TEMASEK POLYTECHNIC

SCHOOL OF BUSINESS
AY 2014/2015 MID-SEMESTER TEST
(October Semester)

MACROECONOMICS (BEC1002)
SUBJECT LEVEL: 1

TIME ALLOWED: 1 HOUR

INSTRUCTIONS TO CANDIDATES

1. This paper consists 7 pages (including cover page).

2. Answer ALL questions.

3. Write your answers in the space provided within the question paper and show your
workings for questions requiring calculations.

Name
Admission No.
Tutorial Class
Seat No.

Page 1 of 7
Section A: Multiple Choice Questions (20 marks)
Please write the correct answers in the brackets provided.

1.1 Which of the following is not a macroeconomic issue?

(A) Fall in investment slows UK’s growth.

(B) Eurozone having persistent stagnation risk.
(C) Singapore economy grew by 3% in 3rd quarter 2014.
(D) Online grocers benefit from India’s ecommerce growth.
(E) Japan’s economy faces challenges ahead of snap elections.
( )

1.2 Holding all else constant, the country’s circular flow of income tends to rise
when there is a

(A) rise in taxes.

(B) rise in savings.
(C) rise in imports.
(D) rise in firm’s borrowings.
(E) rise in the price of electricity.
( )

1.3 GDP tends to be overstated when

(A) resources are over-utilized.

(B) there is a fall in money supply.
(C) transfer payments are not included.
(D) there is an increase in the amount of resources.
(E) there is double-counting using the output approach.
( )

1.4 When a country successfully taps into nuclear power for energy, there will be an
increase in the country’s

(A) AD and real GDP.

(B) AD and potential GDP
(C) SRAS and potential GDP.
(D) LRAS, SRAS and real GDP.
(E) LRAS, SRAS and potential GDP.
( )

1.5 Which of the following will tend to cause a rightward shift of the AD curve?

(A) A rise in interest rates.

(B) A rise in prices of raw materials.
(C) A rise in businesses acquiring more tools.
(D) A rise in savings deposits collected by banks.
(E) A rise in the unemployment rates of neighbouring countries.
( )

Page 2 of 7
1.6 When a falling aggregate demand results in a below full-employment output
equilibrium, there will be

(A) a recessionary gap and cyclical unemployment.

(B) an inflationary gap and less frictional unemployment.
(C) a recessionary gap and less structural unemployment.
(D) an inflationary gap and lower cyclical unemployment.
(E) a recessionary gap and more frictional unemployment.
( )

1.7 One of the more economically favourable long-term solution to rising public
debt is when

(A) households borrow less.

(B) the government raise taxes.
(C) the government cuts operating expenditures.
(D) the government cuts development expenditure.
(E) the government encourages commercial banks to reduce lending.
( )

1.8 During an expansion, the automatic fiscal stabilizers cause

(A) a smaller budget deficit.

(B) a greater budget deficit.
(C) changes in the tax rates.
(D) higher taxes leading to higher government spending.
(E) the government to impose higher taxes to decrease consumption.
( )

1.9 M2 comprise of

(A) quasi money alone.

(B) net deposits with non-bank financial institutions.
(C) currency in active circulation and savings deposits.
(D) demand deposits, savings deposits and fixed deposits.
(E) currency in active circulation, demand deposits, savings deposits, fixed
deposits and other deposits.
( )

1.10 Money supply increases when there is a

(A) rise in savings deposits.

(B) fall in cost of production.
(C) there is a smaller national debt.
(D) fall in the required reserve ratio.
(E) rise in the prices of all final goods and services produced.
( )

Page 3 of 7
Section B : Short Questions (80 marks)
2. The table below shows the economic data (measured at current market prices)
of the Archenland for the year 2013. Use the data to answer the following
questions and show your workings where relevant. Correct your answer to 1
decimal place.
(30 marks, 6 marks for each part)

Consumption expenditure $12.5bn

Import expenditure $0.7bn
Government expenditure $8.4bn
Investment $10.0bn
Total output = Total income = Total expenditure $35.0bn

(a) (i) With reference to the data provided, identify the missing component of
GDP by expenditure approach and (ii) calculate the missing component.

(b) (i) Calculate Archenland’s 2013 real GDP, given that the deflator is 115.
Given that the potential GDP is $33bn. (ii) Identify the type of macroeconomic
equilibrium and (iii) name the gap and calculate the size of it.

(c) (i) State the formula and calculate Archenland’s growth in 2013 given that its
real GDP for the previous year in 2012 was $37bn and (ii) identify the phase
of the business cycle Archenland is currently at.

(d) In light of Archenland’s 2013 negative economic growth (as determined in

part c) and a rising price level, (i) identify whether it is likely to be the AD that
has risen or fallen, or SRAS that has risen or fallen. (ii) Elaborate with an
example what could be the possible causes.

Page 4 of 7
(e) In light of your findings from part d, (i) is unemployment rising or falling? (ii)
Suggest the most effective way the government could adopt to solve the
economic problem. Why? Explain your answer.

3. Currently Donetsk in Ukraine is facing a brain drain as many skilled workers

leave due to the conflict between pro-Russian forces and Ukrainian forces.

(a) Illustrate and explain how this would affect Donetsk’s potential output and
aggregate supply curves as a result of the workers leaving.
(8 marks)

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

(b) Define deflation and recession. Over time, many families and businesses
have also left Donetsk for a safer place in the West of Ukraine. Using the
ADAS model, explain with an initial above full-employment equilibrium
level, how deflation and recession can occur.
(10 marks)

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

Page 5 of 7
4. (a) Suppose that the T-account for EFG Bank is as follows:

Assets Liabilities

Reserves $100,000 Deposits $600,000

Loans $500,000

If the central bank requires banks to hold 15% of deposits as required

reserves, calculate the amount of extra excess reserves EFG Bank is
holding? (3 marks)

____________________________________________________________

____________________________________________________________

(b) Assume that every bank in the economy only holds the required reserve
ratio of 15%. Calculate the money multiplier (round up to 2 dec. places)
and calculate the amount of new money that can be created by the banking
system when $5,000 is deposited into a bank. (5 marks)

____________________________________________________________

____________________________________________________________

(c) The actual amount of new money created within the economy could be less
than the amount calculated in (b). State 2 possible reasons.
(2 marks)

____________________________________________________________

____________________________________________________________

5. Read the excerpt below and answer the following questions.

Over the past six years, Europe’s economies have faced their fair share of difficulties. But
while many have stumbled, Austria has emerged from the storms remarkably well.

The Alpine nation has registered economic growth each year since 2009, and quality of
life is high. As other countries struggle to restore economic competitiveness, Austria’s
export-orientated economy is poised to post a current account surplus for the 13th
successive year. Much of its economic success is also due to the Mittelstand companies
(ie. small medium enterprises), the backbone of Austria’s economy.

However “the problem for Austria at the moment is that it is a small, relatively open
economy, and so can’t avoid what is happening from the troubles of its neighbouring
countries,” says Richard Grieveson, an analyst at the Economist Intelligence Unit. “And
the external situation has deteriorated a lot.”

Austria’s government is planning an income tax reduction of €5bn a year.

Excerpt from “Reforms to reignite Austria’s faltering growth”, The Financial Times, 25th Nov
2014.

Page 6 of 7
a. Based on the article, what is Austria’s GDP growth heavily reliant on?
(2 marks)

b. According to the article, what macroeconomic problem could arise with poorer
exports? Explain and illustrate the effect on real GDP and the price level using
an initial equilibrium at full-employment output.
(10 marks)

c. Identify the type of fiscal policy the government is adopting by cutting income
taxes to solve the economic problem identified in part b. Explain with an AD-
AS diagram, how this will impact the equilibrium price level and real GDP of
Austria.

(10 marks)

***End of paper***

Page 7 of 7