Macroeconomics in the Global Economy.

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SECTION A
Each question is worth 1 mark.
1. If there is an increase in the number of international students studying at Australian universities, this will be reflected in the Circular Flow of Income as:
a. An increase in imports.
b. Higher business investment.
c. An increase in exports.
d. None of the above.
2. A budget deficit, ceteris paribus, results in:
a. injections into the Circular Flow being greater than leakages from it.
b. unsustainable government debt.
c. inflation.
d. A contraction of economic activity.
3. An depreciation of the exchange rate will, ceteris paribus, cause:
a. Investment to increase.
b. Import purchases to rise.
c. A fall in equilibrium GDP.
d. Net exports to increase.
4. In a closed economy, the Marginal Propensity to Consume is 0.75 and the marginal tax rate is 0.2. The Expenditure Multiplier is:
a. 4.
b. 5.
c. 0.4.
d. 0.2.
5. The value of the Expenditure Multiplier falls if:
a. Households decide to increase their savings.
b. People buy more imports.
c. The government imposes a new tax.
d. All of the above.
6. If the Reserve Bank of Australia (RBA) buys government securities on the open market then, ceteris paribus:
a. ESA funds belonging to the private banks will increase.
b. ESA funds belonging to the private banks will decrease.
c. ESA funds will not change.
d. The cash rate will rise.
7. Hidden unemployment refers to:
a. people claiming unemployment benefits illegally.
b. all people who are unemployed.
c. those unemployed who cannot readily be measured as such.
d. workers who have recently been made redundant.
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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8. If domestic inflation exceeds foreign inflation, an economy’s currency will, ceteris paribus:
a. appreciate in value.
b. become worthless.
c. depreciate in value.
d. cease to be traded.
9. Bonds are:
a. A share of ownership in an incorporated company.
b. Used by the RBA to manipulate the money supply.
c. Only issued by the Federal government.
d. All of the above.
10. The Capital Account of the Balance of Payments records:
a. Proceeds from the sale of exports and purchase of imports.
b. Infrastructure spending by the public sector.
c. Migration flows between countries.
d. International purchases and sales of assets.
Section B begins on the next page.
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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SECTION B
QUESTION 1 (15 marks)
a) What are 3 macroeconomic goals? (3 Marks)
b) Outline the 3 ways by which an economy’s GDP can be measured (3 marks)
c) Identify and outline one alternative measure of social welfare. How is it different to GDP? (2 marks)
d) To what type of economic system does the business cycle relate? List two reasons why economies are usually subject to business cycles. (3 marks)
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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The National Accounts of a small open economy reveal the following data for the 2013-2014 financial year:
? Consumption expenditure of $10 billion;
? Savings of $2 billion;
? Planned (and actual) Investment expenditure of $3 billion;
? Government expenditure of $5 billion;
? Taxation of $4 billion;
? Exports of $1 billion; and
? Imports of $2 billion.
Based on the above information, answer questions e) – g).
e) Calculate total leakages and total injections for this economy. (1 mark)
f) Is this economy in equilibrium? Explain. (2 marks)
g) What is this economy’s GDP in financial year 2013-2014? (1 mark)
QUESTION 2 (10 marks)
a) Distinguish between frictional, cyclical and structural unemployment. (3 marks)
b) What is Full Employment? Does it necessarily mean that the economy is at its physical limit in terms of resource use? (2 Marks)
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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c) Circle the correct word in the sentence below. (1 Mark)
The official rate of unemployment as calculated by the Australian Bureau of Statistics tends to overestimate/underestimate the actual amount of people out of work?
d) Why would consumers be concerned about inflation? (1 Mark)
e) What is the difference between cost push and demand pull inflation? (3 Marks)
QUESTION 3 (15 marks)
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450
AE
Y1
Y2
?I
AE2= C+I2
AE1 = C+I1
Figure 1
Y
?Y
0
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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a) Explain why the increase in investment from I1 to I2 in Figure 1 has a larger effect on real GDP (Y). What is this effect called? (2 marks)
In this economy, assume that Consumption=500+0.8Y and the new level of Investment Expenditure (I2) is $200m.
b) Write out the Aggregate Expenditure function for this economy. (1 Mark)
c) What is the equilibrium level of GDP output (Y2) for this economy? Show your working. (2 marks)
d) Assume now that the government undertakes new expenditure in the higher education sector worth $100m. Write out the new equation for Aggregate Expenditure. (1 mark)
e) What is the new level of equilibrium GDP? Show working. (3 marks)
f) Calculate the size of the multiplier. (2 marks)
Assume that the equilibrium level of GDP which you calculated in e) above is $400 million below Full Employment GDP.
g) What is this situation called? (1 Mark)
h) What type of policy could the government use to bring the economy to the Full Employment level of GDP? Quantify this change. (3 marks)
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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QUESTION 4 (15 marks)
a) What are the 3 basic functions of money? (3 Marks)
b) What type of monetary system does Australia have? Explain your answer. (2 Marks)
c) Who creates the bulk of the Australia money supply? What is the name of the process by which this is done? (2 Marks)
d) What are 2 reasons why people demand money? (2 Marks)
e) If a bond has a price of $100 and pays an annual income of $10, what is the yield of the bond? (2 Marks)
f) If the demand for bonds fell, what would happen to this yield? (1 Mark)
g) Outline three main functions of the Reserve Bank of Australia (RBA). (3 marks)
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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QUESTION 5 (15 marks)
a) What is the primary objective of the RBA’s monetary policy? (1 Mark)
b) Outline 2 arguments for and 2 arguments against inflation targeting, as it is currently conducted by the RBA. (4 marks)
c) Assume that in February 2014 the RBA announces a reduction in the cash rate in response to continued sluggish growth in the domestic economy. Explain and illustrate the process by which the RBA makes this occur using the two diagrams below. Label your curves. (4 marks)
Interest Rate
ESA Funds
Time
Interest Rate
MS1
Y1
MD
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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d) Explain why a cut in the Cash Rate may affect investment expenditure and
equilibrium GDP. Illustrate this on the 2 diagrams below. (4 marks)
Question 5e) relates to the following headline which appeared on page 1 of the
Australian Financial Review on Friday 13 December, 2013.
e) In the related article, the Governor of the RBA, Glenn Stevens, “…indicated he
wants a dollar closer to US85¢…”. What does the phrase ‘talk the value of the $A
down’ mean and why would the Governor be doing this? (2 Marks)
f) What can a central bank do when conventional Monetary Policy does not
work as currently demonstrated by the US Federal Reserve and the Bank of
England? (2 Marks)
Interest
Rate
Investment
AE
GDP
450
AE1
I1
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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QUESTION 6 (15 marks)
a) Explain the concept of Crowding Out as it relates to Fiscal Policy. (3 Marks)
b) With Australia’s monetary system, is Crowding Out likely to be a problem? Explain your answer. (3 Marks)
The 2013-14 Australian Federal Government budget outcome is expected to be a $47 billion deficit.
c) In terms of the Circular Flow of Income, what does this deficit represent? (1 Mark)
d) What is the impact on GDP of such a budget outcome? Explain your answer. (2 Mark)
e) Some of this Federal budget deficit is referred to as ‘structural’. What does this mean? (2 marks)
f) Some of this Federal budget deficit is due to higher expenditure to support Australian citizens who have become unemployed due to lower GDP growth. What is the term used to describe this impact? (1 Mark)
g) Can the Australian government ever run out of money? Explain your answer. (3 marks)
END OF EXAMINATION PAPER
Newcastle International College ECON1002: Macroeconomics in the Global Economy
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FORMULA SHEET
AE=C+I+G+NX
C=a+ßY
Ye=AE
k=1/MPS
MPS=?S/?Y
Bond Yield=Coupon Payment/Bond price