ECON 1020 Introductory

Macroeconomics

Pass Workbook

Semester 2, 2007

Student Version

Peer Assisted Study Sessions

University of Queensland School of Economics

i

Contents

Welcome ……… ii Contact details ……… iii Important dates ……… iv Topic 1: Macroeconomics, National Income and GDP (A.1-A.2) ……… 2 Topic 2: The Labour Market and Unemployment (A.3) ……… 10 Topic 3: Productivity and Economic Growth (B.1) ……… 16 Topic 4: Economic Development and Trade (B.2) ……… 20 Topic 5: The Monetary Sector: Money, Banks and Inflation (C.1) 24 Topic 6: The Real Sector: Aggregate Expenditure and the

Multiplier (C.2) ……… 30

Topic 7: Revision of Module C ……… 36 Topic 8: The Economic Fluctuations Model (D.1) ……… 40 Topic 9: Monetary Policy (D.2-E.1) ……… 44 Topic 10: Fiscal Policy (E.2) ……… 50 Topic 11: Australia and the International Economy (E.3) ……… 56 PASS Mock Exam ……… 60

ii

Welcome to PASS! PASS is designed to be an informal and friendly way of revising ECON1010. PASS is not designed to replace lectures and tutorials – it is designed to be an enjoyable and helpful way to study material that you have already covered in those lectures and tutorials. You can find suggested answers to the questions in this workbook by attending PASS. The answers will be placed on the pass website at the conclusion of the semester. For more details about PASS, including how to apply to be a leader in 2008, please visit the website. There is a link to the PASS website through the Course webpage. Note: All questions contained within this book are either sourced or adapted from

Previous Exam Papers - Published by the University of Queensland Resources provided with ‘Principles of Micro Economics’ – published by McGraw-Hill

Current and past PASS leaders

COPYRIGHT NOTICE:

This publication is copyright the University of Queensland. Sales or distribution of this booklet (other than by the University of Queensland) are

prohibited.

iii

Contact Details YOUR PASS LEADERS Name: Name: PASS COORDINATOR Tom Gole Room 516, Colin Clark Building E-mail: pass-econ@economics.uq.edu.au Telephone: 3365 6770 ALL OTHER INQUIRIES Ms Rachel Tutton Room 655, Colin Clark Building E-mail: econ1010@economics.uq.edu.au Telephone: 3365 6093 The School of Economics Enquiries Office Level Six, Colin Clark Building Telephone: 3365 6570 3346 9123

iv

Important Dates

23 JULY (WEEK 1): LECTURES BEGIN 30 JULY (WEEK 2): TUTORIALS BEGIN 6 AUGUST (WEEK 3): PASS SESSIONS BEGIN 15 AUGUST (WEEK 4): EXHIBITION DAY HOLIDAY

20 AUGUST (WEEK 5) TUTORIAL EXAM - MODULE A 3 SEPTEMBER (WEEK 7): TUTORIAL EXAM - MODULE B 24 SEPTEMBER: MID-SEMESTER BREAK BEGINS (no PASS sessions) 1 OCTOBER (WEEK 10): CLASSES RESUME TUTORIAL EXAM – MODULE C 29 OCTOBER: SWOT VAC BEGINS

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ECON1020 PASS TIMETABLE Please note: PASS session times may be subject to change depending on student demand.

MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

10 am –

11 am

ECON1020 PASS

50-S201

ECON1020 PASS

83-C416

11 am –

12 pm ECON1020 PASS

68-214

12 pm –

1 pm

ECON1020 PASS

39A-208 ECON1020 PASS

03-329

ECON1020 PASS

39A-208 ECON1020 PASS

39A-209 1 pm –

2 pm

ECON1020 PASS

39A-208 ECON1020 PASS

05-207 ECON1020 PASS

39A-208

2 pm –

4 pm

ECON1020

LECTURE

27A (UQ Centre)

ECON1020

LECTURE

27A (UQ Centre)

4 pm –

5 pm

ECON1020 PASS

47A-141 ECON1020 PASS

39A-208

5 pm –

6 pm

ECON1020 PASS

32-213

6 pm –

8 pm

ECON1020

LECTURE

39-105

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2

Macroeconomics, National Income and GDP

Topic One

Key Concepts of Macroeconomics Gross Domestic Product (GDP) Real GDP Potential GDP Economic growth Business cycle Recession Peak Trough Expansion Recovery Unemployment Inflation Disinflation Deflation Labour Capital Technology Production function.

Group Discussion Questions 1. What is economic growth? Why do we care about it?

Economic Growth in Australia: 1959-2007(Source: RBA, July 2007)

0

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100000

150000

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300000

Sep-5

9

Sep-6

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Sep-6

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Sep-6

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Sep-7

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Sep-7

3

Sep-7

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Sep-7

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Sep-7

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Sep-8

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Sep-8

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Sep-8

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Sep-9

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Sep-9

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Date

Rea

l GD

P (

$ m

illio

n)

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100000

150000

200000

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3

2. What is Gross Domestic Product? Explain the concept in terms of what, where and when goods are produced. 3. What are the main weaknesses of using GDP as a measure of national well-being?

4

Multiple Choice Questions

1. Which of the following is an assumption that allows economists to use models for prediction?

a. Rationality b. Ceteris paribus c. Scarcity d. Perfect/full knowledge

2. Macroeconomics is different from microeconomics because

a. It is generally on a much bigger scale. b. We observe different behaviour by different groups. c. Both of the above. d. Neither of the above.

3. The total value of all goods & services made in a country during a specified period of time is

called

a. Gross domestic product b. Demand c. Consumer price index d. Net domestic product

4. Economic growth describes

a. an increase in growth b. an increase in inflation c. an increase in real GDP d. an increase in interest rates

5. A slump occurs when _____ and a recession occurs when _____

a. output falls; output falls while inflation rises. b. output falls; output falls below potential. c. output is below potential, output falls. d. output falls rapidly or by a large amount; output falls slowly or by a small amount. e. “Slump” and “recession” are the same thing.

6. Which of the following is not correct?

a. Y = C + I + G + X b. S = Y – C – G c. S = I + G d. S = I + X e. X = S – I

5

7. Answer the question below on the basis of the following national income data. All figures are in billions of dollars.

Labour income 124 Capital and mixed income 113 Indirect taxes 43 Subsidies 12

GDP is:

a. $292 billion b. $268 billion c. $280 billion d. $182 billion

8. In the production approach, what does the value-adding method try to avoid?

a. double counting b. double upping c. double income d. double dipping

9. Ceteris Limited buy $100,000 of sand, rock, and cement to produce pre-mixed concrete. It sells 10,000 cubic yards of concrete at $30 a cubic yard. The value added by Ceteris Limited is:

a. $300,000 b. $100,000 c. $200,000 d. zero dollars

10. Which of the following items would be included in GDP?

a. Transfer payments made to an unemployed worker during the year. b. The cost of the new hammer bought by a thief and used to break into your car c. The cost of pollution caused during the processing of steel. d. The purchase of shares on the Tokyo exchange e. The purchase of stocks on the Australian stock exchange. f. None of the above.

6

11. Which of the above would be included in Australia’s measure of GDP?

a. The housework done by Marvyn, a university student living at St Lucia. b. The Sandman’s haircuts (which are so artistically messy that they require a team of

trained professionals!). c. The make-up an American band brought with them on tour. d. A framed photo of Paul from ‘The Wonder Years’, made in Canberra e. 2nd hand shirts folded at Lifeline. f. Nike shoes made in Indonesia g. Plastic bottles of beer sold at the footy. h. Hydroponically grown plants in a student house for personal consumption. i. A trampoline from Toys-R-Us, Sydney.

a. 1, 5, 7,9 b. 2, 5, 6, 8 c. 2, 4, 7, 9 d. 1, 3, 6, 8 e. 2, 5, 8, 9

Key Concepts of National Income and GDP Spending approach Consumption Investment Business fixed investment Inventory investment Residential investment Government expenditure Net exports Exports Imports Trade balance Income approach Labour income Capital income Depreciation Net investment Gross investment Indirect taxes Production approach Value added Intermediate good Final good National saving

7

Bonus Questions:

1. ‘CPI’ stands for: a. Consumer Propensity for Income b. Consumer Price Index c. Current Price of Inflation d. Current Price Index

2. If a price index was 128 at the end of 1987 and 136 at the end of 1988, what was the rate

of inflation for 1988? a. 4.2 per cent. b. 5.9 per cent. c. 6.25 per cent. d. 9.4 per cent.

3. Net exports are a negative figure when:

a. a nation’s imports of goods and services exceed its exports. b. the economy’s stock of capital goods is declining. c. depreciation exceeds gross private domestic investment. d. a nation’s exports of goods and services exceed its imports.

4. Suppose the value of the CPI is 1.10 in year 1, 1.21 in year 2, and 1.331 in year 3. Assume

also that the price of computers increases by 3% between year 1 and year 2, and by another 3% between year 2 and year 3. The price level is increasing, the inflation rate is _______, and the relative price of computers is _________.

a. increasing; increasing b. constant; increasing c. constant; decreasing d. increasing; decreasing e. decreasing; decreasing

5. The following are the annual national account figures for Econland.

Consumption expenditure ($m) 350 Gross investment ($m) 100 Depreciation ($m) 40 Government expenditure ($m) 100 Imports ($m) 25 Exports ($m) 20

What is Econland’s GDP for the year?

a. $500 million b. $555 million c. $545 million d. $505 million

8

6. What is the net investment in Econland for the year?

a. $100 million b. $60 million c. $140 million d. $70 million

7. Suppose that the total expenditures for a typical household in 2000 equalled $2,500 per

month, while the cost of purchasing exactly the same items in 2003 was $3,000. If 2000 is the base year, the CPI for the year 2003 equals

a. 0.83 b. 2.00 c. 1.2 d. 1.25

8. A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A

college graduate in 2000 found a job paying $28,000. The CPI was 1.68 in 2000. The 1972 graduate's job paid ____ in nominal terms and ______ in real terms than the 2000 graduate's job.

a. more; less b. more: more c. less; the same d. less; more e. less; less

Short Answer Questions: 1. In 1965, investment in the United States was about $113.5 billion and the trade deficit was $5.4 billion. How much was national saving in the United States? 2. In 1999 Macronesia had an annual GDP of $280 m. Consumption accounted for 25 per cent of this and government spending was $30 m. If there is a trade surplus of $80 m, what is investment? How much is national saving? 3. What is the GDP deflator? What does it show?

9

10

The Labour Market and Unemployment

Topic Two

Key Concepts of the Labour Market and Unemployment Natural unemployment rate Cyclical unemployment Frictional unemployment Structural unemployment Labour force Working-age population Unemployment rate Labour force participation rate Employment-to-population ratio Job losers Job leavers New entrants Real wage Minimum wage Efficiency wage Job search Insider-outsider theory Job rationing

Group Discussion Questions 1. Complete the following table.

Unemployment Rate

Labour force participation rate

Employment-to-population ratio

Unemployment in Australia: 1978-2007(Source: RBA, July 2007)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Feb-7

8

Feb-8

0

Feb-8

2

Feb-8

4

Feb-8

6

Feb-8

8

Feb-9

0

Feb-9

2

Feb-9

4

Feb-9

6

Feb-9

8

Feb-0

0

Feb-0

2

Feb-0

4

Feb-0

6

Date

Un

emp

loym

ent

Rat

e (%

)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

11

2. What are the problems with the Australian measurement of unemployment? 3. According to the Australian Bureau of Statistics, in June 2002, there were 9 311 500

employed people in Australia, and 623 600 unemployed. The labour force participation rate had just decreased slightly to 63.6%.

What was the unemployment rate? What was the size of the working age population? 4. Jane has just graduated from school and is looking for work. James used to be call-centre

employee, before the service became fully automated. Joseph has left his job because he thinks he can get more money elsewhere. Julie went fruit-picking for the summer and has now returned home. What type of unemployment do each of these people exhibit? Also, what are their reasons for unemployment?

12

Multi-choice Questions: 1. According to the job rationing explanation of unemployment, if there is unemployment, a) the real wage will fall to the equilibrium level. b) the real wage will increase to the equilibrium level. c) the number of people employed will increase to the equilibrium level. d) the real wage will not fall to the equilibrium level. e) the number of people employed will decline to the equilibrium level. 2. Which of the following is not an explanation of why actual wages may always be above the

equilibrium wage rate? a) Minimum wages b) Job vacancies c) Insider / outsider Theories d) Efficiency wage Theory 3. Historical evidence in America and Australia shows that, a) Unemployment has fallen consistently since the late 1960s b) Unemployment rises sharply in a recession but falls slowly in a recovery. c) Unemployment rises slowly in a recession but falls sharply in a recovery. d) The participation rate remains steady over the course of the business cycle. 4. Of the unemployment rate, the employment-to-population ratio, and the labour force

participation rate, which of the three is (are) unaffected by the discouraged worker phenomenon?

a) Only the unemployment rate. b) Only the employment-to population ratio. c) Only the labour force participation rate. d) Both the unemployment rate and the labour force participation rate. e) Both the unemployment rate and the employment-to-population ratio.

5. Dean voluntarily quit his job as an insurance agent, to return to university full-time and earn

an MBA degree. With degree in hand, he is now searching for a position in management. Dean presently is:

a) cyclically unemployed. b) structurally unemployed. c) frictionally unemployed. d) not a member of the labour force.

13

6. Holding other factors constant, if a larger proportion of the population enters the labour force as a result of a growing social acceptance of women working, then the real wages of workers will _____ and employment of workers will _____.

a) increase; increase b) decrease, increase c) decrease, decrease d) increase, decrease 7. During a recession, a number of individuals drop out of the labour force because they get

discouraged looking for a job. Assuming everything else is held constant, this causes a) The unemployment rate to increase b) The unemployment rate to decrease c) The labour force participation rate to increase. d) Nothing that affects the unemployment rate e) The unemployment rate to increase and the labour force participation rate to increase 8. Rosita has lost her job in a Launceston textile plant because of import competition. She

intends to take a short course in electronics and move to New South Wales where she anticipates new job will be available. We can say that Rosita is faced with:

a) secular unemployment. b) cyclical unemployment. c) structural unemployment. d) frictional unemployment.

14

Notes

15

16

Productivity and Economic Growth

Topic Three

Key Concepts of Productivity and Economic Growth Labour Capital Technology Diminishing returns Subsistence line Growth accounting formula Invention Innovation Diffusion Division of labour Learning by doing Human capital

Group Discussion Questions 1. What was Thomas Malthus’s prediction about economic growth? Why was he wrong? What had he not foreseen? Calculation Questions 2. What is the growth accounting formula? 3. Suppose the growth rate of real GDP per hour of worked is 4% and the growth rate of

Capital is 1.8% per year. What does the growth accounting formula suggest the growth of technology is?

4. Suppose the growth rate of capital per hour of work is 2.7% per year and the growth of

technology is 3.2% per year. What does the growth accounting formula suggest the growth in GDP per hour of work is?

5. Suppose the growth of GDP per hour of work is 4.8% per year and the growth in

technology is 3.3% per year. What does the growth accounting formula suggest the growth in Capital is?

17

Multi-choice Questions 1. According to the neoclassical model, economic growth is determined by: a) increase in the inputs of capital (plant and machinery). b) increase in the inputs of labour (workers). c) technological progress or total factor productivity. d) all of the above. (End of semester exam, June 2001) 2. In the region below the subsistence line,

a) people have less than is needed for subsistence. b) people have more than is needed for subsistence. c) there are diminishing returns. d) there are increasing returns. e) there are constant returns. (In tute quiz, 2004) 3. If the amount of output corresponding to a given labour input is below the subsistence line,

then

a) the population and labour force will increase. b) the population and the labour force will decrease. c) the subsistence line will shift up. d) the subsistence line will shift down. e) nothing will happen. (In tute quiz, 2004) 4. Suppose an economy produces 6,000 units of output with 100 units of labour. If the subsistence

level for this amount of labour is 5,000 units of output, we would predict that there will be

a) no change in output or population. b) a decrease in population and output. c) an increase in population and output. d) an increase in the subsistence level of output per person. e) a decrease in the subsistence level of output per person. (In tute quiz, 2004) 5. The iron law of wages refers to the prediction that a) wages were limited to their subsistence level. b) wages would always rise. c) increases in wages would improve living standards. d) increases in living standards would improve wages. e) nominal wages would fall but real living standards would rise. (In tute quiz, 2004) 6. Which of the following statements is true in the Malthusian model? a) Technological advance makes the Malthusian equilibrium arrive sooner. b) Capital accumulation reduces the rate of growth of the work force and the population. c) Even when capital per worker rises, growth in labour productivity stops eventually. d) All of the above are true. e) Both a and b are true.

18

7. Which of the following statements is true?

a) The inclusion of capital in the production function almost entirely explains the fifty-fold productivity gain in the advanced nations since the Industrial Revolution.

b) Even when capital is added to the production relationship, the Malthusian prediction is still true, if technology is held constant.

c) When capital is added to the production relationship, eventually growth in labour productivity will become constant.

d) When capital is added to the production function, the per capita subsistence level increases. e) When capital is added to the production function, the per capita subsistence level decreases. 8. The main purpose of the growth accounting formula is to

a) quantify the environmental limits to growth. b) explain why economies stop growing. c) measure the rate at which GDP grows. d) determine the role of government in affecting growth. e) determine how much of productivity growth is due to changes in the capital stock and how

much is due to changes in technology.

9. Technology can best be thought of as a) physical equipment. b) scientific process. c) what inventors produce. d) recipes that show how to combine resources. e) any type of capital equipment. ̀ 10. Intellectual property laws arise in response to

a) learning by doing. b) human capital formation. c) non-rivalry. d) non-excludability. e) diffusion. 11. Which of the following could the government do to increase the incentive for individuals

and firms to engage in R&D?

a) It should tax away any resulting monopoly profits. b) It can protect and create property rights to increase the private gain from R&D. c) It needs to ensure that there will be social gains from the activity. d) It should reduce intervention and leave resource allocation to markets. e) It needs to eliminate any unfair private gain arising from the R&D.

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20

Economic Development and Trade

Topic Four

Key Concepts of Economic Development and Trade Economic development Developing country Industrialised country Newly industrialised country Country in transition Catch-up line North-South problem Informal economy Foreign direct investment Portfolio investment, International Monetary Fund World Bank Conditionality Group Discussion 1. Draw the catch-up line.

Why is ‘catch-up’ predicted? That is, why (in theory) will poor countries grow faster than rich? 2. What role can trade play in encouraging economic development? Multi-choice Questions 1. The main purpose of the catch-up line is to show a) how well the rate of productivity growth predicts the level of productivity. b) how well the level of productivity predicts the rate of productivity growth. c) that catch-up has occurred. d) income inequality between different countries or regions. e) how uneven the rate of growth has been in different countries or regions of the world.

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2. A country located on the lower right-hand corner of the catch-up line is

a) a rich country experiencing slow rates of growth. b) a rich country experiencing rapid rates of growth. c) a poor country experiencing slow rates of growth. d) a poor country experiencing rapid rates of growth. e) Not enough information is given. 3. Statistics suggest that the catch-up line can be applied a) to all countries. b) only to developing countries. c) only to NICs (newly industrialised countries). d) only to upper and middle income countries. e) all countries below the industrialised countries. 4. _________________. attempts to explain why poor countries do not develop faster a. The transition phenomenon. b. High population growth c. New growth theory d. The industrialization phenomenon e. North-South problem

5. According to economic growth theory, catch-up among different countries of the world is expected, in part, because of

a) foreign aid. b) diminishing returns to capital. c) the costliness of adopting new technologies. d) long-term mobility of labour. e) increasing returns to labour. 6. Which of the following is not a true phenomenon for rich and poor countries? a) Rich countries utilize advanced technology, and poor countries use more basic technology b) Rich countries have high productivity, and poor countries have low productivity c) Rich countries have a high level of capital per worker, and poor countries have a low level of

capital per worker d) Rich countries do not exhibit diminishing returns, and poor countries exhibit diminishing

returns

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Notes

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24

The Monetary Sector: Money, Banks and Inflation

Topic Five

Key Concepts of the Monetary Sector Money Commodity money Currency Barter Coincidence of wants Medium of exchange Store of value Unit of account Money supply Monetary base Reserve ratio Currency-to-deposit ratio Money multiplier Quantity theory of money Velocity of money Phillips curve

Group Discussion 1. Jack wants to sell his 9-speed mountain bike, to buy a second-hand CD player. Jill wants to

sell her CD player, in order to buy a second-hand 9-speed mountain bike. Do Jack and Jill need money for their transaction? Why not? Why, then, does society as a whole need money? Which aspect of money does this illustrate?

Inflation in Australia: 1970-2007(Source: RBA, July 2007)

-2

0

2

4

6

8

10

12

14

16

18

20

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Sep-7

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8

Sep-0

0

Sep-0

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Infl

atio

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ate

(%,p

a)

-2

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2. Robert Wright (among many others) describes money as an information technology. What

does he mean? How does money assist in transferring information? Which aspect of money does this illustrate? 3. Captain Hook pays his band of pirates in cigarettes. Unfortunately, the pirate boat and

everything on board is drenched in a freak storm. How would the pirates feel (aside from ‘wet’)?

What is the problem with using cigarettes as a form of commodity money? Which aspect of money does this illustrate? 4. What is the formula for the

a) money multiplier? b) Suppose the currency to deposit ratio is initially 50 percent and the required reserve ratio

is 7 percent. What is the money multiplier?

c) Because of increases in the use of ATMs, the currency to deposit ratio falls to 30 percent while the required reserve ratio remains constant at 7 percent. What happens to the money multiplier? Why?

5. What is the:

a) Equation of exchange?

b) Quantity theory of money? 6. What is the Phillips Curve? Do economists think it holds in the long run?

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Multi-choice Questions: 1. The quantity theory of money predicts that increases in the money supply will result in a) a proportionate increase in both real GDP and the price level. b) less than proportionate increases in both real GDP and the price level. c) no change in real GDP, but a proportionate increase in the price level. d) a proportionate increase in real GDP, but no change in the price level. 2. Velocity of circulation is equal to a) the real money supply divided by real GDP. b) nominal GDP divided by the nominal money supply. c) the interest rate times real GNP. d) real GDP divided by the real money supply. e) Both (b) and (d). 3. The central proposition of the theory of the Phillips curve is, other things remaining constant, the higher the a) unemployment rate, the lower the inflation rate. b) price level, the lower the inflation rate. c) price level, the lower the unemployment rate. d) money supply, the lower the unemployment rate. e) growth rate of the money supply, the higher the inflation rate. 4. The conventional Phillips curve shows: a) an inverse relationship between the unemployment rate and the inflation rate. b) a direct relationship between the inflation rate and the unemployment rate. c) no relationship between the inflation rate and the unemployment rate. d) none of the above. 5. If the required reserve ratio is 100%, then the deposits multiplier is a) infinity b) one c) zero d) greater than zero but less than one 6. In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds. a) increase; 3,133 b) increase; 4,100 c) increase; 4,667 d) decrease; 3,133

27

7. The quantity theory of money assumes that, a) the velocity of circulation is constant, and real GDP is not affected by the money supply b) the velocity of circulation is inversely related to the quantity of money, and real GDP is not

affected by the money supply c) the velocity of circulation is inversely related to the quantity of money, but real GDP

increases proportionately to the increase in money supply d) the velocity of circulation increases, and real GDP is not affected by the increase in money

supply Experiment: The Lolly Auction Your leaders will distribute ‘money’ around the class. Your task is simple: to outbid everybody else in a series of auctions for lollies! What principle does this experiment illustrate?

The effects of hyperinflation: a Yugoslav 500 billion dinar note, circa 1993.1

1 Watkins T, ‘Episodes of Hyperinflation’, San Jose State University, <http://www.sjsu.edu/faculty/watkins/hyper.htm>

28

Notes

29

30

The Real Sector: Aggregate Expenditure and the Multiplier

Topic Six

Key Concepts of Aggregate Expenditure and the Multiplier Sticky price assumption Limited information Implicit contracts Marginal propensity to consume (MPC) Average propensity to consume (APC) Autonomous consumption Aggregate income Disposable income 45-degree line Aggregate expenditure line Spending balance Autonomous expenditure Multiplier Marginal propensity to import (MPI).

Group Discussion 1. What is Aggregate Expenditure (AE)? Where does it come from, and what can it tell us about equilibrium GDP?

Consumption and GDP: 1959-2007(Source: RBA, July 2007)

0

50000

100000

150000

200000

250000

300000

Sep-5

9

Sep-6

1

Sep-6

3

Sep-6

5

Sep-6

7

Sep-6

9

Sep-7

1

Sep-7

3

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5

Sep-7

7

Sep-7

9

Sep-8

1

Sep-8

3

Sep-8

5

Sep-8

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Sep-8

9

Sep-9

1

Sep-9

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Sep-9

5

Sep-9

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Sep-9

9

Sep-0

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Sep-0

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$m

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50000

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250000

300000

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2. If MPC equals 0.7 and MPI equals 0.2, by how much does the current level of GDP change when:

a) Government spending increases by $200 million? b) Investment decreases by $35 million? c) The level of autonomous consumption declines by $23 million?

a. Suppose, for a certain economy, the MPC = 0.67 and the MPI = 0.2. If government purchases decline by $100 billion, what will happen to net exports?

Multi-choice Questions: 1. The 45 degree line depicts the equality of a) Consumption and income b) Real GDP and potential GDP c) Income and spending d) Income and real GDP 2. Assume that a particular nation’s imports do not depend upon GDP. Which of the following is false? a) multiplier = 1 ÷ (1 – MPC) b) multiplier = the ratio of the change in GDP to the shift in AE c) multiplier = 1 ÷ (1 + C + I + G + X ) d) multiplier = 1 ÷ (1 – the slope of the AE curve) 3. Which of the following would cause the AE curve to pivot upwards? a) an increase in transfer payments b) increased foreign confidence in Australian made goods. c) an increase in consumers’ marginal propensity to consume d) an increase in taxes e) an increase in investment 4. If there is an unplanned fall in inventories, aggregate planned expenditure is a) greater than real GDP and firms will increase output. b) greater than real GDP and firms will decrease output. c) less than real GDP and firms will increase output. d) less than real GDP and firms will decrease output. e) greater than real GDP and firms will increase investment.

32

5. If real GDP is $2 billion and planned aggregate expenditure is $2.25 billion, inventories will a) pile up and output will increase. b) pile up and output will decrease. c) be depleted and output will increase. d) be depleted and output will decrease. e) stay constant and so will output, but only in the short- to medium-term. 6. Which of the following will not cause a change in the multiplier? a) The AE line getting steeper. b) The AE line getting flatter. c) The AE line shifting up in a parallel way. d) The AE line becoming more sensitive to changes in income. 7. In Econoworld people consume at least $200 worth of goods, even if they are earning nothing.

Last year, when aggregate income was $800, they consumed $600 worth of goods. What must the MPC in Econoworld be?

a) 0.4 b) 0.5 c) 0.6 d) 0.7 8. Assume that Econoworld (from the previous question) is a closed economy (does not import or

export), and that the government increases its spending by $500. By how much will national income change?

a) $250 b) $500 c) $1000 d) National income will not change. 9. The marginal propensity to consume in an economy is 0.7. Imports do not depend upon income.

If equilibrium expenditure rose by $200 million, what was the initial rise in autonomous expenditure?

a) $60 million. b) $140 million. c) $120 million. d) Cannot be calculated.

10. If YC546 += , if 4=+GI , exports 5= and imports = Y

511+ , then:

a) the intercept of the AE curve is 14, its slope is 2/5 and the equilibrium level of income is 35. b) the intercept of the AE curve is 12, its slope is 3/5 and the equilibrium level of income is 30. c) the intercept of the AE curve is 12, its slope is 4/5 and the equilibrium level of income is 60. d) the intercept of the AE curve is 13 and its slope is 1. e) the intercept of the AE curve is 14, and its slope is 3/5.

53

33

11. If two levels of aggregate income are $160 and $200 billion respectively, and if the change in consumption spending is $20 billion between these two levels of income, then the MPC will equal

a. 0.75. b. 0.1. c. 0.5. d. 0.6.

(End of semester exam, November 2005) 12. Suppose that the G component of AE rises by $10b. The MPC is 0.8 and the MPI is 0.2. If the

resulting change in GDP is 25, the extra consumption spending is $___b and the extra import spending is ____.

a. 15; 3. b. 12, 3. c. 20, 5. d. 18; 3. e. 15; 5. (End of semester exam, November 2005)

Spending

Income or Real GDP

AE

AE

1

2

45-degree line

13. The movement from AE1 to AE2 in the above figure could be a result of a. a decrease in the MPC (the marginal propensity to consume). b. an increase in autonomous consumption. c. a decrease in autonomous consumption. d. a decrease in the MPI (the marginal propensity to import). e. Both a and d. (End of semester exam, November 2005)

34

Notes

35

36

Revision

Topic Seven

ECON1020 TEST 3 SEMESTER 2, 2004

1. Which of the following statements is true?

a. Disinflation and deflation have the same meaning. b. Disinflation occurs only when there is a fall in the price level. c. Deflation occurs whenever the rate of inflation declines. d. Both b and c. e. None of the above.

2. The 'quantity theory' can be best explained using

a. MV = PY. b. M= BR +D. c. C+I+G+X =GDP. d. S = I + X. e. M= CU+D.

3. Sustained high inflation affects economic growth because

a. MV=PY. b. it encourages more borrowing, which improves economic growth. c. strong demand improves profits, which improves economic growth. d. it increases uncertainty about future returns, which reduces economic growth. e. it encourages more investment in assets like real estate and gold which appreciate by

the rate of inflation or more, and this raises trend growth. 4. The supply of money is defined in the textbook as

a. currency plus reserves. b. coins, paper money and cheques in circulation. c. currency minus reserves. d. currency plus reserves plus bank deposits. e. currency plus bank deposits.

5. Suppose banks desire to keep 10 percent of all deposits on reserve, and the U.S. Federal Reserve buys $10 million of government securities from the U.S. Bank INF. As a result,

a. the maximum amount that deposits in the economy can increase is $100 million. b. the maximum amount that deposits in the economy can decrease is $100 million. c. the maximum amount that deposits in the economy can decrease is $10 million. d. the maximum amount that deposits in the economy can increase is $10 million. e. the total amount of deposits in the economy do not change.

37

6. The monetary base is equal to

a. the money supply. b. currency plus deposits. c. deposits plus reserves. d. currency plus reserves. e. currency plus reserves plus deposits.

7. If the currency-to-deposit ratio is 0.3 and the reserve-to-deposit ratio is 0.2, then the money multiplier is equal to

a. 4. b. 3.33. c. 2.6. d. 2.0 e. 2.8.

8. Suppose there is a slump. In the model using the AE and 45-degree lines, if households

decide to increase the fraction of their income that they save, then, over the short term, GDP would

a. increase because there would be more funds available for firms to invest. b. fall because the decreased consumption that results from increased saving would cause

the economy to contract. c. remain constant because the change in saving would equal the total change in

investment and exports. d. increase because real interest rates would fall, and available resources would start to

move to the investment sector. e. Both a and d.

9. The 45-degree line indicates

a. what planned spending is at each level of output. b. what firms want to supply at each level of planned expenditure. c. that, during fluctuations, the price level rises as income rises. d. the point along the AE line where unplanned inventories are zero. e. that Y and AE are always in spending balance.

10. The expenditure multiplier exists because

a. more spending creates more income, which creates more saving and this funds more investment.

b. more spending creates more income, which induces more spending. c. more spending creates more income, which creates more deposits that banks can

collectively lend by a multiple amount. d. the central bank changes interest rates whenever Y departs from Y*. e. All of the above.

38

11. When higher income raises imports, the multiplier is equal to a. 1/(MPC-MPI.) b. 1

MPC

c. 1/(1 + MPC)

d. 11 – MPC

e. None of the above.

12. According to the table to the right, when the economy is at the point of spending balance, consumption equals ___ and unplanned inventories equal ___

a. 25; 1.5. b. 25; 0. c. 16; 0. d. 15; 1.5. e. 16; 4.

13. Suppose the MPC for an economy is 0.7. If net exports decline by $100 million in round one of the multiplier process, then in the second round

a. a $100 million decline in spending will lead to a $70 million decline in income. b. a $100 million decline in income will lead to a $70 million decline in spending. c. a $70 million decline in spending will lead to a $49 million decline in income. d. a $100 million decline in income will lead to a $100 million decline in spending. e. a $70 million decline in income will lead to a $70 million decline in spending.

14. For a given economy, the MPC is 0.8 and the MPI is 0.3. The government wants to increase real GDP by $90 million. G would need to ____ by $____m.

a. rise; 90 b. fall; 90 c. rise; 45 d. fall; 30. e. fall; 27

15. In the AE model, an increase in taxes causes

a. the consumption function to shift upwards. b. the consumption function to shift downwards. c. G to shift up by the same amount. d. has no clear net effect on AE. e. Both b and c.

Real GDP C I + G + X AE44444444

05

101520253035

6.09.5

13.016.520.023.527.030.5

39

40

The Economic Fluctuations Model: Aggregate Demand and the Short Run

Adjustment Curve

Topic Eight

Key Concepts of the Economic Fluctuations Model Aggregate demand Monetary policy rule Official cash rate Target inflation rate Short run adjustment line Baseline Deflation Disinflation Reinflation Demand shock Price shock Stagflation Boom-bust cycle Group Discussion Questions 1. State which of the following changes causes a shift of the aggregate demand curve and which

ones are a movement along it. State the direction of any shift or movement. 1. An increase in consumer spending 2. A decrease in government purchases

3. An unexpected reduction in oil prices

4. A shift to a lower inflation target 2. For our economic fluctuations model, we need to know how the components of aggregate expenditure interact with interest rates. For the following components, explain: a) How consumption is related to the interest rate (and why); b) How investment is related to the interest rate (and why); c) How the level of net exports is related to the interest rate (and why).

41

Multi-choice Questions: 1. Which of the following would cause the AD curve to shift up or to the right? a) A decrease in military purchases. b) An increase in the rate of sales tax. c) Both (a) and (b). d) An increase in potential GDP. e) An increase in the generosity of the social security system (pensions etc.). 2. If consumer confidence declines, then a) there will be a downward movement along the AD curve. b) there will be an upward movement along the AD curve. c) the ADI curve will shift to the left. d) the ADI curve will not be affected. e) the ADI curve will shift to the right. 3. The flat inflation adjustment line reflects the idea that: a) real GDP in the short run responds by the same amount as the shift of AD. b) GDP is infinitely responsive to changes in inflation. c) inflation rises only when real GDP exceeds potential GDP. d) inflation is as likely to decline as increase. e) inflation adjusts in the short run. 4. Which of the following explains the slope of the AD curve? a) A change in real GDP changes the interest rate, which changes the inflation rate. b) A change in inflation causes GDP to depart from Y*, which results in a change in interest

rates and so GDP starts to move back to Y*. c) A change in the rate of interest causes the rate of inflation to change, which results in

potential GDP changing. d) A change in inflation causes interest rates to change, which results in a change in aggregate

expenditure and therefore GDP. e) A change in potential GDP causes the rate of inflation to change, which leads to a change in

interest rates. 5. Expectations of steady inflation and staggered wage and price setting are two reasons why a) the AD line is downward sloping. b) inflation is stable in the long run. c) inflation does not change very much in the short run after AD shifts. d) inflation changes gradually in the medium run. e) Both c. and d.

42

6. If the Australian Government decides to increase government purchases, the Australian AD curve will:

a) remain unchanged b) shift left c) shift right d) pivot upwards 7. A price shock would result from a) an unexpected change in the growth rate of the money supply. b) a sudden shift of AE or AD. c) a change in the RBA's target trend rate of inflation. d) a decline in the GST rate. e) All of the above.

8. According to the figure to the right and the explanation of cyclical inflation supplied in the textbook, what should have happened to the rate of inflation between 1974 and 1976?

a) It should have decreased. b) It should have been negative. c) It should have increased. d) It should have fallen during 1974 and then

risen during 1975. e) It should have been constant. 9. If inflation is falling, then what is happening to prices? a) Prices are rising. b) Prices are falling. c) Prices are staying the same d) There is not enough information to tell 10. If GDP is less than potential GDP at the intersection of the AD curve and the SRA line then

the economy is in a) equilibrium and there is no reason for inflation or real GDP to change b) a recession, causing inflation to fall and GDP to rise until equilibrium is reached c) a boom, causing inflation to fall and GDP to rise until equilibrium is reached d) a boom, causing inflation to rise and GDP to rise until equilibrium is reached

Billions of 1987 Dollars

Real GDP

Potential GDP

2,900.003,000.003,100.003,200.003,300.003,400.003,500.003,600.00

1971 1972 1973 1974 1975 1976 1977

43

44

Monetary Policy

Topic Nine

Key Concepts of Monetary Policy Central bank independence Political business cycle Time inconsistency Money demand Open market operations Group Discussion Questions 1. A lecturer wants his students to do really well on the end of semester exam, so wants them to

study very hard. He tells his class, “The final exam will be really, really difficult – unless you study really hard, you won’t pass!”

The lecturer sits down to write the final exam. What is the best thing for the lecturer to do if he wants as many of his students as possible to get 7s? (Write an easy exam.) Should the lecturer do this? Why or why not? What is the name for this phenomenon? How does this relate to the role of the Reserve Bank in setting monetary policy?

45

2. Using the aggregate demand (AD) curve and the short run adjustment (SRA) line, show how real GDP would change over time if the RBA targeted a lower inflation rate and there was no change in fiscal policy. Assume real GDP equaled to potential before the change.

Is there any way that the RBA could achieve a lower inflation rate without having real GDP deviate from potential GDP? [Hint: It relates to Larry Lecturer from the earlier question!] 3. Draw a flow-chart describing the monetary transmission channel.

46

Multi-choice Questions: 1. Ceteris paribus, an expansionary monetary policy leads to: a) higher domestic interest rates and an appreciation of the Australian dollar b) lower domestic interest rates and an appreciation of the Australian dollar c) lower domestic interest rates and a depreciation of the Australian dollar d) lower domestic interest rates, but no change in the Australian dollar 2. The _____________ makes key decisions regarding monetary policy in Australia. a) Prime Minister b) Board of the Reserve Bank c) Treasurer d) Cabinet 3. The quantity of money demanded is: a) negatively related to the rate of interest. b) positively related to the rate of interest. c) not related to the rate of interest. d) either negatively or positively related to the rate of interest depending on whether the rate of

interest is high or low. e) determined by the central bank. 4. Monetary policy that attempts to increase the rate of inflation is called a a) temporary growth slowdown. b) disinflation. c) reinflation. d) supply shock. e) recession. 5. Which one of the following would be considered a contractionary monetary policy? a) A decrease in the reserve requirement. b) An increase in personal income taxes. c) The Reserve Bank of Australia encourages banks to make loans. d) The Reserve Bank of Australia sells government bonds. e) The Reserve Bank of Australia buys government bonds. 6. Suppose that output exceeds potential by 600. Suppose that a 1 percentage point increase in the

real interest rate reduces autonomous spending by 200. The slope of AE equals 1/3. This output gap can be eliminated by raising the real interest rate by ___ percentage points.

a. 1 b. 2 c. 3 d. 4 e. 5

47

7. Which of the following is not a measure that could be taken to slow an economy with a high rate of inflation and near full employment?

a) Raise the interest rate. b) Buy government bonds. c) Decrease the money supply. d) All of the above would slow the economy. 8. If the central bank is following its monetary policy rule and raises the nominal rate of interest

by 2 percentage points, then we would expect that the real interest rate: a) increases by 2 percentage points. b) increases by more than 2 percentage points. c) decreases by more than 2 percentage points. d) decreases by less than 2 percentage points. e) increases by less than 2 percentage points.

9. Which of the following statements is true if the RBA is decreasing the interest rate over the

short term by a specific amount? a) A steeper slope of AE implies that a larger increase in the monetary base is required. b) A flatter slope of the money demand curve implies that a larger increase in the monetary

base is required. c) A smaller money multiplier implies that a smaller increase in the monetary base is required. d) A larger slope of AE implies that a larger increase in the monetary base is required. e) Both a. and b. 10. If the RBA is able to bring about a credible disinflation, then: a) the change to the new long-run rate of inflation will be slower than if the RBA’s policy had

been less credible. b) the new long-run rate of inflation will be lower than if the RBA’s policy had been less

credible. c) the recession will be shallower than if the RBA’s policy had been less credible. d) the recession will be more sudden and deeper than if the RBA’s policy had been less

credible. e) Both b and c.

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Notes

49

50

Fiscal Policy

Topic Ten

Key Concepts of Fiscal Policy Federal budget Balanced budget Budget surplus Budget deficit Federal debt Countercyclical policy Discretionary fiscal policy Progressive tax Automatic stabilisers Structural surplus

` Group Discussion Questions 1. Suppose an economy’s real GDP equals potential GDP and the structural deficit is $70

billion. a) Illustrate this situation graphically with the budget surplus and real GDP on the two axes.

Commonwealth monthly budget headline outcome: 1973 to 2005(Source: RBA, July 2005)

-5000

0

5000

10000

15000

Jul-7

3

Jul-7

4

Jul-7

5

Jul-7

6

Jul-7

7

Jul-7

8

Jul-7

9

Jul-8

0

Jul-8

1

Jul-8

2

Jul-8

3

Jul-8

4

Jul-8

5

Jul-8

6

Jul-8

7

Jul-8

8

Jul-8

9

Jul-9

0

Jul-9

1

Jul-9

2

Jul-9

3

Jul-9

4

Jul-9

5

Jul-9

6

Jul-9

7

Jul-9

8

Jul-9

9

Jul-0

0

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Date

Hea

dlin

e su

rplu

s ($

m)

51

b) Use the AD curve and SRA line to explain what would happen in the short-run, medium-run and long-run if this economy eliminated its structural deficit.

c) What impact can we say that fiscal policy has on long term interest rates?

Multi-choice Questions: 1. When tax revenues are greater than outlays, there is a a) budget deficit. b) balanced budget. c) budget surplus. d) budget supplement. e) government absorption. 2. The difference between the actual deficit and the structural deficit is the: a) budget deficit b) cyclical deficit c) full-employment deficit d) a and c 3. The structural budget deficit is the size of the budget deficit when: a) the unemployment rate is zero. b) real and potential GDP are equal. c) the ADI curve intersects the IA line. d) the economy is in a recession. e) there is a spending balance.

52

4. Government debt is a a) flow, whereas its budget balance is a stock. b) stock, whereas its budget balance is a flow. c) flow, as is its budget balance. d) stock, as is its budget balance. e) stock, while its budget balance is a flow if it is a deficit and a stock if it is a surplus.

5. Unemployment benefits are a form of: a) discretionary policy b) counter-cyclical fiscal policy c) automatic stabiliser d) (b) and (c)

6. Automatic stabilisers refer to: a) the central bank’s monetary policy rule. b) taxes and government outlays that change automatically whenever the state of the economy

changes. c) the self-adjusting nature of a market economy. d) the fact that Parliament meets to adjust aggregate spending whenever there is a recession. e) how government spending in a slump falls because the taxes required to fund it have

declined. 7. Compared to the baseline, the short-run effect of changing fiscal policy to reduce trend G/Y

is a) no change in the real interest rate. b) no change in the nominal interest rate. c) Both a and b. d) no change in inflation. e) All of the above.

8. Suppose that real and potential GDP are initially equal. However, there is now a sustained

decrease in government expenditure. Compared to the baseline, we would expect to see, in the long run,

a) a decrease in consumption and an increase in both net exports and investment. b) an increase in consumption and a decrease in both net exports and investment. c) an increase in consumption, a decrease in net exports, but no change in investment. d) an increase in consumption and net exports but a decrease in investment. e) an increase in consumption, investment and net exports.

53

9. Countercyclical policy involving balancing the government budget over the business cycle requires

a) A budget surplus during a recession b) A budget deficit to finance expansions and budget surplus to offset contraction c) Increased taxes during recessions and reduced government spending during expansions d) A budget deficit during slump and budget surplus during a boom e) All of a, b and c 10. Most macroeconomists disagree with the view that government budget should be balanced

annually. The reason is that: a) it is better to have a budget deficit each year. b) it is better to have a budget surplus each year. c) the things on which government spends are so important to society that the spending should

continue even if tax revenues are inadequate. d) if the government budget is balanced annually, fiscal policy could add to cyclical instability. e) it is not politically popular to cut spending or raise taxes during a slump, even though this is

the best thing to do according to macroeconomics.

54

2005 Final Exam Short Answer Q3

Real GDP (billions of

dollars

800 805 810 815 820

Fiscal surplus (billions of

dollars)

0 2.0 4.0 6.0 8.0

Suppose, for a hypothetical economy, potential GDP equals $805 billion.

a) If spending balance initially occurs when real GDP equals $815 billion, then, according

to the above table, the cyclical surplus equals $ _____ b. and the structural surplus equals $ _____ b. (1 mark)

b) Suppose there is a decrease in G of $5b. The multiplier is 2. At the new short-run equilibrium of $______b., the new structural surplus is $_____b., and the cyclical component of the surplus has risen fallen (circle your choice) by $____ b. (2 marks) c) At the initial spending balance, the actual surplus was $6b. After a cut in G of $5b., the actual surplus at the new income balance is $ ____b. (1 mark) d) Explain briefly why a change in the structural surplus is a better indicator of a counter-cyclical change in fiscal stimulus than a change in the actual surplus.

(1 mark)

55

56

Australia and the International Economy

Topic Eleven

Key Concepts of Australia and the International Economy Net exports National saving Investment Balance of payments Current account Capital account Fixed exchange rate system Flexible exchange rate system

Australian Current Account Deficit: 1959 to 2003(Source: RBA, July 2003)

-12000

-10000

-8000

-6000

-4000

-2000

0

Sep

-59

Sep

-60

Sep

-61

Sep

-62

Sep

-63

Sep

-64

Sep

-65

Sep

-66

Sep

-67

Sep

-68

Sep

-69

Sep

-70

Sep

-71

Sep

-72

Sep

-73

Sep

-74

Sep

-75

Sep

-76

Sep

-77

Sep

-78

Sep

-79

Sep

-80

Sep

-81

Sep

-82

Sep

-83

Sep

-84

Sep

-85

Sep

-86

Sep

-87

Sep

-88

Sep

-89

Sep

-90

Sep

-91

Sep

-92

Sep

-93

Sep

-94

Sep

-95

Sep

-96

Sep

-97

Sep

-98

Sep

-99

Sep

-00

Sep

-01

Sep

-02

Date

Cur

rent

Acc

ount

Sur

plus

($m

)

Group Discussion Question

Year 2000 ($bn) Year 2004 ($bn)

National Saving $400 $544

Investment $443 $500

(a) Referring to the above table, calculate the trade deficit or surplus for the years 2000 and 2004.

(b) Using the same data in the above table, now suppose net factor income and net

transfers from abroad are zero. Is capital flowing into or out of the country in these years?

57

Multi-choice Questions: 1. According to the table below, what is the balance on the current account?

International Transactions for the Year 2010 ($m)

Merchandise trade balance -85,000 Service trade balance 30,000

Net factor income -5,000 Net transfers -15,000

a) $75 billion b) -$75 billion c) $55 billion d) -$55 billion e) -$60 billion 2. The capital account is: a) the amount of plant and equipment Australian residents own compared to other nations. b) a record of our investments abroad and foreign investments here. c) the amount of our dollars held abroad. d) the amount of foreign currency held domestically. e) a record of the dollar amount of exported and imported goods and services. 3. Which of the following is not included in a nation’s current account? a) Merchandise exports. b) Investment income receipts. c) Foreign aid payments. d) Merchandise imports. e) Purchases of foreign assets. 4. Which of the following are likely to benefit from an increase in the value of the Australian

dollar?

1) A Holden factory exporting to Japan 2) A popular tourist facilitity on the Great Barrier Reef 3) An Indonesian furniture importer located in Indooroopilly 4) The Australian Wool Industry

a) 1 b) 2 c) 3 d) 1 and 4 e) 2 and 3

58

5. Vivian earns $1,000 per week and spends $850 per week on living expenses, puts $50 in a savings account, and buys $100 worth of shares in a retirement fund. Vivian's weekly saving is ____ and her saving rate is _____. Her weekly investment is _____.

a) $50; 5%, $100 b) $50; 5.9%, $100 c) $50; 5%, $150 d) $150; 15%, $150 e.) $150; 15%, zero The following table relates to questions 6-8.

$bn Household consumption expenditure 300 Private-sector gross investment 50 Government transfer payments to households 25 Exports of goods and services 49 Imports of goods and services 54 Taxes 75 Government purchases of goods and services 60 Capital consumption (depreciation) 55

6. What is GDP (in $billion)?

a) 405 b) 415 c) 440 d) 460 e) 480 7. Refer again to the table above. There is a fiscal _______ that equals ____ and a balance of

trade that equals_____ a) surplus; 15; 5 b) deficit; 10; – 5 c) surplus; 15; –5 d) deficit; 10; 5 e) surplus; 50; –5

8. Refer again to the table above. Assuming that other items relevant to the balance of payments

equal zero, there is a ______ on the current account of _______ and there is a ______ on the capital account of _______

a) deficit; 5; surplus; 5 b) deficit; 5; surplus; 6 c) deficit; 5; deficit; 5 d) surplus; 5; surplus; 6 e) surplus; 5; surplus; 20

59

The following table relates to questions 9 and 10.

$bn Gross fixed capital formation by the private sector 51 Value of physical increase in stocks 4 Net exports 14 Aggregate saving 75 Government spending on infrastructure 6 Capital consumption (depreciation) 55 Net change in foreign ownership of domestic assets (equity) 0 Net change in domestic ownership of foreign assets (equity) 0

9. What is the change in the stock of capital ($b.)?

a) 6 b) 2 c) 75 d) 89 e) 20 10. Refer to the table above. This country is a _______ of ______$b. a) borrower; 14 b) lender; 14 c) borrower; 8 d) lender; 6 e) borrower; 6

60

PASS Mock Exam The mock exam will be written by PASS leaders as the semester progresses. It will be distributed (free) in PASS classes in this week. The mock exam will not be available on the internet – if you would like to do the mock exam, you must attend PASS.