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UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

: : : :

MACROECONOMICS ECO211/219/164/210 OCTOBER 2006 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. This question paper consists of three (3) parts : PART A (20 Questions) PART B (5 Questions) PART C (5 Questions) Answer ALL questions from PART A and PART B and three (3) questions from PART C. i) ii) Answer PART A in the Objective Answer Sheet Answer PART B and PART C in the Answer Booklet. Start each answer on a new page.

2.

3.

Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) iii) the Question Paper an Answer Booklet - provided by the Faculty an Objective Answer Sheet - provided by the Faculty

4.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

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PART A 1. Macroeconomics is A. B. C. D. 2. the the the the study study study study of market regulations. of economy-wide phenomena. of how households and firms make decisions and how they interact. of money and financial markets.

The goal of macroeconomics is A. B. C. D. to explain the economic changes that affect a particular household, firm, or market. to explain the economic changes that affect many households, firms, and markets simultaneously. to devise policies to deal with market failures, such as monopoly, externalities, common resources, and public goods. all of the above.

3.

If the Malaysian government decides to lower spending by RM10 million, with MPC 0.8, the national income will A. B. C. D. rise by 50 million. fall by 8 million. rise by 12.5 million. fall by 50 million.

4.

Harris decides to hire Daniel to mow his lawn, instead of mowing it himself. result of this transaction, A. B. C. D. GDP will rise. GDP will decrease. GDP will be unaffected because the same service would be performed. GDP could increase or decrease.

As a

5.

Which of the following is a leakage? A. B. C. D. Expenditure by a government entity. Imports of machineries. Investment outside the country. Rental expenditure by a company.

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6.

An improvement in the standard of living is best indicated by an increase in A. B. C. D. real personal income. real per capita income. nominal national income. nominal disposable income.

7.

Keynes believed that savings depend on A. B. C. D. the interest rate, because at high interest rates people will save more. the interest rate, because if interest rates are low, people will save more for their retirement. the size of people's incomes, because at higher income people can save more. none of the above.

8.

An upward shift of the consumption function will A. B. C. D. increase the equilibrium national income. increase the demand for transaction balances. be the result of decisions by people to spend more at each level of national income. result from all of the above.

9.

The maximum gross national product (GNP) a nation can produce in any one year is set by A. B. C. D. its natural resources only. families' desires for products. the amount of money people have to spend. its productive resources.

10.

In Islam, the owner of liquid capital uses his capital for investment through the mode of A. B. C. D. Ai-Mudharabah. Al- Falah. Al- Wadiah. AI-'Araf.

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11.

The main job of Bank Negara Malaysia is to A. B. C. D. control the rate of growth of the money supply. manage the national debt. provide low-interest loans to all financial institutions. none of the above.

12.

If the country is heading into a recession, the government might be able to counteract this by A. B. C. D. increasing the discount rate. forcing the government deficit to decrease. carrying out an expansionary fiscal policy. acting to decrease the money supply.

13.

If the CPI is currently 296.3 and the base year is 1987, how much was the CPI in 1987?

A. B. C.
D.

96.3. 100. 196.3.

14.

Last year Aisyah earned RM70,000. This year her income is RM77.000. In an economy with an inflation rate of 8 percent, we can conclude that Aisyah's nominal income A. B. C. D. and real income both increased. and real income both decreased. increased, but their real income decreased. decreased, but their real income increased.

15.

If the number of people employed were equal to the number of people unemployed, the unemployment rate would be A. B. C. D. 0%. 25%. 50%. 75%.

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16.

It is difficult for cyclically unemployed individuals to find jobs because A. B. C. D. they do not meet the qualifications required for the available jobs. the economy is in a recession. they quit their last job and employers view them with suspicion. they have not looked long enough to find a job.

17.

The main reason why one nation trades with another is to A. B. C. D. save its natural resources from rapid depletion. exploit the advantages of specialization. eliminate the danger of retaliation from other nations. improve political alliances.

18.

Columbia produces more coffee than any other country, it therefore necessarily has A. B. C. D. an absolute advantage in coffee production. a comparative advantage in coffee production. both a comparative and absolute advantage in coffee production. an absolute advantage and comparative disadvantage in coffee production.

19.

After Malaysia introduces a tariff in the market for coconuts, the price of coconuts in Malaysia will A. B. C. D. decrease. Increase. remain the same. change in an indeterminate manner.

20.

The infant industry argument for protectionism suggests that an industry must be protected in the early stages of its development so that A. B. C. D. firms can be protected from subsidized foreign competition. domestic producers can attain the economies of scale to allow them to compete in world markets. there will be adequate supplies of crucial resources in case they are needed for national defence. None of the above reflects the infant industry argument.

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PARTB QUESTION 1

a)

Below is the income data for a country. Items Consumer expenditure Government expenditure Private investment Public investment Wages and salaries Rental income Net exports Taxes on expenditure Subsidies Direct taxes Net property income from abroad Capital consumption RM millions 210 000 14 500 60 100 40 000 100 000 28 000 2 800 56 000 7 000 8 000 3 400 42 000

i)

Calculate the gross domestic product (GDP) at market price. (2 marks)

ii)

Calculate national income. (2 marks)

iii)

Give two (2) reasons why government calculate national income. (2 marks)

b)

Which of the following are counted in this year's GDP? Explain your answer in each case. i) A local car dealer sold a used car. (2 marks) ii) Anita cooked meals for her family. (2 marks)

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QUESTION 2

Use the consumption schedule below to answer the following questions: Income (RM billion) 100 200 300 400 500 Consumption (RM billion) 175 250 325 400 475 Saving (RM billion)

a)

Fill in the blanks. (2 marks)

b)

Define autonomous consumption and marginal propensity to consume (MPC) and find their values. (4 marks) Write the saving function. (1 mark)

c)

d)

Briefly describe consumption from the Islamic perspective. (3 marks)

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QUESTION 3

The following is the information of spending in a hypothetical country. All of the values are in RM million. Consumption function Investment expenditure Public expenditure Tax Net Exports = 350 + 0.65 Yd =150 = 250 = 20 = 120

a)

Compute the equilibrium level of national income for the above economy. (2 marks)

b)

Assume that full employment would be experienced at an income level of RM3.000 million. State the problem that the economy is facing and draw a well-labeled diagram to illustrate it. (3 marks)

c)

Using the spending multiplier, compute the change in the amount of government spending required to achieve the full employment income level. (3 marks)

d)

What is marginal propensity to save (MPS) and what is the relationship between MPS and marginal propensity to consume (MPC) (2 marks)

QUESTION 4 a) For each of the following, indicate if the person would be classified as employed, unemployed, or not in the labor force: i) ii) a 70-year-old man who left his job to help his daughter in her business. a 20-year-old college student who is out of school for the summer and is looking for a job. a 30-year-old woman with a Ph.D. in history who has not been able to find a teaching position and is driving a taxi 30 hours a week. a 40-year-old steel worker who is not working and has given up searching for a job. (4 marks)

iii)

iv)

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b)

The following table shows the consumer price index (CPI) of a hypothetical country. Year 2000 2001 2002 2003 CPI 100.0 105.0 112.5 117.5

i) ii) iii)

What does CPI measure? (2 marks) Which year is the base year? Why? (2 marks) Calculate the rate of inflation in 2003. (2 marks)

QUESTION 5 a) i) What is the basis for international trade? (1 mark) ii) Explain comparative advantage. How can it be different from absolute advantage? (4 marks)

b)

Assume that with a given amount of resources (labor, land and capital) the alternatives shown in the following table can be produced in two countries: Riceland and Clothland. Country Riceland Clothland Rice (kg) 2 4 Cloth (meter) 1 8

Compute the opportunity costs of wheat and cloth for each country. Which country has a comparative advantage in producing rice and which country has a comparative advantage in producing cloth? (3 marks) ii) Compute the rate at which the two countries will exchange rice and cloth. (2 marks)

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PARTC QUESTION 1 a) Explain the macroeconomic objective of economic growth. How does the concept of economic growth in conventional economics differ from the Islamic perspective? (7 marks) b) According to Keynesians what is the key determinant to the level of macroeconomic activity? (3 marks)

QUESTION 2 a) Explain the Keynesian consumption function. (6 marks) b) Investment in Islamic perspective must be based on certain elements. Identify and explain two (2) of them. (4 marks)

QUESTION 3 a) Using examples, explain two (2) types of unemployment. (5 marks) b) What is monetary policy? How can it be used to reduce unemployment? (5 marks)

QUESTION 4 a) What is inflation and why are economists concerned with it? (6 marks) b) What is demand-pull inflation and how can fiscal policy be used to reduce it? Explain. (4 marks)

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QUESTION 5 a) Explain the current and financial accounts in the balance of payments. (6 marks) b) Suggest two (2) ways to reduce trade deficit. (4 marks)

END OF QUESTION PAPER

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