SCHOOL OF ACCOUNTING, ECONOMICS & FINANCE

Intermediate Macroeconomics (ECON201/ECON205)

Test 3

Wednesday, 24th April 2018

Time Allocated: 1 hour Total Marks: 100

INSTRUCTIONS TO STUDENTS:
 This test consists of Multiple-Choice questions (MCQ) only. All questions are
COMPULSORY.
 There are 20 Multiple-Choice questions. Please answer the MCQS on the MCQ answer
sheet provided. Only entries in HB pencil will be recorded by the scanner. Each correct
answer will be awarded 5 marks. There is no negative marking.
 Please ensure that your name and student number appear on your answer sheet.
 UNIVERSITY OF KWAZULU-NATAL
SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE
ECONOMICS 201/205: INTERMEDIATE MACROECONOMICS & APPLICATIONS
CLASS TEST 3 – 24 APRIL 2019
PAGE 2

1. A production function that assumes constant marginal product of capital:

A. results in a concave savings function.

B. is essential to the neo-classical growth model.
C. results in a straight savings function.
D. ensures that convergence in the long-run.
E. ensures a stable steady-state.

2. In the neoclassical growth model, an increase in the savings rate will:

A. shift the production function upward.

B. reduce steady-state capital per capita and increase consumption.
C. increase the capital-labour ratio.
D. result in technological advancement.
E. Both A. and B. are correct.

3. In the endogenous growth model, if the capital growth rate equals 6%, the marginal
product of capital and the savings rate are 200 and 0.03 respectively, then the output
growth rate will be:

A. 200%.
B. 12%.
C. 15%.
D. 6%.
E. Impossible to calculate.

4. Which of the following statements about the ‘poverty trap’ is TRUE?

A. It is an unstable steady-state equilibrium.

B. It is not an steady-state.
C. It is a steady-state equilibrium characterised by high rate of corruption and
mortality.
D. It is a steady-state equilibrium characterised by high income and a low population
growth rate.
E. It is a steady-state equilibria characterised low income and high population
growth rate.

5. An increase in the savings rate will:

A. Increase the level of output, but only temporarily affect the output growth rate.
B. increase both the level and the growth rate of output.
C. affect the level, but not the growth rate, of output.
D. temporarily reduce the output growth rate.
E. will increase both consumption and the output growth rate.
 UNIVERSITY OF KWAZULU-NATAL
SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE
ECONOMICS 201/205: INTERMEDIATE MACROECONOMICS & APPLICATIONS
CLASS TEST 3 – 24 APRIL 2019
PAGE 3
6. In the AD-AS model, in the long-run, a decrease in the real money supply:

A. will result in a movement along a horizontal AS curve.

B. is caused by a decrease in the interest rate.
C. may be the result of equilibrium prices increasing following an expansionary fiscal
policy.
D. causes the actual unemployment rate to fall below the natural rate of
unemployment.
E. decreases consumers’ disposable income.

7. In South Africa, fiscal policies such as _______ are implemented by _______.

A. lowering interest rates; the National Treasury.

B. increasing education spending; Parliament.
C. reducing the company tax rate; the South African Reserve Bank.
D. raising the money supply; the South African Reserve Bank.
E. increasing Value-Added Tax; the National Treasury.

8. Increased investor confidence will:

A. shift the AS curve rightwards in the medium run.

B. result in a movement down a positively sloped AS curve as the price level
increases.
C. decrease the actual rate of unemployment.
D. cause a movement down the short-run Phillips curve.
E. decrease the need for government to support small businesses.

9. Starting from a point of equilibrium, a decrease in the money supply:

A. will not affect output in the short run.

B. raises output in the long run, but not in the short run.
C. raises output in both the short run and the long run.
D. decreases the price level in the long run, but not in the short run.
E. will lower the cost of borrowing for firms.

10. Using the assumptions of the quantity theory of money, if Y=100, V=10, and P=5 then
raising the money supply to 100 in the long run will cause:

A. real output to double, ceteris paribus.

B. the price level to double, ceteris paribus.
C. the price level and real output to increase ceteris paribus, but more information is
needed to determine by how much.
D. the velocity of circulation to decrease to 5, ceteris paribus.
E. nominal output to remain unchanged, ceteris paribus.
 UNIVERSITY OF KWAZULU-NATAL
SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE
ECONOMICS 201/205: INTERMEDIATE MACROECONOMICS & APPLICATIONS
CLASS TEST 3 – 24 APRIL 2019
PAGE 4
11. Given an investment function of the form 𝐼𝐼 = 𝐼𝐼 ̅ − 𝑏𝑏𝑏𝑏 it can be said that:

A. b is a good measure of autonomous investment in the economy.

B. if investor confidence in the economy increases then b increases and the whole
investment schedule shifts to the right.
C. b is a measure of the responsiveness of planned investment to changes in the
interest rate.
D. b is a measure of the sensitivity of the demand for money to changes in the interest
rate.
E. the greater b is, the steeper is the planned investment schedule.

12. An increase in autonomous spending increases _______ and increases the _______at a
given interest rate. This is represented by a _______ shift of the IS curve.

A. aggregate demand, income level, rightward

B. aggregate supply, income level, rightward
C. aggregate demand, consumption level, leftward
D. aggregate demand, investment level, leftward
E. Impossible to determine.

13. Assume a model with no government or foreign sector. If actual output is R150 million
whilst aggregate demand is R170 million, we know that:

A. the magnitude of unintended inventory adjustments is - R20 million.

B. the magnitude of unintended inventory adjustments is + R20million.
C. the magnitude of unintended inventory adjustments is + R10 million.
D. the actual income level is above its equilibrium.
E. there currently is an excess supply of goods and services.

14. In a model with no government or foreign sector, if autonomous consumption is 𝐶𝐶𝑜𝑜 = 80,
investment is 𝐼𝐼𝑜𝑜 = 70, and the marginal propensity to save is s = 0.25, equilibrium
income is:

A. 150.
B. 200.
C. 225.
D. 600.
E. 750.

15. If there is no government or foreign sector and planned investment equals planned
saving, then:

A. the multiplier is smaller than it would be if there was a proportional income tax.
B. consumption plus investment equals income.
C. the quantity of output produced exceeds aggregate demand.
D. the multiplier is equal to 1/MPC (where MPC is the marginal propensity to consume).
E. All of the above are correct.
 UNIVERSITY OF KWAZULU-NATAL
SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE
ECONOMICS 201/205: INTERMEDIATE MACROECONOMICS & APPLICATIONS
CLASS TEST 3 – 24 APRIL 2019
PAGE 5
16. In an IS-LM model, an increase in the money supply will:

A. lower interest rates and therefore decrease the level of investment.

B. lower interest rates, stimulate investment spending, and increase national income.
C. lower interest rates and bond prices and decrease money demand.
D. stimulate investment spending, shifting both the LM- and IS-curves to the right.
E. increase government spending since more funds become available.

17. Which of the following represents an action by the South African Reserve Bank that is
designed to increase the money supply?

A. A fall in government spending on tertiary education.

B. An increase in the required reserve ratio.
C. An increase in the repo rate.
D. Selling government bonds in the open market.
E. Buying government bonds in the open market.

Use the diagram below to answer BOTH questions 18 and 19:

18. The diagram above shows that:

A. the level of investment is independent of the interest rate.

B. the money demand curve is vertical.
C. the demand for money is very sensitive to changes in income.
D. the supply of money is dependent on the interest rate.
E. the public are willing to hold any amount of money at a given interest rate.
 UNIVERSITY OF KWAZULU-NATAL
SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE
ECONOMICS 201/205: INTERMEDIATE MACROECONOMICS & APPLICATIONS
CLASS TEST 3 – 24 APRIL 2019
PAGE 6

19. Given the LM curve above, which of the following is true?

A. This is an example of the classical case showing the effectiveness of monetary

policy.
B. A shift of the LM curve results in a substantial change in interest rates and income.
C. Monetary policy will have its maximal effect on income in the economy.
D. The economy is in a liquidity trap.
E. Both B) and C) are correct.

20. Which of the following events best explains the shift of the IS curve from IS to IS’ below?

A. An increase in autonomous consumption.

B. An increase in government spending.
C. An increase in transfer payments.
D. A reduction in autonomous taxes.
E. A fall in government spending.