macro test 2 past qs
If you are traveling in Thailand and you purchase a meal that costs 1,400 baht and the current exchange rate is 35 baht to the dollar, then the price of the meal in dollars is
$40
If the NZD appreciates against the USD: (a) US households and firms find New Zealand-made products relatively more attractive to buy. (b) NZ households and firms find US-made products relatively less attractive to buy. (c) New Zealand's (merchandise) trade balance with the US will go down in the medium run. (d) None of the above.
(d) None of the above.
The presence of (positive) inflation means all of the following except: (a) the value of a dollar is falling over time. (b) borrowers repay loans with cheaper dollars. (c) nominal interest rates are higher than real interest rates. (d) real interest rates are falling.
(d) real interest rates are falling.
Consider an economy currently at its full-employment output level. An increase in income tax rates will cause output to fall in the short run, but not in the long run. Discuss.
-in SR: the reduction in aggregate expenditure (AE) due to higher t leads Y to fall. If the central bank follows a a monetary policy rule (MPR), lower output and a lower price level would cause the bank to reduce the nominal (and real) interest rate. This stimulus will offset, to some degree, the initial fall in AE from a higher t -With the AD-AS model, in the long run, the public will adjust its inflation expectations, which along with the consequent changes in the labour market, will restore output to its long run equilibrium level.
If a Big Mac' costs 5 Euros (EUR) in Prague and 30 Polish zloty in Warsaw, the Big Mac implied exchange rate is
0.1667 Euros = 1 zloty.
in the short run, contractionary monetary or fiscal policy shifts the ( ) and leads to a ( ) in inflation.
Aggregate Demand curve left, decline
Which of the following would shift the IS curve to the right?
An increase in autonomous expenditure
Based on the supply and demand model of the exchange rate, which of the following should cause the Icelandic krona to appreciate?
An increase in remittances from Iceland workers abroad to their families at home
Which one of the following is least likely to increase a country's GDP per capita?
An increase in the country's population.
In an open economy with no government, expenditure on GDP is given by
C + I + X − M
If inflation slows what would the central bank have to do to decrease real interest rates?
Decrease the nominal interest rate by more than the decrease in the inflation rate (in percentage point terms).
Suppose that the government considers introducing a budget rule under which the government is required to spend exactly what it receives in tax revenue - that is, to run a balanced budget. It has been advised that this rule would help control inflationary pressures if the economy experienced a positive demand shock. Is this advice true or false?
False. If there is a positive demand shock and income rises, tax revenues will rise and transfers will fall. To keep the budget balanced tax rates have to cut or spending must be increased. Any of this reinforces the first shock and worsens the expansion
When the nominal interest rate is zero, it is impossible for government to stimulate aggregate demand in our model?
False.The government can increase spending or cut taxes - in our model this will boost aggregate demand no matter how it is financed.
In 50 words or fewer, define GDP.
GDP is a monetary measure of the total market value of all final goods and services produced within a given period (typically a quarter or year) by factors of production located within a particular geographic area typically a country).
Which of the following events will cause the value of the US dollar to depreciate against the NZ dollar?
Increased demand for foreign produced goods by US consumers.
Suppose that the RBNZ believes the NZ economy is overheating and attempts to slow the economy down using monetary policy. Which of the following statements is correct regarding the effects of an interest rate rise?
It leads to higher demand for the New Zealand dollar (NZD), which results in an appreciation of NZD.
Which of the following would increase aggregate output in an open economy?
Lower tax rates
Which of the following statements is correct about the adjustment of the macroeconomy from the short-run to the long-run?
Output in excess of the potential level (in the short-run) leads to higher prices.
Which of the following is the best measure of the purchasing power of one country's goods relative to another country's goods in foreign trade?
The real exchange rate.
Assume that the central bank uses an inflation-targeting monetary policy rule. Suppose that the price level (and rate of inflation) decreases following a decrease in Aggregate Demand. In 200 words or fewer, describe and explain the effect of this change on the nominal interest rate, real interest rate and output in the short run. Use an IS-MPR diagram, and other diagrams as appropriate, to illustrate your answer.
The slowdown would trigger the MPR to operate so as to offset some of the negative shock by lowering the nominal (and real) interest rate to stimulate interest-sensitive components of AE - typically I - and perhaps C and NX; for simplicity the model answer will focus on I only. Given a I(r) has a negative relationship with the real interest rate, a lower r leads to higher I. Output would fall by less, in equilibrium, than in the absence of the MP R.
Which of the following statements is correct regarding inflation and deflation?
Unanticipated inflation transfers wealth from lenders to borrowers.
Suppose that the economy has an independent central bank with an inflation target of 2%, and initially actual inflation equals the target rate. Consider an aggregate demand shock that increases unemployment. Which of the following statements is correct?
Without monetary or fiscal policy to counter the shock, the short run Phillips curve would shift down (in the long-run).
The "purchasing power parity" concept suggests differences in inflation rates between countries will cause
a change in the nominal exchange rate.
In the open economy income-expenditure model presented in the textbook, a decrease in Gross Domestic Product will cause
a decrease in imports.
Assume that a closed economy is initially operating at the potential level of output and the investment is given by the following function, I = d − gr, where r is the real interest rate. Suppose that the government implements a simultaneous increase in taxes and in the Official Cash Rate (r). This change will also cause
a decrease in investment in the short run.
Suppose that due to public pressure the government cuts spending. In terms of AD − SRAS this will cause
a movement down (to the left) along the the SRAS curve.
Suppose that due to public pressure the government cuts spending. In terms of AD-SRAS this is represented as
a movement down (to the left) along the the SRAS curve.
Suppose that the real interest rate is fixed, employment is substantially below the full employment level and the short run aggregate supply curve is horizontal. An increase in government spending creates
a multiplier effect.
Assume that a closed economy is initially operating at the potential level of output and the investment is given by the following function, I = d − gr, where r is the real interest rate. Suppose that the government implements a simultaneous increase in taxes and in the Official Cash Rate (r). This change will cause
a reduction in output and a reduction in the price level in the short run.
An increase in exports leading to a balance of payments surplus causes
a rise in the interest rate and a rise in the nominal exchange rate.
A decrease in interest rates is represented as
a shift of the AD line and a movement along the IS curve.
In an open economy, fiscal policy has
a smaller impact on aggregate demand compared to a closed economy.
An automatic stabiliser is
a tax or form of government expenditure that has the effect of reducing the size of the multiplier.
The economy experiences both inflation and unemployment when
aggregate supply decreases and aggregate demand remains unchanged.
When households "consumption smooth" they are
aim to maximise their utility by taking into account expected future income levels when choosing how much to consume now.
Which of the following would likely be a source of economic growth?
all of these: (a) An improvement in the quality of the factors of production available to produce society's goods and services. (b) An improvement in technology. (c) An increase in the quantity of factors of production that society has available for the production of goods and services.
When the economy is operating at a point where output is greater than the potential level of output, which of the following occurs?
all of these: (a) The unemployment rate is less than the natural unemployment rate. (b) The price level is greater than the expected price level. (c) The price level will be higher next period than it is this period.
A decrease in aggregate output in the short-run could be due to
all of these: (a) an increase in income tax rates. (b) an increase in household savings rates. (c) a lift in interest rates increasing returns to lenders.
Which of the following determines the long-run (i.e. potential) level of real GDP?
all of these: The size of the labour force. (b) Available natural resources. (c) Education and work experience.
There is a "crowding out" effect if
an increase in government expenditures reduces private investment
An intended goal of expansionary fiscal policy is
an increase in the level of aggregate output.
The level of investment expenditure is of particular interest to macroeconomists because it
appears to play a major role in fluctuations in economic growth.
The economic impact of ( ) during expansionary periods is to moderate growth.
automatic stabilisers
If a country has a fixed exchange rate regime and a balance of payments deficit
before intervention, the quantity of foreign exchange supplied is less than the quantity demanded.
If a country wishes to run large structural deficits year after year, the government will have to
borrow money to finance them
In 50 words or fewer, define the nominal and real interest rates
both interest rates are expressed as percentages. The nominal interest rate (i) is the dollar value of the gain/loss; the real interest rate (r) is the gain/loss in terms of purchasing power, i.e. adjusted for inflation (π). The Fischer equation (approximation) defines the nominal interest rate as i = r + π.
A significant increase in net migration to New Zealand that increases the consumption expenditure, the demand for mortgages and for the demand for new houses is likely to
cause the inflation rate to increase and cause the Official Cash Rate to increase.
Suppose that there is a decrease in spending by households (i.e. consumers). In 200 words or fewer, describe and explain the effect of this change on the unemployment rate and inflation the short run. Use a Phillips Curve diagram, and other diagrams as appropriate, to illustrate your answer.
consumption (C is a component of aggregate expenditure (AE). A decrease in spending by households (i.e. consumers) de creases AE; it is a negative demand shock. The negative demand shock in the goods market has implications for the labour market. In equilibrium, firms react to the lower demand by decreasing output. In turn, this reduces the demand for inputs. Rising unemployment weakens worker bargaining power, leading to lower wages/wage growth and a lower price level/inflation in equilibrium. Thus higher unemployment is associated with lower inflation (in the short run), given fixed price expectations
When aggregate income increases
consumption expenditure increases.
Assume that a closed economy is initially operating at the potential level of output and the investment is given by the following function, I = d − gr, where r is the real interest rate. Suppose that the government implements a simultaneous increase in taxes and in the Official Cash Rate (r). This change is an example of
contractionary fiscal policy and contractionary monetary policy
Any transaction that causes a country to gain foreign exchange is a
credit item in that country's balance of payments.
The typical IS curve slopes downwards because
expenditure is decreasing in the real interest rate.
If the economy is in short-run equilibrium to the right of the LRAS curve then
factor costs will rise until output has been reduced to its potential level.
A fall in the exchange rate will temporarily lead to a ( ) in the value of exports, and as quantities ( ) to a change in the price of exports.
fall, do not respond or respond slowly
If technology (as it appears in the production function) improves, this implies that
firms can create more output with the same set of other factors of production.
Compared to a closed economy, in an open economy (with flexible exchange rates),
fiscal policy is less effective, as a fiscal stimulus increases interest rates causing an appreciation of NZ dollar exchange rates.
Suppose that nominal GDP increases by 3%, real GDP increases by 2% and the population increases by 1%. Real GDP per capita
grows by 1% (approximately).
If wages adjust fully to price increases, a change in fiscal policy will
have no effect on output in the long run.
Hyperinflation involves ( ) inflation and ( ) economic growth.
high, decreases
Increasing returns to scale
implies that doubling all inputs will more than double output.
Purchasing power parity implies that New Zealand experiences deflation, then the nominal exchange rate between the Japanese Yen and NZ Dollar (JPU/NZ$) will
increase
Purchasing power parity implies that if inflation in China increases, then the nominal exchange rate between Chinese Yuan and NZ Dollar (CH/NZ$) will
increase (i.e. an appreciation of the NZ$).
An increase in autonomous consumption would
increase Aggregate Demand at every price level
An increase in planned investment would
increase aggregate demand in the short run.
In the short run, expansionary monetary or fiscal policy is expected to ( ) inflation and ( ) output.
increase; increase
Long run economic growth with a stable price level will involve ( ) aggregate demand and ( ) aggregate supply.
increasing, increasing
In 50 words or fewer, define inflation.
inflation is the rate of change in an aggregate price level, typically reported as a percentage and based on the Consumers Price Index.
In order to influence spending on goods and services in the short-run, the monetary policy rule (MPR) presented in lectures aims to directly influence
interest rates
Assume that potential output is fixed. A point on a short run Phillips curve but not on a long run Phillips curve
is a short run equilibrium.
Suppose that the exchange rate is 30 Eurocents to NZ$1. If a cup of coffee costs 90 Eurocents in Paris, and $4 in New Zealand, then a cup of coffee
is less expensive in Paris than in New Zealand.
The open economy multiplier, as presented in the textbook,
is lower than in a closed economy model.
If the central bank credibly target a higher rate of inflation then over time the Short-Run Aggregate Supply curve shifts ( ) and the Aggregate Demand curve shifts ( )
left; right
A typical recession will begin with planned expenditures being ( ) than output, while unplanned changes in inventories (physical stocks) will be ( ).
lower; positive
A current account deficit implies
on average, people within the country are net borrowers of capital from the rest of the world.
A vertical long-run Phillips curve implies that
over time the unemployment rate tends towards a particular rate, irrespective of the rate of inflation.
If the economy is in long-run equilibrium and faces a positive demand shock output will ( ) in the short-run. If potential output is unchanged, in the transition between the short and long term, output will ( ).
rise; fall
A short run Phillips curve indicates that
rising inflation is associated with a lower real wage and lower unemployment.
Suppose that the Government attempts to stimulate the economy by sending every household a cheque for $1000. Consumption smoothing implies that households ( ) as a consequence of this policy, ( ) the net effect of the fiscal stimulus on equilibrium output.
save more, reducing
If the economy is operating substantially below its potential level of output, an increase in aggregate demand causes a ( ) change in the price level and ( ) change in output
small; big
An Aggregate Supply curve that is bent, rather than a straight line, is used to illustrate that
stimulatory fiscal policy in an already booming economy is likely to result mainly in inflation with little boost to output.
The European countries that use the Euro cannot each set a different monetary policy because of
the absence of barriers to capital flows between EU countries
When some consumers decrease their marginal propensity to consume, ceteris paribus,
the aggregate demand curve would shift to the left (down).
On a daily basis, a floating exchange rate will adjust to ensure
the balance of payments is always equal to zero.
The Monetary Policy (or Fed) Rule curve slopes upwards because
the central bank increases interest rates in response to higher output.
In the open economy income-expenditure model presented in the textbook,
the domestic country's imports depend on the domestic country's income.
The interest parity condition suggests that if the domestic interest rate is higher than the world interest rate
the domestic currency is expected to depreciate
The natural rate of unemployment is closely associated with
the potential level of output.
If purchasing power parity were to hold even in the short run, then
the real exchange rate should equal one.
The price that balances labour market supply and demand in the long run is
the real wage
If wages are sticky, then in the short run as inflation rises
the real wage falls as the nominal wage rises less than proportionately to inflation.
Assume that wages are sticky and expectations are rational (i.e. forward looking). In the short-run, expansionary monetary policy causes
the real wage to decrease.
In the long-run, contractionary monetary policy causes
the short-run Phillips curve to shift left.
According to the uncovered interest parity condition, an increase in the domestic interest rate will cause
the spot (current) exchange rate to rise.
If Purchasing Power Parity holds for a given nominal exchange rate
then a unit of one currency should purchase the same quantity of goods in all countries.
Suppose that the economy begins at a long-run equilibrium. Following a positive demand shock
unemployment is lower than the natural rate.
Suppose that the economy begins at a long-run equilibrium. Following a shock that causes demand-pull inflation
unemployment is lower than the natural rate.
In 50 words or fewer, define unemployment
unemployment rate: the percentage of the labour force that is unemployed, where the labour force is number of employed and unemployed workers in the economy (excluding people who are not available or not seeking work). This group does not include discouraged workers: people who are available for work but are not "actively" seeking a job.
Suppose that the inflation rate is lower than the central bank's target rate. To stimulate inflation, the government might
use expansionary fiscal policy.
The long-run aggregate supply (LRAS) curve shows the level of output that firms are willing and able to supply, in equilibrium in the long run, at each inflation rate
when all inputs are fully employed.
