MACRO-Tutorial Questions2
MACRO-Tutorial Questions2
MACRO-Tutorial Questions2
Section A (MCQ)
1. When a firm sells a good or a service, the sale contributes to the nation’s income
a. only if the buyer of the good or service is a household.
b. only if the buyer of the good or service is a household or another firm.
c. whether the buyer of the good or a service is a household, another firm, or the
government.
d. We have to know whether the item being sold is a good or a service in order to answer the
question.
2. Estimates of the values of which of the following non-market goods or services are
included in GDP?
a. the value of unpaid housework
b. the value of vegetables and other foods that people grow in their gardens
c. the estimated rental value of owner-occupied homes
d. All of the above are included.
3. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these
two practices, which of the following statements is correct?
a. Only Ralph’s payments are included in GDP.
b. Ralph’s payments as well as the estimated value of Mike’s mowing services are included
in GDP.
c. Neither Ralph’s payments nor the estimated value of Mike's mowing services is included
in GDP.
d. Ralph’s payments are definitely included in GDP, while the estimated value of Mike’s
mowing services is included in GDP only if Mike voluntarily provides his estimate of that
value to the government.
4. During the third quarter of 2006, a firm produces consumer goods and adds some of those
goods to its inventory. During the fourth quarter of that year, the firm sells the goods at a
retail outlet, with the result that the value of its inventory at the end of the fourth quarter is
smaller than the value of its inventory at the end of the third quarter. These actions affect
which component(s) of fourth-quarter GDP?
a. These actions affect only consumption, and they affect consumption positively.
b. These actions affect only investment, and they affect investment positively.
c. These actions affect consumption positively and investment negatively.
d. These actions affect both consumption and investment positively.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
d. would not be included in GDP because the government raises taxes to pay for them.
9. Unemployment compensation is
a. part of GDP because it represents income.
b. part of GDP because the recipients must have worked in the past to qualify.
c. not part of GDP because it is a transfer payment.
d. not part of GDP because the payments reduce business profits.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section B
Question 1
Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
Question 2
Below are some data from the land of milk and honey.
Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2001 as the base
year.
Question 3
Question 4
Suppose you are watching a news report with a friend. The news report points out that a certain
African nation generates a GDP per capita of only $2,000 per year. Since your friend knows that
Malaysia's GDP per capita is approximately $20,000, he suggests that Malaysian are materially
10 times better off than the people of the African nation.
a) Is your friend’s statement accurate?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
b) What general category of production is not captured by GDP in both Malaysia and the
African nation?
c) Provide some examples of this type of activity.
d) Why would the exclusion of this type of production affect the measurement of African
output more than Malaysian output?
e) Does this mean that residents of the African nation are as well off materially as residents
in Malaysia?
Chapter 24: Measuring the cost of living
Section A (MCQ)
3. Which of the following means that the CPI overstates the actual inflation rate?
a. New goods bias.
b. Quality change bias.
c. Outlet substitution bias.
d. All of the above cause the CPI to overstate inflation.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
b. the extent to which each good or service is regarded by the government as a necessity.
c. how much consumers buy of each good or service.
d. the number of firms that produce and sell each good or service.
7. Substitution bias in the CPI refers to the fact that the CPI
a. takes into account the substitution of goods by consumers when relative prices change.
b. substitutes quality changes whenever they occur without taking account of the cost of the
quality changes.
c. substitutes relative prices for absolute prices of goods.
d. takes no account of the substitution of goods by consumers when relative prices change.
9. Which of the following is not a widely acknowledged problem with the CPI as a measure
of the cost of living?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. unmeasured price change
10. If the prices of Australian-made shoes imported into the United States increase, then, as a
result,
a. both the GDP deflator and the consumer price index increase.
b. neither the GDP deflator nor the consumer price index increases.
c. the GDP deflator increases but the consumer price index does not increase.
d. the consumer price index will increase, but the GDP deflator will not increase.
Section B
Question 1
Economists and policymakers monitor both the GDP deflator and the consumer price index to
gauge how quickly prices are rising. However, these two statistics may not always tell the same
story. Discuss two important differences that can cause them to diverge.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 2
Calculate the consumer price index and the rate of inflation if given a fixed basket of goods of 4
hamburgers and 2 apples by taking the year 2001 as the base year.
Year Price($)
Hamburger Apple
2001 $1 $0.50
2002 $2 $1.00
2003 $3 $1.50
Question 3
Describe the three problems that make the consumer price index an imperfect measure of the
cost of living.
Question 4
Convert the salary of Mr. A in the year 1930 to dollars in the year 2000 by using the following
information.
a) A’s salary in the year 1930 was $80,000
b) The price level in the year 2000 was 160
c) The price level in the year 1930 was 52
Question 5
Suppose you’ve been talking to a friend’s father who told you that he gave up smoking cigarettes
in 1995. When you asked him why he quit, you got a surprising answer. Instead of reciting the
health benefits of quitting smoking, he said, "I quit because it was just getting too expensive. I
started smoking in 1965 and cigarettes were only 45 cents a pack. The last pack I bought was
$2.00 and I just couldn't justify spending more than four times as much on cigarettes as I used
to."
a) In 1965, the CPI was 31.5. In 1995 the CPI was 152.4. While it is commendable that your
friend’s father quit smoking, what is wrong with his explanation?
b) What is the equivalent cost of a 1965 pack of cigarettes measured in 1995 prices?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
c) What is the equivalent cost of a 1995 pack of cigarettes measured in 1965 prices?
d) Do both methods give you the same conclusion?
e) The preceding example demonstrates what economists refer to as a "money illusion."
Why do you think economists might choose the phrase "money illusion" to describe this
behavior?
Section A (MCQ)
1. Consider two countries. Country A has a population of 1,000, of whom 800 work 8 hours
a day to make 128,000 final goods. Country B has a population of 2,000 of whom
1,800 work 6 hours a day to make 270,000 final goods
a. Country A has higher productivity and higher real GDP per person than Country B.
b. Country A has lower productivity and lower real GDP per person than country B.
c. Country A has higher productivity, but lower real GDP per person than country B.
d. Country B has lower productivity, but higher real GDP per person than country B.
2. Real Foods produced 300,000 boxes of organic spiral noodles in 2014 and produced
360,000 boxes in 2015. They used the same total hours of work each year. In 2015 their
productivity
a. fell.
b. was the same as in 2014.
c. rose 20%.
d. rose 30%.
3. A nation's standard of living is determined by
a. its productivity.
b. its gross domestic product.
c. its national income.
d. how much it has relative to others.
4. If a production function has constant returns to scale, the output can be doubled if
a. labor alone doubles.
b. all inputs but labor double.
c. all of the inputs double.
d. None of the above is correct.
5. Suppose that there are diminishing returns to capital. Suppose also that two countries are
the same except one has more capital and so more real GDP per person than the other.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Finally, suppose that the saving rate in both countries increases from 5 percent to 6
percent. Over the next ten years, we would expect that
a. the growth rate will not change in either country.
b. the country that started with less capital will grow faster.
c. the country with started with more capital will grow faster.
d. both countries will grow at the same rate.
7. If the real GDP is $13,000 billion and aggregate labor hours used in production are
270 billion, labor productivity equals
a. $6.50 per hour.
b. $45 per hour.
c. $48 per hour.
d. $650 per hour.
8. A recent survey by India's central bank reported that spending plans by firms on large new
projects fell by 46 percent in the year ending March 2016, compared with the prior year.
This decrease will most directly impact
a. physical capital growth.
b. human capital growth.
c. technological change.
d. population growth.
9. The aggregate production function shows how ________ varies with ________.
a. leisure time; labor
b. labor; leisure time
c. real GDP; labor
d. labor; capital
Section B
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 1
List and describe four determinants of productivity.
Question 2
Why is productivity related to the standard of living? In your answer, be sure to explain what is
meant by productivity and standard.
Question 3
Why does a nation’s standard of living depend on property rights?
Question 4
You are discussing with some friends. The conversation turns to a supposed lack of growth and
opportunity in Europe when compared to some Asian countries such as Japan, South Korea,
Taiwan, and Singapore. One of your friends says, "These Asian countries must have cheated
somehow. That's the only way they could have possibly grown so quickly."
a) Have you learned anything in this chapter that would make you question your friend’s
allegation?
b) The phenomenal growth rate of Japan since World War II has often been referred to as
the "Japanese miracle." Is it a miracle or is it explainable?
c) Are the high growth rates found in these Asian countries without cost?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section A (MCQ)
1. In a closed economy, a nation's investment must be financed by
a. private saving only.
b. the government's budget deficit.
c. borrowing from the rest of the world only.
d. national saving.
3. The nominal interest rate minus the real interest rate approximately equals the
a. rate of increase in the amount of investment.
b. inflation rate.
c. rate of increase in income.
d. rate the bank receives to cover lending costs.
N= Real + Ig
4. Assume you save $1,000 in a bank account that pays 8 percent interest per year and the
inflation rate is 3 percent. At the end of the year, you have earned
a. a nominal return of $50.
b. a negative real return.
c. a real return of $50.
d. a real return of $80.
5. The demand for loanable funds is the relationship between loanable funds and the
________ other things remaining the same.
a. real interest rate
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
b. Income level
c. inflation rate
d. price level
8. Which of the following explains why the demand for loanable funds is negatively related
to the real interest rate?
a. A lower real interest rate makes more investment projects profitable.
b. Consumers are willing to spend less and hence save more at higher real
interest rates.
c. Interest rate flexibility in financial markets assures an equilibrium in which saving equals
investment.
d. All of the above are reasons why the demand for loanable funds is negatively related to
the real interest rate.
10. Suppose the market for loanable funds is in equilibrium. If the expected profit falls, the
equilibrium real interest rate ________ and the quantity of loanable funds ________.
a. rises; decreases
b. rises; increases
c. falls; decreases
d. falls; increases
Section B
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 1
The following information describes a loanable funds market. Values are in billions.
a) Plot the supply and demand for loanable funds. What is the equilibrium real interest rate and
the equilibrium level of saving and investment?
b) Why do "market forces" not allow 2 percent to be the real interest rate?
c) Suppose the government suddenly increases its budget deficit by $400 billion. What are the
new equilibrium real interest rate and the equilibrium level of saving and investment?
Question 2
Suppose GDP is $8 trillion, taxes are $1.5 trillion, private saving is $0.5 trillion, and public
saving is $0.2 trillion. Assuming the economy is closed, calculate consumption, government
purchases, national saving, and investment.
Question 3
Suppose you are watching an opposition party spokesperson being interviewed on TV during an
election campaign. When questioned about their position on economic growth, the spokesperson
says, "We need to get this country growing again. We need to use tax incentives to stimulate
saving and investment, and we need to get the budget deficit down so that the government stops
absorbing our nation's savings."
a) If the opposition party’s spending plans remain unchanged from current government
spending, what inconsistency is implied by the spokesperson's statement?
b) If the opposition party truly wishes to decrease taxes and decrease the budget deficit,
what has the spokesperson implied about his party’s plans for government spending?
c) If policymakers want to increase growth, and if policymakers have to choose between tax
incentives to stimulate saving and tax incentives to stimulate investment, what might they
want to know about supply and demand in the loanable funds market before making their
decision?
Question 4
Examine the impact of the following events on the equilibrium interest rates, saving, and
investment using the market for loanable fund model. Each event is treated independently :
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
a) Investors are highly optimistic about the economic outlook and they want to expand their
business.
b) The government budget changes from a balanced budget to a deficit budget.
Section A (MCQ)
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
4. Tom loses his job and immediately begins looking for another. Other things are the same,
the unemployment rate
a. increases and the labor-force participation rate decreases.
b. increases and the labor-force participation rate is unaffected.
c. is unaffected, and the labor-force participation rate increases.
d. decreases, and the labor-force participation rate is unaffected.
6. Sam just lost his job, but isn't yet looking for a new one. Sam is
a. counted as unemployed and part of the labor force.
b. counted as unemployed, but not part of the labor force.
c. not counted as unemployed, but counted as part of the labor force.
d. not counted as unemployed, and not in the labor force.
7. Suppose the working-age population in Tiny Town is 100 people. Suppose 25 of these
people are NOT in the labor force, the ________ equals ________.
a. unemployment rate; 25/100 × 100
b. unemployment rate; 25/75 × 100
c. labor force; 75
d. labor force; 25/100 × 100
8. The ________ is the total number of people aged 16 years and older (and not in jail,
hospital, or institutional care) while the ________ is the number of people employed and
unemployed.
a. labor force; working-age population
b. labor force participation rate; labor force
c. working-age population; labor force
d. working-age population; labor force participation rate
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section B
Question 1
The Bureau of Labour Statistics announced that in December 1998, of all adult Americans,
138,547,000 were employed, 6,021,000 were unemployed, and 67,723,000 were not in the labor
force. How big was the labor force? What was the labor-force participation rate? What was the
unemployment rate?
Question 2
Use the following information about Employment Country. Numbers are in millions.
Labor Statistic 2020 2021
Population 223.6 226.5
Adult population 168.2 169.5
Number of unemployed 7.4 8.1
Number of employed 105.2 104.2
Question 3
Using a diagram of the labor market, show the effect of an increase in the minimum wage on the
wage paid to workers, the number of workers supplied, the number of workers demanded, and
the amount of unemployment.
Question 4
Explain four ways in which a firm might increase its profits by raising the wages it pays.
Question 5
Consider an economy with two labor markets, neither of which is unionized. Now suppose a
union is established in one market.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
a. Show the effect of the union on the market in which it is formed. In what sense is the
quantity of labor employed in this market an inefficient quantity?
b. Show the effect of the union on the nonunionized market. What happens to the equilibrium
wage in this market?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section A (MCQ)
1. Money
a. is more efficient than barter.
b. makes trades easier.
c. allows greater specialization.
d. All of the above are correct.
3. Which of the following best illustrates the medium of exchange function of money?
a. You keep some money hidden in your shoe.
b. You keep track of the value of your assets in terms of currency.
c. You pay for your double latte using currency.
d. None of the above is correct.
4. Liquidity refers to
a. the ease with which an asset is converted to the medium of exchange.
b. a measurement of the intrinsic value of commodity money.
c. the suitability of an asset to serve as a store of value.
d. how many time a dollar circulates in a given year.
7. You get money for babysitting the neighbors' children. This best illustrates which
function of money?
a. medium of exchange
b. unit of account
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
c. store of value
d. Liquidity
10. Which of the following is a tool that is used by the Fed to control the quantity of money?
a. open market operations
b. government expenditure multiplier
c. excess reserves
d. real interest rate
Section B
Question 1
a) Why don’t banks hold 100 percent reserves? How is the amount of reserves banks hold
related to the amount of money the banking system creates?
b) Suppose that the T-account for First National bank is as follows:
Assets Liabilities
I) If the Central Bank requires banks to hold 5% of deposits as reserves, how much in
excess reserves does First National now hold?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 2
Assume that Miss A deposits RM50,000 with Bank Y. Assume also that required reserves are 20
percent of checking deposits, and that banks hold no excess reserves and households hold no
currency. Explain the detailed process of money creation in the economy and calculate the size
of the money multiplier. Demonstrate your answers using banks’ T-account.
Question 3
a) What are the tools of monetary control used by central banks and explain how central banks
use them to control money supply?
b) Why is the central banks unable to fully control the money supply?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section A
1. What will happen to the price of bonds when the interest rate falls?
a. Bond prices will remain the same.
b. Bond prices will rise.
c. Bond prices will fall.
d. Ambiguous.
2. What will happen to the interest rate if the quantity of money demanded is less than the
quantity of money supplied?
a. Either increase or decrease, depending on the amount of excess demand.
b. Increase.
c. Decrease.
d. Unaffected.
4. Which of the following is NOT a monetary policy tool of the Federal Reserve?
a. Changes in required reserves.
b. Last resort loans.
c. Deposit insurance.
d. Open market operations.
5. The minimum percentage of deposits that a depository institution must hold and cannot
use for lending is known as the
a. Minimum rate.
b. required reserve ratio.
c. money multiplier.
d. discount rate.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
7. If the desired reserve ratio is 3 percent and deposits totaled $575 billion, banks would
hold
a. $534.75 in reserves.
b. $17.25 billion in excess reserves.
c. $1,725 billion in currency.
d. $17.25 billion in reserves.
10.
Refer to the above figure. If the money supply is MS2 and the value of money is 2,
a. the value of money is less than its equilibrium level.
b. the price level is higher than its equilibrium level.
c. the quantity of money demanded is greater than the quantity of money supplied.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
d. the quantity of money supplied is greater than the quantity of money demanded.
Section B Question 1
a) Explain the difference between nominal and real variables, and give two examples of
each. According to the principle of monetary neutrality, which variables are affected by
changes in the quantity of money?
b) According to Fisher's effect, how does an increase in the inflation rate affect the real
interest rate and the nominal interest rate?
Question 2
Suppose you explain the concept of an "inflation tax" to a friend. You correctly tell them, "When
a government prints money to cover its expenditures instead of taxing or borrowing, it causes
inflation. An inflation tax is simply the erosion of the value of money from this inflation.
Therefore, the burden of the tax lands on those who hold money." Your friend responds, "What's
so bad about that? Rich people have all the money so an inflation tax seems fair to me. Maybe
the government should finance all of its expenditures by printing money."
a) Is it true that rich people hold more money than poor people?
b) Do rich people hold a higher percentage of their income as money than poor people?
c) Compared to an income tax, does an inflation tax place a greater or lesser burden on the
poor?
d) Are there any other reasons why engaging in an inflation tax is not a good policy?
Question 3
Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion, and real
GDP is $5 trillion.
I) What is the price level? What is the velocity of money?
II) Suppose that velocity is constant and the economy’s output of goods and services rises
by 5% each year.
a) What will happen to nominal GDP and the price level next year if the Reserve
Bank keeps the money supply constant?
b) What money supply should the Reserve Bank set next year if it wants to keep the
price level stable?
c) What money supply should the Reserve Bank set next year if it wants inflation of
10%?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 5
a) Income taxes treat nominal interest earned on savings as income even though much of the
nominal interest is simply to compensate for inflation. a. To see what this does to the
incentive to save, complete the following table for both the low-inflation and
highinflation country.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
1. When Safeway supermarkets in the United States buy strawberries from Mexico
a. it uses dollars to pay Mexican farmers.
b. it uses pesos to pay Mexican farmers.
c. it may use any currency it chooses.
d. the transaction shows up in the U.S. capital account.
2. When the value of one currency falls relative to another currency, the exchange rate for
the first currency has
a. depreciated.
b. appreciated.
c. demanded.
d. revalued.
3. Sonya, a citizen of Denmark, produces boots and shoes that she sells to department stores
in the United States. Other things the same, these sales
a. increase U.S. net exports and have no effect on Danish net exports.
b. decrease U.S. net exports and have no effect on Danish net exports.
c. increase U.S. net exports and decrease Danish net exports.
d. decrease U.S. net exports and increase Danish net exports.
5. If a country changes its corporate tax laws so that domestic firms build and manage more
firms overseas, then this country will
a. increase foreign direct investment which increases net capital outflow.
b. increase foreign direct investment which decreases net capital outflow.
c. increase foreign portfolio investment which increases net capital outflow.
d. increase foreign portfolio investment which decreases net capital outflow.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
7. A German company sells computers to a retailer in the United States. These sales by
themselves
a. have no affect on U.S. net exports and increase German net exports.
b. decrease U.S. net exports and increase German net exports.
c. increase U.S. and German net exports.
d. increase U.S. net exports and decrease German net exports.
8. When the New Paradigm (an American company) buys shares of BMW stock (a
German company) for its pension fund, U.S. net capital outflow a
increases because an American company makes a portfolio investment in
Germany.
b. declines because an American company makes a portfolio investment in Germany.
c. increases because an American company makes a direct investment in Germany.
d. declines because an American company makes a direct investment in Germany.
9. Greg, a U.S. citizen, opens an ice cream store in Bermuda. His expenditures are U.S.
a. foreign portfolio investment that increase U.S. net capital outflow.
b. foreign portfolio investment that decrease U.S. net capital outflow.
c. foreign direct investment that increase U.S. net capital outflow.
d. foreign direct investment that decrease U.S. net capital outflow.
Section B Question 1
a) Define net exports and net capital outflow. Explain how and why they are related.
b) Explain the relationship between saving, investment, and net capital outflow.
c) How would the following transactions affect U.S. exports, imports, and net exports?
i. An American art professor spends the summer touring museums in Europe. ii.
Students in Paris flock to see the latest movie from Hollywood.
d) How would the following transactions affect U.S. net capital outflow? Also, state
whether each involves direct investment or portfolio investment.
i. An American cellular phone company establishes an office in the Czech
Republic.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 3
Suppose you are having breakfast with your parents one Sunday. Your father is reading the paper
and comments on a report that the exchange rate for the ringgit has just hit its lowest value in a
decade. He reads on and then exclaims that JCB, a heavy equipment manufacturer, has reported
that sales of their earth-moving equipment have hit an all-time high. Your parents are shocked
by the report's positive view of the low value of the ringgit. They’ve recently abandoned plans to
visit Australia because of the ringgit’s low value.
a) Why might JCB and your parents have different opinions about the value of the dollar?
b) JCB imports many parts and raw materials for their manufacturing processes and they
sell many finished products abroad. If they are happy about a low ringgit, what must be
true about the ratio of JCB’s imports and exports?
c) If someone argues that a strong ringgit is "good for Malaysia" because Malaysian
residents can exchange some of their GDP for a greater amount of foreign GDP, is it true
that a strong ringgit is good for every Malaysian resident? Why?
Question 4
Suppose the price of a pair of Levi’s jeans is €40 in Spain and 400 pesos in the Philippines.
a) What is the nominal peso/euro exchange rate if purchasing-power parity holds?
b) Suppose the central bank in the Philippines is politically pressured to double the country’s
money supply, which doubles the price level in the Philippines. If purchasing-power parity
holds, what is the new peso/euro exchange rate? Did the peso appreciate or depreciate?
c) Suppose the ECB now doubles the Eurozone money supply, which doubles the price level in
the Eurozone, including, of course, Spain. If purchasing power parity holds, what is the new
value of the peso/euro exchange rate? Did the euro appreciate or depreciate?
d) Compare your answer to part (a) and part (c). What has happened to the exchange rate?
Why?
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Section A (MCQ)
1. A country has $100 million in net exports and $170 million in savings. Net capital
outflow is
a. $70 million and domestic investment is $170 million.
b. $70 million and domestic investment is $270 million.
c. $100 million and domestic investment is $70 million.
d. None of the above is correct.
2. In an open economy, the market for loanable funds equates national savings with
a. domestic investment.
b. net capital outflow.
c. the sum of national consumption and government spending.
d. the sum of domestic investment and net capital outflow.
3. Other things are the same, a higher real interest rate raises the quantity of
a. domestic investment.
b. net capital outflow.
c. loanable funds demanded.
d. loanable funds supplied.
5. When a French vineyard establishes a distribution center in the U.S., U.S. net capital
outflow
a. increases because the foreign company makes a portfolio investment in the U.S.
b. declines because the foreign company makes a portfolio investment in the U.S.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
c. increases because the foreign company makes a direct investment in capital in the U.S.
d. declines because the foreign company makes a direct investment in capital in the U.S.
7. If interest rates rose more in France than in the U.S., then other things were the same
a. U.S. citizens would buy more French bonds and French citizens would buy more U.S.
bonds.
b. U.S. citizens would buy more French bonds and French citizens would buy fewer U.S.
bonds.
c. U.S. citizens would buy fewer French bonds and French citizens would buy more U.S.
bonds.
d. U.S. citizens would buy fewer French bonds and French citizens would buy fewer U.S.
bonds.
8. How much is the saving of a country with $50 million of domestic investment and a net
capital outflow of $15 million?
a. -$35 million.
b. $35 million.
c. -$65 million.
d. $65 million.
9. Which of the following increases when the real interest rate decreases, ceteris paribus?
a. Domestic investment.
b. Net capital outflow.
c. Loanable funds supplied.
d. Loanable funds demanded.
10. The amount of dollars demanded in the market for foreign-currency exchange at a given
real exchange rate increases if
a. either U.S. imports decrease or U.S. exports increase.
b. either U.S. imports increase or U.S. exports decrease.
c. either U.S. imports or exports decrease.
d. either U.S. imports or exports increase.
Section B Question 1
Describe the supply and demand in the market for loanable funds and the market for foreign
currency exchange. How are these markets linked?
Question 2
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Why are budget deficits and trade deficits sometimes called twin deficits?
Question 3
Suppose that the government is considering an investment tax credit, which subsidizes domestic
investment. How does this policy affect national saving, domestic saving, domestic investment,
net capital outflow, the interest rate, the exchange rate, and the trade balance?
Question 4
Hong Kong has a capitalistic economic system. It was leased from China by Great Britain for
100 years. In 1997, it was returned to China, a socialist republic.
a) What do you think this event might have done to the net capital outflow of Hong Kong?
Why?
b) If the residents of Hong Kong chose Canada as a place to move some of their business
activity, what impact do you suppose this will have on the value of the Canadian interest
rate and exchange rate? Why?
c) Which Canadian industries, those engaged in importing or exporting, are likely to be
pleased with Hong Kong's investment in Canada? Why
d) What impact will Hong Kong's return to China have on the growth rate of Canada?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section A(MCQ)
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
6. Real GDP equals $20 billion and aggregate planned expenditure is $30 billion. There is an
unplanned ________ in inventories of ________ and real GDP will ________.
a. increase; $10 billion; increase
b. increase; $50 billion; decrease
c. decrease; $10 billion; increase
d. decrease; $10 billion; decrease
10. In general, an increase in autonomous expenditure that is NOT created by a change in the
price level results in a
a. rightward shift of the AD curve.
b. movement upward along the AD curve.
c. movement downward along the AD curve.
d. leftward shift of the AD curve.
Section B
Question 1
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 2
Real GDP C I G
(billions of (billions of (billions of (billions of
2009 dollars) 2009 dollars) 2009 dollars) 2009 dollars)
100 150 150 150
200 200 150 150
300 250 150 150
400 300 150 150
500 350 150 150
600 400 150 150
700 450 150 150
800 500 150 150
900 550 150 150
The above table gives information about the nation of North Hampton. There are no imports or
exports from North Hampton.
a) Find aggregate planned expenditure for each level of real GDP.
b) What is the equilibrium level of real GDP?
Question 3
An increase in the price level shifts the aggregate expenditure curve downward and results in a
movement along the aggregate demand curve. Why does an increase in the price level result in a
shift in the aggregate expenditure curve rather than a movement along it?
Question 4
How does the economy adjust so that aggregate planned expenditure equals real GDP?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section A (MCQ)
1. An aggregate supply curve depicts the relationship between
a. the price level and the quantity of nominal GDP supplied.
b. household expenditures and household income.
c. the price level and the quantity of real GDP supplied.
d. the money wage rate and the quantity of real GDP supplied.
3. The short-run aggregate supply curve is upward-sloping because in the short run the
a. money wage rate changes but the price level does not.
b. price level changes but the money wage rate does not.
c. both the money wage rate and the price level change.
d. neither the money wage rate nor the price level can change.
4. Which of the following changes does NOT shift the long-run aggregate supply curve?
a. a decrease in the labor force
b. a fall in the price level
c. a rise in number of college graduates in the labor force
d. a tax hike that reduces the capital stock
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
5. Moving along the aggregate demand curve, a decrease in the quantity of real GDP
demanded is a result of
a. an increase in the price level.
b. a decrease in the price level.
c. an increase in income.
d. a decrease in income.
9. Suppose that the money prices of raw materials increase so that short-run aggregate
supply decreases. If the Federal Reserve does not respond, the higher money price of
raw materials will
I. repeatedly shift the aggregate demand curve rightward and raise the price level.
II. shift the aggregate demand curve rightward and the aggregate supply curve leftward,
raising prices.
III. result initially in lower employment and a higher price level.
a. I only
b. both I and II
c. both II and III
d. III only
10. The wealth effect, interest rate effect, and exchange rate effect are all explanations for
a. the slope of short-run aggregate supply.
b. the slope of long-run aggregate supply.
c. the slope of the aggregate demand curve.
d. everything that makes the aggregate demand curve shift.
Section B
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 1
Suppose the aggregate demand and short-run aggregate supply schedules for an economy whose
natural output equals $2,700 are given in the table.
a) Draw the aggregate demand, short-run aggregate supply, and long-run aggregate supply
curves.
b) State the short-run equilibrium level of real GDP and the price level.
c) Characterize the current economic situation. Is there an inflationary or a recessionary
gap? If so, how large is it?
d) Explain how the economy will achieve its long-run equilibrium with and without
government intervention.
Question 2
Suppose the Central Bank expands the money supply, but because the public expects this action,
it simultaneously raises its expectation of the price level. What will happen to output and the
price level in the short run? Compare this result to the outcome of the Central Bank expanded the
money supply, but the public didn’t change its expectation of the price level.
Question 3
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Gas prices and petrol hit an all-time high and oil neared record levels after the US said it had
discussed the prospect of an embargo on exports from Russia before pushback from Germany
eased the market tension.
The price of gas for delivery in the UK in April soared to 800p per therm at one point, up from
460p on Friday and 20 times the price of the same contract a year ago, before the autumn energy
price crunch and war in Ukraine hit.
European benchmark gas prices jumped by 79% to as high as €345 per megawatt-hour, while
Brent crude oil soared by more than 10% in early trading to $139 per barrel, a 14-year high and
close to the record of $147.50 set in July 2008.
Markets were responding to comments by the US Secretary of State, Andrew Blinken, who
referred to “very active discussions” with allies about escalating sanctions against the Kremlin
by banning the import of Russian oil and natural gas.
As commodity prices surged, the average cost of a litre of petrol at UK forecourts reached a new
record of 155.62p, according to the data firm Experian Catalist, while diesel was also at an
alltime high, at 161.28p.
Analysts at Bank of America said cutting off oil exports by Russia, the world’s second largest
supplier at 5m barrels a day, could send oil shooting to $200 a barrel.
Prices only eased after Germany’s new chancellor, Olaf Scholz, appeared to pour cold water on
the prospect of a coordinated transatlantic embargo on Russian oil and gas.
“Europe has deliberately exempted energy supplies from Russia from sanctions,” he said.
“Supplying Europe with energy for heat generation, mobility, electricity supply, and industry
cannot be secured in any other way at the moment. It is therefore of essential importance for the
provision of public services and the daily lives of our citizens.”
Europe sources about 40% of gas imports and about 27% of oil imports from Russia, but
Germany is more reliant than any other major economy on the continent on Kremlin-controlled
supplies.
After Scholz spoke, the UK benchmark gas price dropped back from 800p per therm to 500p,
still in record territory, while oil pared back some of its gains but was still up 4% at $123.
On the stock markets, the FTSE100 closed down 0.4% at 6959, while France’s Cac40 shed 1.3%
and Germany’s Dax was the worst affected, ending the day just under 2% lower. Panic on
trading floors sent safe havens sharply higher, with gold hitting as much as $2,000.86, its highest
since mid-2020. While Scholz’s comments calmed markets somewhat, the increasing
seriousness with which a fossil fuel embargo is being discussed is set to keep commodity prices
high.
The Bank of America chief economist Ethan Harris said cutting off most of Russia’s energy
exports would be a “major shock to global markets”, and the loss of Russia’s 5m barrels could
see oil prices double to $200 a barrel.
Rising commodity prices will only add to the global inflationary pulse, with US consumer price
data this week expected to show annual growth at a stratospheric 7.9%, and the core measure at
6.4%.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
It leaves a tough decision for the European Central Bank when it meets this week against a
backdrop of a sharply falling euro. The nightmare scenario of stagflation – where inflation
combines with stagnating growth – looms for the world economy.
“Given the potential for stagflation is very real, the ECB is likely to maintain maximum
flexibility with its [quantitative easing] programme at €20bn through the second quarter and
potentially beyond, thus effectively pushing out the timing of rate hikes,” said Tapas Strickland,
an economist at NAB. “Higher inflation forecasts, though, mean rate hikes will be needed on the
horizon.”
(Extracted from theguardian. com;7/3/22)
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
Section A(MCQ)
1. All of the following are part of fiscal policy EXCEPT A) setting tax rates.
B) setting government spending.
C) choosing the size of the government deficit.
D) controlling the money supply.
2. A budget surplus occurs when the government A) spending exceeds tax revenues.
B) tax revenues exceed spending.
C) tax revenues equals spending.
D) tax revenues equal Social Security expenditures.
3. When the economy is hit by spending fluctuations, the government can try to
minimize the effects by
A) changing government expenditures on goods.
B) changing taxes.
C) changing government expenditures on services.
D) all of the above
7. According to the liquidity preference theory, an increase in the overall price level
of 10 percent
a. increases the equilibrium interest rate, which in turn decreases the quantity of
goods and services demanded.
b. decreases the equilibrium interest rate, which in turn increases the quantity of
goods and services demanded.
c. increases the quantity of money supplied by 10 percent, leaving the interest rate
and the quantity of goods and services demanded unchanged.
ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
d. decreases the quantity of money demanded by 10 percent, leaving the interest rate
and the quantity of goods and services demanded unchanged.
8. If expected inflation is constant and the nominal interest rate increases by 3.5
percentage points, then the real interest rate
a. increases by 3.5 percentage points.
b. increases, but by less than 3.5 percentage points.
c. decreases, but by less than 3.5 percentage points.
d. decreases by 3.5 percentage points.
9. When the interest rate increases, the opportunity cost of holding money
a. increases, so the quantity of money demanded increases.
b. increases, so the quantity of money demanded decreases.
c. decreases, so the quantity of money demanded increases.
d. decreases, so the quantity of money demanded decreases.
Section B Question
1
a) Distinguish between a multiplier effect and a crowding-out effect.
b) The economy is in recession. Shifting the AD curve rightward by $200b would end
the recession.
i) If MPC = 0.8 and there is no crowding out, how much should the government
increase its spending (G) to end the recession?
ii) If there is crowding out of $20b, how much should the government increase its
spending to end the recession?
Question 2
a) Explain the reasons why the aggregate demand (AD) curve slopes downward.
b) What are fiscal and monetary policies? Do they have an immediate effect on the
AD curve or the short-run aggregate supply (SRAS) curve?
Question 3
Suppose you are watching the news on television during a general election campaign.
The opening report is a story about today's announcement that the Bank of England
has raised interest rates by a quarter of a percent today to head off future inflation.
The report then moves to an interview with a politician from the governing party with
a marginal constituency in an industrial area. She says, "The Consumer Price Index
has not increased, yet the Bank of England is restricting growth in the economy,
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
supposedly to fight inflation. My constituents will want to know why they are going
to have to pay more for their mortgages, and why their jobs are being put at risk, and I
don't have a good answer. I think this is an outrage!"
a) What interest rate did the Bank of England raise?
b) State the Bank of England’s policy in terms of the money supply.
c) Why might the Bank of England raise interest rates before the CPI starts to rise?
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Section A(MCQ)
3. In the long run, which of the following depends primarily on the growth rate of
the money supply?
a. the natural rate of unemployment and the inflation rate
b. the natural rate of unemployment but not the inflation rate
c. the inflation rate but not the natural rate of unemployment
d. neither the natural rate of unemployment nor the inflation rate
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
7. As the aggregate demand curve shifts leftward along a given aggregate supply
curve,
a. unemployment and inflation are higher.
b. unemployment and inflation are lower.
c. unemployment is higher and inflation is lower.
d. unemployment is lower and inflation is higher.
10. Which of the following is correct according to the long-run Phillips curve?
a. No government policy, including changes in monetary growth, can change the
natural rate of unemployment.
b. Changes in the money supply growth rate are the only government policy that can
change the natural rate of unemployment.
c. Monetary policy cannot change the natural rate of unemployment, but other
government policies can.
d. Monetary policy and other government policies can both change the natural rate of
unemployment.
Section B Question 1
a) Draw the short-run tradeoff between inflation and unemployment. How might the
Central Bank move the economy from one point on this curve to another?
b) Draw the long-run tradeoff between inflation and unemployment. Explain how
the short-run and long-run tradeoffs are related.
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ECO102/ECO157 Principles of Macroeconomics/Macroeconomics 1 –Tutorial questions
Question 2
Suppose a drought destroys farm crops and drives up the price of food. What is the effect
on the short-run tradeoff between inflation and unemployment?
Question 3
Use the following equation and information to answer the questions given below.
Question 4
The Fed Chairman is convinced that the economy is in danger of recession and
decides to take action. He implements an expansionary monetary policy to combat
the recession. Explain the unemployment and inflation outcomes for the economy if
workers and firms form their expectations using
i) rational expectations.
ii) adaptive expectations.
Use a short-run and long-run Phillips curve to illustrate your answer.
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