0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

MASSEY UNIVERSITY PALMERSTON NORTH & WELLINGTON CAMPUS EXAMINATION FOR 178.100 PRINCIPLES OF MACROECONOMICS Semester Two – November 2007

Time allowed: THREE (3) hours All students are required to answer ALL the questions. ONE (1) mark per question – total of ONE HUNDRED (100) marks.

Scantron Cards Ensure that your name and identification number are entered on your Scantron Card. Record your answer on your Scantron card by putting a solid horizontal pencil line through the character representing the ‘best’ answer to the question with a blunt 2B or 3B pencil, please. The Scantron Card will not read properly if you do not follow these instructions. At the conclusion of the examination hand in the Scantron Card separately.

Permitted Calculators Those calculators with alphanumeric keypads and/or alphanumeric memory and/or can store and display text are not permitted, memories must be cleared.

NSB – No Script Book Required A blue answer book is not required for this question paper.

Page 1 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

1. Jeff has estimated that the marginal benefit of studying an additional hour of economics (instead of biology) is an increase of 20 points on the weekly test and the marginal cost is a decrease of 15 points on his weekly biology test. Applying the optimal quantity rule to maximize his test scores, he should: A. not study the additional hour of economics, but rather should study an additional hour of biology. B. study the additional hour of economics, but no more than one additional hour. C. not study the additional hour of economics, but rather should study an additional one-andone-half hours of biology. D. study the additional hour of economics, plus some additional time studying economics. E. not study economics nor biology.

2. Amy is thinking about going to the movies tonight. A ticket costs $7 and she will have to cancel her dog-sitting job that pays $30. The cost of seeing the movie is A. $7. B. $30. C. $37. D. $37 minus the benefit of seeing the movie. E. indeterminate.

3. If one fails to account for opportunity costs in decision making, then applying the costbenefit rule will be flawed because A. the benefits will be overstated. B. the costs will be understated. C. the benefits will be understated. D. the costs will be overstated. E. the benefits and costs will be understated.

Page 2 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

4. In general, individuals and nations should specialize in producing those goods for which they_________ other individuals or nations. A. can produce more quickly than B. can produce less quickly than C. have the lowest opportunity cost compared to D. have the highest opportunity cost compared to E. have an average opportunity cost compared to

5. The slope of any production possibilities curve is __________ because __________. A. negative; production of one of the two goods is always insufficient B. negative; to produce more of one good means less production of the other C. constant; the trade-off in production never changes D. positive; to produce more of one good means more production of the other E. positive; to produce more of one good means less production of the other

6. Any combination of goods that can be produced with currently available resources defines a(n) A. unattainable point. B. efficient point. C. inefficient point. D. attainable and efficient point. E. attainable point.

7. If both supply and demand decrease simultaneously, the new equilibrium price is ___________ and the new equilibrium quantity is _________________. A. lower; lower B. lower; indeterminate C. indeterminate; higher D. indeterminate; lower E. higher; indeterminate

Page 3 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

8. Assume both the demand and the supply of bagels increase. Which of the following outcomes is certain to occur? A. The equilibrium price of bagels will rise. B. The equilibrium quantity of bagels will rise. C. The equilibrium price of bagels will fall. D. The equilibrium quantity of bagels will fall. E. Neither the equilibrium price nor the equilibrium quantity of bagels can be predicted.

9. If Country A and Country B have the same total output, then the standard of living in Country A will be ______ the standard of living in country B. A. the same as B. higher than C. lower than D. either higher, lower, or the same as (depending on their relative population size) E. either higher, lower, or the same as (depending on their relative geographic size)

10. Average labour productivity equals: A. average production per year. B. total output. C. output per person. D. output per employed worker. E. production per person.

11. The duration of unemployment: A. rises during recessions. B. falls during recessions. C. is a period during which an individual is continuously unemployed. D. is shorter for the chronically unemployed than it is for the long-term unemployed. E. is of less importance to macroeconomics than the costs of unemployment.

Page 4 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

12. The value-added method eliminates the problem of: A. differentiating between final and intermediate goods and services. B. inflation when comparing GDP over time. C. determining whether capital is a final good or intermediate good. D. dividing the value of a final good or service between two periods. E. aggregation.

13. People who would like to work full time, but are able to find only part-time work are officially counted as: A. employed. B. unemployed. C. out of the labour force. D. discouraged workers. E. chronically unemployed.

14. Data for an economy shows that the unemployment rate is 10 percent, the participation rate 80 percent and 200 million people 16 years or older are not in the labour force. How many people are unemployed this economy? A. 20 million. B. 80 million. C. 200 million. D. 800 million. E. 1,000 million.

Page 5 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

15. Given the following data for an economy, compute the investment component of GDP.

A. 300 B. 400 C. 800 D. 900 E. 1,500

16. If the total expenditures of a typical family equalled $35,000 per year in 2000 and the exact same basket of goods and services cost $40,000 in the year 2005, the family's cost of living: A. increased by 14 percent. B. decreased by 14 percent. C. increased by 12.5 percent. D. decreased by 12.5 percent. E. was unchanged.

17. A CPI that equals 1.34 in 2005 (when 2000 is the base year) means that: A. prices in 2005 are 34 percent higher than in 2004. B. the CPI equals $1.34 in 2005. C. the inflation rate in 2005 is 134 percent. D. the average level of prices is 34 percent higher in 2005 than in the base year. E. the inflation rate in 2005 is 1.34 percent.

Page 6 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

18. A situation of negative inflation is called: A. recession B. expansion C. boom D. deflation E. disinflation

19. The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 10 percent. The nominal price of gasoline _____ and the real price of gasoline _____. A. increased; increased B. increased; decreased C. increased; did not change D. decreased; decreased E. decreased; increased

20. To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be: A. deflated. B. indexed. C. aggregated. D. hyperinflated. E. adjusted for relative price changes.

21. If workers and employers agree to a three-year wage contract expecting 3 percent inflation and inflation turns out to be 5 percent, then: A. workers gain and employers gain. B. workers gain and employers lose. C. workers lose and employers gain. D. workers lose and employers lose. E. neither workers nor employers are affected by the unexpectedly high inflation.

Page 7 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

22. Real GDP per person in Northland is $30,000, while real GDP in Southland is $10,000, however, Northland's real GDP per person is growing at 1 percent per year and Southland's is growing at 3 percent per year. If these growth rates persist indefinitely, then: A. Northland's real GDP per person will decline until it equals Southland's. B. Northland's real GDP per person will always be greater than Southland's. C. Southland's real GDP per person will always be less than Northland's. D. Southland's real GDP per person will eventually be greater than Northland's. E. Southland's real GDP per person will catch up to Northland's, but never exceed Northland's.

23. Assume that the share of population employed in all countries is 50 percent. Based on the information below, which country has the smallest real GDP per capita?

A. Country A. B. Country B. C. Country C. D. Country D. E. Country E.

24. The principal economic cost of growth is: A. higher interest rates. B. higher inflation rates. C. higher unemployment rates. D. consumption sacrificed for capital formation. E. investment in stocks and bonds.

Page 8 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

25. In the market for labour, the price of labour is the: A. nominal wage. B. real wage. C. marginal product of labour. D. number of hours employed per year. E. number of workers employed per year.

26. The principle of diminishing returns to labour is based on the: A. scarcity principle. B. cost-benefit principle. C. principle of comparative advantage. D. equilibrium principle. E. principle of increasing opportunity cost.

27. The following table provides information about production at the XYZ-TV Company.

How many workers will the XYZ-TV Company hire if the going wage for TV production workers is $34,000? A. 1 B. 2 C. 3 D. 4 E. 5

Page 9 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

28. As the real wage decreases the quantity of labour demanded _____, the quantity of labour supplied _______. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases E. does not change; does not change

29. Capital gains are: A. increases in the flow of investment. B. increases in the flow of saving. C. additions to plant and equipment. D. increases in the value of existing assets. E. decreases in the value of existing assets.

30. Where Y is GDP, C is consumption, I is investment, and G is government spending, if there is no international trade, then national saving equals: A. C + I + G B. Y - C - G C. Y + C + G D. Y - C - I E. Y - C - I - G

31. If total government tax collections equal $100 billion, transfer payments equal $50 billion, and government interest payments equal $5 billion, then net taxes equal: A. $45 billion. B. $50 billion. C. $95 billion. D. $105 billion. E. $155 billion.

Page 10 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

32. The excess of government spending over tax collections is: A. national income. B. national saving. C. national wealth. D. the government budget deficit. E. the government budget surplus.

33. If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving ____ and public saving ______. A. increases; increases B. increases; decreases C. does not change; increases D. does not change; decreases E. decreases; increases

34. The marginal product of new capital depends on _____ and _____. A. productivity of capital; relative price of the firm's output B. price of new capital goods; real interest rate C. relative price of the firm's output; real interest rate D. taxes levied on the revenue generated; price of new capital goods E. productivity of new capital; real interest rate

35. As the cost of capital goods falls relative to other prices, the: A. demand for investment in new capital will shift to the left. B. demand for investment in new capital will shift to the right. C. amount of investment in new capital will increase. D. amount of saving will rise. E. amount of saving will fall.

Page 11 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

36. 100 percent reserve banking refers to a situation in which banks' reserves equal 100 percent of their: A. loans. B. deposits. C. profits. D. income. E. money.

37. Commercial banks create new money: A. by printing currency. B. by issuing checks. C. through multiple rounds of lending and borrowing. D. when they buy government bonds from the Federal Reserve. E. when they increase their desired reserve/deposit ratio.

38. If the Central Bank of Macroland puts an additional 1,000 units of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totalling _______ and the money supply will increase by _______. A. $1,000; $1,000 B. $9,000; $9,000 C. $9,000,. $10,000 D. $1,000; $9,000 E. $10,000; $10,000

39. The money supply is 1,500 of which 500 is currency held by the public. Bank reserves are 200. The desired reserve/deposit ratio equals: A. 0.05 B. 0.10 C. 0.15 D. 0.20 E. 0.25

Page 12 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

40. In Macroland, currency held by the public is 2000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10 percent. If the Central Bank prints an additional 200 econs and uses this new currency to buy government bonds from the public, the money supply in Macroland will increase from ____ econs to _____ econs assuming that the public does not wish to change the amount of currency it holds. A. 2,000; 2,200 B. 2,300; 2,500 C. 3,000; 5,000 D. 5,000; 7,000 E. 5,300; 7,500

41. Velocity is a measure of the speed at which: A. inflation increases. B. productivity increases. C. population grows. D. money circulates. E. production accelerates.

42. The quantity equation states that: A. money times velocity equals nominal GDP. B. money times velocity equals real GDP. C. money times prices equals nominal GDP. D. money times prices equals real GDP. E. velocity times prices equals nominal GDP.

43. If the money supply grew by 4 percent per year, velocity increased by 1 percent per year, and the inflation rate was 3 percent per year, then real GDP must have _______ by approximately ______ percent. A. increased; 2 B. increased; 7 C. increased; 12 D. decreased; 2 E. decreased; 7

Page 13 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

44. A country's trade balance and its net capital inflows: A. sum to zero. B. determine the size of the pool of saving available for capital investment. C. must always equal the sum of the four components of aggregate demand. D. must equal domestic investment in new capital goods. E. are identical in open and closed economies.

45. An increase in net capital inflows to a country will: A. increase its real interest rates. B. increase its imports. C. decrease its exports. D. decrease its real interest rates. E. decrease its investment in new capital.

46. If domestic saving is greater than domestic investment, then a country will have a ______ and ______ net capital inflows. A. trade deficit; negative B. trade deficit; positive C. trade balance; zero D. trade surplus; negative E. trade surplus; positive

47. The primary cause of trade deficits is: A. production of poor quality goods. B. unfair trade restrictions. C. low rates of national saving. D. high rates of national saving. E. cheap foreign labour.

Page 14 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

48. For an open economy at high values of the domestic real interest rate, the total supply of saving ___ national saving. A. equals B. is less than C. is greater than D. equals investment minus E. equals investment plus

49. In an open economy, if domestic citizens decide to save less, then the domestic real interest rate will ____and the level of capital investment in the country will _____, holding other factors constant. A. increase; increase B. increase; decrease C. increase; not change D. decrease; decrease E. decrease; increase

50. In an open economy, a decrease in the government's budget deficit will ____ the domestic real interest rate and _____ the level of capital investment in the country, holding other factors constant. A. increase; increase B. increase; decrease C. increase; not change D. decrease; decrease E. decrease; increase

51. In the short run, total spending affects ____ and in the long run total spending affects ______. A. prices; output B. prices; unemployment C. output; prices D. output; unemployment E. output; output

Page 15 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

52. In the long run, total spending only influences: A. actual output. B. potential output. C. productive capacity. D. labour supply and demand. E. inflation.

53. When firms preset prices in the short-term, economy wide spending changes are the primary cause of: A. frictional unemployment. B. output gaps. C. inflation. D. the growth of potential output. E. structural unemployment.

54. According to Okun's Law, when the output gap is negative, cyclical unemployment: A. equals structural unemployment. B. equals frictional unemployment. C. equals zero. D. is positive. E. is negative.

55. The economy of Alpha operates according to Okun's Law. In Alpha real GDP equals $520 billion, the natural rate of unemployment is 5 percent and the actual rate of unemployment is 3 percent. What is potential GDP in Alpha? A. $480 billion B. $490 billion C. $500 billion D. $510 billion E. $520 billion

Page 16 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

56. In Okunland, a country that operates according to Okun's Law, potential GDP equals $8,000 billion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 5 percent. What is real GDP in Okunland? A. $7,360 billion B. $7,520 billion C. $8,000 billion D. $8,240 billion E. $8,480 billion

57. According to Okun's Law each extra percentage point of ___ unemployment is associated with a ____ percentage point increase in the output gap, measured in relation to potential output. A. frictional; 2 B. frictional; 4 C. cyclical; 2 D. cyclical; 4 E. structural; 4

58. In Macroland potential GDP equals $500 billion and real GDP equals $515 billion. Macroland has a(n) _________ gap equal to _____ percent of potential GDP. A. expansionary; -3 B. expansionary; 3 C. expansionary; -15 D. recessionary; 3 E. recessionary; -3

59. For policymakers the problem with a recessionary gap is _____ and the problem with an expansionary gap is _____. A. a tendency for inflation to develop; wasted resources B. wasted resources; a tendency for inflation to develop C. an increase in cyclical unemployment; an increase in structural unemployment D. an increase in structural unemployment; an increase in cyclical unemployment E. excessive growth of potential output; declining potential output

Page 17 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

60. If potential output equals $8 billion and actual output equals $7 billion, then this economy has a(n): A. budget deficit. B. trade deficit. C. expansionary gap. D. recessionary gap. E. value-added gap.

61. Menu costs are the costs of: A. running a restaurant. B. changing prices. C. increasing aggregate demand. D. changing production. E. obtaining computer software.

62. The four components of planned aggregate expenditure are: A. spending on domestic goods, domestic services, foreign goods, and foreign services. B. spending on durable goods, inventory investment, government debt, and net exports. C. consumption, planned investment, government transfers, and net interest. D. consumption, interest payments, transfer payments, and net exports. E. consumption, planned investment, government purchases, and net exports.

63. Planned investment may differ from actual investment because of: A. changes in government purchases and net exports. B. the marginal propensity to consume. C. unplanned changes in inventories. D. fluctuations in preset prices. E. menu costs.

Page 18 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

64. If firms sell less output than expected, planned investment: A. is greater than actual investment. B. is less than actual investment. C. equals actual investment. D. equals zero. E. equals aggregate demand.

65. The slope of the consumption function: A. is vertical. B. is horizontal. C. equals 1. D. equals the marginal propensity to consume. E. is negative.

66. In Macroland short-run equilibrium output equals 500,000 and the income-expenditure multiplier equals 5. If autonomous government purchases now increases by 100, short-run equilibrium output will change from 500,000 to ____. A. 499,500 B. 499,900 C. 500,005 D. 500,100 E. 500,500

67. If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, the MPC equals 0.9, and potential output (Y*) equals 9,000, then taxes must be increased by ________ (rounded to the nearest whole number) to eliminate any output gap. A. 10 B. 100 C. 1000 D. 11 E. 111

Page 19 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

68. A fiscal policy action to close a recessionary gap is to: A. increase taxes. B. decrease transfer payments. C. increase government purchases. D. increase the marginal propensity to consume. E. increase potential output.

69. If short-run equilibrium output equals 20,000 and potential output (Y*) equals 15,000, then this economy has a(n) __________ gap that can be closed by _________. A. expansionary; increasing taxes B. expansionary; increasing transfer payments C. expansionary; increasing government purchases D. recessionary; increasing government purchases E. recessionary; increasing taxes

70. If planned aggregate expenditure in an economy can be written as: PAE = 1000 + 0.9 Y, what is the income-expenditure multiplier in this economy? A. 0.1 B. 0.9 C. 1.11 D. 9 E. 10

71. Because _____ policy is more flexible than ______ policy, it is used more actively to help stabilize the economy. A. structural; international B. structural; fiscal C. monetary; fiscal D. fiscal; monetary E. structural; monetary

Page 20 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

72. Any value of the nominal interest rate chosen by the Central Bank implies a specific value for ______. A. potential output B. net exports C. government purchases D. the budget deficit E. the money supply

73. The benefit of holding money is _______, while the opportunity cost of holding money is _______. A. the nominal interest rate; the fees charged by banks B. the nominal interest rate; its usefulness in carrying out transactions C. increased income; lost purchasing power D. its usefulness in carrying out transactions; the nominal interest rate E. its usefulness in carrying out transactions; the price of wallets and billfolds

74. The money demand curve will shift to the right if: A. the nominal interest rate increases. B. the nominal interest rate decreases. C. ATM machines are introduced. D. the price level decreases. E. real income increases.

75. When the Central Bank engages in an open market purchase, the money supply ____ and the nominal interest rate ______. A. increases; increases B. increases; decreases C. increases; may either increase or decrease depending on money demand D. decreases; increases E. decreases; decreases

Page 21 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

76. If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y 20,000r, and potential output equals 35,000, what real interest rate must the Central Bank set to bring the economy to full employment? A. 0.02 B. 0.03 C. 0.04 D. 0.05 E. 0.06

77. In the short-run, if the Central Bank decreases interest rates, then consumption and investment ______, planned aggregate expenditure ______, and short-run equilibrium output _______. A. increase; increases; increases B. increase; increases decreases C. increase; decreases; decreases D. decrease; decreases; increases E. decrease; decreases; decreases

78. In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y 20,000 r, the central bank is currently setting the interest rate at 0.05 (5 percent). If potential output equals 11,750, the central bank must ____ the interest rate to close the ____________ gap. A. lower; expansionary B. lower; recessionary C. not change; output D. raise; expansionary E. raise; recessionary

79. According to the Taylor Rule, if there is a recessionary gap of 2 percent of potential output and inflation is 4 percent, what real interest rate will the Central Bank set? A. 0.015 B. 0.02 C. 0.025 D. 0.03 E. 0.035

Page 22 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

80. In a certain economy the components of planned aggregate expenditure are given by: C = 60 + 0.6 (Y- T) - 1000 r I = 200 - 1000 r G = 200 NX = 50 If net taxes equal 100 and the Central Bank sets the interest rate equal to 0.05 (5 percent), short-run equilibrium output equals: A. 825 B. 875 C. 925 D. 975 E. 1,025

81. The aggregate demand curve shows the relationship between short-run equilibrium output and the ______ rate. A. nominal interest B. real interest C. unemployment D. inflation E. exchange

82. Because decreases in inflation increase planned spending and short-run equilibrium output, A. the short-run aggregate supply line is downward sloping. B. the short-run aggregate supply line is upward sloping. C. the aggregate demand curve is horizontal. D. the aggregate demand curve is downward sloping. E. the aggregate demand curve is upward sloping.

83. If the Central Bank’s monetary policy reaction function does not change, then when inflation increases the Central Bank responds by _____ the real interest rate, which _____ consumption and investment spending, which _____ output. A. increasing; increases; increases B. increasing; increases; decreases C. increasing; decreases; decreases D. decreasing; decreases; increases E. decreasing; decreases; decreases

Page 23 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

84. A downward shift in the Central Bank's policy reaction function is a monetary _____ , and the aggregate demand curve _______. A. tightening; shifts right B. tightening; shifts left C. tightening; does not shift D. easing; shifts right E. easing; shifts left

85. Inflation inertia is the tendency for inflation to: A. equal zero. B. change relatively slowly from year to year. C. decrease when the Central Bank increases interest rates. D. increase when the Central Bank decreases interest rates. E. re-distribute resources to low-spending households.

86. The short-run aggregate supply curve shows _____ while the long-run aggregate supply curve shows _____. A. planned aggregate spending; output B. output; planned aggregate spending C. the current inflation rate; potential output D. potential output; the current inflation rate E. potential output; planned aggregate spending

87. If the aggregate demand curve in an economy is Y = 20,000 - 20,000π, current inflation (π) equals 0.08 (8 percent), and potential output (Y*) equals 19,200, then in the short run equilibrium output equals ____ and in the long run the inflation rate equals ___ percent. A. 19,200; 4 B. 18,800; 6 C. 18,800; 4 D. 18,400; 4 E. 18,400; 8

Page 24 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

88. An inflation shock is: A. the level of inflation consistent with output in a recessionary gap. B. the level of inflation consistent with output in an expansionary gap. C. a sudden change in the normal behaviour of inflation, unrelated to the nation's output gap. D. a change in the inflation rate generated by excessive aggregate spending. E. a change in inflation brought about by changes in inflation expectations and pricing decisions. Use the following figure to answer Questions 89-91

89. Based on the figure above, starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from π to π1 will lead to a short-run equilibrium at point ___ creating _____gap. A. A; an expansionary B. A; a recessionary C. A; no output D. B; expansionary E. B; recessionary

Page 25 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

90. Based on the figure above, starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from π to π1 will lead to a short-run equilibrium at point ___ and eventually to a long-run equilibrium at point ____, if left to self-correcting tendencies. A. A; B B. A; C C. B; A D. B; C E. B; B

91. Based on the figure above, an economy in short-run equilibrium at point A has a(n) _______ gap. The gap could be eliminated by the self-correcting mechanism of the economy and eventually achieve long-run equilibrium at point ____ or the central bank could intervene with monetary easing and the long-run equilibrium would be at point ____. A. recessionary; B; C B. recessionary; C; B C. recessionary ; C; C D. expansionary; B; C E. expansionary; C; B

92. A combination of inflation and recession is called: A. deflation. B. stagflation. C. disinflation. D. reflation. E. infusion.

93. Suppose the aggregate demand curve in an economy is Y = 10,000 - 10,000π, current inflation (π) equals 0.05 (5 percent), and potential output (Y*) equals 9,500. If starting from long-run equilibrium, an inflation shock raises inflation to 0.07, in the short run output will equal ____ and in the long run output will equal _____ A. 9,300; 9,300 B. 9,300; 9,500 C. 9,500; 5,500 D. 9,500; 9,300 E. 9,500; 9,700

Page 26 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

94. Suppose the aggregate demand curve in an economy is Y = 10,000 - 10,000π, current inflation (π) equals 0.05 (5 percent), and potential output (Y*) equals 9,500. If starting from long-run equilibrium, an aggregate supply shock reduces potential output to 9,300, in the short run there will be a(n) _______ gap and in the long run inflation will equal _____ percent. A. expansionary; 5 B. expansionary; 6 C. expansionary; 7 D. recessionary; 5 E. recessionary; 7

95. If inflation equals zero, then a worker's real wage will fall when: A. the nominal wage increases. B. the nominal wage decreases. C. the nominal wage is constant. D. the nominal wage increase, decreases, or remains constant. E. relative prices increase.

96. The Central Bank can not achieve a negative real interest rate if the inflation rate is zero or negative because: A. the nominal interest rate can not fall below zero. B. inflation doves will not permit a negative real interest rate. C. zero or negative values of inflation can not be accurately measured. D. inflationary expectations are not anchored when the inflation rate is zero. E. the inside monetary policy lags will become infinite.

97. A weakness of the argument that cheap foreign labour might take the jobs away from high-wage economies is that it does not consider the ________. A. cost benefit principle B. differences in human capital C. differences in the level of technology D. principle of comparative advantage E. principle of increasing opportunity cost

Page 27 of 28

0702/178.100 PN/WGTN

CP2 Sc

Internal only

NSB

98. Easy monetary policy will ____ net exports as a result of a _____ currency. A. increase; stronger B. increase; weaker C. not effect; stronger D. decrease; stronger E. decrease; weaker

99. The real exchange rate is the: A. market on which currencies of various nations are traded for one another. B. price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. C. quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. D. rate at which two currencies can be traded for each other. E. rate at which a good in one country can be traded for the same good in another country.

100. Net exports will tend to be low when the real exchange rate ____. A. is high B. is low C. equals the nominal exchange rate D. depreciates E. is weak

++++++++

Page 28 of 28