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ECON1002

Practice Final Exam

The actual final exam will be 120 minutes (+30 minutes upload time) during the uni- versity exam period.

Examinable Material and Expectations:

1. The final exam will cover material from the whole course. Anything covered in the lectures, in the tutorials, or the online quizzes is examinable.

2. The final exam consists of three parts:

PART A: consists of 21 multiple choice questions and is worth 21 marks. All questions are of equal value. Unanswered or incorrect answers are given a mark of zero. No marks will be deducted for wrong answers.

PART B: consists of three analytical questions and is worth 14 marks. In answering questions, be precise, showing all of the steps, and indicate if you are making any assumptions along the way.

PART C: consists of a short essay question and is worth 15 marks. You are encouraged to use relevant theories to help you clarify your arguments.

Practice Final Exam Questions:

PART A:

1. In addition to the response of the Reserve Bank to inflation, the aggregate demand curve could be downward sloping because:

(a) household purchasing power rises with inflation

(b) the real value of fixed income payments fall with inflation

(d) the price of domestic goods and services sold overseas decreases with inflation

(e) lower rates of inflation prompt governments to decrease their spending

2. Everything else being equal, an exogenous increase in consumption spending due to improved consumer sentiment would:

(a) shift the aggregate demand curve to the left

(b) shift the aggregate demand curve to the right

(c) leave the position of the aggregate demand curve unchanged but lead to an upward shift in the short-run aggregate supply curve

(d) leave the position of the aggregate demand curve unchanged but lead to a downward movement along the aggregate demand curve

(e) leave the position of the aggregate demand curve unchanged but lead to an upward movement along the aggregate demand curve

3. The self-correcting mechanism that removes an expansionary gap operates through:

(a) a decrease in inflation and a downward shift of the aggregate demand curve

(b) an increase in inflation and an upward shift of the short-run aggregate supplycurve

(d) an increase in inflation and a downward shift of the short-run aggregate supply curve

(e) an increase in inflation and a downward shift of the aggregate demand curve

4. An increase in the cost of production shifts the curve .

a) aggregate demand; to the right

b) aggregate demand; to the left

c) short-run aggregate supply; upward

d) long-run aggregate supply; to the left

e) short-run aggregate supply; downward

5. While the initial effect of a(n) shift in the curve is a rise in output, the ultimate effect is only a rise in the inflation level.

a) rightward; long-run aggregate supply

b) upward; short-run aggregate supply

c) leftward; aggregate demand

d) downward; short-run aggregate supply

e) rightward; aggregate demand

3. A supply shock that improves production technology would produc- tion costs and shift the aggregate supply curve .

(a) negative; lower; downward

(b) negative; raise; upward

(d) positive; raise; downward

(e) positive; raise; upward

4. Stagflation is a situation of

(a) stable prices and falling output

(b) stable prices and rising output

(d) rising prices and rising output

(e) rising prices and falling output

5. A movement down an aggregate demand curve results from:

(a) an increase in the level of inflation

(b) a decrease in the level of inflation

(d) a decrease in the money supply

(e) a negative supply shock

6. Consider an economy, with a production function given by Y = AK0.3L0.7. This economy’s annual GDP growth rate is 5%. Also assume that L and K are both growing at annual rates of 2%. The growth rate of total factor productivity for this economy is:

(a)	2.0%
(b)	3.0%
(c)	4.0%
(d)	5.0%
(e)	5.0%

7. In the Solow-Swan model, if saving is less than replacement investment then, other things being equal,

(a) the capital-labour ratio will fall and the marginal product of capital will fall

(b) the capital-labour ratio will rise and the marginal product of capital will fall

(d) the capital-labour ratio will fall and the marginal product of capital will rise

(e) the capital-labour ratio will rise and the marginal product of capital will rise

8. The convergence hypothesis of the Solow-Swan model implies that:

(a) countries with relatively high per capita capital stocks tend to grow more quickly than countries with lower per capita capital stocks

(b) countries with relatively low per capita capital stocks tend to grow more quickly than countries with higher per capita capital stocks

(c) countries with relatively low per capita capital stocks tend to reach their steady state more quickly than countries with higher per capita capital stocks

(d) countries with relatively high per capita capital stocks tend to reach their steady state more quickly than countries with higher per capita capital stocks.

(e) all countries will grow at the same rate regardless of the level of per capita capital stock

9. Consider the following Solow-Swan model in which output per capita is given by Y = A K 0.5, the total factor productivity parameter is 2, the savings rate is 50%, the depre- ciation rate is 20% and the population growth rate is 5%. The steady state value of the output per capita for this economy is:

(a) 1

(b) 2

(d) 8

(e) 16

10. If total production in the economy is described by the Cobb-Douglas production function

Y = AKαL1−α and α = 0.25, then the share of output going to labour is:

(a) 0.25

(b) 0.75

(d) 0.75Y

(e) 0.75Y/L

11. Consider an economy which is described by the Solow–Swan model. Let the saving rate be θ = 0.8, the population growth rate n = 0.05 and the rate of depreciation d = 0.05. If per capita income Y/L = 100 and the per capita stock of capital stock K/L = 600, then:

(a) replacement investment is 60, saving is 80 and K/L will decrease towards the steady state per capita capital stock

(b) replacement investment is 80, saving is 80 and K/L is at the steady state per capita capital stock

(d) replacement investment is 60, saving is 80 and K/L will increase towards the steady state per capita capital stock

(e) replacement investment is 80, saving is 60 and K/L will increase towards the steady state per capita capital stock

12. If the nominal exchange rate is 4.367 Polish zloty per Australian dollar, and 1.59 South African rand per Polish zloty, then there are South African rand per Australian dollar.

(a)	0.364
(b)	0.229
(c)	2.727
(d)	6.944

(e) 0.144

13. The demand for euros in the foreign exchange market equals 8000 - 2000e and the supply of euros in the foreign exchange market equals 3000 + 3000e, where e is the nominal ex- change rate expressed in Australian dollars per euro. The fundamental value of the euro is

euros per Australian dollar or Australian dollars per euro.

(a) 2.2; 0.45

(b) 0.5; 2

(e) 2; 2

14. Suppose an Australian citizen buys a plane ticket on Swiss Air, travels to Zurich, buys chocolate, and brings it back to Australia. The plane ticket is an for Australia and the chocolate is an for Australia.

(a) export of a service; export of a good

(b) import of a service; import of a good

(d) import of a good; import of a service

(e) export of a good; import of a good

15. An Australian manufacturer borrows $1,000,000 from a US bank in order to pay for a new machine (priced at $1,000,000) imported from Germany. This transaction will be recorded in Australia’s balance of payments as:

(a) debit of $1,000,000 on both the current and capital accounts

(b) credit of $1,000,000 on both the current and capital accounts

(d) a debit of $1,000,000 on the current account and a credit of $1,000,000 on the capital account

(e) a debit of $1,000,000 on the current account and a credit of $1,000,000 on the current account

16. What happens to the Australian current and capital accounts if a Canadian bank purchases

$5,000 Australian dollars from an Australian bank and then sells the $5,000 Australian dollars to a Canadian who spends it all on a surfing holiday in Australia?

(a) a current account debit of $5,000 and a capital account debit of $5,000

(b) a current account debit of $5,000 and a capital account credit of $5,000

(d) a current account credit of $5,000 and a capital account credit of $5,000

(e) a current account credit of $5000 and a current account debit of $5000

17. A country with a high saving rate tends to have a domestic real interest rate that will capital inflows.

(a) high; attract

(b) high; discourage

(d) low; attract

(e) low; discourage

PART B:

1. Suppose an economy is experiencing a contractionary gap. In response, the central bank eases monetary policy. With the aid of an AD-SRAS-LRAS diagram, and in words, describe the transition of the economy from the short run to the long run following the implementation of this policy. (4 points)

2. Country A described by the Solow-Swan model has the following production function:

Y K 0.25

L L

where Y is aggregate output, K is capital and L is labour. Also, assume the population growth n₀ = 2% and depreciation d = 3%.

(a) Solve for country A’s saving rate θ_A and steady-state capital-labour ratio K/L∗ if steady- state output per worker is Y/L∗ = 2. (3 points)

Assume country B is characterised by the same population growth rate and depreciation as country A, but has the production function:

Y K 0.25

= 2

L L

(b) Compute the saving rate θ_B that country B needs in order to achieve the same standard of living as country A with a steady-state output per worker of Y/L∗ = 2. (2 points)

(c) How does the saving rate in country B compare to that of country A? Explain the economic intuition for your answer. (2 points)

3. In 2020, the economy of Macroland exported $400 billion of goods and $300 billion of services while it imported $500 billion of goods and $350 billion of services. Furthermore, the rest of the world purchased $250 billion of Macroland’s assets.

(a) Compute Macroland’s balance of payment on the current account and the capital account in 2020. (2 points)

(b) What was the value of Macroland’s purchases of assets from the rest of the world in 2020? (2 points)

Part C:

Below is a sample practice essay question. (15 points)

The Global Financial crisis, which had its roots in the 2007 meltdown in the U.S. mortgage market, hurt economies around the globe and weakened private consumption, firm investment and interna- tional trade. Central banks around the world responded by cutting interest rates aggressively as the crisis unfolded. Yet, as interest rates were driven to their lower bound, central banks encountered a policy challenge related to the limitation on the extent to which conventional monetary policy can be expansionary. Write a short essay to explain the consequences of the Global Financial crisis and the role of macroeconomic policy in responding to it. In writing your answer, make sure to address the following points:

i. Discuss the macroeconomic effects of the Global Financial Crisis. How did the crisis affect the demand side of the economy?

ii. Evaluate the policy action of central banks to manage the demand shocks during the Global Financial crisis.

iii. Discuss the policy options that governments and central banks have at their disposal when they cannot pursue conventional monetary policy at the zero lower bound.

2022-11-22

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