ECON20031 MACROECONOMICS 3
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ECON20031
MACROECONOMICS 3
SECTION A
Answer ALL Questions (80 Marks)
The online version of this section will use a mixture of multiple choice, fill in the blanks and open text boxes to assess your understanding of the following questions [For more details see guidance in the same folder; word counts are just guides not limits] NOTE:
I cannot respond to questions about this:
1. An economy has a Cobb Douglas production function, given by:
α (1-α)
(1) Y = AK L
Where Y is equal to total production, Kis equal to the capital input of production and L is equal to the labour input of production. The constant, A, represents technology in the economy and α the output elasticity of capital.
A1. Determine whether the production function exhibits, decreasing, increasing or constant returns to scale. [6 Marks]
A2. Discuss the role of the parameter “ in the production function and the consequences of its invariance over time. [Guide: Short Essay 50-75
Words] [10 Marks]
2. Consider a closed economy that is characterised by the following equations:
(1) Y = C + I + G
(2) C = 200 + 0.75(Y-T)
(3) I = 325 -25r
(4) T=500
(5) G=500
(6) Md/P= L(r,Y) = 0.5Y – 50r
(7) Ms=1000
(8) Ms=Md
where Y is gross domestic product, C is private consumption expenditure, I is investment expenditure, G is government expenditure, T is lump sum taxes, Ms is money supply, Md/P is demand for real money balances, r is the real interest rate and P is the aggregate price level.
A1. Derive the IS and LM curves of the economy, expressing Y as a function of r and assuming P is fixed at 2. [6 Marks]
A2. Calculate the short-run equilibrium values of Y and r, assuming P is fixed at 2. [6 Marks]
A3. Calculate the long run equilibrium values of r and P, assuming that the potential level of output (Y*) is equal to 2300 monetary units. [6 Marks]
A4. An oil price shock causes the price level in the economy to increase from 2 to 2.5. Calculate the new equilibrium values of Y and r. Explain and critically evaluate, making reference to the IS/LM model, how the central bank might accommodate this adverse supply shock to stabilize income at its original level in the short run. [Guide: Calculation and Short Essay 150-200 Words] [16 Marks]
3. The IS/LM/BP model captures the small open economy explanation of the real effects of economic policy through changes in the exchange rate:
A1. Outline the structural equations in the IS/LM/BP model, under the restrictive assumption of perfect capital mobility. [Guide: Short Essay 50-75 Words] [10 Marks]
A2. Discuss and critically evaluate how the model might be used to explain a scenario where a small open economy receives news of an increase in its sovereign credit rating by an international rating agency. [Guide: Short Essay 200- 250 Words] [20 Marks]
SECTION B
Answer ALL Multiple Choice Questions (20 Marks)
Please use the Multiple Choice Answer Sheet provided.
1. Ask the invigilator if you do not know your registration number.
2. Enter and code your answers in the Economics Multiple Choice Answer Sheet, following the instructions on that sheet.
3. Do not mark the answer sheet anywhere other than in the spaces indicated.
4. Mark your answer options initially faintly in pencil, to allow you to change your answer.
5. When you have finalised your answer, mark your answer options with a thick, dark line.
1. Which of the following is included in the calculation of GDP?
A) Somebody picks flowers from their own garden.
B) A patient receives treatment for a broken leg.
C) A volunteer helps to build a community allotment.
D) The auction of a collectable fine art painting.
2. If production remains the same and all prices rise by 50%, then real GDP
A) is constant and nominal GDP is reduced by half.
B) and nominal GDP are both constant.
C) is constant and nominal GDP is increased by half.
D) falls by half and nominal GDP remains constant.
3. If Y = AK0.5L0.5 and K and L are 100 and A is 160, the marginal product of capital is:
A) 40.
B) 80.
C) 160.
D) 4000.
4. The government removes an investment subsidy, designed to assist with the cost of purchasing electronic fleet vehicles. In a closed economy with national saving fixed, the real interest rate will
A) fall.
B) remain constant.
C) rise.
D) first rise and then fall
5. In the context of a small open economy with national savings independent of the interest rate, an increase in taxation will
A) increase the real interest rate.
B) reduce the level of net exports.
C) increase net capital outflow.
D) reduce the level of national savings.
6. If a country’s real exchange rate decreases then
A) exports will rise and imports will fall.
B) exports will fall and imports will rise.
C) exports and imports will rise by the same amount.
D) exports and imports will fall by the same amount.
7. Which of the following is determined in the IS/LM model?
A) The level of taxation.
B) The interest rate.
C) Government expenditure.
D) The average price level.
8. The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.
A) greater; greater
B) greater; smaller
C) smaller; smaller
D) smaller; greater
9. In the context of the IS/LM model, with the interest rate on the vertical axis, an increase in the marginal propensity to consume will … .
A) increase the slope of the IS curve
B) decrease the slope of the IS curve.
C) increase the slope ofthe LM curve.
D) decrease the slope ofthe LM curve.
10. According to the Mundell Fleming model an appreciation of the exchange rate will cause the LM* curve to
A) shift to the right.
B) shift to the left.
C) remain unchanged.
D) become flatter.
2026-01-22