MACQUARIE UNIVERSITY

MACROECONOMIC ANALYSIS ECON204 Mid-semester Test 13 September, 2010, 6-8pm Version 3

Last name: First name: Student ID: (Officially enrolled) lecture day and time: ____________________ (Officially enrolled) tutorial day and time: _____________________ Instructions: This is a closed book test. The test consists of two parts: Part A and Part B. Part A includes 25 multiple choice questions each worth 2 points. Part B includes 2 short answer questions each worth 25 points. Please write your answers to questions in part B in the space provided in your exam paper. Read the whole question before you start answering. You should answer all questions in the test which is worth 100 points in total. Non-programmable calculators are allowed. You have 1h. 40 min. to complete the test. You are not allowed to leave until the exam is ended. All mobile phones should be switched off. Put you name and student number on the exam paper and the multiple choice answer sheet.

Good luck!

Part A There are 25 questions in this section each worth 1point .

1) Which of the following represents the medium-run effects of a reduction in the price of oil? A) no change in the level of output. B) no change in the price level. C) an increase in the interest rate. D) all of the above. E) none of the above. 2) Use the IS-LM model to answer this question. Suppose there is a simultaneous RBA sale of bonds and increase in government spending. We know with certainty that this combination of policies must cause: A) an increase in the interest rate (i). B) a reduction in Y. C) a reduction in i. D) an increase in output (Y). 3) Suppose the Phillips curve is represented by the following equation: with subscript((t)) with subscript((t-1)) = 20 - 2ut. Given this information, which of the following is most likely to occur if the actual unemployment in any period is equal to 6%? A) the rate of inflation will tend to increase. B) the rate of inflation will be constant. C) the rate of inflation will tend to decrease. D) none of the above. 4) Suppose that in the IS-LM model there is a tax increase and the central bank controls the money supply. Which of the following is a complete list of the variables that must decrease? A) consumption, output and investment. B) consumption and investment. C) consumption and output. D) consumption. E) consumption, output and the interest rate. 5) The natural level of unemployment will decrease when which of the following occurs? A) a reduction in the actual unemployment rate. B) a reduction in the markup of prices over costs. C) an increase in unemployment benefits. D) all of the above. E) none of the above.

6) In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect on: A) the nominal wage. B) the interest rate. C) the expected price level. D) firms' markup over labour costs. E) government spending. 7) In the AS-AD model, assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a tax cut. This fiscal expansion will, in the short run, cause an increase in: A) the price level. B) the nominal wage. C) the interest rate. D) all of the above. E) none of the above. 8) Use the IS-LM model to answer this question. Assume that the central bank controls money supply and investment spending depends only on the interest rate and no longer depends on output. Given this information, an increase in government spending: A) may cause investment to increase or to decrease. B) will cause an increase in output and have no effect on the interest rate. C) will have no effect on output. D) will cause investment to increase. E) will cause investment to decrease. 9) In the AS-AD model, suppose the central bank decides to reduce the price target. Which of the following will occur in the short run? A) a decrease in output. B) an increase in the interest rate. C) a decrease in the price level. D) all of the above. E) none of the above. 10) The natural level of output is the level of output that occurs when: A) the unemployment rate is zero. B) the markup is zero. C) the economy is operating at the unemployment rate consistent with both the wage-setting and price-setting equations. D) there are no discouraged workers in the economy. E) both the goods and financial markets are in equilibrium. 11) Assume that the economy is initially operating at the natural level of output. A reduction in taxes will cause:

A) an increase in the real wage in the medium run. B) ambiguous effects on the real wage in the medium run. C) no change in the nominal wage in the medium run. D) a reduction in the real wage in the medium run. E) none of the above. 12) In the IS-LM model, suppose there is an increase in consumer confidence and the central bank controls the interest rate. Which of the following represents the complete list of variables that must increase in response to this consumer optimism? A) consumption, investment and output. B) consumption, output and the interest rate. C) consumption. D) consumption and output. E) consumption and investment. 13) A firm's value added equals: A) its revenue minus its wages. B) its revenue minus its wages and profit. C) its revenue minus its cost of intermediate goods. D) its revenue minus its wages and the cost of intermediate goods. E) its revenue minus all of its costs. 14) The IS curve will NOT shift when which of the following occurs? A) a reduction in firm confidence. B) a reduction in the interest rate. C) a reduction in consumer confidence. D) a reduction in government spending. E) a reduction in taxes. 15) In the AS-AD model, assume the economy is initially operating at the natural level of output. Now suppose that individuals decide to reduce their desire to save. We know with certainty which of the following will occur in the short run as a result of the decreased desire to save? A) lower investment. B) greater investment. C) no change in the economy at all. D) higher output and lower investment. E) an increase in consumption. 16) Using the AS-AD model, which of the following would cause a reduction in the natural level of output in the medium run? A) a decrease in government spending. B) an increase in taxes. C) a decrease in the money supply. D) both A and C.

E) none of the above. 17) Which of the following events would not cause a movement along aggregate supply curve in the short run? A) an increase in government spending. B) a decrease in the markup. C) an increase in the money supply. D) all of the above. E) none of the above. 18) Use the following Phillips curve equation to answer this question: t - t-1 = ( + z) u t Which of the following will cause an increase in the natural rate of unemployment? A) an increase in . B) a reduction in expected inflation. C) an increase in z. D) a reduction in . E) none of the above. 19) An increase in the marginal propensity to consume from 0.3 to 0.4 will cause: A) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a smaller effect on output. B) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a smaller effect on output. C) the ZZ line to become flatter and a given change in autonomous spending (c0) to have a larger effect on output. D) the ZZ line to become steeper and a given change in autonomous spending (c0) to have a larger effect on output. 20) Which of the following is a liability for the central bank? A) current account deposits. B) loans. C) bonds. D) currency. E) savings accounts. 21) In the aggregate supply relation, a decrease in current output causes: A) an increase in the expected price level and an upward shift of the AS curve. B) an increase in the mark-up over labour costs. C) a change in the expected price level this year. D) a shift of the aggregate supply curve. E) a decrease in the current price level. 22) An open market purchase of securities will tend to cause: A) an increase in the supply of central bank money.

B) a reduction in the supply of central bank money. C) a reduction in the demand for currency. D) a reduction in the demand for reserves. E) none of the above. 23) Suppose the Phillips curve equation is = -0.5(u t - u n). Given this information, the sacrifice ratio for this economy is equal to: A) 1.5. B) 2. C) -1.5. D) 0.5. E) -0.5. The next 2 questions refer to the following data: Suppose a country using the Australian system of unemployment statistics has 200 million people, of whom 100 million are working age. Of these 100 million, 40 million have jobs. Of the remainder: 20 million are actively searching for jobs; 20 million would like jobs but are not searching; and 20 million do not want jobs at all. 24) The labour force is: A) 60 million. B) 40 million. C) 20 million. D) 100 million. E) 80 million. 25) The labour force participation rate is: A) 0.8. B) 0.3. C) 0.2. D) 0.4. E) 0.6.

Answers: 1) B 2) A 3) A 4) E 5) B 6) B 7) D 8) E 9) D 10) C 11) C 12) A 13) C 14) B 15) E 16) E 17) B 18) C 19) D 20) D 21) E 22) A 23) B 24) A

25) E