GSOC1301 – A: Principles of Macroeconomics

Mid-Term Exam

Question 0. State your full name and your student ID.

1. Question:
What is the difference between nominal GDP and Real GDP (RGDP)? Explain!

Answer:
Nominal GDP is expressed in the prices of that year/current year. However, Real
GDP is expressed in the prices of a basis year which have been chosen as the
reference. Therefore, even though both nominal GDP and real GDP measure the final
goods and services produced in a given year, they do not use the same price reference.

2. Question:
How do increases in government purchases/spending (G) affect RGDP and Economic
Growth? Explain use sentences and a graph (AD curve and AS curve, and equilibrium
AD-AS).

Answer:
When government purchases/spending (G) increases, the RGDP will increase from
Y1 to Y2, which means that the economy is growing. This leads to inflation or
increase on price level from P1 to P2.

However, taxes will decrease, income and consumption levels will increase. Since the
government will run a large deficit and spend lots of budget on capital projects, the
aggregate demand increases and the economy grows.

Therefore, the aggregate demand curve will shift to the right. On the other hand, the
aggregate supply curve does not shift the aggregate supply curve because aggregate
supply is not dependent to government spending.

(Due to the lack of space, the graph for question number 2 is provided in the
following page)
 Legend:
Green : AD1
Blue : AD2
Purple : AS

3. Question:
How does technical progress, including automation, affect labor market equilibrium?
Explain, use sentences and a graph(s) (Labor Demand Curve and Labor Supply
Curve, and its Labor Market Equilibrium Ld-Ls)
Note:
Ld = Labor Demand Curve
Ls = Labor Supply Curve

Answer:
Technical progresses such as automations causes the wage rate to decrease. Therefore,
the labor supply to shift to the right. However, it does not impact the labor demand
and hence it stays in the same position.
4. Question:
When consumers feel or become wealthier, what is the effect on consumption
spending (Consumption Spending = C)? On Aggregate Supply curve (AS curve)? On
Aggregate Demand curve (AD curve)? On Macroeconomics equilibrium (AD curve
and AS curve)? Explain by using sentences and graphs.

Answer:
When consumers feel wealthier, consumption spending will increase. This causes the
RGDP to increase and the price level to increase as well. Therefore, the aggregate
demand curve will shift to the right. However, this does not impact the aggregate
supply curve since it does not dependent on consumption. Therefore, the aggregate
supply curve will remain on the same position. The macroeconomic equilibrium will
shift to from P1Y1 to P2Y2.

Legend:
Green : AD1
Blue : AD2
Purple : AS

5. Question:
All other things being equal, what would be happened to AD curve? AS curve?
Equilibrium AD and AS? If wage rates increase, explain by using sentences and
graphs.

Answer:
An increase in wage rates will cause the future income to increase and tax to decrease.
Therefore, the aggregate demand curve will shift to the right. However, since the rise
in wage rates causes lower employment and less output, the aggregate supply will
decrease. Hence, the aggregate supply curve will shift to the left. The equilibrium will
shift from P1Y1 to P2Y2.
 P2Y2

P1Y1

6. Question:
When Pak Jokowi government builds more and more toll roads, what would be
happened to Indonesia Price Level and Indonesia RGDP? Explain by using sentences,
AD curve, AS curve and its equilibrium AD-AS.

Answer:
The building of more toll roads boosts the aggregate demand and economic growth in
a country. However, the government spending will increase. Therefore, the RGDP in
Indonesia will increase from Y1 to Y2 and the price level will increase from P1 to P2.
The aggregate demand will shift to the right. However, the aggregate supply is not
affected since it is not dependent on government spending.

Legend:
Green : AD1
Blue : AD2
Purple : AS
7. Question:
What would be the impact of Expansionary Fiscal Policy to macroeconomics
equilibrium (AD-AS). Use sentences and graphs.

Answer:
Expansionary fiscal policy occurs when the government increase their
purchases/spending. Through this policy the government runs a large budget deficit
and spend on capital projects in order to boost AD and general economic activity.
This means that the price level will increase, and the RGDP will also increase.
Therefore, the aggregate demand curve will shift to the right. However, it does not
impact the aggregate supply curve. Therefore, the macroeconomic equilibrium will be
shifting from P1Y1 to P2Y2.

Legend:
Green : AD1
Blue : AD2
Purple : AS

8. Question:
How labor unproductivity lead(s) to gains in uneconomic growth (RGDP decreases)?
Explain by using sentences and graph (AD curve, AS curve, and equilibrium AS and
AD).

Answer:
Labor unproductivity causes the production number of goods and services to be less
although the amount of relative work is the same. Hence, it causes uneconomic
growth and decrease in RGDP. This impacts to the price level as it will decrease.
Hence, the aggregate supply will shift to the left.
9. Question:
Using the definition of the unemployment rate, is an increase in the unemployment
rate necessarily a bad thing for a nation? Why? Explain by using sentences and
graphs.

Answer:
An increase in the unemployment rate does not necessarily a bad thing. It depends on
the case. If the economy in a nation grows, many people who were formerly
discourage workers will search for a job again. When this happens, the measured
unemployment rate will rise temporarily.

10. Question:
What is the main reason for (the) government to do contractionary fiscal,
contractionary fiscal policy by government such as decreases government spending
and increases (tax), in a time of strong economic growth nation? Why? Explain by
using sentences and graphs.

Answer:
The government regulates the contractionary fiscal policy because the government has
a large surplus in its budget which can be used to combat demand. Moreover, due to
an excessive spending from the government, they need to pull down the inflation rate.
This policy causes the taxes to increase and the consumption to decrease, which
means, the aggregate demand to shift to the left from AD2 to AD1.

Due to the lack of space, the graph for number 10 will be in the next page.
Legend:
Red : AD1
Blue : AD2