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CONFIDENTIAL

Surname : ____________________________________________________________________
First Names : _________________________________________________________________
Student ID No. : _______________________________________________________________
Seat No. : ____________________________________________________________________

THE UNIVERSITY OF SYDNEY

SHOOL OF ECONOMICS
FACULTY OF ARTS AND SOCIAL SCIENCES

ECON 5002
Macroeconomic Theory

Mid-semester Examination: Semester 1, 2014

Time allowed: 1.5 hours + 10 minutes reading time

1. The exam consists of 30 multiple choice questions. Choose the most appropriate answer. Each
question is worth 1 (one) mark. No deductions will be made for incorrect answers.

2. Code and write your name and SID number on the computer scoring sheet.

3. Code answers to the multiple-choice questions in a dark pencil or pen on the computer scoring
sheet.

4. Aids allowed: non-programmable calculator only.

5. The length of the exam is 1.5 hour + 10 minutes reading time.

6. If you finish within 15 minutes of the end of allowed time for the exam you should remain in
your seat until the completion of the exam.

Relax, concentrate, and think your answers through. Good Luck

.
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Multiple Choice Questions

Use the following information to answer questions 1-3. Suppose a country using the Australian
system of unemployment statistics has 300 million people, of whom 200 million are working age.
Of these 200 million, 80 million have jobs. Of the remainder: 40 million are actively searching for
jobs; 40 million would like jobs but are not searching; and 40 million do not want jobs at all.

1. Refer to the information above. The labour force is:

a. 120 million. b. 200 million. c. 80 million. d. 40 million. e. 160 million.

2. Refer to the information above. The labour force participation rate is:

a. 0.8. b. 0.2. c. 0.3. d. 0.4. e. 0.6.

3. Refer to the information above. The official unemployment rate is:

a. 0.43. b. 0.53. c. 0.13. d. 0.33. e. 0.23.

4. Suppose the demand for money is NOT very sensitive to the interest rate. Given this
information, we know that:

a. the IS curve should be relatively flat.

b. the IS curve should be relatively steep.
c. the LM curve should be relatively flat.
d. the LM curve should be relatively steep.
e. neither the IS nor the LM curve will be affected.

5. Consider the IS-LM framework. For where point B is located, there is excess in
goods market, excess in financial market.

a. demand; demand
b. demand; supply
c. supply; supply
d. supply; demand
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6. Consider the IS-LM framework. For where point B is located, there is excess in
goods market, excess in financial market.

a. demand; demand
b. demand; supply
c. supply; supply
d. supply; demand

7. We can expect the IS-curve to become flatter as

a. the supply of money decreases

b. the marginal propensity to consume decreases
c. money demand becomes more interest sensitive
d. investment becomes less sensitive to interest rate changes
e. none of the above.

8. When C = 𝐶0 + 𝐶1 𝑌𝐷 , an increase in 𝐶0 will cause which of the following to increase?

a. Equilibrium income.
b. Equilibrium disposable income.
c. Demand.
d. Consumption.
e. All of the above.

9. An increase in the propensity to consume from 0.42 to 0.78 will cause:

a. the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a
smaller effect on output.
b. the ZZ line to become steeper and a given change in autonomous consumption (c0) to have
a larger effect on output.
c. the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a
larger effect on output.
d. the ZZ line to become steeper and a given change in autonomous consumption (c0) to have no
effect on output.
e. the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a
smaller effect on output.
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10. Suppose there is a decrease in consumer confidence and the central bank controls the interest
rate. Which of the following represents the complete list of variables that must decrease in response
to this consumer pessimism?

a. Consumption, investment and output.

b. Consumption, output and the interest rate.
c. Consumption.
d. Consumption and output.
e. Consumption and investment.

11. Consider the IS-LM framework. Suppose there is a simultaneous tax cut and open market sale
of bonds. Which of the following must occur as a result of this?

a. output increases
b. output decreases
c. the interest rate increases
d. the interest rate decreases
e. both output and the interest rate increase.

12. Which of the following would decrease the short-run output effects of a monetary expansion?

a. an increase in the marginal propensity to consume.

b. an increase in the interest rate sensitivity of investment
c. The IS curve is very flat.
d. all of the above.
e. none of the above

13. Events in the money market affect the equilibrium in the goods market because

a. money is one form of wealth

b. investment spending is sensitive to the interest rate
c. demand for money is determined by the level of output
d. all of the above
e. none of the above.

14. The natural level of employment (𝑵𝒏 ) will decrease when which of the following occurs?

a. an increase in the markup of prices over costs.

b. a reduction in unemployment benefits.
c. an increase in the actual unemployment rate.
d. all of the above.
e. none of the above

15. Suppose we wish to examine the determinants of the equilibrium real wage and the equilibrium
level of employment. In a graph with the real wage on the vertical axis, and the level of
employment on the horizontal axis, the wage-setting relation will now be:

a. a vertical line.
b. a downward sloping line.
c. a horizontal line.
d. a curve that first slopes upward, then downward.
e. an upward sloping line.
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16. Which type of policy can have a medium-run effect on output and employment?

a. labour market policy

b. monetary policy
c. fiscal policy
d. all of the above
e. none of the above

17. If discouraged job seekers re-enter the labour force but do not find work, they will:

a. increase the measured unemployment rate

b. increase the measured participation rate
c. both (a) and (b)
d. none of the above

18. The aggregate supply curve has its particular shape because of which of the following
explanations?

a. An increase in the nominal wage causes a decrease in the amount of output that firms are willing
to produce.
b. A decrease in the aggregate price level causes a decrease in nominal money demand and a
decrease in the interest rate.
c. An increase in output causes an increase in employment, a decrease in unemployment, an
increase in the nominal wage and an increase in the price level.
d. An increase in the aggregate price level will cause an increase in the interest rate and a decrease
in output.
e. A decrease in output causes a decrease in employment, a decrease in unemployment, an increase
in the nominal wage and an increase in the price level.

19. The aggregate demand curve has its particular shape because of which of the following
explanations?

a. A decrease in the aggregate price level will cause an increase in the real wage, a decrease in
employment, and a decrease in output.
b. An increase in the aggregate price level prompts the government to decrease government
spending in the hope of bringing down prices.
c. A decrease in the aggregate price level will cause a decrease in the interest rate and an
increase in output.
d. An increase in the money supply will cause an increase in the interest rate, a decrease in
investment, and a decrease in output.
e. As the aggregate price level increases, goods and services become relatively more expensive and
individuals respond by decreasing the quantity demanded of goods and services.

20. The aggregate demand curve will shift to the right when which of the following occurs?

a. a reduction in the markup ratio

b. a reduction in the government spending
c. a rise in the price level
d. a decrease in the price level
e. none of the above.
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21. An increase in government spending will, in the medium run, cause no change in:

a. unemployment and price level

b. the interest rate and unemployment
c. the price level and the interest rate
d. all of the above
e. none of the above.

22. In the AS-AD model if the central bank targets the price level, a permanent increase in
government spending will cause which of the two following effects in the medium run:
(I) the price level will increase
(II) the interest rate will increase

a. I is true, II is not
b. II is true, I is not
c. both I and II are true
d. neither I nor II is true.

23. Consider the AS-AD framework. In the short run, a reduction in the price of oil will cause:

a. a reduction in output
b. an increase in the price level
c. a reduction in the interest rate
d. all of the above
e. none of the above.

24. The neutrality of money is consistent with which of the following statements?

a. Changes in the money supply will not affect the price level in the medium run.
b. Changes in the money supply will not affect employment in the medium run.
c. Changes in the money supply will not affect wages in the medium run.
d. Changes in the money supply will not affect employment in the short run.
e. Changes in the money supply will not affect the price level in the short run.

25. Suppose the minimum wage decreases. Given this event, we would expect which of the
following to occur?

a. An increase in the aggregate price level and an increase in output in the short run.
b. A decrease in the real wage in the medium run.
c. An increase in the natural rate of unemployment.
d. An increase in the interest rate in the medium run.
e. None of the above.

26. In the AS-AD model the aggregate supply curve will shift leftward (upward) when

a. there is an increase in unemployment benefits

b. there is a reduction in the expected price level
c. the central banks adopts a restrictive monetary policy
d. there is an increase in the government spending
e. none of the above
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27. Assume that the economy is initially operating at the natural level of output. When the central
bank raises the price target, the subsequent one-time 20% increase in the nominal money supply
will cause:

a. a 20% increase in the real wage in the medium run.

b. a 20% increase in the real money supply in the medium run.
c. a 20% increase in the interest rate in the medium run.
d. a 20% increase in the price level in the medium run.
e. a 20% increase in output in the medium run.

28. Suppose the economy is described by the following behavioural equations. Assume the central
bank keeps the money supply constant.

C = c0 + c1(Y –T) Consumption

I = I0 + b1Y – b2i Investment
M/P = kY – hi LM curve
G = G0 Exogenous government purchases
T = T0 Exogenous Taxes
c1 = 0.8
b1 = 0.1
b2 = 0.2
k = 0.4
h = 0.2

Increase in government spending by $1 will increase the short-run equilibrium output by -----, and
will shift the IS curve horizontally by ------,

a. $2; $2
b. $10; $10
c. $5; $10
d. $2; $10
e. $5; $5

29. Suppose firms in the Australian economy have market power and, therefore, set prices P equal
to the wage rate W plus a mark-up m on W (i.e. P = (1 + m)W). Then an increase in the mark up m,
assuming everything else remaining constant, will cause in the medium run:

a. the RBA will raise the interest rate

b. natural rate of unemployment will decrease
c. investment will increase
d. none of the above
e. all of the above

30. Assume the economy is initially operating at the natural level of output. Suppose that
individuals decide to increase their saving. We know that this increased desire to save will be
"neutral" in:

a. both the short run and the medium run.

b. the short run, but not the medium run.
c. neither the medium run nor the short run.
d. the medium run, but not the short run.