ECO 112 BASIC MACROECONOMICS

TEST 2 11 APRIL 2010 (Sunday) SECTION A QUESTION- 1 Multiple Choice Questions Choose Correct Answer and Write in the Answer paper (Each question caries One Mark = 10 Marks) 1. What is the main cost of unemployment to society? a) The tax revenue in the form of income tax an unemployed person would have paid if he/she had been employed b) The output which those unemployed persons could have produced if they had been employed c) The reduction in wages resulting from the increase in competition among the labour force for jobs d) The increase in the public sector borrowing requirement arising from the fall in tax revenue 2. What is the basic determinant of the speculative/asset demand for money? a) b) c) d) 3. The level of the money supply The real gross domestic product (GDP) The interest rate None of the above

The purchasing power of the Pula: a) b) c) d) Decreases because of economic growth Varies directly with the supply of money Is inversely related to the level of aggregate demand Is inversely related/ is the reciprocal of the price level

4. The amount that a commercial bank can lend is determined by its: a) Required deposits

b) Excess reserves c) Size of pending loans d) Size of future deposits 5. Who is least likely to be hurt by unanticipated inflation? a) b) c) d) A disabled labourer who is living on accumulated savings An owner of a small business A pensioned worker None of the above

6. Which of the following could trigger demand-pull inflation? a) b) c) d) A decrease in money supply An increase in taxes An increase in government spending An increase in interest rates

7. The natural rate of unemployment is generally thought of as: a) b) c) d) Sum of structural and cyclical unemployment Sum of frictional and structural unemployment Sum of frictional and cyclical unemployment Ratio of frictional unemployment rate to the cyclical unemployment rate

8. Inflation is defined as a situation of: a) b) c) d) Increase in the prices of goods Increase in the general price level Increase in the prices of essential goods and services None of the above

9. Commercial Banks are referred to as intermediaries because: a) b) c) d) They earn a profit. They provide a way for people to save their money. They charge rate of interest on a loan. They channel funds from depositors to borrowers.

10. The buying and selling of bonds by the Bank of Botswana to change bank reserves is referred to as:

a) b) c) d)

Reserve accounting. Speculation. Financial intermediation. Open-market operations.

SECTION- B (Answer any TWO questions) QUESTION- 2 A) In 2008 the Bureau of Labour Statistics for country A showed the following data: Total labour force: Employed labour force: Total population: Calculate: (i) (ii) (iii) B) C)
D)

154 294 000 146 089 000 493 410 000

Unemployment rate Labour force participation rate Employment- to- population rate

(2 Marks each) [3 Marks]

Briefly discuss any three functions of money

Explain how an increase in the general price level will affect the value of money [3 Marks]
What determines the amount of money demanded for transactions? Explain (3 Marks)

QUESTION-3 A) Explain the important causes that can contribute to the following i) ii) B) C) D) Structural unemployment Cyclical unemployment

(3 Marks each) (3 Marks)

Explain the link between unemployment and real GDP What is money? What is M1 money supply in Botswana? [1 Mark] [1 Mark]

E)

Consumer Price Index increased from 120 in 2008 to 140 in 2009. Calculate the rate of inflation in 2009 (2 Marks) Show how monetary policy is useful in controlling inflation (2 Marks)

F)

QUESTION- 4
A)

Discuss the problem of unemployment in the context of Botswana (4 Marks) Why does frictional unemployment take place? (2 Marks) Discuss any three functions of the central bank [3 Marks]

B) C) D)

Distinguish between demand pull inflation and cost push inflation [3 Marks] Suppose the central bank has set a reserve requirement ratio of 10%, and that the total demand deposits of the banking system are equal to P100, 000. What is the maximum amount of money that can be created by the banking system [3 Marks]

E)