Macro91 1 In a closed economy without government, consumption rises by $40 million when

national income rises by $100 million. This shows that [91.1] (1) the marginal propensity to consume is 0.4. (2) savings will rise as national income rises. (3) the average propensity to save is 0.6. (4) investment increases as national income increases. A. (1) and (2) only B. (1) and (3) only C. (2) and (4) only D. (3) and (4) only

2 The marginal propensity to save of an economy that has no taxes is 0.2, and half of

the consumption goods are imported. What is the value of the multiplier in this economy? [91.2]

A. 1 B. 1.67 C. 2.5 D. 5 3 If fiscal policy is to be more effective, should be greater in absolute value. [91.3]

A. interest elasticity of investment B. interest elasticity of money demand C. income elasticity of money demand D. income velocity of money

4 In the above diagram, AA and BB are the production-possibility frontiers of Countries

A and B, respectively. [91.4] A. Country A will not trade with Country B. B. Country A will export Good X to Country B. C. Country B has a comparative advantage in the production of Good X. D. Country B has an absolute advantage over Country A in the production of

Good Y.

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5 A monetary policy will be more effective if the liquidity preference function is more and the marginal efficiency of capital function is more . [91.5]

A. elastic, elastic B. inelastic, inelastic C. inelastic, elastic D. elastic, inelastic

6 It is often said that inflation is a monetary phenomenon. Which of the following can

most accurately explain the meaning of this term? [91.6] A. The price level cannot increase without an increase in the money supply. B. The continuous rise in prices can only be sustained by continuous increases in

the money supply. C. Inflation can only he started by increases in the money supply. D. Repeated supply shocks cannot raise prices if there is no monetary

accommodation. 7 Suppose Country X trades with Country Y only. Country X wishes to improve its

terms of trade by imposing a tariff on goods imported from Country Y. This will be less effective if [91.7] A. Country Y is a small country. B. Country Y has low elasticities of demand and supply of the goods traded. C. Country Xs demand for goods from Country Y is highly elastic. D. Country Y has high price elasticities of demand and supply of the goods

traded. 8 An increase in money supply will be likely to lead to an increase in national income.

Which of the following would affect the extent of the change in national income? (1) the interest elasticity of investment (2) the marginal propensity to withdraw (3) the interest elasticity of demand for money [91.8] A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. All of the above.

9 An efficient tariff

(1) causes a reduction in the real output of the world as a whole. (2) minimizes dead-weight loss. (3) can improve the terms of trade of the importing country only if it is not a

price-taker in the world market. [91.9] A. (1) and (2) only B. (1) and (3) only C. (2) and (3) only D. All of the above.

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Refer to the above diagram. Under the present linked exchange rate system the exchange rate is US$1 = HK$7.8. If the demand for the US dollar increases from D1 to D2 ,then [91.10] A. Hong Kong will have a balance of payments surplus. B. Hong Kong will have a balance of payments deficit, causing the money supply

and the interest rate to adjust. C. the external value of the Hong Kong dollar will be artificially fixed at a lower

level. D. Hong Kongs exports will become dearer and imports cheaper.

11-12. Refer to the following national income statistics of a hypothetical economy. ($ billion) Consumers expenditure 1150 Government final consumption 380 Gross domestic fixed capital formation 340 Value of physical increase in steaks and work in progress 30 Exports of goods and services 550 Imports of goods and services 540 Net property income from abroad 10 Taxes on expenditure 300 Subsidies on production units 40 Capital consumption 220 11 The gross national product at market prices is [91.11]

A. $1 880 billion. B. $1 920 billion. C. $2 140 billions D. $2 400 billion.

12 The difference between national income at market prices and national income at

factor cost is [91.12] A. $220 billion. B. $260 billion. C. $300 billion. D. $340 billion.

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13 When the equilibrium national income is attained at the full employment level, [91.13] A. the gap between the rich and the poor will be reduced. B. the natural unemployment rate will remain unchanged. C. economic growth will slow down because there exists no idle resources. D. some job searchers will still be unemployed.

14 During Christmas and Chinese New Year, people tend to carry more cash. Assuming

bank does not hold excess reserves, there will be [91.14] A. a decrease in the money supply. B. an increase in the money supply. C. no change in the money supply but a higher velocity of circulation. D. no change in the money supply but a higher demand for goods and services.

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Which of the following correctly explains the shift of the asset demand for money curve from Ma0 to Ma1? (1) a fall in the interest rate (2) a preference for higher liquidity (3) a widespread use of credit cards (4) expectations of a fall in bond prices [91.15] A. (1) and (2) only B. (1) and (3) only C. (2)and (4) only D. (3) and (4) only

16 Which of the following ratios gives the correct definition of the velocity of the

circulation of money? [91.16] A. nominal GNP to the stock of money B. nominal GNP to the flow of money C. red GNP to the stock of money D. real GNP to the flow of money

17 A country with a labour force of 2 million has 500 000 workers searching for jobs in a

particular year. They spend on the average 13 weeks in locating a new job. Calculate the unemployment rate of this country. [91.17] A. 2.5% B. 3.25% C. 6.25 % D. 25 %

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18 If the terms of trade of Hong Kong have become more favourable, then [91.18] A. Hong Kong will have a surplus in her balance of trade. B. Hong Kong will be better off. C. Hong Kong can obtain goods through international trade at a lower

opportunity cost. D. the volume of Hong Kong imports has risen relative to the volume of Hong

Kong exports. 19 Which of the following statements about the Acceleration Principle is correct?

[91.19] A. The rate of change in sales of goods affects net investment. B. Net investment increases as national income increases. C. The rate of change in net investment affects national income. D. A higher level of output leads to a higher rate of change in net investment.

20 The crowding-out effect would he minimal if [91.20]

A. investment is insensitive to changes in the interest rate. B. the transactions demand for money is sensitive to changes in national income. C. the asset demand for money is inelastic with respect to changes in the interest

rate. D. consumption is inelastic with respect to changes in national income.

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When the consumption line changes from C1 to C2, it means (1) the autonomous consumption level increases. (2) the value of the multiplier increases. (3) the average propensity to consume increases. (4) the marginal propensity to save increases. [91.21] A. (1) and (2) only B. (1) and (4) only C. (2) and (3) only D. (3) and (4) only

22 The Phillips curve shows the relationship between [91.22]

A. the price level and the unemployment rate. B. real national income and the price level. C. the unemployment rate and nominal national income. D. the rate of change of the wage rate and the unemployment rate.

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23 Other things being equal, an open market sale of bonds by the central bank to the non-bank public will (1) curb the credit creation power of the commercial banks. (2) raise the market rate of interest. (3) increase the amount of securities held by the commercial banks. (4) lead to a fall in national income. [91.23] A. (1), (2) and (3) only B. (1), (2) and (4) only C. (1), (3) and (4) only D, (2), (3) and (4) only

24 The necessary condition for credit creation of the commercial banks is [91.24]

A. the adoption of a fractional reserve system. B. no excess reserves held by the banking sector. C. no cash leakage to the public. D. the availability of sufficient loans to the public.

25 Other things being equal, the central banks redemption of bonds in the open market

will most probably lead to [91.25] A. an upward shift of the investment schedule. B. a downward shift of the saying schedule. C. an increase in expenditure on consumer durables. D. an increase in government consumption.

26 Which of the following types of people are likely to benefit most period of

unanticipated inflation, assuming that the composition of their assets and liabilities remains unchanged? [91.26] A. Pension owners with savings accounts, who have no liabilities B . Those who have common stocks and houses, and whose only liability is a

mortgage. C. Those who own government bonds and a paid-up fife insurance policy, and

who have no liabilities. D . Those who own government bonds and houses, and whose only liability is a

mortgage. 27 Which of the following is NOT the basic assumption of the principle of comparative

advantage? [91.27] A. Countries have different endowments of factors of production. B. The technology of production and consumer tastes are fixed. C. Factors of production are perfectly mobile within countries but not between

countries. D . The production possibility frontier of each country must be a straight line.

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28 Suppose a Hong Kong investor buys a factory worth HK$1 million in China, which of the following is NOT possible? [91.28] A. There will be a debit entry in the capital account of Hong Kongs balance of

payments. B. There will be a credit entry in the official reserves account of Hong Kongs

balance of payments. C. There will be a credit entry in the capital account of Chinas balance of

payments. D. There will be a debit entry in the current account of Hong Kongs balance of

payments. 29 Which of the following statements concerning unemployment is FALSE? [91.29]

A. Frictional unemployment is unavoidable in any free society. B. It is possible that the rate of unemployment in one region of a country is much

higher than the national unemployment rate. C. The difference between the number of unemployed and the number of job

vacancies is a measure of frictional plus structural unemployment. D. Search unemployment can be reduced if more information about the job

market is provided. 30 Which of the following is NOT a reason why international comparisons of national

income statistics can be misleading? [91.30] A. The rates of inflation vary between countries. B. The methods of calculating national income vary between countries. C. Some economies have more non-market goods and services. D. The exchange rates may not reflect differences in the domestic purchasing

powers of currencies. SECTION B 91.1 The real interest rate is the opportunity cost of holding money. Explain this

statement. (10 marks) 91.2 The classical Quantity Theory of Money is a theory of full employment. Do you

agree? Explain your answer. (10 marks)

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91.3. An economy not engaged in trade can produce and consume anywhere along its production possibility boundary TT. II is the economys indifference curve. With free-trade prices shown by the slope of line RR, production takes place at A and consumption at B. The economy exports DA units of clothing to obtain BD units of food. With the aid of the diagram provided, show the new consumption pattern and the trade situation after a fire destroyed quantity DA units of its clothing. (10 marks)

91.4. Consider the following economy:

consumption: C = 100 + 0.70 (Y-T) investment: I = 900 - 25r government spending: G = 100 tax: T = 100 demand for money: MD = 0.2Y + 100 -50r money supply: Ms = 500

Y is the national income and r is the interest rate.

(a) Derive the IS curve and the LM curve. Explain your derivation. (6 marks) (b) Compute the equilibrium level of income and the equilibrium level of the

interest rate. (4 marks) 91.5. Both expansionary monetary policy and expansionary fiscal policy lower

unemployment when the price level is fixed, but they have the opposite effect on interest rates. Do you agree? Explain your answer. (10 marks)

91.6 (a) What is meant by crowding out? (5 marks) (b) Explain how the degree of crowding out depends on

z conditions of employment or capacity utilization; (6 marks) z the interest elasticity of the demand for money; and (7 marks) z the interest elasticity of investment. (7 marks)

Illustrate your answers to (b) with diagrams. 91.7 (a) What is the consumption function? Use a diagram to explain the marginal

propensity to consume. (10 marks) (b) Distinguish between a movement along the consumption function and a shift of the

function. Briefly explain THREE main factors that cause a shift of the consumption function. (15 marks)

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91.8 A small open economy whose currency is linked or pegged to that of a major country cannot pursue effectively an independent monetary policy. (a) Explain this statement. (10 marks) (b) discuss this statement with special reference to the determination of money supply

and interest rates in Hong Kong. (15 marks) 91.9 (a) Define the term natural rate of unemployment. Explain why there has been an

upward drift of this rate in some leading industrial countries. (11 marks) (b) Explain why an expansionary monetary policy cannot lower the natural rate of

unemployment. What are the possible measures that might lower it? (14 marks)

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Solution SECTION A

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

D.income velocity of moneyA.(1) and (2) only

Exports of goods and services550Imports of goods and services540B.nominal GNP to the flow of moneyD,(2), (3) and (4) only