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FACULTY ECONOMIC AND MANAGEMENT SCIENCES

DEPARTMENT ECONOMICS

SUBJECT BASIC MACROECONOMICS

SUBJECT CODE EMA 3572/8MA2572

DATE NOVEMBER 2OI8

DURATION 3 HOURS MARKS 100

Snecial/Supnlementarv Examinations

Examiner: Prof. E. Ziramba (University of Namibia)

Examiner: Mr S. Kalumbu (University of Namibia)

Examiner: Mr E. Iiyambula (University of Namibia)

Examiner: Ms M. Nangolo (University of Namibia)

Examiner: Ms P Msiska (University of Namibia)

Moderator: Dr J.M. Nyambe (University of Namibia)

This question paper consists of l0 pages including this front page

Instructions
e There are four questions, answer All.
@ Students can bring calculators.
e Marks for each part of every question are indicated.
e Draw clearly labeled diagrams where necessary.

UNIVERSITY OF NAMIBIA EXAMINATIONS

 1) If Frito Lay, an American
snack company, opens a new manufacturing facility in Namibia and
produces snacks which are distributed in Southern Africa, then Namibia's GDp and
U.S. GDP
A) increases; does not change
B) does not change; increases
C) increases; decreases
D) increases; increases

2) which of the following is true regarding the circular flow diagram?

I. "Aggregate income" is the flow of income earned by firms.
II. Retained earnings are considered income eamed by firms rather than part of households'
income.
III. The government, households, and firms all have transactions in the goods market.
A) I only
B) I and II
C) I and III
D) III only

3) Gross investment equals

A) net investment - depreciation r change in inventories.
B) net investment * depreciation.
C) net investment + change in inventories.
D) depreciation + shange in inventories.

4) In the circular flow model of an economy, households

A) receive income from buyers of goods and services.
B) receive income from the sale of factors in the goods markets.
C) pay firms for the use of their factors.
D) receive income from producers for the use of factors in the factor markets.

5) One policy that would increase the saving rate would be

A) raising taxes on the returns to saving.
B) raising taxes on the returns to investment.
C) taxing consumption.
D) raising taxes on saving.

6) Suppose that in 2013 a country has a population of I million and real GDP of S1 billion. In
2014, the population is 1.1 million andthe real GDP is $1.1 billion. The real GDP perperson
growth rate is
A) $1000.
B) positive.
C) negative.
D) zero.
 7) Namibia's current growth rate of real GDP per person is 5 percent
ayear. Using the Rule of
70, how long will it take to double real GDP per person?
A) two and half years
B) approximately 10 years
C) 28 years
D) 14 years

8) The aggregate production function is graphed as

A) a downward sloping curve.
B) an upward sloping straight line.
an upward sloping line that becomes flatter as the quantity of labor
!)
D) an upward sloping line that becomes steeper as the quantity of labor
increases.
increases.

9)
fn an economy, 42 millionpeople are in the labor force, 38 million are employ ed., and,47
million are of working age. How many people are not in the labor force?
A) 19 percent
B) 9 million
C) 5 million
D) 4 million

l0) Suppose the population of Tiny Town is 100 people and the working age population
is 70.lf
10 of these people are unemployed, the unemployment rate in Tiny Town
is
A) 10 percent.
B) 10/70 x 100.
C) 10/80 x 100.
D) There is not enough information provided to calculate the unemployment rate.

1l) Structural unemployment is

A) associated with the normal changing ofjobs in a dynamic economy.
B) associated with the general downturns in the economy.
c) associated with the general decline of specific industiies.
D) almost always short-term in nature.

12) The natural unemployment rate

A) occurs when the unemployment rate is 0 percent.
B) is the unemployment rate when there is no structural unemployment.
C) is the unemployment rate at full employment.
D) is the unemployment rate when there is only cyclical unemployment.

13) If the government mns a budget deficit, then

A) national saving is negative.
B) household but not business saving must pay for the deficit.
c) part of household and business saving finances the deficit.
D) national saving cannot fund investment.
 14) When the inflation rate
is negative,
A) real interest rate is g."at".;#;. the
nominar interest rate.
B) real interest rate is r...
,rru, ii" lominar interest rate.
C) nominal interest rate is
zero.
D) real interest rate equals
thenominar interest rate.

15) A movement dlwlward

along the demand for loanabre
funds curve occurs when
1] lhr expected profit r.o- ir""rtL"nt increases.
B) business expectation, U""*
_Jr" optimistic.
the real interest rate falls.
_C)
D) the supply of loanable funds
decreases.

roilowin e shtrtthe supprv

curve orroanabre runds ExcEpr
l!tli::fff,:1*T;lJhe
B) wealth.
C) disposable income.
D) expected future income.

a hamburger for lunch, you are using money

as a
^ll,Ylnf,|ir:*
B) standard of deferred payment.
C) medium of exchange.
D) unit of accounting.

18) Checks are NOI money

because they
A) are issued byTiils, *, Lv,rr" g""J__.nr.
I].u.. merely instruction, to i*r€.,ion"y.
C) have value in exchange brtiitfl";rt
insic
D) are not backed by eitf,er gol;;;.iil.. value.

19) Excess reserves are equal

to
that are more than are required
iii:Hffi:"1*:*,Xffi:.i:#[::H.::*rves
reserves ptus desiret;r;;.
SJ i.q"t
r,l/ oestred reserves minus actual
reserves.

20) The.quantity of real money

demanded is
A, negatlvely related to the price
level.
B) positively related to the pl."
f"""i.
C) independent of the price level.
D) sometimes negatively and
sometimes positively related
to the price lever.

4
 2l) Last year the exchange rate between U.S. dollars and Mexican pesos was 10 pesos per dollar.
Today is it 1l pesos per dollar. Here, the dollar
against the peso, and the peso
against the dollar
A) appreciated; depreciated
B) depreciated; appreciated
C) appreciated; appreciated
D) depreciated; depreciated

22) The demand curve for U.S. dollars slopes downward because as
the dollar U.S.
goods become expensive to foreign residents, so they purchase fewer u-s. goods, and
the quantity of dollars demanded decreases.
A) appreciates; more
B) appreciates; less
C) depreciates; more
D) depreciates; less

23) The current account records all transactions below EXCEpT for
A) net exports of goods and services.
B) net interest income.
C) net foreign investment.
D) net transfers.

24))If the nominal exchange rate rises and price levels stay constant,
the real exchange rate
A) rise
will
B) fall
C) stay constant
D) could rise, fall or stay constant

25) 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 nominil GDp increases or decreases.

26) If disposable income increases,

A) the consumption function shifts upward.
B) there is a movement upward along the consumption function.
C) the consumption function shifts downward.
D) there is movement downward along the consumption function.
 ,?:Hff]$" "o'ilibrium level of expenditure is $13 triilion. rf real GDp is
^" $12 trillion, then
their target levels and real
A) above; incr.ur" COp r"iff .
B) above; decrease
C) below; increase
-
D) below; decrease

is 6 and exports decrease bv

$30, what impact wilr that have
on aggregate
"':1"I,f,,tff.$'ltiplier
A) increase by $:O
B) increase by $tSO
C) decrease by $:O
D) decrease by $ t gO

long-run aggregate supply

?9)_The curve is because along
wage rate it, as prices rise, the money
a; rerti"u1 falls-
B) vertical; rises
!) uRward sloping; falls
D) upward sloping; stays constant

30) The AD curve shows the

sum of
tne price level, employmen,,uJ
f]
B) consumption expendiiure,
real GDp.
investment, and rear GDp.
expendit"e, in",tment, gou"-*"rl
expenditures on goods and
;J:[t#:tion
D) consumption expenditure,
services, and
investment, the price rever,
and real GDp.

quantity of money increases,

]l,h:level rises
11).pnce
A/ the
an-d the AD curve does
B) AD curve shifts leftward not shift.
rrzur.*ate demand decreases.
C) AD curve does not shift
and td;;;
'r,it' 'ier,t,il il'";;;"1ffi;lllf;3*1"ng
D) AD curve the curve.

iil'tf.l1x"#?fl flX1"T,,:1i,'3fr ;1"',"unmacroeconomicequ,ibriumGDp

B) equals full-employment
GDp.
U) rs more than full_employment
GDp.
tnu"'mo'" ihun' or the same as full-employment
|L*Aiafil GDp depending on the lever of

H
 33) Cost-push inflation can start with
A) a decrease in investment.
B) an increase in oil prices.
C) an,increase in govemment expenditure.
D) a decrease in the quantity of
-orly.
increases by ress than expected.
:3]j,tx";i:ifl:f:::ffland which of the fo,owing
A) Real GDp will be less than potential
GDp.
B) The price level will fall.
C) Real GDp will be more than potential
GDp.
D) Both answers A and B are correci--

35) The long-run phillips curve

shows that in the long run, policymakers
A) lower yn_employSent if they ur" can
*itirng to accept more inflation forever.
B) lower inflation if they are willing
to accept higher unemproyment forever.
c) choose the unemployment rate u"ut rrot
the inflation
D) lower infl ation without in".easing-unemptoyment. rate.

36) The supply sideeffects of a change

a- in taxes on rabor income means that
on labor income shift the in taxes
1) un increase; tubo. ,rppty
u" increase; labor supply "rr*-.ightward
l)
C) a decrease; labor demand "r.r"
leitward
curve rightward
D) a decrease; labor demand curve
fe?*a.a

37) The difference between the before-tax

and after-tax rates is referred to as
A) tax plug. the
B) deadweight gain.
C) tax wedge.
D) taxation penalty.

38) According to the Laffer curve,

raising the tax rate
A) always increases the amount oitur, r"u".rr..
B) always decreases the amount of
tax revenue.
dg"l not change the amount of ta;;evenue.
!)
D) might increase, decrease, or not change
the amount of tax revenue.
39) When the output gap is positive, it represents
represents gap.
_ _gap,and when it is negative,
_
A; a recessionary; an inflationarv
inflationary; an employment
I)u,
u, inflationary; a,ecessiorary
!J
D) an employment; an unemployment
 40) If the Central Bank lowers the repo
rate,
A) other short-term interest rates fall.
B) other short-term interest rates rise.
C) the exchange rate falls.
D) Both answers A and C are correct.

Question 2 (20 marks)

Indicate whether each of the following statements
is True or False (write the word in full)

2.l GDP does not O*

that would understate the true size of GDp.
2.2)Potential GDp is another name for real
GDp
2.3 The aggregate
GDP to labor hours
has a positive slope and becomes steeper
as emolor ment increases.
2.4)lf the r"ul *
2.5 At the *
market, there is no
2.6 Full employmenr o.
2.7 Whenthe inflation rate iinegative, tfre real
interest rate is greater than the
nominal interest rate.
2.8 The Ricardo-Barro effect holds that govemment
budget deficits Eave no effect
on the real interest rate.
2.9 ) Suppose prices at
The dollar serves as a medium of exchanse,
2.10 The demand for
-orr.V
real GDP increases.
2.I I With everything els
larger the value of U.S. exports, the greater is
tf,e quantitli"f US dollars

2.12The current aciount is the difference between

e@
@king into account interest rayments to and from the rest of the world.
2.13 The long-run aggr@ has a positive slope.
2.14 A fall in the money wag

2.15 As disnosa
smaller amount.
2.1.6
.If aggregate plurn
will increase and real GDp will decrease as production falls.
' ,.'

2.17 For a given level of anticipated inflation and natural unemployment rate, the
short-run Phillips curve shows the relationship between inflation and money
srowth.
2.18. Along the long-run Phillips ctlrve, actual inflation is equal to expected
inflation.
2.19 The budget deficit is the total outstanding borrowing by the govemment.

2.2}Whenthe output gap is positive, it represents inflationary gap, and when it is

negative, it represents a recessionary gap.

QUESTION 3 (20 marks)

The tables below give the purchases of a typical consumer in a country comprised of one large
city. These consumers purchase only restaurant meals and parking. The year 2012 is the
reference base period. Use the information provided in the tables to answer the questions below.

Quantity ?rice
tem '2012\
:2012)
Meals r00 810.00
Parkins s0 8100.00

Quantity Price
tem '20t3\
t20r3)
vleals 100 812.00
larkine t0 197.s0

a) Find the total cost of the CPI basket for 2012 and 2013. (7 marks)
b) What is the CPI in20l2 and in 2013? (7 marks)
c) What is the inflation rate between 2012 and20l3? (6 marks)
 QUESTION 4 (20 marks)

demand and supplv schedures

ffir1#L3?:yd1:i:,lhe.aggregate ror purpreland country

I GDP demanded (billions ::11 cDP supptiea

of 2005 dollars) lUittio,x o-
005 dollars)

curve, the short-run aggregate

;]-r:?i:'r:,ff?':f,?[.demand supply curve, and the rong-run
(4 marks)
b) what are the short-run equilibrium
real GDP and price level in purpleland?
(1 marks)
c) what is the long-run equilibrium rear
GDp? (l mark)
d) Is Purpleland's short-run macroecon^omic
full-emplovment equiliu.iu-,oi equilibrium a full-emproyment
uio"" r"il-"-pily;;;;' equlibrium? equilibrium, berow
or an inflationary gap? Explai,
youiunr*.r. -{u,r,flum7lsIs there a i
*,
e)
Tffiffif
Suppose aggregate demand
increases by $tso bilrion. plot the new aggregate
How do real GDp and the p.i..
r"rli.rrange in the shoJrun ? -- demand curve.
(5 marks)
0 Is Purpleland's new short-run macroeconomic equilibrium
below. full-employment equilibrium, a full-emproyment equilibrium,
recesslonary gap or is there
or above ruit-emptoyment
- -- -^'^Pr,JrrrtrIrr equlllDrl
equilibiium? Is there a
an inflation ary gap?
(4 marks)

END OF PAPER

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