INSTRUCTIONS TO CANDIDATES

1.         Circle the best answer to QUESTIONS 1 to 20 (Section A) in the table below.  Answer all of the remaining questions in Section B and C in the question booklet.

2.          Give only ONE answer per question in the table below. Choosing more than one answer will invalidate all answers to the question.

3.          Do NOT detach the first page. This will invalidate the test paper

SECTION A

True/False (10 marks)

Indicate whether the statement is true or false on the answer sheet.

1.    Gross Domestic Product (GDP) is not a good measure of economic wellbeing because people prefer higher incomes to lower incomes.

2.    The accumulation of capital is not subject to diminishing returns in the short-run.

3.    The term money refers to the assets that people regularly use to buy goods and services.

4.    The long run aggregate supply curve is vertical as it is dependent on the price level.

5.    In an open economy, savings = investment.

6.    Most of the economy’s unemployment problem is attributable to the relatively few workers who are jobless for long periods of time.

7.    Menu costs are costs of inflation limited to restaurants and fast food establishments.

8.    Other things being the same, an increase in a country’s real interest rate increases net foreign investment.

9.    Commodity money has value independent of its use as money.

10.  When the government chooses to raise revenue by printing money, it will lead to inflation.

Multiple Choice (10 marks)

Identify the choice that best completes the statement or answers the question.

11. The natural rate of unemployment is:

a.   unchanging

b.   is known as full employment

c.   short-term unemplyment

d.   always increasing

12. Mary has been out of paid workforce in order to raise her children, now she decides to do paid work and is looking for a job. Which of the following is the correct statement?

a.   The number of unemployed increases, and the labour force increases.

b.   The number of unemployed increases, and the labour force decreases.

c.   The number of unemployed is unaffected, and the labour force increases. d.   The number of unemployed increases, and the labour force is unaffected.

13. A budget deficit:

a.   shifts the supply curve for loanable funds to the left

b.   lowers the interest rate

c.   does not affect the interest rate

d.   shifts the supply curve for loanable funds to the right

14. Establishing unions will:

a.   raise the wage of the union workers

b.   increase the demand for union workers

c.   decrease the supply of labour in the non-unionised parts of the economy d.   none of the above

15. A rise in price level means a:

a.   higher value of money

b.   deflation

c.   lower value of money

d.   lower value of goods

16. When the money is neutral (real interest rate remains the same), an increase in the rate of inflation from 2 percent to 5 percent will                      .

a.   increase the real interest rate 3 percent

b.   increase the nominal interest rate by 3 percent

c.   decrease the nominal interest rate by 3 percent

d.   increase the nominal interest rate by less than 3 percent

17. Which of the following explanations for the upward slope of the short-run aggregate-supply curve is correct?

a.   nominal wages will not adjust immediatly

b.   prices are sticky or fixed

c.   prices cannot be adjusted immeidatly due to menu costs

d.   all of the above

18. Consumption expenditure:

a.   is spending on new capital equipment, inventories and structures including housing b.   is spending on goods and services by local, state and federal governments

c.   is spending on domestically produced goods by foreigners minus spending on foreign goods by domestic residents

d.   is spending by households on goods and services

19. Suppose that the prices of imported consumption goods rose from the base year. Which is the most accurate statement about the CPI and the GDP deflator?

a.   The CPI rises but the GDP deflator doesn’t change

b.   The GDP deflator rises but the CPI doesn’t change

c.   Both the GDP deflator and the CPI rises

d.   Both the GDP deflator and the CPI don’t change

20. The government has introduced the minimum wage law. The minimum wage is set at W1  as shown in Graph 1 below. After introducing the minimum wage law, the quantity of labour supplied is                .

a.   L0, the quantity of labour demanded is L0  and the amount of unemployed labour is zero

b.   L0, the quantity of labour demanded is L1  and the amount of unemployed labour is L0 – L1 c.   L2, the quantity of labour demanded is L1  and the amount of unemployed labour is L2 – L1 d.   L2, the quantity of labour demanded is L0  and the amount of unemployed labour is L2 – L0

Graph 1

SECTION B

Short Answer Questions (15 marks)

1.   a) Define GDP (0.5 marks)

b) List the four components of GDP with examples. (1 mark)

c) List and explain three factors that can affect the consumption spending (1.5 marks)

2.   Would the following events cause a shift in Aggregate demand or/and Short run Aggregate

supply curve. State the direction of shift of the curve.  (3 marks)

a.   An increase in interest rates.

b.   A decrease in wages throughout the economy.

c.   An increase in oil prices

d.   A decrease in income taxes

e.   An increase in household wealth

3. Use the dynamic model of aggregate demand and aggregate supply to illustrate a situation where the economy is growing but do not experience inflation of deflation in the long run. (3 marks)

4. Use the following graph to answer the questions. (3 marks)

a.  What is the value of equilibrium real GDP?

b. What is the value of the MPC?

c.  What is the value of the multiplier?

d. What is the value of unplanned changes in inventories when real GDP has each of the following values?

.   $1000 billion

.   $1200 billion

.   $1400 billion

5.   Analyse the impact of imposing efficiency wages in a labour market. Draw a labour market diagram and explain. (3 marks)

SECTION C

Analytical Questions (25 marks)

Question 1                      (13 marks)

Read the article below and answer the following questions.

Zaun, Todd. "Japan's Jobless Rate Jumps Unexpectedly." New York Times 28 Aug. 2004: C3. Academic OneFile. Web. 25 Apr. 2016. (excerpt)

Japan's unemployment rate jumped unexpectedly in July while prices and consumer spending continued to decline, raising a note of doubt on the strength of the economic recovery here.

Japan's unemployment rate rose for the first time this year, jumping to 4.9 percent for July from 4.6 percent  for  June.  Economists  had  expected  the  rate  to  remain  unchanged.  Spending  by households of salaried workers fell 2.5 percent in July from a month earlier, the third consecutive monthly decline.

''These numbers were generally on the weak side of expectations, so it does raise the question of whether  economic  growth  was  as  strong  as  the  market  would  portray,''  said  Ryo  Hino,  an economist for J.P. Morgan in Tokyo.

A report earlier this month showed that Japan's economy grew at an unexpectedly weak annual rate of 1.7 percent in the second quarter, sharply slowing from 6.6 percent in the first quarter and 7.4 percent in the last quarter of 2003.

Still, Mr. Hino and other economists cautioned against reading too much into Friday's figures because other recent data, in particular strong exports and corporate profits,  suggest Japan's recovery remains intact even if growth has backed off the torrid pace seen earlier this year.

Traders seemed to share that view. Stock prices initially declined on the reports, but Japan's benchmark Nikkei 225 stock average recovered to close up 0.7 percent, at 11,209.59.

Government officials and economists said the jump in the July unemployment rate was mostly a result of an increase in the number of job seekers as the improved economy drew people who had given up looking for work back into the job market. Some 90,000 new jobs were created in July, not nearly enough to absorb an increase of 320,000 entrants to the labor force.

''The economic recovery maybe prompting people to look for new or better jobs, and is one reason the unemployment rate temporarily rose,'' Michio Matsumura, a statistics bureau official, told reporters, according to Bloomberg News.

The drop in household spending in July was also worse than expected. The decline came as a surprise to economists, who expected unusually hot summer weather to help spending. While sales of air-conditioners and beer have been rising, the increases were not enough to offset declines in spending on housing and entertainment.

Policy makers are counting on a rebound in consumer spending to act as a counterweight to exports, which have so far been the main driver of this recovery, now in its second year.

Consumer spending has been tepid amid a long decline in incomes. Although profits are growing incorporate Japan, many companies have been reluctant to raise salaries to keep costs down. That cost pressure stems in large part from Japan's six-year battle with deflation, which has limited revenue growth at companies and forced them to cut costs to raise profits. …

Although Friday's reports suggest Japan's economy may not be as vigorous as previously thought, other economic data paint a different picture. On Thursday, the government said the trade surplus grew for the 13th consecutive month in July, rising to $10.3 billion. The trade surplus was larger than expected, with exports toChinaand other Asian countries remaining high despite predictions that they would begin to taper off. … .

a.   Refer to the above article. What is the major factor that leads to an increase in unemployment rate? (1 mark)

b.   According to the article, what is the unemployment rate in June and July? (1 mark)

c.   According to the article, what has happened to the economic growth rate per quarter in Japan?

How has it changed from the previous quarters? (1 mark)

d.   “ The trade surplus was larger than expected … ”

Assume that the economy is initially at its long run equilibrium. Using the Static Aggregate Demand-Aggregate Supply (AD-AS) model, explain the possible effects of an increase in net- exports on the price level and the output level in the short-run.  (4 marks)

e.   (i) “ The drop in household spending is worst than expected … ”

Assume that the economy is initially at its long run equilibrium. Using the Static Aggregate Demand-Aggregate Supply (AD-AS) model, explain the possible effects of drop in household spending on the price level and the output level in the short-run.  (4 marks)

f.   In response to part d), what policy can be pursued by the government to boost household spending? How can the government implement this policy?       (2 marks)

Question 2

Read the article below and answer the following questions. (12 marks)