Question 1 When using GDP growth as a measure of change in welfare we do not need to adjust for: Seer Answer © Changes in population ~/ © Changes in product quality ./ © Environmental externalities (= Value added by intermediate | producers 7 © Changes in hours worked 7 Question 2 Which of the following is not considered a goal of macroeconomic policy? Answer © Low unemployment 8 T a in | {©_Low interest rates | PSG © Sustainable growth in GDP Ms © Price stability Recast © Balancing present and future consumption qs aal ] Question 3 Doo A/e? =lo» ps Y28ml Hat [iseeeeie| t peemae If taxation is $200 million, GDP is $800 million, consumption is $300 million, and government expenditure is $100 million, then Answer oO Public saving is $100 million, total saving rau, x 7 © Public saving is $200 million, private saving is $400 million. © © Public saving is $100 million, private saving is $300 million. x © Public saving is -$100 million, private saving is $400 million. © We need more ini le to tell. 7 Question 4 $209 in Vanes S A Sen's = RS+ psQues! If prices in the economy are falling by 5% a year, the nominal interest rate is 10%, the marginal tax rate is 10% and rate of GDP growth is 5% then the real interest rate is: 15%. — © 10%. / © 5%, t © 0%. © 10% tion 5 There are 10.2 million employed in an economy with a total civilian population of 15.4 million. If 4.2 million people are out of the labour force from the working age population, what is the unemployment rate? Answer © 7.44 percent © 8.23 percent_ 8.93 percent © 21.43 percent © 27.5 percent ce eo! adn Pre = UTES Question 6 209K ISP F + G9 Kher ee 2 Qyjox2s0O .325, Sox !OP = 500% = $7504 Year! 2°%2 Svo = $ © XJooo sexes < $7907 In year 1 Australia produces 200 cars at $2500 each and 50 computers at $1000 each. In year 2 Australia produces 210 cars at $3006-each and 50 computers at $81 each. What is the growth in real GDP between year 1 and year 27/7" apo f SOX/90% Answer era > 5/po © -1% approximately = © _ 2% approximately e pe? 4.5% approximately eo oge © 12% approximately \ C/ 22% approximately a 5 coo = Grew —~sygyer0Question 7 The following table provides information about production at the XYZ- TV Company. Number of TVs Marginal Value of workers Produced Product Marginal Product 0 = = d 35 $35,000 _; 2 33 $33,000 ¥_| 3 31 $31,000 4 29 $29,000 5 20. $27,000 | How many workers will the XYZ-TV Company hire if the going wage for TV production workers is $32,000? Answer oy ©2 i 7O 1 5 3 a sas c4 —_ o 8 ! ip etn, lo \o Question 8 7 ° \p v2 Imagine that a new technology allows firms to costlessly improve the i productivity of their existing machines. What effect will this change Q Q have on employment and wages, other things being equal? Answer wo wo NE > A\. © Employment will rise, wages will rise. ° © Employment will rise, wages will fall. 7,\~~¢ Employment will fall, wages will rise. po y 7 2S. ©) p© Employment wil fal, wages wil fll, Employment wil fall but wages may seo fall DY oO « weston A aS bebo fing Data for an economy shows thatthe unemployment rate i 6X, the patclgation rate i 60%, and 20 ilfon peopl 1S year or older thatthe kar foe Hew mn peop ta troepeyt as cose cone a, © d are Jo men 7 O6misen s x Re ka mition 1.8 mil baal 4 ae UTE Fe pera ena pene ag pre fl Al other things berg equal the labour force participation rates most answer areas 2mion poe, > Seturtutel chaege 7 Thereistechnolgial progress. [ef _Mamninorewrsveasene Economic oct isexpectedtoslow. {> 9 et ate Govementeisere sts vreretueX > 4 P_R Ae (© None ofthe above a ae ‘The sland of Freedonia has two residents, tan and Fran. In year one Freedonia produces goods worth $500, and consumption is vided evenly between Stan ang Fran, s0 that exch consumes $250 worth af good In yer two, the eal value of production rises to ‘$600, but this time Fran receives $500 worth of goods and Sten recaivas only $100 worth of goods. What can we say about the GOP ‘and collective welfare of Freedonia in year two relative to year one? nk art ye (7 Neither GOP nor wettare na en fen Sten wo be CoP hasrsenandwetarehas stayed He same _ GoPhestaya the same and wetarehas son X 5 |e 6oPhasrsen bt we cannot besure what has appenedtowellre ae J 4 ‘Question 12 Dv ich the ollonng ts mas Hl to be an econo cst ination? pi (consumers ringforeard purchases in ore to beat antated pce iss ¢_Gresretor dco olen pueden lao pres Tiere mote deci (© reonesredirted aay Fom were toerornlncone d ‘There sno cost associated with infton =Question 13 “The consumer price index (CP) may overestimate the trenton rate because ae doesnot tae int account producers inftion k tq __Theunderying consumption baskot is araly altored overtime, g > sony eases ona aur basis E _Wincdudes ome imported tems Moth above cvestion bee eee Assn atthe consumption basket on which usa's CPs calexiatd cos Grores 3rd eth caress. The wii sancinawth enh bn eapenaureomgnert SFO re Teac re te fon nes 5, eal care prices hove risen by isan the pre of electro goad as fale 0%, Te nang fod pies must be fnower OF b+ O-9410 — OD 0 VY. a u ou eae “ane? AK ayy \ Rete = a a. + 9-5 re coum OF a. Fwy trary ot Gow O5x 12 5 co aN ° Be ce ees ae cueston 35, ‘Apostle xtanaton or Ausra’ s deg leet household segs Ailing stock market =) } Increasing government budget surpluses aT fe nrriot ¢ Metta seers tion abil ten bennett gel © meweveene acess ae a 7 Werease the real wage and reduce employment (_Redice te real wage and reece employment crease te real wage and increase employment h keep everything the same, eb Question 17 Inventory investment wil tend to contribute mare ta the GOP growth rate answer‘Question 18 ‘As frm expand production. Q firms edie production. XQ consumers inerese spending (_Aconsers decree sing None ofthe stove Which ofthe follwing a reat to sviddiatas? Ip pecans eee a. xe c ferro pina cost. lo ax) ey =z Question 19 Question 20 | __IBiRe Hore people ito higher income tax brackets, c ‘Suppose that you estimated Okun’s low and obtained the relation: (-¥ as a 2S Fora gen nominalinteestrate, the Fisher eect implis that w Ti eae Allo (a, (0) ad ‘ a gith OM yy ZB at eet 8-09 memes cate inemretton fs Output 3p i 8 while the unemployment rate is 2% ‘An output gap of 1% below potential outputs associated with an increase in unemployment of 0.5% above the natural rate B ‘of unemployment. ad ‘An output gap of 1% below potential output is associated with an increase in unemployment of 0.2% above the natura ate ‘of unemployment. “To keep unemployment a the natural rate, output should grow a 2% above the potential output yell unemsloyment cannot be explained bythe change in output gap. (Ae 2 paamineh 1 flaben ‘The real intrest ate sequal tothe inatlon rte 9 a (8) ( ‘Te rominal interest rate shouldbe kept constant fora constant rate of real return.“ "Nominal and ral interest rates should move together over time to protect lenders ‘The nominal interest rate shouldbe mutiplod bythe ination rate for contracts.Sa- C4 (eo) ¥ -2§0+CI-0-18)* 1800 The key assumption of the basic Keynesian model is that in the short run, firms: newer oa cyt) ( decrees oth oupen tess han 5%. @? (7 Increase only if the coupon rate is greater than 8%. e\ (b) Coyre Pdemodk yh? geasune ‘An increase in the overnight cash rate by the Reserve Bank erp Ancwer causes both an increase in the supply of 90-day bils and a decrease in demand for 90-day bills, causing the price of 80-day bil to rise. © causes both an increase inthe supply of 90-day bils and a decrease in demand for 90-day bl causing the of 90-day bills to fall. © causes both 2 decrease in the supply of 80-day bills and an increase in demand for 90-day bl causing the price of @0-day bils tose, —== CP © causes both a decrease in the supply of 80-day bils and an increase in demand for 99-day bills, causing the price of 0-day bil to fal s If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y 20,000, and Potential output equals 36,000, what real interest rate must the Reserve Bank set to bring the economy {0 full employment? Answer 7 0.02 0.03 ct 3 glooe = (Sous Hob YoBeyo29 0.05 Kona g OY -20,2° 9 Pea ee: as i = 15,002 FOR Y= 2497 — erat ao Yoo ey eons ee y(cot) + tone 20 Ba GE poss = 22,027" +20. Fiscal policy is NOT often used as a stabilisation tool. However, it does have important roles in the economy. Three of these roles are: Answer rato cone dort sovoyactangs. ann ee) ‘managing collection of taxes, public health and antiterrorism policy y,I79 ‘Suppose the overnight cash rate is below the Reserve Bank's target, The Reserve Bank should respond by Answer (increasing its purchase of financial assets, putting the exchange settlement accounts into a deficit position that contracts lending on the overnight market, CC increasing its purchase of financial assets, puiting the exchange settlement accounts into a surplus position that expands lending on the overnight market, (© decreasing its purchase of financial assets, putting the exchange settlement accounts into a deficit position that contracts lending on the overnight market. © decreasing its purchase of financial assets, putting the exchange settlement accounts into a surplus position that expands lending on the overnight market. sul bots peletS Nye ba bo 4 7 me a cre‘The self-correcting tendency of the economy means that rising inflation eventually eliminates Answer (© expansionary gaps. | “Fvecessionary gaps. © exogenous spending. fl 313 © induced spending. ‘o achieve long-run equilibrium in an economy with a recessionary gap, output will ___and the inflation rate will Answer © increase; increase i lnerase aacrene 7 inerense not change) ries Vy © decrease; decrease ° fcuate Policymakers attempt to offseta favourable inflation shock with monetary ___ the resulting long-run equilibrium will be at ___ inflation rate compared with allowing the self-correcting mechanism to return the economy to potential output. Answer ad . 4 tightening; a higher fe \ f4 37 ( \) 0 tightening: a lower © easing; a lower gh Qo Question 4 d + Disinflation is, Answer © asubstantial increase in the rate of inflation. © asubstantial decrease in the rate of inflation. 9324© azero inflation. fuestion 5 feal GDP per person in Northland is $30,000, while real GDP in Southland is $10,000. However, Northland’ real GDP per person is growing at 1 % per year and Southland’s is growing at 3% per year. If these growth rates persist indefinitely, then ‘Answer © Northland's real GDP per person will decline until it equals Southland’. — Northland's real GDP per person will always be greater than Southland’s. K Xx © _Southland’s rel GDP per person will always be less than Northland’, Southland’s re 's real GDP per person will eventually be greater than} Nowland sy/ ——— n {) 4-Jo7ate Question 6 Growth of real GDP per person is totally determined by the growth of average Answer [(©/_labour productivity and the proportion of the population employed. P4- 340 © labour productivity and the proportion of the population in the labour force. © labour force participation and the share of income going to capital. labour force participation and the share of the population employed S Question 7 ;SSume that the share of population employed in all countries is 50 per cent. Based on the information below, which country has the highest real GDP per capita? Country Population (millions) [Average Labour Productivity] () A 00 2,000 HF | Abele B 10,000 Ye srooe c 25,000 i2, $00 D 50,000 2sroe? E 41S 60,000 3eyo0e Answer Country A a © Country B © Country c Country D °~)All but one of the following statements describes how the political and legal environment encourages productivity. Which is the exception? Answer © Well-defined property rights encourage production and saving. © The free and open exchange of ideas spreads the development of new technologies. © _ Pee changes in markets provide suppliers with incentives to supply goods to markets. uw “Bay rates deterzaine by a guvertubental planalig agency provide workers with the @ incentive to work hard. Question 9 Which of the following factors would not be useful when a policymaker aims to achieve a higher standard of living for her country in the long run? Answer © Using expansionary fiscal and! monetary policy to raise the level of demand in thel ven 9 economy. Raising the number of years of schooling and the level of skills of workers = © Encouraging people to save more, leading to increased capital accumulation, © _ Spending more on research and development (R&D) Question 10 The following table gives you information regarding two economies Shrek Republic and Farquaad Republic. Assume the participation rate is constant and equal to 100% in both economies. ‘Shrek Republic [Farquaad Republic] 2 15% 3% ‘opulation growth rate irowth rate of Productivit jrowth rate of GDP. eae] ‘The growth in the standard of living of Farquaad Republic will be than Shrek Republic because Answer © better, because its growth rate of per-capita output is higher D © worse, because its growth rate of output is lower © worse, because its growth rate of population is lower { Question 11OI aS Abestion 13) joo Ce Which of the following statements provides the most accurate account of the role of monetary policy in Australia? Answer K Monetary policy in Australia attempted very hard to prevent the recession in the early 1990s. The RBA has an explicit policy objective of avoiding a recession. © is ewer peereeee is @ 5 jaan ava een | X © __The RBA’S monetary policy can cause a recessio, bur ry ? ‘The RBA cares as much about unemployment as it does about inflation, when setting monetary policy. 9 9 ‘Suppose that the saving rate for an economy is 0.8; the level of per capita capital stock is 100; the rate of depreciation is 0.03 and the rate of population growth is 0.02, What is the level of per capita income if this economy is in steady state? Answer (RY key = 04 - cin}, = 625 Joo = O8y-(ev3r0-02) 5 jog = OF ~Cees ox2}J0o ee [99 t ) gz 08 Coosea)ic Sy joo © 7995 Fy sgyowa) \ joo =o FY -C# oby-° a Consider the country of Solow, which is described by the Solow-Swan model. Let the saving rate ‘theta’ = 0.8; let the population growth rate n= 0.05; let the rate of depreciation d= 0.08. 1f per capita income y= 100 and the per capita stock of capital k = 800, then Answer Oy © replacement investment is 60, saving is 80 and k will decrease towards the steady state percapita capital stock, cue replacement investment is 80, saving is 80 and kis at the steady state per capita capital stoc ee © _ replacement investment is 80, saving is 60 and k will decrease towards the steady state per capita capital stock. replacement investment is 80, saving is 60 and k will increase towards the steady state ~ Per capita capital stock. uestion 14 Let the saving rate .025; let the rate of depreciation i=0.025. f per capita income y= 100, then the steady state per capita capital stock in the Solow- ‘Swan model is AnswerAVC) [= 1600 ieee Poe) 800 wank 80 Sroy if Toe eee /Question eas to the Solow-Swan model, for a country that is initially in steady state, ifthe technology parameter A (the index of secondary factors) rises, then Answer © the per capita capital stock initially decreases, then returns to its initial steady state level. © the per capita capital stock decreases and the country moves to a new lower steady state level of per capita income. © the per capita capital stock initially increases, then returns to its initial steady state level. © _ the per capita capital stock increases and the country moves to a new higher steady state \| @R (______level of per capita income. 5 ® S/ ‘uppose the country of ‘Neo’ is in steady state in the Solow-Swan growth model and decides that its growth rate of per capita income is too low. In response, it decides to raise its savings rate. This has the effect of Answer n = = : eo -( temporarily raising per capita income growth as the economy moves to a new steady) = } « tate, but no long-run effect on per capita income growth. © _ raising per capita income growth in both the near term and in the new steady state. wo raising steady state per capit on per capita income growth. 5 © taises the replacement investment required for any given level of per capita capital stock. EN at / auestion 12 / C come growth in the long run but has no immediate effect _| If population growth is minus two per cent and the depreciation rate of capital is five per cent, then by how much would the capital stock have to grow just to satisfy the need for replacement investment? AnswerConsider the country of ‘Swan’, which is described by the Solow-Swan model. _Let the saving rate q = 0.8; let the population growth rate n = 0.05; let the rate of depreciation d= 0.05. Ifper capita income y= 100 and the per capita stock of capital k= 600, then Answer b00 = gO=(0:1)s12° © Dk (change in k) = 0 and kis at the steady state per capita capital stock. & Dk (change in k) = 20 and kis below the steady state per capita capi © Dk (change in k) = -20 and kis above the steady state per capita capital stock. © Dk (change in k) = -20 and kis below the steady state per capita capital stock AT trS estion 19 Arum n in the Solow-Swan model, erie Answer ; XS © anincrease in population growth rate increases the economy's steady state of capltal per worker. © adecrease in population growth rate decreases the economy's steady state of capital per worker. © output growth is completely accounted for by the sum of growth in capital and labour. oe an increase in population growth has a similar effect as an increase in the depreciation Consider the Solow-Swan model with zero population growth and zero technological change. If an earthquake destroys a large portion of a country's capital stock but the saving rate and the rate of depreciation are unchanged, the model predicts that output will Answer cease to grow. © grow but the new steady state will be at a higher output level than before, Oy grow but the new steady state will be at a lower output level than before. | grow and the new steady stateQ.1 The following table provides the nominal exchange rates for the Australian dolla. ‘Country Foreign currency per Australian dollar United States dolar 0.7689 jpanese yen 2.2400 Based on this data, the nominal exchange rate equals ___yen per US dollar, or equivalently, US dollars per yen. Answer © 0.0093; 106.9580 © 0.7689; 1.3006 1.3008; 0.7689 WY ) Q.2 If the nominal exchange rate is 1.730 Swiss francs per US dollar, and 1.053 Brazilian reals per Swiss franc, then there are__ Brazilian reals per US dollar. Answer LUSH buys $1730 francs 2) 1.643 ee g) 0.609 f trance bys $1053 Yeats Toss me Gant c) (Eee Cy Cc a Go1-134 053 “122, Ears | ub 7 4-73 Fane Q.3 A decrease in the nominal exchange rate, 9, defined as the number of units of the foreign currency that the domestic currency will buy, indicates that the domestic currency has. relative to the foreign currency. Answer Ova i become overvalued (© become undervalued sume that the price levels in two countries are constant. In this situation, we know that: a deroht Pate anyeopnt/O) Bioan pe S teyoupat(C) ) iE es) cP ther the real north | exchange rate can chan eee te (~ either the real nor the nominal exchange rate can change. ae a ra x Foeryn Ome ¢ the real exchange rate can change, while the nominal exchange rhe is constant. e& 6, 7K ay a a - “SG (te rear and nominal ex exchange rate must move c together, changing by the same percentage. 4 fu) @ Q_5 Between 1973 and 1999, annual inflation in developing nations that export mainly manufactured goods averaged 23 percent, compared with an average 59 percent in countries that mainly export raw materials, Other things being ‘equal, the PPP theory would predict that, in the long run, the currencies of the countries exporting raw materials should have Answer © been approximately stable relative to the currencies of countries exporting manufactured goods. Papper ote cureces ofc xing mandbewe gots. y (6 epredeted retve tothe cence of ousies pot Yo | Tad npc reateelip othe areca cl courte pate anfacred o rer={ (PMI Ke = ator ~LP doweibC € Paom = Pfer = 23rfo~ {SteQ6 Tighter monetary policy in Australia_net exports through a Australian dollar Answer Ro ®M VINX Increases; stronger } © increases; weaker © does not change; stronger ve Q7 Suppose policy makers want to increase output (Y) and increase net exports (NX). Which of the following policies would most likely achieve this? Answer an increase in government spending > Vacca! aieal Geersciene) & an i in government spending and an increase in the real exchange rate _) KR (© aninctease in the real exchange rate { a } .8 Which ofthe following events will cause the smallest change in the real oops rate? aX) answer cite doa 2% nonin depdston anda ncreaseithetragn reste, ACP Ge we = V2 6%incease inthe domestic price lve, P and a 6% reduction in P Tee sats pF A ; vee Ce {20% renin depreciation and 26% reductoninP') a 3% nominal appreciation 9 In an open economy under flexible exchange rates, expansionary monetary policy will always cause: Answer © arise in output. ~ atop inthe interest rate, ae a fallin the exchange rate, : (by allofthe above Q.10 Holding all else constant, a decrease in the preferences of Australians for Japanese goods will___ the supply of dollars in the foreign exchange market and ___ the equilibrium Japanese yen/Australian dollar exchange rate. answer Increase; increase 7, IS © Increase: decrease J wae not change; not change (5s ) WI [F_asstcses reese] increase F_seaesseirese] Q.11 Consider the following balance of payments data for Australia (in $ million). Exports of Goods and Services 30000 Imports of Goods and Services Net Income -3500 Net Current Transfers 1200 Net Capital Transfers o Net Acquisition/Disposal of non-produced, non-financial assets 0 Foreign Investment in Australia 43000Foreign Investment Abroad iE 39300 Based on the information in the table, Australia's current account balance is Answer c $0. ft -$1000 milion, iN © $3700 milion U) -$3700 million. Q.12 Holding constant risk and the real returns available abroad, higher domestic real interest rates. capital inflows, capital outflows and net capital inflows. Answer increase; increas increase increase; increase; decrease © decrease; decrease; decrease Q.13 At each value of the domestic interest rate, decreases in the riskiness of domestic assets capital inflows, capital outflows and net capital inflows. Answer (> Increase; increase; increase increase; increase; decrease Cc ~ increase; decrease; increas decrease; decrease; decrease a Inan open economy, a decrease in the perceived riskiness of domestic assets by foreigners, arising, for example, {rosy an increase in politcal stability, leads to a(n) in the equilibrium domestic real interest rates and to quantity of domestic investment. n peer 178 te Answer n 3 — (vnme yer) ie fer aa ao (© reese an reease > increase; a decrease 7 0) — no change | 7 | ae been qa race dort tag high; attract ~ o ) 9 417. ae (Dat v Lips ees ~ Tow, discour Spel = 2 (aes ose | ns *e\ .Q.16 The demand for francs in the foreign exchange market equals 11,000 — 25,000e and the supply of francs in the foreign exchange market equals 9,000 + 25,0002, where @ is the nominal exchange rate expressed in Australian dollars per franc. The fundamental value of the francis francs per Australian dollar or___Australian dollars per franc. Answerfee aes 2.00; 0.0008 Demerol inte. freign untray wow i : 0.04; 25 (6) cc 02:5 217 The ausvaton dota xchange rt, here 2 the nominal exchange rae expresed a pane yon per Austin dolar wi epee when anne a fi ngs 4 real GDP in Australia decreases. Thi Japan decreases. a the Reserve Bank of Australia tightens monetary policy. Australian consumers decrease their preference for Japanese cars. ~ 2.18 in 1999, Brazian bonds were paying a monthly interest rate of:{6.Bper cent while the annual interest ate rom US bonds were only 3 per cent corresponding toa monthly interest rate of 0 percent. One US dollar was worth 99,010 cruzers in July 1993 but was worth 189.999 cruzeros in August 1883. Note thal the name ofthe Bazilan currency atthe ime was ‘ruzelto' the currency is now called the real, Based on ths observation, we can conclude that fora US resident, Answer US dollor ap pecan HG @ investing in Brazilian bonds rather than US bonds makes a good economic sense as it offers a much higher rate of return. i” if cruzeiro continues depreciating against the US dollar at such a rate, she may well decide to keep her funds out of Brazil investing in US bonds always makes a better economic sense even if the Brazilian currency is fixed against the US dollar. if cruzeiro continues depreciating against the US dollar at such a rate, the return from US bonds will surely exceed the return from Brazillian bonds. Q.19 In the mid 1980s, Australian nominal interest rates were high at an average of 15 percent per annum. Major Australian banks advised farmers and investors to borrow in foreign currency (denominated in Japanese yen, Deutsch marks etc.) terms at much lower foreign interest rates and to use the loans to invest in properties and farm businesses in Australia. However, those who took out the loans denominated in foreign currencies found their debts (in Australian dollar terms) escalating a few years later and were made worse off. Which of the following accounts is the most renarrated depaccbon @ Answer They failed to take into consideration that a recession could lead to a rise in the real value of debts, They failed to know that the Australian dollar could sharply depreciate, which would offset any gains from the low foreign interest rates. They failed to know that the real interest rates are the same across countries although nominal interest rates were different. © They failed to note that borrowing in foreign currency is always more expensive than borrowing domestically 2.20 Which of the following is incorrect as an account of the current account and the balance of payments? Answer a 8) ‘A current account deficit should not be a matter for concer if'a nation has a flexible exchange rate system, but will be @ concer for nations with a fixed exchange rate system. ‘An open economy with a flexible exchange rate system such as Australia does not have to worry about the balance of payments equilibrium. 19s ‘An increase in a nation’s current account deficit may help the nation produce more output in the future. Fora country with a fixed exchange rate system, the balance of payments may not be in equilibrium.QUIZ1 1. Given the following data for an economy, compute the value of GDP: ‘Consumption expenditures ‘(i007 ] © Imports 600 M ‘Government purchases G Construction of new homes and flats Coy ae Sales of existing homes and flats > 600 ‘Exports 500 E ‘Government payments (o retirees 200 ; Household purchases of durable goods 300 wd fy ‘Beginning-of-year inventories 500 g End-of-year inventories 600 i ii do Business fixed investment G00) L t 2400 anlude b.2500- e. e Sao ooo + soor3ee +(er0rss0) #729 uy e. 2800 <— 2 2508 [Hint: GDP = C +1 + G + NX (C: 1000, I: 500+300+(600-500), G: 700, N 100)] 2. The CPI indexation of wages and salaries is most likely to a. make workers’ standard of living unchanged.” ] b. make workers’ standard of living worse off. cc. make workers’ real wages fall. s and the economy must be above steady ‘°° state] 4, Starting from a long-run equilibrium, a reduction in potential output leads to ap in the short run and to __ rates of inflation in the long run. a.an expansionary; higher b.an expansionary; lower c. no output; higher d.a recessionary; higher [Hint; Draw this on the AD-AS diagram, start from long run equilibrium and then shift LRAS to the left, SRAS will then adjust until you reach the new long run equilibrium} 5, According to the Solow-Swan model, if the savings rate rises, then a. steady state per capita income falls. b. steady state per capita income rises. c. steady state per capita income is unaffected. d. per capita income falls. [Hint: Draw this on the diagram. There is a new higher steady state, and per capita income rises until that steady state is reached] QUIZ5 1. The Australian dollar exchange rate, e, where € is the nominal exchange rate expressed as Japanese yen per Australian dollar, will appreciate when a. real GDP in Australia decreases. \ \ . real GDP in Japan decreases. c. the Reserve Bank of Australia eases monetary policy. 4. Australian consumers increase their preference for Japanese cars.[Hint: Australians demand less imports from Japan and hence the Yen depreciates relative to the Australian dollar} 2. Assume that the price levels in two countries are constant. In t know that: fa. neither the real nor the nominal exchange rate can change. b. the real exchange rate can change, while the nominal exchange rate is constant. ¢. the nominal exchange rate can change, while the real exchange rate is constant 4d.the real and nominal exchange rate must move together, changing by the same percentage. [Hint: Use equation 16.1 on page 456, if P and P’ are fixed, then the real and nominal exchange rates move together] 3. In an open economy, a decrease in the perceived riskiness of domestic assets by foreigners, arising, for example, from an increase in political stability, leads to a(n) in the equilibrium domestic real interest rates and to_ in the quantity of domestic investment. a. increase; an increase b. increase; a decrease c. increase; no change . decrease; an increase [Hint: opposite to the diagram on 495. And a decrease in domestic interest rates will lead to an increase in domestic investment as there is an inverse relationship] 4. Relative to the case of a closed economy, monetary policy is ‘economy with a flexible exchange rate in an open a. less effective *b. more effective ~ c. equally effective d. not effective at all (Hi ‘ee page 467] 5. A country with a low saving rate tends to have a domestic real interest rate that will capital inflows. a. high; attract | ~ \ \ ¢- high; not affect ] 4. low; attract (ea [Hint: The country’s savings may not be high enough to fund investment, the extra funds are derived from overseas. And as the savings rate is low, there is competition for investment which drives the interest rates higher.