower and inflation is higher.
8. According to the short-run Phillips curve, inflation

a. and unemployment would fall if the policymakers decreased the money
supply.
b. would fall and unemployment would rise if policymakers decreased the
money supply.
c. and unemployment would fall if the policymakers increased the money
supply.
d. would fall and unemployment would rise if policymakers increased the
money supply.
9. The natural rate of unemployment

a. is constant over time.
b. varies over time, but can’t be changed by the government.
c. is the unemployment rate that the economy tends to move to in the long run.
d. depends on the rate at which the Fed increases the money supply.
10. Which of the following is correct according to the long-run Phillips curve?
a. No government policy, including changes in monetary growth, can change
the natural rate of unemployment.
b. Changes in the money supply growth rate is the only government policy that
can change the natural rate of unemployment.
c. Monetary policy cannot change the natural rate of unemployment, but other
government policies can.
d. Monetary policy and other government policies can both change the natural
rate of unemployment.

1. Draw the short-run tradeoff between inflation and unemployment. How might the
Central Bank move the economy from one point on this curve to another?
2. Draw the long-run tradeoff between inflation and unemployment. Explain how the
short-run and long-run tradeoffs are related.
3. Suppose a drought destroys farm crops and drives up the price of food. What is
the effect on the short-run tradeoff between inflation and unemployment?
4. Use the following equation and information to answer the questions given below.
Unemployment rate = Natural rate of unemployment – α (Actual inflation – Expected

inflation)
50
Natural rate of unemployment = 5%

Expected inflation = 2%
Coefficient a in PC equation = 0.5
i) Plot the long-run Phillips curve.
ii) Find the unemployment rate for each of these values of actual inflation: 0%,
6%. Sketch the short-run PC.
iii) Suppose expected inflation rises to 4%. Repeat part (ii).
iv) Instead, suppose the natural rate of unemployment falls to 4%. Draw the new
long-run Phillips curve.

Question 1
The Fed Chairman is convinced that the economy is in danger of recession and
decides to take action. He implements an expansionary monetary policy to combat
the recession. Explain the unemployment and inflation outcomes for the economy if
workers and firms form their expectations using
i) rational expectations.
ii) adaptive expectations.
Use a short-run and long-run Phillips curve to illustrate your answer.
51

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ECO102 Principles of Macroeconomics –Tutorial questions

Department of Business Studies

Bachelor of Business Year 1

Chapter 23: Measuring a Nation’s Income

5. To encourage formation of small businesses, the government could provide subsidies;

6. For an economy as a whole,

7. Gross domestic product is defined as

8. If a government made a previously-illegal activity such as gambling or prostitution legal,

10. In a certain economy in 2005, GDP amounted to $5,000; consumption amounted to

Section B (Short answer questions)

Year Price of Milk Quantity of Milk Price of Honey Quantity of Honey

2001: 100 x ($200/$200) = 100.0

3. Consider the following data on a country’s GDP:

Nominal GDP in 1996: $7662 (Old)

Growth Rate of nominal GDP between 1996 and 1997

GDP Deflator in 1996: $110 (Old)

Growth Rate of GDP deflator between 1996 and 1997

c. What was real GDP in 1996?

d. What was real GDP in 1997?

Real GDP in 1996: $6965.45 (Old)

Growth Rate of real GDP between 1996 and 1997

Section C (Essay Questions)

Chapter 24 : Measuring the cost of living

1. The first step in measuring the CPI is to

4. Economists use the term inflation to describe a situation in which

5. What basket of goods is used to construct the CPI?

6. In the CPI, goods and services are weighted according to

8. The goal of the consumer price index is to measure changes in the

“Australian made shoes is a imported goods”

Section B (Short answer questions)

Defined GDP Deflator and CPI.

COB = Cost of H + Cost of A

COB in 2001 = 4 x $1 + 2 x $0.5 = $5

CPI = COB2/ COB (Base year) x 100

CPI in 2001 = $5/ $5 x 100 = 100

Inflation rate = [CPI (New) – CPI (Old)]/ CPI (Old) x 100

Inflation rate (2001 - 2002)

Inflation rate (2002 - 2003)

:. The purchasing power is growing. Higher purchasing power.

Mr A’s Salary in 1930 = $80,000

Chapter 25 : Production and Growth

COUNTRY A = FG/Population =128k/ 1000 = 125

3. A nation's standard of living is determined by

4. If a production function has constant returns to scale, output can be doubled if

a. the growth rate will not change in either country.

6. The aggregate production function is graphed as

10. Labor productivity is defined as

c. the growth rate of the labor force.

Section B ( Short answer questions)

Chapter 26 : Saving, Investment, and Financial System

2. National saving is defined as the amount of

6. A rise in the real interest rate (Interest increase ; Quantity(Cost of borrow)

7. Investment is financed by which of the following?

9. All of the following are sources of loanable funds EXCEPT

National savings = Private savings + Government savings

Public Saving = (T-G)

2) What is investment? How is it related to national saving.

National saving = Public saving + Private saving

5) Suppose that intel is considering building a new-chip making factory.

Section C(Essay questions)

b) Government budget change from a balanced budget to a deficit budget.

Chapter 28 : Unemployment 22/2