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School of Economics

ECON5002 Macroeconomic Theory

EXAMPLE FINAL EXAM

SECTION A (10 marks)

1. Suppose there is a decrease in the real exchange rate. Which of the following will occur as a result of this change in the real exchange rate?

A. an increase in net exports

B. an increase in imports

C. a decrease in output

D. a decrease in demand for equity stocks

2. In an open economy, an increase in the interest rate will cause an increase in which of the following?

A. investment

B. consumption

C. the exchange rate

D. output

3. Changes in which of the following variables will cause the current nominal exchange rate to change?

A. the future expected long-run nominal exchange rate

B. future expected domestic nominal interest rates

C. future expected foreign nominal interest rates

D. all of the above

4. A rise in the risk premium on domestic bonds (r):

A. causes a nominal depreciation of the currency

B. leads to lower domestic interest rates

C. will eventually see the domestic country default on its national debt

D. is equivalent to a fall in the foreign interest rate i*

5. Which of the following statements is true?

A. when comparing bonds from two countries investors will demand a risk premium be added to the interest rate of the more risky country, in order to remain indifferent between the two bonds in equilibrium

B. when comparing bonds from two countries investors will demand a risk premium be added to the interest rate of the less risk country, in order to remain indifferent between the two bonds in equilibrium

C. when comparing bonds from two countries with differing risk characteristics investors will look at exchange rates, not interest rates

D. none of the above

6. A 10% appreciation of the $A against the US$ would:

A. decrease the US$/$A exchange rate from US$0.720 to $0.648

B. increase the US$/$A exchange rate from US$0.720 to $0.792

C. make imports from the US more expensive for Australians to buy

D. make imports from Australia less expensive for Americans to buy

7. In the economic growth model, which of the following will cause a decrease in output per worker in the long run?

A. a decrease in the saving rate

B. a decrease in the stock of human capital

C. an increase in the depreciation rate

D. all of the above

8. Assume that an economy experiences both positive population growth and technological progress. Once the economy has achieved balanced growth, we know that output per worker (Y/N) is:

A. growing at a rate equal to gA

B. growing at a rate equal to gA + gN

C. growing at a rate equal to δ + gA + gN

D. growing at a rate equal to δ(gA + gN) 

9. Let α represent labour's share of total output. Economic growth attributable to labour growth is represented by:

A. αgA

B. αgN

C. αgK

D. 1/α

10. The model that assumes human capital produces positive externalities and that capital defined in this way is no longer subject to diminishing marginal productivity is known as:

A. the Solow model

B. the extended model

C. developmental growth theory

D. endogenous growth theory 

SECTION B (40 marks)

Present your answers clearly and concisely. Show all working. Underline the key final answer from your calculations. Draw and label charts in a format that is accurate and comprehensive. Explain what you are doing, stressing the economic meaning of the various steps. The way you organize your answers will be a factor in your overall mark

Question B1 (20 marks)

Consider an open economy with flexible exchange rates.

(a) In an IS-LM-IP diagram, show the effect of an increase in domestic government spending on domestic output Y. Assume the central bank responds by raising the interest rate to keep inflation from rising. Explain. (7 marks)

(b) Explain what type of factors cause the IP curve to rotate or shift. Give two examples. (3 marks)

(c) Using an IS-LM-IP diagram for the home economy, show the effect of an increase in the foreign interest rate i* on domestic output Y and on the exchange rate E. Explain. (5 marks)

(d) Given your answer in (c), comment on the size of the net effect of a foreign monetary contraction on domestic output? (2 marks)

(e) What effect is a foreign monetary contraction likely to have on Y* and i*? (2 marks)

(1 bonus mark for overall clarity of writing and diagrams.)

Question B2 (20 marks)

Consider the production function Y = AK^0.7[(1− u)N]^0.3, where u is the unemployment rate.

(a) Show that output per worker yt as a function of capital per worker kt and the rate of unemployment u equals Akt^0.7(1-u)^0.3. (6 marks)

(b) Consider a growth model with technological change and let the term ‘per worker’ represent per effective worker. Draw a generalized chart of economic growth equilibrium, showing curves for depreciation per worker, output per worker, and investment per worker, respectively. With the help of the diagram, explain that there is one steady-state value of capital per worker (k*). Carefully label your diagram. (7 marks)

(c) With the aid of a diagram, explain the general effect of an increase in the saving rate. (6 marks)

(1 bonus mark for overall clarity of writing, equations, and diagrams.)

END OF EXAMPLE FINAL EXAM