Introduction to Macroeconomics Exam Solutions
Course Introduction
Introduction to Macroeconomics explores the fundamental principles and concepts that underpin the functioning of whole economies. Topics covered include national income determination, economic growth, unemployment, inflation, fiscal and monetary policy, and international trade. Students will gain an understanding of how aggregate economic variables are measured, how government policy can influence economic performance, and how real-world economic issues are analyzed using macroeconomic models. This course provides a foundation for further study in economics and offers critical insights into contemporary economic problems and policy debates.
Recommended Textbook Economics for Today 5th Edition by Allan Layton
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Page 2
Chapter 1: Thinking Like an Economist
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Q1) Microeconomics only looks at the behaviour of one consumer or one firm in a market, while macroeconomics looks at the behaviour of an entire industry or group of consumers.
A)True
B)False
Answer: False
Q2) An entrepreneur is a motivated person who seeks profit by:
A) economising.
B) undertaking risky activities, e.g. combing economic resources to produce goods and services.
C) winning in the lottery.
D) selling shares.
Answer: B
Q3) Which of the following is a microeconomics topic?
A) Changes in the economy's price levels.
B) Issues of Gross Domestic Product.
C) The reasons why industries employ different levels of resources.
D) Effect of government taxation on aggregate consumption level.
E) Issues of inflation and unemployment rates.
Answer: C
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Chapter 2: Applying Graphs to Economics
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Q1) A change in a third variable, not on either axis of a graph, is illustrated with:
A) a horizontal or vertical line.
B) a movement along a curve.
C) a shift of a curve.
D) a point of intersection.
Answer: C
Q2) In Exhibit A1.3, the slope of straight line AB is:
A) variable.
B) zero.
C) negative.
D) positive.
E) not determinable from the information provided.
Answer: D
Q3) Straight line AB in Exhibit A1.1 shows which of the following?
A) There is no relationship between variable X and variable Y.
B) Decreasing values for X will cause the values of Y to increase.
C) There is a positive relationship between X and Y.
D) There is a negative relationship between X and Y.
Answer: C
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Page 4
Chapter 3: Production Possibilities and Opportunity Cost
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Q1) Suppose an economy is faced with the production possibilities table shown in Exhibit 2.8. As additional units of capital goods are produced, the opportunity cost in terms of sacrificed units of consumption goods _____ because of _____.
A) decreases; greater efficiency in production
B) increases; decreasing opportunity cost
C) increases; the law of increasing costs
D) increases; greater efficiency in production
Answer: C
Q2) The law of increasing opportunity costs states that:
A) the opportunity cost cannot be determined when the economy operates on the production possibilities frontier.
B) people always prefer having more goods.
C) there is always full employment.
D) the opportunity cost increases as production of one output increases.
Answer: D
Q3) An increase in current consumption is necessary for economic growth.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Market Demand and Supply
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Sample Questions
Q1) A supply schedule shows the relationship between:
A) demand and supply.
B) supply and income.
C) price and income.
D) quantity supplied and price.
Q2) Suppose A and B are complementary goods. Other things being equal, the demand curve for A will shift to the right when the price of B goes up.
A)True
B)False
Q3) If consumers are anticipating a wet summer, then:
A) the demand for hotdogs will increase.
B) the demand for raincoats will shift to the right.
C) the demand for umbrellas will not be affected.
D) the demand for umbrellas will shift to the left.
Q4) An increase in the demand for a good quality steak, a normal good, can be caused by a/an:
A) decrease in consumer income.
B) increase in the price of steak.
C) increase in the price of tomato sauce.
D) increase in consumer income.
Page 6
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Chapter 5: Markets in Action
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Q1) The reason individual homeowners usually do not hire a private contractor to fill the potholes on their street is because:
A) it costs too much.
B) the value to the neighbourhood exceeds the cost of repair.
C) others who use the street will be free riders.
D) they do not trust the government.
Q2) The presence of negative externalities that are incorporated in price, results in misallocation of resources.
A)True
B)False
Q3) Suppose the government sets a price ceiling. Which of the following will result?
A) The quantity supplied will be greater than quantity demanded.
B) There will be a shortage.
C) There will be a surplus.
D) The quantity supplied will be equal to quantity demanded.
Q4) If the price of fish rises, then the demand for chips will:
A) rise.
B) fall assuming that they are a complement to each other.
C) remain unchanged.
D) react unpredictably.
Page 7
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Chapter 6: Elasticity of Demand and Supply
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Q1) Price elasticity of demand measures:
A) the responsiveness of the quantity demanded of a good to a change in income.
B) the responsiveness of the quantity demanded of a good to a change in consumers' Preferences.
C) the responsiveness of the quantity demanded of a good to a change in the price of that good.
D) the reduction in the quantity demanded of a good when the price of that good is reduced.
Q2) The smaller the proportion of your income is spent on a good, the more likely it is to be:
A) relatively inelastic.
B) highly elastic.
C) perfectly elastic.
D) unit elastic.
Q3) The price elasticity of demand formula includes:
A) percentage change in quantity demanded.
B) percentage change in quantity supplied.
C) difference in quantity demanded.
D) difference in price.
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Page 8
Chapter 7: Production Costs
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Sample Questions
Q1) If a firm has total revenue of $300 million, explicit costs of $200 million and implicit costs of $30 million, its accounting profit is:
A) $200 million.
B) $100 million.
C) $70 million.
D) -$10 million.
Q2) Suppose the cost to produce an additional unit of output is $20. What is the change in total variable cost?
A) $10.
B) $20.
C) $30.
D) $40.
Q3) Implicit costs are:
A) labour costs to the firm.
B) the opportunity costs of using someone else's resources.
C) payments from owners of a firm for labour.
D) the opportunity costs of using resources owned by the firm.
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Chapter 8: Perfect Competition
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Q1) The firm in a perfectly competitive market will:
A) set the price lower than the variable cost of producing the product or service to gain a market share.
B) set the price higher than the fixed cost of producing the product or service but lower than the variable cost to prevent competition.
C) set the price as low as possible to prevent competition.
D) set the price higher than the variable cost of producing the product or service.
Q2) A perfectly competitive firm shuts down in the short run when the market price is less than the average variable cost.
A)True
B)False
Q3) In Exhibit 7.1, if output is between 100 and 200 units per week, economic profit for the firm is:
A) zero.
B) negative or zero.
C) at its maximum.
D) positive or zero.
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Chapter 9: Monopoly
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Sample Questions
Q1) Water is often provided to households by one supplier because:
A) there is not enough competition in the market.
B) the single supplier cannot supply the entire market demand at a lower cost than two or more smaller firms could.
C) long-run average total cost increases over the entire range of output.
D) it is a natural monopoly.
Q2) The only hairdresser in a small town is an example of:
A) monopsy.
B) luxury.
C) monopoly.
D) oligopoly.
Q3) The argument that supports monopolies' role in an economy is that:
A) they distribute income from firms to consumers.
B) they save valuable resources by producing less output than in perfect competition.
C) they charge a price in excess of the marginal cost.
D) they can use their profits to invest in research and development, increasing technological change.
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Chapter 10: Monopolistic Competition and Oligopoly
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Q1) When the behaviour of other firms must be taken into account by another firm in the industry, economists often examine this using:
A) game theory.
B) the monopolistically competitive model.
C) the monopoly model.
D) the perfectly competitive model.
Q2) In monopolistic competition, a firm:
A) enjoys its monopoly status.
B) does not compete with other firms.
C) can only compete on price.
D) can use non-price competition.
Q3) In Exhibit 9.3, in a kinked-demand oligopoly model, D<sub>2</sub> represents the:
A) demand curve applicable to any price increase above $50.
B) demand curve applicable to any price decrease below $50.
C) demand curve facing firms when a cartel is formed.
D) market demand curve.
Q4) The number of sellers is the largest in oligopoly.
A)True
B)False
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Chapter 11: Policy Issues: Housing Affordability and Climate Change
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Sample Questions
Q1) If negative externality is included in the price, we would expect:
A) the increase in production and the increase in price.
B) the reduction in production and the decrease in price.
C) the reduction in production and the increase in price.
D) the reduction in production and no change in price.
Q2) Suppose that firms are required to purchase equipment to reduce carbon emissions. How is this illustrated in Exhibit 10.2?
A) A shift from 'Supply 2' to 'Supply 1'.
B) A movement along the 'Supply 1' curve.
C) A shift in demand.
D) A shift from 'Supply 1' to 'Supply 2'.
Q3) The Carbon Pollution Reduction Scheme (CPRS) was authored by:
A) Kevin Rudd.
B) Barack Obama.
C) Bill Clinton.
D) Ross Garnaut.
Q4) The external cost of carbon emissions is not included in the market supply curve of private firms.
A)True
B)False
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Chapter 12: Measuring the Size of the Economy
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Q1) GDP is the sum of exports, consumer expenditure, government expenditure and taxes.
A)True
B)False
Q2) In an open economy, domestic savings must always equal investment.
A)True
B)False
Q3) GDP does not count:
A) the estimated value of household production, which is not sold in the market.
B) state and local government purchases.
C) spending for new homes.
D) changes in inventories.
Q4) Which of the following transactions is not included in GDP?
A) A drug addict buys cough medicine.
B) A drug addict spends two months in a drug rehabilitation centre.
C) A doctor treats a patient for drug addiction.
D) Someone sells drugs in a black market.
Q5) Actual measured saving and measured investment are equal.
A)True
B)False
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Chapter 13: Business Cycles and Economic Growth
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Sample Questions
Q1) If an increase in labour and capital of 10 per cent leads to output increasing by 10 per cent then, ceteris paribus, the economy is operating with:
A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) economies of scale.
Q2) The level of GDP that could be produced at full employment is:
A) aggregated GDP.
B) desirable nominal GDP.
C) potential real GDP.
D) unattainable.
Q3) The Solow growth model explains:
A) how consumption, saving, capital, labour and technological change combine in the short term to determine economic growth.
B) how consumption, saving, capital, labour and technological change combine in the longer term to determine economic growth.
C) how history changes economic growth.
D) how net exports determine economic growth.
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15
Chapter 14: Inflation and Unemployment
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Sample Questions
Q1) The civilian labour force is:
A) the number of people (including students) aged 15 and over who are unemployed.
B) the number of people (including students) aged 15 and over who are either employed or unemployed.
C) the number of people (including students) aged 15 and over who are either employed or unemployed, excluding people in hospitals.
D) the number of people (excluding students) aged 15 and over who are either employed or unemployed, excluding members of the armed forces and certain categories of people.
Q2) The phrase 'too much money chasing too few goods' describes which type of inflation?
A) Demand-supply inflation.
B) Demand-push inflation.
C) Demand-pull inflation.
D) Demand-excess inflation.
Q3) To be counted as unemployed, a person must be retired.
A)True
B)False
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16
Chapter 15: A Simple Model of the Macro Economy
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Sample Questions
Q1) Government spending is often used to:
A) change interest rates, which in turn alters consumption and investment.
B) increase demand in a recession.
C) decrease demand in a recession.
D) target inflation.
Q2) If people believe inflation is likely to increase sharply over the next few months, which of the following is likely to occur?
A) Current consumption will fall.
B) Current consumption will rise.
C) Government spending will increase.
D) Interest rates will fall.
Q3) When the aggregate demand curve shifts to the right, intersecting the aggregate supply curve on its upward-sloping or vertical segment:
A) demand-pull inflation occurs.
B) cost-push inflation occurs.
C) stagflation occurs.
D) deflation occurs.
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Chapter 16: The Monetary and Financial System
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Q1) Which of the following is not counted as part of M1?
A) Silver coins.
B) Reserve Bank notes or 'paper money'.
C) Passbook savings deposits.
D) Cheque account deposits.
Q2) The primary functions of money are:
A) velocity, liquidity and transactions.
B) speculative demand, measure of value and precautionary demand.
C) a medium of exchange, a measure of value and a store of value.
D) a store of value, heterogeneity and a medium of exchange.
Q3) If an exporter believes the $A is going to rise in three months when it receives payment for a shipload of its good, it may decide to:
A) enter the short-term money market to hedge against this.
B) borrow money in the interim.
C) enter the futures market to hedge against this.
D) buy Treasury notes in the interim.
Q4) Fiat money has no redeemability or intrinsic value.
A)True
B)False
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Chapter 17: Macroeconomic Policy I: Monetary Policy
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Q1) The RBA might try to sell securities at an attractive rate of interest.
A)True
B)False
Q2) Since the early 1990s, the RBA has implemented monetary policy primarily by focusing on:
A) interest rates.
B) the money supply.
C) the demand for money.
D) the velocity of money.
Q3) If the velocity of money is 5 and the supply of money is $200 billion, then real GDP is:
A) $66.67 billion.
B) $200 billion.
C) $600 billion.
D) indeterminate as there is no information about nominal GDP.
Q4) Monetarists advocate the monetary rule, which states that the money supply should be stable year after year, in order to stabilise the business cycle.
A)True
B)False
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Chapter 18: Macroeconomic Policy II: Fiscal Policy
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Sample Questions
Q1) The Keynesian approach to fiscal policy advocates:
A) continual budget deficits.
B) manipulation of aggregate demand.
C) budget deficits when economic growth is high.
D) budget surpluses when economic growth is low or negative.
Q2) Increases in the fraction of national debt held by foreigners will _____ the burden of debt service on future generations _____.
A) decrease; because it is easier for the borrowing nation to default on the debt
B) decrease; but may make the country more vulnerable to foreign intervention
C) decrease; because debt servicing accomplished by increases in the money supply is not as inflationary as it would be if all debt were held domestically
D) increase; because taxes to pay the debt are collected within the country but more interest payments on the debt are sent outside
E) increase; because foreign bond-holding pushes up interest rates at date of issue, increasing crowding out
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Chapter 19: International Trade and Finance
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Sample Questions
Q1) In Exhibit 18.1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. In Nabia the cost of producing one more unit of wheat is equal to:
A) 4 units of wheat.
B) 1/4 unit of corn.
C) 4 units of corn.
D) 15 units of corn.
Q2) If the Australian dollar depreciates, the effect of this is likely to be:
A) exports will be more expensive.
B) imports will be cheaper.
C) import-competing domestic goods will be relatively expensive.
D) 'imported inflation' may become a problem.
Q3) Free trade often has its critics because the benefits are spread over most of the population and go largely unnoticed.
A)True
B)False
Q4) If the yen price of dollars falls, then the dollar price of yen rises.
A)True
B)False
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