Macro93

1 Which of the following items should be excluded from GNP at market prices in order to calculate disposable income? [93.1] (1) indirect business taxes (2) income tax (3) retained earnings (4) transfer payments (5) subsidies A. (1), (2) and (3) only B. (1), (2) and (4) only C. (1), (3) and (5) only D. (2), (4) and (5) only

2 When the LM curve is vertical, it implies that [93.2]

A. the government is adopting a tight monetary policy. B. people hold money only for the purpose of transactions. C. fiscal policy is very effective in reducing unemployment. D. investment does not depend on interest rates.

3 The IS curve will shift to the left if

(1) there is an autonomous increase in savings. (2) credit cards become more popular. (3) the government reduces the unemployment allowance to encourage

more people to work. (4) investment decreases as a result of an increase in interest rates. [93.3] A. (1) and (2) only B. (1) and (3) only C. (2) and (4) only D. (3) and (4) only

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45o

C

consumption

Disposable incomeY Y Y1 0 20

According to the above graph, which of the following is correct? [93.4] A. Consumption decreases as disposable income increases. B. The marginal propensity to save increases as disposable income

increases. C. Equilibrium national income is Y0. D. The average propensity to consume increases at first but eventually

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decreases. 5 There are three hypothetical economies. They have different sets of IS and LM

functions. IS Function LM Function Economy A : Y = $1000 - 500r Y = $400 + 500r Economy B : Y = $1800 - 200r Y = $500 + 500r Economy C : y = $2400 y = $700 + 500R

Suppose the central banks of the three economies reduce the money supply by the same amount. The national income will decrease most in and least in . [93.5] A. Economy A, Economy B B. Economy A, Economy C C. Economy B, Economy C D. Economy C, Economy A

6 Refer to the following equations about a hypothetical economy. C = $100 + 0.75Yd C : consumption expenditure I = $150 - 30r I : investment expenditure G = $30 G : government expenditure T = $0.2Y T : taxation M = $20 + 0.1Y M : expenditure on imports

The income multiplier for this economy is [93.6] A. 1.66 B. 1.92 C. 2 D. 4

7 Which of the following are examples of built-in stabilizers?

(1) the recurrent expenditure on education (2) the unemployment allowance (3) the allowance for the aged (4) the progressive tax system [93.7] A. (1) and (2) only B. (1) and (3) only C. (2) and (4) only D. (3) and (4) only

8 When the opportunity cost of two goods are equal between two countries, then (1) an absolute advantage may exist. (2) the absolute advantage will be the basis for trade. (3) no comparative advantage will exist. (4) the two countries will have equal gains from trade. [93.8] A. (1) and (2) only B. (1) and (3) only C. (2) and (4) only

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D. (3) and (4) only 9

AE

Y

AE=Y

AE

AE

0P Q

R

S

T1

2

45O

From the above graph, the value of the multiplier is equal to [93.9]

A. PQ/ST B. PQ/TQ C. ST/RT D. ST/PQ

10 Which of the following is correct for the situation of liquidity trap? [93.10] A. The current interest rate is deemed to be at its lowest level. B. The fiscal policy is the least effective in this case. C. The prices of interest-bearing assets are deemed to be at their lowest

levels. D. People tend to hold assets in bonds.

11 In an open economy with government intervention, which of the following will ensure full employment? [93.11] A. saving = investment B. saving = government expenditure C. saving + taxation + imports = investment + government expenditure +

exports D. None of the above.

12 Suppose the value of imports of an open economy increases by ten cents for every one dollar increase in income. If its marginal propensity to consume is 0.8 and the tax rate is 10% of income, an increase in national income of $100 will result in increase in consumption spending on domestic goods. [93.12] A. $62 B. $64 C. $72 D. $91

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13 Refer to the following diagram of an open economy with no government sector.

0

$

Income45O

A B C D

Saving + imports

consumption + investmen

investment + exports

Which is the equilibrium level of national income? [93.13] A. OA B. OB C. OC D. OD

14 Refer to the following diagram of a closed economy with no government sector.

Which of the following are true?

AE

C

AE

0 YY Y Y1 2 3

45O

C = consumptionAE = aggregate expendituY = national income

(1) Saving must be negative when income is less than Y. (2) The average propensity to save is one at Y1. (3) The vertical distance between C and AE at Y2 represents saving at Y2. (4) There is an unintended reduction in inventory at Y3. [93.14] A. (1) and (2) only B. (1) and (3) only C. (2) and (4) only D. (3) and (4) only

15 A labour retraining programme can help to reduce [93.15] A. search unemployment. B. frictional unemployment. C. structural unemployment. D. cyclical unemployment.

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16 Which of the following has a contractionary effect on the money supply? [93.16] A. There is an increase in the cash drain ratio. B. There is a decrease in the rediscount rate. C. There is a decrease in the legal reserve ratio. D. The government buys bonds in the open market.

17 According to the classical quantity theory of money, [93.17] A. the velocity of circulation is unpredictable. B. money demand is a constant fraction of nominal income. C. money demand falls as the interest rate increases. D. at full employment, a 10% increase in the money supply may lead to a

5% increase in the price level.

18 Initially a bank has no excess reserves and the legal reserve ratio is 25%. Now a customer adds to his demand deposit by depositing $100 in cash from his pocket. The bank grants a loan equal to the resulting excess reserves.

What is the possible maximum amount of loans created by the whole banking system? [93.18] A. $75 B. $100 C. $300 D. $400

19 Which of the following will lead to a decrease in the rate of unemployment? [93.19] A. a decrease in the money supply. B. an increase in unemployment benefit. C. an unexpected increase in the inflation rate. D. an increase in the income tax rate.

20 If the timing, rate and duration of an inflation can be fully anticipated, which of the following will occur? [93.20] A. There will be no wealth redistributive effect. B. The inflation can be avoided. C. Transaction costs will increase. D. The real interest rate will equal the nominal interest rate.

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21 If the assets and liabilities of four persons are listed as follows, who will gain most from an unanticipated inflation? [93.21]

Mr. A Mr. B Mr. C Mr. D Monetary Assets $100 $100 $100 $100 Monetary Liabilities 100 50 150 200 Real Assets 200 250 250 220 Real Liabilities 400 300 200 100

A. Mr. A B. Mr. B C. Mr. C D. Mr. D

22 Which of the following are claimed to be advantages of a flexible exchange rate system when compared with a fixed exchange rate system? (1) The influence of market forces prevents speculative pressures against a

countrys currency. (2) A government can pursue an independent monetary policy unaffected

by the balance of payments problem. (3) Floating exchange rates are not influenced by non-trade factors such as

interest rates. (4) Automatic adjustments in exchange rates correct a balance of

payments disequilibrium. [93.22] A. (1) and (2) only B. (1) and (3) only C. (2) and (4) only D. (3) and (4) only

23 A 10% appreciation in the value of a countrys currency causes the volume of its imports to change by 10% and the volume of its exports to change by 15%. The overall effect of these changes on this country will be: [93.23] A. its balance of payments will be 5% worse than before. B. its marginal propensity to import will fall. C. its terms of trade will be worse. D. its balance of trade will be worse.

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24 Which of the following is an explanation for the shift in demand for the HK$ from DD to D1D1? [93.24]

S

S

D

D

D

D

1

1

0

Price of HK$

(in terms of US$)

Quantity of HK$

A. There is speculation against the HK$. B. There is an increase in Hong Kong investment in the United States. C. There is a decline in American invisible earnings. D. The price of the HK$ in terms of the US$ is below that of the linked

rate.

25 A countrys terms of trade will worsen when [93.25] A. the volume of imports increase faster than the volume of exports. B. the value of total imports has risen relative to the value of total exports. C. the ratio of export price to import price rises. D. trading partners revalue their currencies.

26 Which of the following would cause a reduction in Hong Kongs exports? [93.26] A. a depreciation of the Hong Kong dollar. B. a reduction of tariffs abroad. C. a decrease in the foreigners marginal propensity to import. D. an increase in Hong Kongs interest rates.

27 The following are the items in the balance of payments account of a country. Items $ billion Imports 500 Exports 300 Interest receipt 30 Overseas investment by domestic companies 65 Foreign investment in the country 30 Fall in reserves 50 The amount that the country has to borrow to balance the account is [93.27]

A. $85 billion. B. $155 billion. C. $185 billion. D. $255 billion.

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28 Which of the following about money demand is NOT true? [93.28] A. It is positively related with the anticipated inflation rate. B. It is positively related with wealth. C. It is negatively related with the real rate of interest. D. It is positively related with income.

29 If the sum of the real interest rate and the anticipated inflation rate is greater than the nominal interest rate, which of the following will be FALSE? [93.29] A. Nobody likes to lend money to others. B. People want to borrow money for consumption. C. People want to make investments themselves. D. The anticipated inflation rate will fall.

30 Which of the following does NOT lead to search unemployment? [93.30] A. a structural change in the economy. B. fluctuation in the demand for goods and services. C. imperfect information in the labour market. D. insufficient aggregate demand.

SECTION B 93.1. The GDP figures (in HK$m.) for the last three years are as follows: 1989 1990 1991 at current market prices 499 157 555 856 633 023 at constant 1980 price 254 434 262 189 272480 (a) What are the GDP implicit price deflators for all three years? (1980 = 100).

Show your working. (b) What are the inflation rate as measured by the GDP deflators for 1990 and

1991? Show your working. (8 marks) 93.2 Is the rate of unemployment necessarily equal to zero when GNP is at its full

employment level? Give two reasons to support your answer. (8 marks) 93.3 Under the linked exchange rate system of Hong Kong, explain the exchange

rate arbitrage which keeps the market exchange rate of the Hong Kong dollar approximately equal to the linked exchange rate. (8 marks)

93.4 If the national income and the money supply of a country grow at 5% and 10%

a year respectively, what is the rate of inflation predicted by the Quantity Theory of Money? Explain. (8 marks)

93.5 With the aid of diagram, compare the income redistributive effects on a

country imposing tariffs and quotas on its imports. (8 marks)

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93.6 Suppose that the linked rate of exchange is altered from US$1 = HK$7.02. Assume also that the elasticities of demand for Hong Kongs exports and imports are both greater than one. What will be the effect of this revaluation in the near future on the inflation rate in Hong Kong? (10 marks)

93.7 If the new airport project costs HK$170 billion over the next four years, and

the government decides to finance this expenditure entirely by taxation without borrowing, will such a fiscal policy be expansionary, contractionary, or neutral? Explain. (10 markets)

93.8 Briefly explain three general methods whereby a Central Bank can control the

money supply. Can such methods be used in Hong Kong? (10 marks) 93.9 Explain two situations in the product market in which an expansionary fiscal

policy would be less effective in affecting the national income. (10 marks)

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Solution SECTION A

1 A 16A

2 B 17B 3 B 18C

4 B 19C 5 B 20A

6 C 21D 7 C 22C

8 B 23D 9 A 24D

10 A 25D 11 D 26D

12 A 27B 13 C 28A

14 B 29D 15 C 30D

IS FunctionLM FunctionItems