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ECON1102 MACROECONOMICS 1

Session 1, 2014
Sample Final Exam Questions
Short-Answer Questions
The following are examples of the type of question that could be asked in
Part B of the final exam.
Question 1 (10 marks)
(a) Define national saving. What determines the level of national saving?

(2 mark)

(b) Briefly explain the main factors that determine the demand for money. Use a model to
show equilibrium in the money market and explain the effect of a financial innovation that
leads to a fall in the demand for money.
(5 marks)
(c) Using a diagram explain the concept of the Paradox of thrift.

(3 marks)

Question 2 (10 marks)


(a) Explain the function of the Reserve Bank

(2 marks)

(b) Briefly outline the mechanisms used by the RBA to achieve its target for the overnight
cash rate.
(5 marks)
(c)Explain the role of the policy reaction function in maintaining inflation targeting?
(3 marks)
Question 3 (10 marks)
(a) Explain the concept of the average labour productivity. Why do economists consider
growth in average labour productivity to be a key influence on long-run living standards?
(2 marks)
(b) Identify three variables that may affect average labour productivity and briefly explain
how they do so.
(3 marks)
(c) Suppose that aggregate output is determined by the following Cobb-Douglas production
function, Yt = AtKt . Lt(1 ).
(i)Does this production function exhibit constant returns to scale? Explain. (1 mark)
(ii) What is the marginal product of labour equal to for the Cobb-Douglas function?
(1 mark)
(iii) Using the above function explain the concept of growth accounting. (3 marks)

Question 4 (10 marks)


The country of Utopia is in a long-run equilibrium with an inflation rate of 10 percent per
annum. In an effort to reduce the rate of inflation the central bank of Utopia adopts an
inflation target of 2 percent. Use the AD-AS model to answer the following questions.
(a) Use a labelled diagram to show the initial long-run equilibrium for Utopia.

(2 marks)

(b) With the aid of a diagram explain the process that could be used by the central bank of
Utopia to reduce the inflation rate from the initial level of 10 percent to its target rate of 2
percent.
(4 marks)
(c) Discuss the relative costs and benefits of the disinflation process undertaken by the
central bank of Utopia. (Hint: In your answer you should explain the benefits of having a
lower long-run inflation rate).
(4 marks)
Question 5 (10 marks)
(a) Explain how the Australian/US dollar exchange rate can be determined using a model of
supply and demand model. What factors might cause a depreciation of the Australian dollar
against the US dollar?
(3 marks)
(b) Describe how changes in the exchange rate can be explained using purchasing power
parity (PPP). Would you use PPP to explain short run movements in the exchange
rate? Give reasons for your answer.
(5 marks)
(c) Explain why it is not possible for a country to maintain an independent domestic
monetary policy when it has a fixed exchange rate system.
(2 marks)