SEMESTER I EXAMINATIONS – 2009/2010

ECON 10020

Principles of Macroeconomics

Dr. Ivan Pastine

Dr. Frank Walsh

Time Allowed: 2 Hours

Answer ALL Questions on the EDPAC Sheet

Calculators Are Permitted

Instructions for Candidates

Points are added for each correct answer. No points are deducted for incorrect
answers. A question with more than one marked answer is considered incorrectly
answered.

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 ECON 10020: Principles of Macroeconomics
Answer ALL 40 Questions Using the EDPAC Sheet

1. If nominal GDP increases from €100 to €150 between 2000 and 2004 and the price
index for GDP increases from 100 to 120, real and nominal GDP respectively increase
by:
(a) 50%, 50%
(b) 50%, 25%
(c) 25%,50%
(d) 25%,25%
(e) 100%,120%

2. If U is the number Unemployed, E the number employed, P the working age

population and N the number of working age not-participating in the labour force.
The unemployment rate and labour force participation rate respectively are:
(a) U/E and P/(E+U)
(b) U/(E+U) and E/P
(c) U/P and (E+U)/P
(d) U/(E+U) and (E+U)/P
(e) U/E and (E+U)/P

3. Other things equal the Solow growth model predicts that a decrease in the rate of
depreciation of capital would lead to:
(a) Higher output per worker in long run equilibrium.
(b) A higher savings rate in long run equilibrium.
(c) A lower savings rate in long run equilibrium
(d) Lower output per worker in long run equilibrium.
(e) A lower capital labour ratio in long run equilibrium.

4. Y=GDP , C=Consumption expenditure, I=Investment expenditure, G=Government

expenditure, X=Net exports and T=Taxes. National savings is:

(a) Y-C-G-T
(b) (Y-T-C)+(T-G)
(c) Y-T-C
(d) (T-G)
(e) Y-C-I

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5. If Bountiful Orchard grows €110,000 worth of peaches, sells €50,000 worth of
peaches to consumers and uses to rest to make jam that is sold to consumers for
€100,000, Bountiful Orchard's contribution to GDP is:
(a) €50,000.
(b) €110,000.
(c) €150,000.
(d) €200,000.
(e) €250,000.

6. If a pizza maker pays €3 for tomatoes, €2 for cheese, €2 for sausage, and sells the pizza made
with these ingredients for €11, then each pizza sold contributes how much to GDP?
(a) €3
(b) €5
(c) €7
(d) €9
(e) €11

7. Which of the following is not a reason for GDP being a poor measure of well
being:
(a) It ignores non–market activity
(b) It does not include the value of leisure time
(c) Does not measure externalities such as pollution
(d) It does not take account of inequality
(d) It measures output at market prices

8. The Fisher effect is the tendency for:

(a) Real interest rates to be high when inflation is high and low when inflation is
low
(b) Nominal interest rates to be high when inflation is high and low when
inflation is low
(c) Real interest rates to be high when nominal interest rates are high and low
when nominal interest rates are low:
(d) Nominal interest rates to be high when real interest rates are high and low
when real interest rates are low.
(e) Real interest rates to increase faster than inflation.

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9. Using the data in the table calculate the consumer price index. The inflation rate
between year 1 and Year 2 is?
Quantity Quantity Price Price
year 1 year 2 Year 1 year 2

Bread 10 8 €2 €3
Butter 5 6 €3 €2

(a) 13.3%
(b) 0%
(c) 14.3%
(d) 23.3%
(e) -13.3%

10. Fred invested €10,000 at a nominal interest rate of 10% for three years. Inflation
was zero percent in the first two years and 10% in the last year. What real rate of
return will Fred earn over the three years on his investment?

(a) 33%
(b) 51%
(c) 30%
(d) 21%
(e) 25%

11. Which of The following is best described as structural employment;

(a) Mary’s parents are injured in an accident. She quits her job to care for them.
(b) Jim worked for twenty years in a cement factory as a panel beater before
losing his job. He cannot find another job given his skills.
(c) Joe worked in a restaurant but lost his job due to the economic climate. He
expects to resume employment as soon as the economy picks up.
(d) Joe just graduated from college and will spend three months in unemployment
before finding a suitable job.
(e) Susan works for a restaurant during the Summer tourist season but is laid off
at the end of the Summer.

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12. The depreciation rate is 5% and population growth rate is 2%. The capital labour
ratio is €10,000. Output per worker is €50,000. What would the savings rate need to
be to keep the capital labour ratio constant?

(a) 5%.
(b) 1.4%
(c) 2%
(d) 7%
(e) 8.4%

13. The U.S. economy grew by 0.6% between 1973-79 and by 1.7% between 1977-
2000. How much higher was U.S. GDP in percentage terms in 2000 compared to
1973?

(a) 19%
(b) 27%
(c) 13%
(d) 29%
(e) 0%

14. Total factor productivity growth is:

(a) That part of the growth in output which is not accounted for by capital and
labour growth.
(b) That part of the growth in output which is accounted for by capital growth.
(c) That part of the growth in output which is accounted for by labour growth.
(d) That part of the growth in output which is accounted for by capital and labour
growth.
(e) That part of the growth in output which is not accounted for by technological
progress.

15. A bond has a term of three years. The principal amount is €10,000 and the
coupon payment is €100. At the end of the second year and after the receiving the
coupon payment for the second year how much would the bond sell for if the interest
rate available on other loans is 10%.

(a) €11,100
(b) €100
(c) €10,100
(d) €10,000
(e) €9,182

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16. If a technological improvement increases the marginal productivity of
investments, this would lead to:

(a) Lower supply of savings leading to higher interest rates

(b) Higher supply of savings leading to lower interest rates
(c) Higher investment demand leading to higher interest rates
(d) Higher investment demand leading to lower interest rates
(e) Lower investment demand leading to lower interest rates.

17. The introduction of word processing software that increases the demand for workers
with computer skills relative to those without such skills is an example of:
(a) increasing reservation prices.
(b) skill-biased technological change.
(c) the diminishing marginal product of labour.
(d) the diminishing marginal product of capital.
(e) globalization.

18. The marginal propensity to consume is 0.7 and the marginal propensity to import
is 0.2. The value of the expenditure multiplier in the Keynesian model is:

(a) 0.7
(b) 0.2
(c) 2
(d) 3.3
(e) 1

19. You are given the following data on expenditure. Y=GDP, C=consumption,
T=taxes, I=investment, G=government expenditure and NX=net exports.
C=100+0.6(Y-T)
I=100
G=200
NX=0
T=100
Using this data autonomous expenditure is:

(a) 500
(b) 400
(c) 440
(d) 460
(e) 560

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20. Using the data given in question 19. The equilibrium level of GDP is:

(a) 500
(b) 1,100
(c) 1,000
(d) 460
(e) 560

21. When bookkeepers use Euros to record income and expenses, they are using
money as a
a. unit of account.
b. means of payment.
c. store of value.
d. medium of exchange.
e. none of the above

22. Liquidity refers to

a. the suitability of an asset to serve as a store of value.
b. a measurement of the intrinsic value of commodity money.
c. the ease which an asset is converted to the medium of exchange.
d. All of the above.
e. None of the above.

23. When the Central Bank conducts open market transactions, it

a. sets the interest rate that banks charge for home loans.
b. buys or sells government bonds from the public.
c. lowers the discount rate.
d. both b and c are open market operations.
e. None of the above.

24. Suppose that the reserve ratio is 10 percent and that a bank has €1,000 in deposits.
Its reserves are
a. €10.
b. €90.
c. €100.
d. €900.
e. €1,000.

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25. If a bank uses €100 of reserves to make a new loan when the reserve ratio is 20
percent, this action by itself initially makes the money supply
a. and wealth increase by €100.
b. increase by €100 while wealth does not change.
c. decrease by €100 while wealth decreases by €100.
d. and wealth decrease by €100.
e. none of the above

26. As the reserve ratio increases, the money multiplier

a. increases.
b. does not change.
c. decreases.
d. could do any of the above.

27. When the Central Bank conducts open market purchases, bank reserves
a. increase and banks can increase lending.
b. increase and banks must decrease lending.
c. decrease and banks can increase lending.
d. decrease and banks must decrease lending.
e. decrease but lending is unaffected

28. In the IS/LM model when the Central Bank increases the money supply
a. output goes up and the interest rate goes up
b. output goes up and the interest rate goes down
c. output goes down and the interest rate goes up
d. output goes down and the interest rate goes down
e. output and the interest rate are unchanged

29. In the IS/LM model when Government spending increases

a. output goes up and the interest rate goes up
b. output goes up and the interest rate goes down
c. output goes down and the interest rate goes up
d. output goes down and the interest rate goes down
e. output and the interest rate are unchanged

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30. In the IS/LM model when Government spending increases
a. consumption goes up and investment goes up
b. consumption goes up and investment goes down
c. consumption goes down and investment goes up
d. consumption goes down and investment goes down
e. consumption and investment are unchanged

31. Fill in the blanks in this sentence: The IS curve gives equilibrium in the _______
market while the LM curve gives equilibrium in the ________ market.
a. money; labour
b. labour; banking
c. goods; money
d. money; goods
e. banking; goods

32. Which of the following is not included in aggregate demand?

a. stocks and bonds
b. consumption goods
c. investment goods
d. government purchases
e. services

33. The effect of an increase in the price level is represented by

a. a movement to the left along a given aggregate demand curve.
b. a movement to the right along a given aggregate demand curve.
c. a shift to the right of the aggregate demand curve.
d. a shift to the left of the aggregate demand curve.
e. a shift in both the aggregate demand and aggregate supply curves.

34. In the Aggregate Demand/Aggregate Supply model, an increase in government

spending will:
a. increase the price level and increase output
b. decrease the price level and increase output
c. increase the price level and decrease output
d. decrease the price level and decrease output
e. leave the price level unchanged and decrease output

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35. In the Aggregate Demand/Aggregate Supply model, an increase in the money
supply will:
a. increase the price level and increase output
b. decrease the price level and increase output
c. increase the price level and decrease output
d. decrease the price level and decrease output
e. leave the price level unchanged and decrease output

36. In the Aggregate Demand/Aggregate Supply model, an improvement in

production technology will:
a. increase the price level and increase output
b. decrease the price level and increase output
c. increase the price level and decrease output
d. decrease the price level and decrease output
e. leave the price level unchanged and decrease output

37. A decrease in the price level induces people to hold

a. more money, so they lend more, and the interest rate rises.
b. more money, so they lend less, and the interest rate falls.
c. less money, so they lend less, and the interest rate rises.
d. less money, so they lend more, and the interest rate falls.
e. less money, but it has no effect on the interest rate.

38. Investment falls when

a. the money supply increases
b. the nominal interest rate goes up
c. the real interest rate goes up
d. the nominal interest rate goes down
e. the real interest rate goes down

39. An increase in the money supply

a. increases the nominal interest rate
b. increases the real interest rate
c. decreases the nominal interest rate
d. decreases the real interest rate
e. decreases the price level

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40. Suppose that a banking crash and government budget crisis made people feel
poorer and so they decreased their consumption. Using the AS/AD model this would
a. decrease the interest rate and decrease output
b. increase the interest rate and decrease output
c. increase the price level and increase output
d. increase the price level and decrease output
e. decrease the price level and decrease output

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