SECTION A: FOR EACH OF THE FOLLOWING STATEMENTS CHOOSE THE

CORRECT ANSWER AND PROVIDE AN EXPLANATION FOR YOUR CHOICE IN NO

MORE THAN TWO LINES. (1.5 MARKS)

1. When a local manufacturer raises the price on industrial tractors it produces, the
GDP deflator of the country rises but the CPI does not.
i. True
ii. False
ANSWER (0.25 marks):
Explanation (0.25 marks):

(Sub total: 0.5 marks)

2. An increase in the saving interest rate from 5% to 10% in Japan would shift the
supply curve of loanable funds to the right.
i. True
ii. False
ANSWER (0.25 marks):
Explanation (0.25 marks):
(Sub total: 0.5 marks)
3. An appreciation of the Vietnam real exchange rate induces Vietnamese consumers
to buy fewer domestic goods and more foreign goods.
i. True
ii. False
ANSWER (0.25 marks):
Explanation (0.25 marks):

(Sub total: 0.5 marks)

Total: 1.5 marks
SECTION B: SHORT ANSWER QUESTIONS (7.5 MARKS)
1. In countryland, there are only 2 goods: pizza and latte. The table below shows the
prices and quantities produced of these goods in 2018, 2019 and 2020:

Year Price of Quantity of Price of Quantity

pizza pizza latte of latte

2018 $2.00 100 $4.00 50

2019 $3.00 160 $6.00 80

2020 $4.00 220 $7.00 80

Required:
a) Calculate the nominal GDP in 2018, 2019 and 2020 for countryland. (0.5 marks)
1
b) Calculate the real GDP in three years for this economy using 2018 as base year.
(0.5 marks)
c) Compare growth rate of nominal GDP and real GDP in 2019 and 2020. (0.5 marks)
d) Given your answers in a) and b) calculate the GDP deflator and the inflation rate in
2020. (1 mark)
Total: 2.5 marks
2. Suppose an economy with only one good: rice. The economy has enough labor,
capital, and land to produce total output Y = 4000 kg of rice. V is constant. In 2020,
MS=$6000, P = $3/kg.
a. Compute nominal GDP and velocity in 2020. (1 mark)
For 2021, the Fed increases MS by 10%, to $6600. Use this information to answer
questions b and c.
b. Compute the 2021 values of nominal GDP and P. Compute the inflation rate for
2020-2021. (1 mark)
c. Suppose that in 2021 technology progress causes output Y to increase to 4160.
Compute the 2020-2021 inflation rate. (0.5 marks)
Total: 2.5 marks
3. The banking system currently has $260 billion of reserves, none of which are
excess. People hold only deposits and no currency, and the reserve requirement is
20 percent.
a) How much is the money multiplier and the money supply? (1 mark)
If the Central Bank changes the reserve requirement to 12.5 percent, then:
b) How much is the new money multiplier and the new money supply? (1 mark)
c) By how much does the money supply change? (0.5 marks)
Total: 2.5 marks

SECTION C: SHORT ESSAY QUESTIONS (word limit:150 words) (1 MARK)

Suppose that consumers become optimistic about the future health of the economy
and so they increase their consumption spending.
1. Which curve(s) is (are) affected: AD? AS? Or both AD and AS? (0.25 marks)
2. What will happen to output, price level and unemployment in short run? (0.5 marks)
3. Explain the change with appropriate graphs. (0.25 marks)
Total: 1 mark
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