ECONOMICS EC10

1. Other things being equal, the higher the price level, the lower the level of real output purchased. This occurs because of:A. the wealth effectB. consumer spending on capital goodsC. the full –employment unemployment rateD. the sensitivity to demand-pull inflation2. Which of the following set of events would most likely reduce aggregate demand?A. a reduction in the excess capital of the existing capital stockB. a reduction in business and personal tax ratesC. an increase in investment spendingD. an increase in personal income tax rates3. Which of the following would most likely increase aggregate supply?A. an increase in the prices of imported goodsB. an increase in productivityC. a decrease in business subsidiesD. a decrease in net exportsUse the table below to answer question 4 – 7National Income(GDP)ConsumptionInvestmentGovernment Expenditure0400505050080050501000120050501500160050502000200050502500240050503000280050503500320050504. The marginal propensity to consume is:A.0.2B. 0.4C. 0.6D. 0.85. The equilibrium level of national income is:A. $2000B. $2500C. $3000D. $35006. The equation for the consumption function isA. C = -400 + 0.2YB. C = 400 + 0.2YC. C = 400 + 0.8YD. C = -400 + 0.8Y7. At income level $2000, the economic activity of the economy: A. is in equilibrium B. will tend to expand C. will tend to be contracting D. may be expanding or contracting8. Holding the money deposits of businesses and households and making loans to the public are the basic functions of: A. the Reserve Bank B. commercial banks and thrift institutions C. Board of Governors of the Reserve Bank D. Insurance Corporation9. If you deposit $1 200 in a commercial bank which has an 18 percent reserve requirement, the bank will have increased: A. required reserves by $216 B. excess reserves by $900 C. excess reserves by $1200 D. required reserves by $1 20010. A single commercial bank must meet a 25 percent reserve requirement. If it initially has no excess reserves and then $2000 in cash is deposited in the bank, it can increase its loans by a maximum of: A. $2000 B. $1250 C. $1500 D. $100011. The use of government spending and taxation for the purpose of stabilizing the economy is called:A. exchange rate policyB. monetary policyC. fiscal policyD. trade policy12. Which of the following is true of contractionary fiscal policy? A. the government budget is balanced B. Aggregate demand increases. C. the tax rate increases D. a budget deficit occurs13. In order to remove a given deflationary/recessionary gap, the government could –A. decrease aggregate demand by budgeting for a deficitB. increase aggregate demand by budgeting for a deficitC. decrease aggregate demand by budgeting for a surplusD. increase aggregate demand by budgeting for a surplus14. The balanced-budget multiplier suggests that when taxes and government spending are increased by the same amount, there will be (hint: compare government expenditure multiplier and taxation multiplier formulas)A. no change in the equilibrium level of outputB. a decrease in the equilibrium level of outputC. an increase in the equilibrium level of outputD. first an increase and then a decrease in the equilibrium level of output.15. The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as (an)A. law making lagB. recognition lagC. operational lagD. impact lag PART B: “TRUE or FALSE and WHY?” – Questions (10 marks)Answer all questions and justify your answer. Each question is worth 2 marks.An increase in business taxes will increase investment demand.Answer True or FalseWhy?The marginal propensity to consume shows the fraction of any level of total income that is consumed.Answer True or FalseWhy?In the simple model, any increase in autonomous investment will give rise to an even larger increase in the equilibrium level of income.Answer True or FalseWhy?The larger the budget surplus the more expansionary is the government budget.Answer True or FalseWhy?Banks can create money – that is demand deposits, through their borrowing and lending activities.Answer True or FalseWhy?PART C: “SHORT ANSWER” Questions. (20 marks)Answer all questions. Each question is worth 5 marks.i) What are the components of aggregate expenditure?ii) In the Keynesian model, state at least two components which vary with changes in output/ real GDP? 2. i) What are the three major functions of money? ii) Describe how drastic inflation can undermine the ability of money to perform these three basic functions. 3. i) Consider an economy that is operating at full employment equilibrium. Graphically illustrate the effect of an increase in government spending (G) on the price level and the level of GDP in the short run. ii) Explain with the aid of an AD-SAS-LAS diagram, how long run adjustments will take place in this economy as a result of the event in i) above? 4. i) Explain how banks create deposits by making advances. ii) Describe the factors that limit how much credit and deposits the banks are able to create.Part D: “Problem” – Based Questions (15 marks) A simple macroeconomic model of an economy is estimated at end of 2009 giving the following information:Y = C + I + G + X-IMC = 100 + 0.8 YDYD = Y – T + TRIM = 20 + 0.4YI = 50; G = 60; TR = 70; X = 80; T = 0.2YPrice level: GDP deflator 110 (2006/)Where C denotes consumption expenditure, I level of investment, G government expenditure, X exports, IM imports, YD disposable income, Y real GDP, T tax revenue, TR transfer payments (Think of C, I, G etc as being measured in millions of dollars)What is the equilibrium level of real GDP?Show the economy’s macroeconomic equilibrium using two sets of diagrams:i) the AE diagram (Keynesian cross diagram)ii) the typical AD-AS diagram.iii) Indicate the equilibrium expenditure, equilibrium real GDP, and the equilibrium price level using actual figures.Determine the size of the autonomous expenditure multiplier, and comment on what happens to the multiplier if there is no foreign trade? If the full employment level of GDP is $750m, calculate the size and the type of output gap persistent in the economy.Calculate the change in government expenditure required to eliminate the output gap in part d above.