2013 S2 ECON1016

ECON1016 Macroeconomics 1 Semester 2 2013 1

FORMULA SHEET

YSMPS

YCMPC

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100index price

GDP nominalRGDP =

100year ousyear/previlast

year ousyear/previlast -year current year/most thischange percentage

100ariable

ariable change percentage

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100pricebasket year base

pricebasket current CPI =

100PopulationAdult

ForceLabour Rateion Participat force-Labour =

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=MPSMPCkT =

TkY T =

Multiplier eExpenditurGap GDPgapionary gap/inflatry recessiona =


1. The concept of national saving refers to the

a. total saving of the private sector.

b. money supply measure, M3.

c. sum of private saving and government saving.

d. difference between private saving and government saving.

e. difference between the two measure of the money supply, M3 M2.

2. If the union sets a wage above the equilibrium level, the effect will be

a. to create a group of workers who would like to obtain jobs but cannot do so.

b. a level of employment which is the same as that at the competitive equilibrium wage.

c. to increase the amount of employment.

d. to cause the labour demand curve to shift to the left.

e. to cause the labour supply curve to shift to the right.

3. Assume that an economy is currently in long-run equilibrium at its potential output and aggregate demand increases as a result of demand-pull inflation. When the economy moves back to producing its potential level of national income, the price level will be

a. higher than it was in the short-run equilibrium but lower than it was originally.

b. equal to what it was originally before demand-pull inflation occurred.

c. higher than it was in the short-run equilibrium and even higher than it was originally.

d. lower than it was in the short-run equilibrium and lower than it was originally.

e. lower than it was in the short-run equilibrium but higher than it was originally.

4. Suppose there is a recessionary gap in the short-run and both the Monetary Authority of

Singapore and the government do not undertake any policy actions. This scenario will eventually lead to

a. a reduction in wages and a downward shift of the SRAS curve.

b. the emergence of an inflationary gap.

c. increased transactions demand for money and thus a higher interest rate.

d. an increase in wages and an upward shift the SRAS curve.

e. a permanent decrease in output.


5. An American travelling to Singapore converts US $100 into $118 Singapore dollars. One month later she does the same thing and receives $125 Singapore dollars. There are no transaction costs.

a. The Singaporean currency has appreciated.

b. The Singaporean currency has depreciated.

c. The US dollar has weakened.

d. The Singaporean dollar has strengthened.

e. The Singaporean dollar has remained unchanged.

6. Suppose that the nominal national income in some country increased by 10 percent

during the year, when inflation was 5 percent. Therefore the real national income

a. fell by 10 percent.

b. fell by 5 percent.

c. was unaffected.

d. rose by 5 percent.

e. rose by 10 percent.

7. General domestic inflation that is above inflation in the rest of the world will affect the

supply and demand for foreign exchange in the following way:

a. decrease both the supply and demand

b. there will be no effect

c. decrease the demand and increase the supply

d. increase both the supply and demand

e. decrease the supply and increase the demand


8. Refer to the figure above. This economy begins in equilibrium with MS0 and MD0 and

real GDP equal to potential GDP. Now suppose there is an increase in the money supply to $540 bn. In the long-run, after all adjustments have taken place, what is the effect of the increase in the money supply?

a. A decrease in the interest rate to 2%, and increase in real GDP to $805 billion and an increase in the price level to 102.

b. An increase in the price level to 104, and no change to any real economic variables.

c. A decrease in the interest rate to 2%, an increase in the price level to 102 and a decrease in real GDP to $795 billion.

d. A decrease in the interest rate to 2%, an increase in potential GDP to $805 billion and an increase in the price level to 102.

e. An increase in the price level to 102, and no change to any real economic variables.


9. Refer to the Figure above. If a minimum wage of W1 is imposed, the quantity of labour

hired would be

a. Q2

b. Q3

c. Q4

d. Q5

e. Q6

10. An unemployed worker can be identified as being cyclically unemployed if

a. minimum wage laws prevent the worker from finding a job.

b. there is an economic downturn and the worker is laid off.

c. the worker quits a job in order to search for a better one.

d. the worker has a different set of skills than what is required in the economy.

e. the worker want to work only during certain months of the year.

11. The reason why inflation can persist even after its original causes have been removed is that

a. the Monetary Authority of Singapore ensures that money supply growth

matches growth in real GDP.

b. workers are willing to accept wage increases lower than the increase in productivity.

c. government embarks on a deficit reducing program.

d. inflationary expectations cause AS to continue shifting upwards.

e. workers expect wage increase to match increases in labour productivity.


12. If Singaporean demand for French wine increases, the supply of Singaporean dollars to the foreign-exchange market will __________ and the demand for euros will therefore __________. a. increase; increase

b. increase; decrease

c. increase; remain the same

d. decrease; increase

e. decrease; decrease

13. An illustration of crowding out in macroeconomics is best provided by:

a. a decrease in the money supply decreases nominal GDP.

b. a fiscal expansion raises interest rates and thereby lowers private investment.

c. an increase in the money supply crowds out the issuance of privately held debt.

d. an increase in tariffs causes a decrease in imports.

e. a decrease in government subsidies for low-cost housing causes an increase in private spending on housing.

14. Suppose that next year 300,000 existing jobs on the economy are eliminated through

layoffs and business closures, and 400,000 new jobs are created through expansions and the creation of new firms. The amount of unemployment will rise over that year if

a. less than 100,000 people join the labour force.

b. less than 100,000 people drop out of the labour force.

c. more than 100,000 people drop out of the labour force.

d. more than 300,000 people drop out of the labour force.

e. more than 100,000 people join the labour force.

15. If the Monetary Authority of Singapore responds to repeated supply shocks with expansionary monetary policy, the economy will be faced with

a. continuous inflation.

b. alternating periods of inflation and deflation.

c. a one-time increase in prices.

d. steady reductions in real output.

e. a one-time decrease in prices.


16. If the general price level were to increase, ceteris paribus, the money demand curve would

a. not be affected.

b. shift to the right.

c. shift, but the direction of the shift cannot be predicted.

d. shift to the left.

e. become steeper but not shift.

17. If a country transfers resources from the production of consumption goods to the

production of capital goods, the result will be to

a. lower future living standards.

b. raise current living standards.

c. decrease the long-run growth rate.

d. raise current consumption.

e. raise future consumption.

18. If real income grows at approximately 2 percent per year, the number of years it

will take for real income to double is approximately

a. 5

b. 12

c. 24

d. 35

e. 72 19. Assume that Bank ABC has a reserve ratio of 10 percent. If Bank ABC receives a new

deposit of $100,000, the largest new loan this bank could initially make and maintain its reserve ratio is

a. $900,000

b. $100,000

c. $90,000

d. $1,000

e. $10,000


20. With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200km of highway. Refer to the diagram above. If the government chooses to allocate all $200 million to highway repair, we can say that

a. there is no opportunity cost involved because the government stayed within its budget.

b. there is no opportunity cost involved because the government has achieved its objectives.

c. the opportunity cost of the highway repair is 4 search and rescue helicopters.

d. the opportunity cost of the highway repair is uncertain.

e. the opportunity cost of the highway repair is $0.

21. Consider an open-economy AD/AS macro model. An expansionary fiscal policy will

generally increase the governments budget __________ and thus tend to __________ and thus __________ net exports.

a. surplus; depreciate the currency; increase

b. deficit; appreciate the currency; increase

c. deficit; depreciate the currency; decrease

d. deficit; appreciate the currency; decrease

e. surplus; appreciate the currency; decrease


22. If the marginal propensity to consume is 0.4 and government spending falls by $0.6 billion, AD will __________ and economic activity will change by approximately __________.

a. increase; $1.0 billion

b. decrease; $1.0 billion

c. decrease; $0.24 billion

d. decrease; 1.5 billion

e. increase; 1.5 billion

23. If the Monetary Authority of Singapore enters the open market and purchases $1,000 of government securities, what will be the eventual change in the money supply given a 10 percent reserve ratio in the commercial banking system?

a. Increase of $9,000

b. Increase of $10,000

c. Increase of $1,000

d. Decrease of $10,000

e. Decrease of $9,000

24. If the government has a budget deficit of $400 and the countrys level of national saving is $200, then private savings must be

a. $600

b. $200

c. $-400

d. $400

e. $800


25. Refer to the Figure above. Which of the following years was used as the base year for

constructing real GDP?

a. 1990

b. 1995

c. 2000

d. 2003

e. 2005

25 marks


Question 1 (a) Consider the following production possibilities frontier for a nation.

i. At which point(s) does this economy achieve full employment?

_____________________________________________________________________ ii. At which point(s) does this economy achieve allocative efficiency?

_____________________________________________________________________

iii. At which point(s) does this economy achieve productive efficiency?

_____________________________________________________________________

iv. Briefly define productive efficiency.

_____________________________________________________________________

_____________________________________________________________________

v. Why do opportunity costs exist in an economy?

_____________________________________________________________________

vi. What type of opportunity costs does this production possibility frontier display?

_____________________________________________________________________

vii. What is the opportunity cost for the economy of moving from point C to point B?

_____________________________________________________________________

viii. What is the opportunity cost of each unit of capital good as the economy moves from point C to point B?

_____________________________________________________________________

ix. Illustrate on the diagram above what will happen to the frontier if an improvement in technology

affects consumer goods by a much larger degree than its impact on capital goods.


(b) An economy produces and consumes chips, wine, books and marshmallows. The Department of Statistics has determined that 2010 is the base year and the average household in the economy consumes 20 packets of chips, 6 bottles of wine, 10 books and 50 packets of marshmallows. Answer the questions based on the following information.

Product 2010 2011 2012 Quantity Price ($) Quantity Price ($) Quantity Price ($)

Chips (packet) 200 2 250 2 400 2 Wine (bottle) 60 30 80 31 100 30 Book 100 15 140 12 160 13 Marshmallow (bag) 500 1 400 2 300 3

i. Calculate the growth rate for this economy.

2011: ________________________________________________________________

_____________________________________________________________________

2012: ________________________________________________________________

_____________________________________________________________________ ii. Calculate the inflation rate for this economy based on the GDP Deflator.

2011: ________________________________________________________________

_____________________________________________________________________

2012: ________________________________________________________________

_____________________________________________________________________ Calculate the inflation rate for this economy based on the CPI.

2011: ________________________________________________________________

_____________________________________________________________________

2012: ________________________________________________________________

_____________________________________________________________________ iii. Is the inflation rate calculated using the GDP Deflator in part (ii) the same as the inflation

rate calculated using the CPI in part (ii)? If not, explain why not.

_____________________________________________________________________

_____________________________________________________________________


(c) Provide two reasons why measured GDP may understate true production in the economy.

Reason 1: ____________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

Reason 2: ____________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

(d) Use the economic data given to answer the following questions. Suppose the values are from a country with a closed economy (all values are in billions) in 2013. Assume that the government budget was balanced in 2012.

GDP = $432 Tax collections = $90 Consumption expenditure = $286 Government expenditure = $72 Transfer payments = $30

i. Calculate the value of public savings.

___________________________________________________________________________

___________________________________________________________________________

ii. Calculate the value of private savings.

___________________________________________________________________________

___________________________________________________________________________

iii. Calculate the value of investment.

___________________________________________________________________________

___________________________________________________________________________

iv. How will your answer in part (i) above impact on economic growth?

___________________________________________________________________________

(10+8+3+4) = 25 marks


Question 2 (a) Consider the following markets. Illustrate what happens to equilibrium price and quantity for each

market. State your determinant assumption.

i. Market for iPhones: Android phones become more popular as their range of Apps increases dramatically.

ii. Market for Woh Hup Sauces and Condiments: Production of Woh Hup products moves offshore where labour and other input costs are cheaper.

iii. Market for Insurance Contracts: An increasing amount of banks in the nation begin to offer house and car insurance.

iv. Market for Household Appliances: There is a large increase in the number of two-income households.

Illustrate (i) Determinant:_____________________________

Illustrate (ii) Determinant:_____________________________

Illustrate (iii) Determinant:_____________________________

Illustrate (iv) Determinant:_____________________________


(b) Using the labour market, illustrate what happens if most businesses in the economy decide to follow the efficiency wage hypothesis.

(c) Imagine that in the nation of Haynes, the required reserve ratio is set at 25 percent and a

business deposits $42,000 into Bank National.

i. By how much will Bank Nationals required reserves expand?

_____________________________________________________________________

ii. What is the maximum loan that Bank National will be able to grant?

_____________________________________________________________________

iii. Calculate the potential change in the money supply as a result of the $42,000 deposit.

_____________________________________________________________________

iv. If the reserve requirements in the nation of Haynes were lower, how would this have affected:

1. the money multiplier? _____________________________________________

2. the money supply? _____________________________________________

v. Illustrate how your answer your answer to part (iii) will impact on the money market and the product market.

Illustrate Money Market Illustrate Product Market

Illustrate


(d) Consider the product market for each of the following scenarios, and state whether the Aggregate Demand and/or the Aggregate Supply (short-run and/or long-run) will shift and in which direction. i. The government decreases business taxes.

___________________________________________________________________________

ii. An excess of capital stock becomes available in the economy as a result of the downturn in economic activity.

___________________________________________________________________________

iii. The US government reduces its quantitative easing, driving the economy back into recession.

___________________________________________________________________________

iv. Migration policy is changed, encouraging professional and experienced labour into the country.

___________________________________________________________________________

v. The domestic currency continues to weaken relative to foreign currencies.

___________________________________________________________________________

(e) The following is 2010 data from the nation of Haynes:

Consumption Expenditure = $583 million

Investment Expenditure = $216 million

Government Expenditure = $208 million

Export Expenditure = $172 million Import Expenditure = $261 million MPC = 0.5

i. Calculate the equilibrium level of GDP (market-clearing) for the nation of Haynes.

___________________________________________________________________________

ii. Calculate the level of autonomous consumption for this economy.

___________________________________________________________________________

iii. If total consumption expenditure increases to $599 million while national income increases to $948 million, what will the marginal propensity to consume change to in this economy?

___________________________________________________________________________

iv. Define marginal propensity to save.

___________________________________________________________________________

v. What is the relationship between the marginal propensity to consume and the marginal propensity to save.

___________________________________________________________________________

(6+1.5+7+5.5+5) = 25 marks


Question 3 (a) Assume the Singaporean economy begins to experience an inflationary trend.

i. Will the Monetary Authority of Singapore wish to buy or sell Singapore dollars?

_________________________________________________________________________

ii. Illustrate how the action undertaken in (i) above will impact on the exchange rate market.

iii. Will the domestic currency appreciate or depreciate?

_________________________________________________________________________

iv. Illustrate how the action undertaken in (i) above will impact on the product market.

v. What will be the impact on the unemployment rate and the inflation rate as a result of the action undertaken by the Monetary Authority of Singapore?

Unemployment Rate: _________________________________________________

Inflation Rate: _______________________________________________________

(b) Assume that in the nation of Keyhey consumption expenditure = $860 billion; investment expenditure = $180 billion; government expenditure = $260 billion and net export expenditure = -$30 billion.

i. Calculate equilibrium GDP for Keyhey.

___________________________________________________________________________

ii. If potential GDP is estimated at $920bn, what is the size of the GDP gap?

___________________________________________________________________________

iii. Is the economy facing a recessionary gap or an inflationary gap?

___________________________________________________________________________

Illustrate (ii) Exchange Rate Market Illustrate (iv) Product Market


iv. What is the size of the recessionary/inflationary gap?

___________________________________________________________________________

v. By how much should the government spending change to close the GDP Gap calculated in part (ii)?

___________________________________________________________________________

vi. By how much should the government taxes change to close the GDP Gap calculated in part (ii)?

___________________________________________________________________________

(c) Assume that as a result of continued weakness of the domestic dollar, the cost of inputs rises dramatically in the nation, resulting in stagflation. Illustrate the above scenario. Provide two (2) possible policy responses to the problems that occur as a result of stagflation and the likely outcome for the economy from each policy response.

Policy (1): _____________________________________________________________

______________________________________________________________________

______________________________________________________________________

_____________________________________________________________________

Policy (2): _____________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

Illustrate


(d) Consider the Quantity Theory of Money and using the data provided, answer the following questions.

RGDP (2010): $968 million Money Supply: $1,936 million Velocity: 62

i. Calculate the general price level for 2010.

________________________________________________________________________

ii. If RGDP increased to $992 million while the money supply grew to $2012 million in 2011, what was the rate of inflation?

________________________________________________________________________

________________________________________________________________________

iii. State the three major causes of inflation in an economy.

(1): _____________________________________________________________________

(2): _____________________________________________________________________

(3): _____________________________________________________________________

(e) Growth models argue that labour productivity is a core determinant of economic growth. What

are the two primary factors that determine labour productivity within a nation?

(1): _________________________________________________________________________

(2): _________________________________________________________________________

(f) What does the Rule of 70 calculate when focusing on economic growth?

_____________________________________________________________________________

_____________________________________________________________________________

(g) Is the ultimate purpose of patents and copyrights to provide owners of innovation large profits

forever? If not, what is their purpose?

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

(7+6+4+3.5+1+1.5+2)= 25 marks


Question 4 (a) For each of the following transactions state whether it will be included or excluded from current

Singaporean GDP. If included, under which component(s) of GDP will this transaction appear? i. Alessia buys a second-hand edition of the ECON1016 Macroeconomics 1 textbook.

____________________________________________________________________________

____________________________________________________________________________

ii. Amanda buys a new Porsche for personal use.

____________________________________________________________________________

____________________________________________________________________________

iii. Ashley buys orchids at the local market.

____________________________________________________________________________

____________________________________________________________________________

iv. SIM purchases new German-manufactured coffee machines for all staff areas in SIM.

____________________________________________________________________________

______________________________________________________________________ v. Abby buys 10,000 local bank shares.

____________________________________________________________________________

______________________________________________________________________

vi. Anthony buys a newly built apartment, which he intends to use as a rental property.

____________________________________________________________________________

______________________________________________________________________ (b) Consider the market Child Care Centres. To improve the quality of childcare centres, the

government makes a significant increase to the minimum wage payable to childcare workers to attract more professional child carers back into the industry. This however results in a shortage of childcare in the market.

i. Illustrate this scenario using the supply and demand model.

ii. If at the same time there is an increase in the demand for childcare places, illustrate and state the impact on equilibrium price and quantity of both events occurring simultaneously.


(c) Briefly explain and illustrate how the Crowding-Out effect could diminish the effectiveness of

fiscal policy.

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

____________________________________________________________________________

Illustrate (i) Illustrate (ii) Equilibrium Price: ________________________________

Equilibrium Quantity: _____________________________

Illustrate


(d) For each of the following scenarios, illustrate the impact on the exchange rate market.

i. Interest rates in the domestic economy continue to fall.

ii. In an attempt to protect local industries, the government increases tariffs (taxes) on all imported goods and services.

iii. Trading partners begin to recover from recession and increase their demand for Singaporean goods and services.

iv. Recession in Singapore results in the domestic price level falling.

(6+7+6+6)= 25 marks

Illustrate (i)

Illustrate (iii)

Illustrate (ii)

Illustrate (iv)

2013 S2 ECON1016

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