Exercise 4 : Please send it before 23 March 2014 Macroeconomics Group H Multiple choice questions 1.

The investment component of GDP includes A. residential construction investment. B. inventory investment. C. business fixed investment. D. both B and C 2. If the nominal GDP is $12,000 in 2005 and $15,000 in 2006, and if inflation is 10% between these years, then A. employment fell between 2005 and 2006. B. real GDP fell between 2005 and 2006. C. real GDP rose between 2005 and 2006. D. the economy experienced no growth between these years. 3. Which of the following are not included in the consumption component of gross domestic product? A. Purchases of stocks and bonds. B. Consumer durable goods C. Nondurable consumption goods D. Consumer services 4. Gross domestic product includes A. all intermediate and final goods and services produced. B. the current production of final goods and services with a countrys borders. C. exchanges of assets. D. the current production of final goods and services by a countrys citizens. 5. Consumption expenditure includes A. the production of consumption goods not sold and held in inventory. B. the purchase of consumption goods made domestically but consumed by foreigners. C. purchase of goods and services by local government. D. services, durables, and non-durable goods. 6. The most commonly used measure of changes in the cost of living for households A. real GDP. B. the CPI. C. nominal GDP. D. the GDP deflator.

7. Which of the following indices best signals future movements in retail prices? A. The implicit GDP deflator B. nominal GDP C. The consumer price index D. The producer price index

8. Profits earned in Malaysia by a foreign-owned firm would be included in A. gross domestic product and gross national product. B. gross national product but not in gross domestic product. C. gross domestic product but not in gross national product. D. neither gross domestic product nor gross national product.

9. The most volatile component of GDP over the business cycle is A. consumption. B. net exports. C. investment. D. government purchases. 10. If the value of a price index was 125 for 2005 and 75 for 1982, and GDP was 2500 in 2005 compared to 600 in 1982, the value of real 2005 GDP in terms of 1982 prices is A. 1500. B. 1000. C. 2500. D. 360. 11. The index that measures the change in price of a typical basket of consumer goods is A. the GDP deflator. B. the consumer price index. C. nominal GDP. D. real GDP. 12. If MPC is 0.8, and tax increase by RM10 million, the new equilibrium output A. decrease by RM10 million . B. increase by RM40 million. C. decrease by RM40 million. D. increase by RM50 million. 13. If government expenditure and tax increase by RM50 million and MPS is 0.2, the new equilibrium output will A. remain unchange B. increase by RM50 million. C. increase by RM250 million D. decrease by RM200 million. 14. Consumption function is given as : C =50 +0.5Yd and tax function is T = 0.25Y. If government expenditure increase by RM10 millions, calculate the changes in income A. 10 million. B. 20 million C. 25 million D. 30 million . 15. The rate of unemployment can be calculated by A. simply dividing all unemployed persons by all employed persons. B. subtracting those employed from the total labor force to find the number of unemployed and express this number as a percent of the total labor force. C. subtract those unemployed from the total labor force and express this number as a percent of the total labor force. D. dividing all unemployed by the population.

16. Inventory is the A. net change in inventories of final goods awaiting sale. B. net change in inventories of materials used in the production process. C. included in investment when calculating GDP. D. Both A and B 17. If interest rate is reduce it will effect A. Reduce money dd for speculation. B. Increase money dd for speculation. C. Movement along money dd curve. D. Money supply curve will shift to the left. 18. Which of the following combination policy that will effect interest rate to decrease? A. Increases in interest rate and price B. Central bank buy government securities and income decrease . C. Decrease in rezeb ratio and increase in income D. Decrease in price level and central bank sell securities. 19. Profits earned in Malaysia by a foreign-owned firm would be included in A. gross domestic product and gross national product. B. gross national product but not in gross domestic product. C. gross domestic product but not in gross national product. D. neither gross domestic product nor gross national product. 20. If reserves ratio is 10% and Bank X receive RM50,000 as a new deposit RM50,000 , as a result A. Bank X must save RM5,000 as a required reserve. B. Bank X reserve will increase by RM45,000. C. Liability Bank X will increase by RM50,000. D. Loan from Bank X will increase by RM450,000. 21. Increase in price level will effect A. total of transaction increase and will effect interest rate to increase. . B. money dd will increase because money dd for transaction increase C. money dd will decrease because opportunity cost for holding money will increase. D. money dd curve will shift downward 22. If central Bank buy securities at open market which value RM50 million, calculate this effect on money supply if required reserve ratio is 10 percent. A. RM5 million B. RM50 million C. RM500 million D. RM200 million. 23. If the consumption function is given by C = 100 + .6(Y-T) and planned investment is 150, government spending is 50, and T is 100, then equilibrium income is A. 600 B. 750 C. 400 D. 350

24. In the equation Y = C + I + G, A. only I is an exogenous variable determined by factors outside the model. B. only G is an exogenous variable determined by factors outside the model. C. C is an endogenous variable determined by factors inside the model. D. A,B, and C 25. Assuming that C + Ir + G < C + I + G, then A. there is an unintended inventory accumulation. B. there is an unintended inventory shortfall. C. aggregate demand is less than output. D. both B and C 26. In the Keynesian consumption function A. consumption is a constant fraction of income. B. the marginal propensity to consume is constant. C. disposable income determines consumption. D. none of the above

Essay Questions Question 1 Assume the following national income accounting data in billions of dollars: transfer payments to persons personal taxes Corporate profit tax payments, undistributed profits and valuation adjustments Interest paid to businesses Contributions to Social Security net personal transfer payments to foreigners personal interest income government purchases of goods and services Consumption expenditures gross investment Imports of goods and services Exports of goods and services Depreciation indirect taxes a. Calculate gross national product. 500 120 200 50 350 15 160 100 750 80 20 10 250 100

b. Calculate net national product.

c. Calculate national income.

d. Calculate personal income.

e. Calculate personal disposable income.

Question 2 ( 7 marks) a. Show the autonomous investment multiplier in the open-economy model.

b. Show the autonomous investment multiplier in the closed-economy model.

c. Which multiplier will be smaller? Explain the intuition behind this result.

Question 3 Suppose that, for a given economy, investment were equal to 100, government spending equaled 150, taxes equaled 90 and consumption were given by C=120+0.75YD. a. What will be the level of equilibrium income?

b. What is the value of the government expenditure multiplier and the tax multiplier? (4 marks)

c. Now suppose that investment rose to 50 units. Find the new value of equilibrium income. (3 marks)

d. What is the formula for the autonomous investment multiplier? Use this formula to calculate how much income will change with a 10 unit increase in investment. Does the change in income you calculated in part (c) correspond with the change in income just calculated? (5 marks)