Macro85 85.1 Given a consumption function of the form C = a + bY where C is consumption, Y is disposable income,

and a and b are positive constants. A. an increase in consumption leads to an increase in disposable income. B. an increase in disposable income leads to an increase in consumption. C. an increase in disposable income leads to an increase in the marginal propensity to consume. D. an increase in disposable income leads to an increase in the average propensity to consume.

85.2 Equality between planned saving and planned investment A. determines an equilibrium level of income. B. determines the full-employment level of income. C. is a tautology. D. is observable.

85.3 Equality between realized investment and realized saving A. is a tautology. B. implies income must be falling. C. is an equilibrium condition. D. implies income must be rising.

85.4 Suppose in an economy each and every household consumes 80 percents of its disposable income. A redistribution of income from the rich to the poor will A. lead to an increase in aggregate consumption. B. lead to a decrease in aggregate consumption. C. lead to no change in aggregate consumption. D. have an uncertain effect on aggregate consumption.

85.5 When a downward parallel shift of the consumption function occurs, A. the marginal propensity to consume falls. B. the average propensity to consume falls. C. the marginal propensity to consume falls more than the average propensity to consume. D. both the marginal and the average propensity to consume remain unchanged.

85.6 The quantity of money is A. a tautology. B. valid when the economy is suffering from serious unemployment. C. valid when the economy is operating at full employment. D. valid in all phases of the trade cycle.

85.7 A constant marginal propensity to consume implies that A. saving remains unchanged at all levels of income. B. as income increases, the percentage saved out of the increase remains unchanged. C. savings is positive at all levels of income. D. the average propensity to save is falling as income increases.

85.8 Full employment is usually defined as the situation A. where everyone who wants work is employed. B. where unemployment is at the natural rate. C. where planned saving and planned investment are equal. D. where aggregate demand and aggregate supply are equal.

85.9 People are said to be under money illusion when A. their behaviour is guided by nominal values rather than real magnitudes. B. they maximise profits and/or wealth. C. they do not know what constitutes money.

D. they bargain harder for increase in payment-in-kind rather than in money wages.

85.10 (OUT SYL) What economists often call Says Law states that

A. overproduction is possible because of excessive demand. B. overproduction is possible because of excessive supply. C. demand creates its own supply, therefore overproduction is impossible. D. supply creates its own demand, therefore overproduction is impossible.

85.11 If there is a rise in the market rate of interest, people will hold money for speculative purposes as bond prices , and they will tend to buy

bonds. A. more, rise, less B. more, fall, more C. less, rise, less D. less, fall, more

85.12 (OUT SYL) According to the acceleration principle,

1. net investment is positive only when levels of sales are high. 2. the amount of net investment is a multiple of the increase in sales because the output-capital ratio

is less than one. 3. sales must rise at a constant rate for net investment to be constant. A. 1 and 2 only B. 1 and 3 only C. 2 and 3 only D. 1, 2 and 3

85.13 Once the Hong Kong government adopted a linked exchange rate system, which of the following policy options was NO longer available? 1. monetary policy 2. fiscal policy 3. controlling the government debt 4. influencing long-term interest rate A. 1 and 2 only B. 1 and 4 only C. 2 and 3 only D. 3 and 4 only

85.14 Which of the following statements about MV = PQ is FALSE? A. Empirical findings have shown that P and M tend to move in the same direction. B. PQ may be treated as the level of nominal GNP of an economy. C. The velocity of circulation tends to be quite stable over time. D. MV = PQ may be rejected by evidence.

85.15 The C + I + G function will shift upwards when 1. the tax rate falls 2. there is an increase in expenditure on public works. 3. there is an increase in transfer payments. 4. there is an increase in the rate of interest. A. 1 and 2 only B. 2 and 4 only C. 1, 2 and 3 only D. 1, 2, 3 and 4

85.16 Assume a simple banking model. If the required reserve ratio is 25% and the only reserve is cash, the

banking multiplier is 4 if and only if: 1. the banking sector does NOT keep excess reserve. 2. there is a central bank. 3. there is no leakage from the banking system. 4. the number of banks is unlimited. A. 1 and 2 only B. 1 and 3 only C. 2 and 4 only D. 3 and 4 only

85.17 Which of the following central bank policies will NOT reduce inflation? A. Buying bonds in the open market B. raising the required liquidity ratio C. raising the discount rate D. asking banks to be more conservative in their lending policies

85.18 Which of the following statements are TRUE about built-in stabilizers? 1. Built-in stabilizers can reduce the degree of fluctuation in the economy. 2. A progressive tax system has a higher degree of built-in stabilization than a proportional tax. 3. Built-in stabilizers are never an obstacle to government fiscal policy. 4. Transfer payments are NOT built-in stabilizers. A. 1 and 2 only B. 1 and 3 only C. 2 and 3 only D. 3 and 4 only

85.19 Which of the following are TRUE about government expenditure and taxation? 1. An increase in government expenditure may NOT lead to an increase in tax revenue. 2. An increase in tax revenue may NOT lead to an increase in government expenditure because

government expenditure is independent of taxation. 3. An increase in government expenditure can have a redistributive effect. A. 1 and 2 only B. 1 and 3 only C. 2 and 3 only D. 1, 2 and 3

85.20 Which of the following statement are FALSE? 1. The issue of bonds by the government in the domestic market reduces the money supply. 2. When foreigners buy bonds issued by the government, this is recorded as a debit item in our

balance of payments accounts. 3. The burden of public debt is normally unevenly distributed among the population. 4. A large public debt requires the government to issue more bonds. A. 1 and 2 only B. 1 and 3 only C. 2 and 4 only D. 3 and 4 only

85.21 Which of the following is TRUE? A. Differences in opportunity cost is a necessary condition for international trade. B. Differences in opportunity cost is a sufficient condition for international trade. C. The existence of absolute advantage must show a difference in opportunity cost. D. Whenever international trade exists, a difference in opportunity cost is implied. (Deleted)

85.22 Which of the following may lead to the appreciation of a currency? 1. Bullish speculation in the currency in the foreign exchange market

2. An increase in foreign aid to other countries 3. An increase in the amount of profits repatriated from abroad 4. The success of import-substitution policies adopted by the countrys trading partners. A. 1 and 2only B. 1 and 3only C. 2 and 4 only D. 3 and 4 only

85.23 Which of the following statements are TRUE? 1. The problem of scarcity is less serious in a planned economy than a free enterprise economy. 2. Consumers in a planned economy do NOT suffer from inflation because prices do NOT skyrocket

as in a free economy. 3. There is a stronger need for centralized information in a planned economy. 4. Price control is common in a planned economy. A. 1 and 2 B. 2 and 3 C. 3 and 4 D. 1 and 4

85.24 If the prices of Hong Kongs exports fall relative to the prices of imports, then

1. Hong Kongs terms of trade will deteriorate. 2. Hong Kongs balance of payments will deteriorate. 3. the quantity of Hong Kongs exports will increase. A. 2 only B. 1 and 2 only C. 1 and 3 only D. 2 and 3 only

85.25 Which of the following will decrease unemployment? 1. a decrease in liquidity preference 2. an increase in the velocity of circulation of money 3. a decrease in money stock 4. a rise in the interest rate A. 1 and 2 only B. 1 and 3 only C. 2 and 4 only D. 3 and 4 only

85.26 Which of the following statements about the natural rate of unemployment is FALSE?

A. It is the rate at which there will be NO pressure on the money wages in the economy. B. It is explained by the presence of friction or search activity in the labour market. C. It remains constant when the rate of inflation changes. D. The rate can vary if institutional factors change.

85.28 As everybody attempts to save more, aggregate saving decreases, if aggregate investment

A. is autonomous. B. rises with income. C. falls when income rises. D. falls when the rate of interest rises.

85.28 Which of the following will lead to an increase in the exchange rate of a floating currency?

1. a rise in the income of the economy 2. an increase in the domestic interest rates 3. an increase in the domestic rate of inflation 4. a decrease in the money supply A. 1 and 2only

B. 2 and 3only C. 2 and 4 only D. 3 and 4 only

85.29 Which of the following are TRUE about indirect taxes?

1 Indirect taxes would shift the supply curve of a product to the left. 2. Indirect taxes would shift the demand curve to the left. 3. The more inelastic the supply curve, the greater the tax burden borne by the seller. 4. The more inelastic the demand curve, the greater the tax burden borne by the buyer. A. 1, 2 and 3 only B. 1, 2 and 4 only C. 1, 3 and 4 only D. 2, 3 and 4 only .

85.30 Given the following information about an economy, find the numerical value of the multiplier. C = 0.8Yd + 10 where C = Consumption I = 0.1Y + 20 Yd = Disposable income G = 10 Y = Income T = 0.2Y T = Direct tax A. 2.17 B. 2.85 C. 3.33 D. 3.85

85.31 What economists often call Says Law states that

A. overproduction is possible because of excess demand. B. overproduction is possible because of excessive supply. C. demand creat6es its own supply, therefore overproduction is impossible. D. supply creat6es its own demand, therefore overproduction is impossible.

85.1 Explain the operation of a balanced-budget multiplier. 85.2 If the income-tax rate is increased, will workers work more or fewer hours? Explain. 85.3 In the analysis of equilibrium national income, the aggregate demand function (C + I + G) is normally

drawn with a slope less than one. Explain the significance of this construction. 85.4 Distinguish between the definition of the velocity of circulation of money, V = PQ / M, and the quantity

theory of money. 85.5 Is it possible that a country like Japan has a comparative advantage in everything? Explain.

85.6 Inflation is a tax. Do you agree? Explain

85.7

Consumer Price Indexes (October, 1979 September, 80 = 100): Monthly average figures

Consumer Price Index 1981 1982 1983 Consumer Price Index (A)

(HK$1000 HK$3499) All items 117.9 130.3 143.2

Consumer Price Index (B) (HK$3500 HK$6499)

All items 117.3 129.8 142.6 Consumer Price Index (Hang Seng)

(HK$6500 HK$19999) All items 116.6 130.3 143.8

(a) From the above table, what is the trend of the CPIs from 1981 to 1983? Explain the trend.

Gross Domestic Product Gross Domestic Product 1980 1981 1982* 1983** Total (HK$Mn) At current market prices At 1980 market prices

137 209 137 209

165 346 150 139

184 351 151 750

206 890 160 673

Per capita (HK$) At current market prices At 1980 market prices

27 232 27 232

32 080 29 130

35 229 28 999

38 939 30 240

* provisional estimates ** preliminary estimates (b) From the above table, compute the GDP deflator for the various years using 1980 as the base year. Is the

use of the GDP deflator different from the use of the various CP1s ? Explain. (c) Explain why rising prices may coexist with a rising unemployment level. (d) Analyse the difficulties faced by the Hong Kong government in fighting inflation. 85.8 Taxation distorts prices, incentives, and income distribution. Analyse the following taxes with respect to

these effects : (a) a tax on food consumption in restaurants in excess of HK$30 per person. (b) a tax on realised capital gain from real estate.

85.9. (a)(i) What is money ? (ii) Why does money exist ? (b) What are the major factors which affect an individuals choice of assets for his portfolio ? 85.10 (a) Whereas free trade is beneficial to all, an import tariff imposed by one country may benefit that country.

Do you agree ? Why or why not ? (b) Hong Kongs garment exports have long been restricted by quotas imposed by her trading partners.

Analyse the effects of these quotas in terms of

(i) who gains and who loses in Hong Kong, and (ii) the quality of Hong Kongs garment products.

Solution SECTION A

1A 16B 2A 17A 3A 18A 4A 19D 5B 20A 6C 21X 7B 22B 8B 23C 9A 24C 10D 25A 11D 26A 12X 27B 13B 28C 14D 29C 15C 30D

Consumer Price Indexes \(October, 1979 SeptembGross Domestic ProductSolutionSECTION A