CORK INSTITUTE OF TECHNOLOGY INSTITIÚID TEICNEOLAÍOCHTA CHORCAÍ Semester 2 (Autumn 2015) Examinations 2014/2015

Module Title: Introduction to Macroeconomics Module Code:

ECON6001

School:

Business & Humanities

Programme Title:

Bachelor of Business and Higher Certificate in Business

Programme Code:

BACCT_7_Y1, BACCT_8_Y1, BBIS_8_Y2 , BBADM_7_Y2, BMRKT_8_Y1, BBUSA_6_Y1, BMNGT_7_Y2, BBUSE_6_Y1.

External Examiner:

Mr G. Phelan

Internal Examiners:

Ms A. Conway, Ms S. Huskisson, Ms N. Lenihan

Instructions – Please read carefully Duration: 2 Hours Sections A B C

Numbers of Questions to be attempted 20 2 2

Percentage of Total Marks Allotted to each Section 20 40 40

Section A:

The answers for section A must be entered into the MCQ Answer Sheet handed out with this examination paper. Please ensure your name, student number, lecturers name and class group are written clearly on this sheet, and submit it in the centre of your answer booklet. Any solutions written on the examination paper WILL NOT be corrected. There is no negative marking for incorrect answers.

Section B:

The answer to each question attempted in this section must be written in the answer booklet provided.

Section C:

The answer to each question attempted in this section must be written in the answer booklet provided. Non-compliance with the above instructions will result in a loss of marks.

Please ensure you hand up your Answer Booklet + MCQ Answer Sheet. INVIGILATORS’ Note: Please circulate a copy of “MCQ Answer Sheet ECON:6001 Autumn 2015” to all students along with the examination paper.

Page 1 of 10

Section A A1.

Which of the following best describes the four sector model? (a) (b) (c) (d)

A2.

Last year an economy produced 3400 hurleys, 3000 footballs and 2000 rugby balls. The price of hurleys was €30, the price of footballs was €20 and the price of rugby balls was €25. Nominal GDP was: (a) (b) (c) (d)

A3.

Exports. Taxation. Investment. Externalities.

The Marginal Propensity to Tax is 0.2 and the Marginal Propensity to Consume out of disposable income is 0.90. If the Marginal propensity to Import is 0.25, what is the value of the multiplier? (a) (b) (c) (d)

A5.

€212,000. €660,000. €420,250. Cannot be computed.

Which one of the following is a leakage from the circular flow of income? (a) (b) (c) (d)

A4.

Y= C – I + G + M – X. Y = C –I – G – X + M. Y = C + I + G + M – X. Y = C + I + G + X – M.

0.84. 1.62. 0.74. 1.82.

The Marginal Propensity to Import (MPM) tells us: (a) (b) (c) (d)

That society needs to import. The proportion of each extra Euro of income that is spent on imports. That the total volume of imports is constant over time. The proportion of any extra income that will be spent on exports.

Page 2 of 10

A6.

If the Marginal Propensity to Save increases from 0.15 to 0.2, which one of the following will result in a closed economy? (a) (b) (c) (d)

A7.

If the CPI was 106.1 in Year 1 and was 112.4 for Year 2, then the rate of Inflation between Year 1 and Year 2 was: (a) (b) (c) (d)

A8.

The value of the currency falls. The value of the currency increases. Inflation falls. The balance of payments improves.

If leakages are less than injections, ceteris paribus: (a) (b) (c) (d)

A11.

Government expenditure and taxation are increased. Government expenditure is reduced and taxation is increased. Government expenditure and taxation are reduced. Government expenditure is increased and taxation is reduced.

A appreciation of a currency occurs when: (a) (b) (c) (d)

A10.

5.9%. 6.3%. 5.6%. 12.4%.

The thrust of government fiscal policy is expansionary when: (a) (b) (c) (d)

A9.

The slope of the consumption function will steepen. The multiplier will decrease from 6.6 to 5. The Marginal Propensity to Consume will increase. The interest rate will increase to 20%.

National income will increase. National income will decrease. National income will stay in equilibrium. None of the above.

Which of the following is a category (degree) of inflation? (a) (b) (c) (d)

Deflation. Externally induced inflation. Demand-Pull inflation. Stagflation.

Page 3 of 10

A12.

The exchange rate of the Euro against the British Pound is currently: (a) (b) (c) (d)

A13.

If a Central Bank wants to increase the supply of money in the economy, it should: (a) (b) (c) (d)

A14.

Cyclical unemployment. Seasonal unemployment. Frictional unemployment. Real Wage unemployment.

A supply side policy is designed to: (a) (b) (c) (d)

A17.

€10,000. €5,000. €1,000. €500.

Unemployment associated with industries where the demand for labour regularly rises and falls at different times of the year, is best described as: (a) (b) (c) (d)

A16.

Lower the reserve requirement. Lower the rate of discount. Buy government bonds in the market. Do any, or all of the above.

If banks are required to keep a reserve ratio of 10% at the central bank, by how much would money supply increase if they acquire an additional deposit of €1,000? (a) (b) (c) (d)

A15.

At parity. Below parity. Above parity. Undefined.

Raise the level of demand in the economy. Lower the demand for domestic goods in an economy. Improve the ability of the economy to produce goods and services. None of the above.

Which of the following tend to gain when inflation exists? (a) (b) (c) (d)

Savers. Those investing in cash. Those on fixed incomes. Borrowers.

Page 4 of 10

A18.

Which one of the following is not a benefit of adopting a single currency? (a) (b) (c) (d)

A19.

The transactionary demand for money is (a) (b) (c) (d)

A20.

Reduced transaction costs. Increased price transparency. Lower interest rates. Reduced exchange rate uncertainty.

An active balance. Directly related to interest rates. Negatively related to income. An idle balance

The Eurozone announced in 2015 that it will follow actions taken by both the UK and US Central Bank authorities and print additional money to inject funds into the financial system. This is called: (a) (b) (c) (d)

Structural debt reduction. Contractionary fiscal policy. Quantitative Easing. Austerity Measures.

Page 5 of 10

Section B B1. Consider the following four sector Keynesian Income-Expenditure model for a small open economy. C

=

50+ 0.25Yd

I G X-M T

= = = =

100 100 100 0.2Y

Calculate the following showing all your formulas and workings; (a)

Calculate the equilibrium level of income in the above model.

(8 marks)

(b)

The multiplier is 1.05. Explain the components of the Multiplier and interpret the value of 1.05. (4 marks)

(c)

Suppose G is increased from 100 to 110. Calculate the new equilibrium level of income. (4 marks)

(d)

Suppose NX decreases from 100 to 50. Calculate the new equilibrium level of income. (4 marks) (20 marks)

Page 6 of 10

B2. Consider the following information for the economy of Southland, then answer the questions below, making sure that you show all workings:

This year’s output

This year’s prices

200 litres of milk

€1 per litre

400 pears

€0.10 each

300 bananas

€0.20 each

(a)

Calculate this year’s nominal GDP.

(b)

Assuming that all prices had increased by 10% between last year and this year, calculate this year’s real GDP. Use last year as the base year. (6 marks)

(c)

Determine the output of milk last year, assuming that nominal GDP last year was €155 and that Southland produced 300 pears and 250 bananas last year.

(4 marks)

(8 marks) (20 marks)

Page 7 of 10

B3.

The Euro Bank is the only bank operating in an economy where the general public holds no cash and the bank is required to observe a 12.5% reserve requirement. New cash, in the amount of €8000 enters the economy and is deposited with the bank. (a)

Transcribe and complete the following table in your answer book: Stage 1 2 3 4 Etc…. Totals

New deposits

Reserves

New loans

8000 _____ _____ _____

______ ______ ______ ______

______ ______ ______ ______

_____

______

______

(7 marks)

(b)

By how much will the Money Supply have increased as a result of the new cash when the process of new bank credit creation has been completed? (3 marks)

(c)

Set out the final row of the table above in balance sheet format.

(d)

Present the revised assets/liabilities profile of the bank when it has fully adjusted to a new reserve requirement of 20%. (5 marks)

(5 marks)

(20 marks)

Page 8 of 10

B4.

Table 1: Government Budget & Public Sector Borrowing (€million)

Revenue from Customs & Excise Duties

250

VAT Revenue

100

Corporation Tax

50

Income Tax

300

Wage Bill for Government Departments

600

Revenue from Privatisation of Aer Lingus

200

Construction of new Bridge over River Lee

450

Interest on National Debt

150

Once off purchase of a statue of Katie Taylor to be erected in Bray Borrowing by State Sponsored Bodies and Local Authorities

5 350

(a) Calculate the following based on the figures provided in the above table: (i) (ii) (iii)

The Current Budget Deficit (CBD) The Exchequer Borrowing Requirement (EBR) The General Government Deficit (GGD)

(4 marks) (4 marks) (4 marks)

(b) Describe the instruments of fiscal policy.

(4 marks)

(c) Explain discretionary policy.

(4 marks) (20 marks)

Page 9 of 10

Section C C1.

(a)

Illustrate with the aid of a diagram, the components and operation of the circular flow of economic activity. (6 marks)

(b)

Identify the leakages from and the injections to the flow of economic activity, in the diagram in (a) above. (4 marks)

(c)

Using one of the three methods, explain how economic activity in Ireland is measured. (10 marks) (20 marks)

C2.

(a)

Explain the component parts of the Balance of Payments account. (12 marks)

(b)

Using examples, explain the difference between invisible and visible exports. (4 marks) In recent years, the Irish government has been concerned with Ireland’s Patent Cliff. Explain what this refers to and its significance for GDP. (4 marks)

(c)

(20 marks)

C3. (a)

Define Money and describe its characteristics.

(6 marks)

(b)

Describe any three functions of a Central Bank.

(6 marks)

(c)

Explain using an example how banks create money.

(8 marks) (20 marks)

C4.

Write explanatory notes on four of the following: (a) (b) (c) (d) (e) (f)

Deflation Quarterly National Household Survey Expansionary Fiscal Policy Required Reserve Ratio Demand-Pull inflation Flexible Exchange Rate

(5 marks) (5 marks) (5 marks) (5 marks) (5 marks) (5 marks) (20 marks)

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