Department of Business Studies Bachelor of Business Year 1 Principles of Macroeconomics ECO102 Tutorial Question
Department of Business Studies Bachelor of Business Year 1 Principles of Macroeconomics ECO102 Tutorial Question
Department of Business Studies Bachelor of Business Year 1 Principles of Macroeconomics ECO102 Tutorial Question
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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ECO102 Principles of Macroeconomics –Tutorial 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.
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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ECO102 Principles of Macroeconomics –Tutorial questions
b. What was the growth rate of GDP deflator between 1996 and 1997?
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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ECO102 Principles of Macroeconomics –Tutorial questions
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?
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?
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ECO102 Principles of Macroeconomics –Tutorial 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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ECO102 Principles of Macroeconomics –Tutorial questions
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ECO102 Principles of Macroeconomics –Tutorial questions
b) To what extent can Gross Domestic Product be used as a reliable indicator of living standards?
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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
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ECO102 Principles of Macroeconomics –Tutorial questions
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 $80,000
b. The price level in the year 2000 was 160
c. The price level in the year 1930 was 52
Amount in Tday’s ($) = 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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ECO102 Principles of Macroeconomics –Tutorial questions
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ECO102 Principles of Macroeconomics –Tutorial questions
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
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%.
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ECO102 Principles of Macroeconomics –Tutorial questions
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)
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
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ECO102 Principles of Macroeconomics –Tutorial 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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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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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ECO102 Principles of Macroeconomics –Tutorial questions
Section B
1) What is national saving, private and public saving?How these three variables are related.
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)
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.
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
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ECO102 Principles of Macroeconomics –Tutorial questions
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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ECO102 Principles of Macroeconomics –Tutorial 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.
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ECO102 Principles of Macroeconomics –Tutorial questions
Section A (MCQ)
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.
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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ECO102 Principles of Macroeconomics –Tutorial questions
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
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ECO102 Principles of Macroeconomics –Tutorial questions
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%
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%
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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ECO102 Principles of Macroeconomics –Tutorial questions
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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ECO102 Principles of Macroeconomics –Tutorial questions
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
ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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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ECO102 Principles of Macroeconomics –Tutorial questions
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
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?
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?
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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ECO102 Principles of Macroeconomics –Tutorial questions
(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?
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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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ECO102 Principles of Macroeconomics –Tutorial questions
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%?
Question 1
Explain the six costs of inflation.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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.
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?
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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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ECO102 Principles of Macroeconomics –Tutorial questions
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?
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
d. None of the above is correct.
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.
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
Section A(MCQ)
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ECO102 Principles of Macroeconomics –Tutorial questions
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
Question 1
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ECO102 Principles of Macroeconomics –Tutorial questions
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?
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
Section A(MCQ)
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.
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.
ECO102 Principles of Macroeconomics –Tutorial questions
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.
ii) If there is crowding out of $20b, how much should the government increase its
spending to end the recession.
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ECO102 Principles of Macroeconomics –Tutorial questions
Section A(MCQ)
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
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ECO102 Principles of Macroeconomics –Tutorial questions
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.
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.
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.
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ECO102 Principles of Macroeconomics –Tutorial questions
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