Started on Tuesday, 2 April 2024, 7:32 AM

State Finished

Completed on Tuesday, 2 April 2024, 10:29 AM

Time taken 2 hours 57 mins

Marks 26.00/30.00

Grade 86.67 out of 100.00

Question 1

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From the perspective of South Africa, an increase in the nominal exchange rate will cause the following
to happen:

Select one:

A.

South African goods are more expensive to foreigners, and SA exports will decrease.

B.

Foreign goods are more expensive to South Africans, and imports will decrease.

C.

The Rand becomes less expensive to foreigners, and SA exports will increase.

D.
Foreign currency is more expensive to South Africans, and imports will decrease.

Feedback

Your answer is correct. South African goods are more expensive to foreigners, and exports will decrease.
If there is an increase (or appreciation) in the nominal exchange rate, the rand is worth more in terms of
dollars. In other words, the rand becomes more expensive to foreigners, and foreign currency is less
expensive to South Africans. If the nominal exchange rate appreciates, exports will decrease, and
imports will increase, ceteris paribus. Imports will increase because foreign goods are cheaper than
South African goods (imports are cheaper). If there is an increase (or appreciation) in the nominal
exchange rate, the rand is worth more in terms of dollars. In other words, the rand becomes more
expensive to foreigners, and foreign currency is less expensive to South Africans.

The correct answer is:

South African goods are more expensive to foreigners, and SA exports will decrease.

Question 2

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An increase in the South African interest rate relative to that of the rest of the world, ceteris paribus,
leads to ____

Select one:

A.

An appreciation of the rand.

B.
A depreciation of the rand.

C.

An increase in exports.

D.

A capital outflow and a lower demand for rands on the foreign exchange market.

Feedback

Your answer is correct. An increase in the South African interest rate relative to that of the rest of the
world leads to a capital inflow since the return is higher. The higher return causes a higher demand for
rands on the foreign exchange, leading to an appreciation of the rand. The appreciation of the rand
results in a decrease in exports.

The correct answer is:

An appreciation of the rand.

Question 3

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Study the following diagram and answer the question. Assume that the economy is initially in a position
where output is equal to potential output Yn.

Which of the following statements is correct?

Assume that the shift of the IS curve to the right is because of an increase in government spending. If
government spending increases without increasing the interest rate, the new equilibrium level of output
and income is ____
Select one:

A.

Now Y1, consumption spending has increased, investment spending has decreased, and the exchange
rate is unchanged.

B.

Now Y1, consumption spending and investment spending has increased, and the exchange rate is
unchanged.

C.

Now Y2, consumption spending has increased, investment spending has decreased, and the exchange
rate appreciated.

D.

Now Y2, consumption spending and investment spending have increased, and the exchange rate
appreciated.

Feedback

Your answer is correct. The initial equilibrium level of output and income is Yn, where the IS curve and
the LM curve intersect. If government spending increases without increasing the interest rate, the IS
curve shifts to the right to IS1. The new equilibrium level of output and income is now Y1; consumption
spending has increased (Y↑ → YD↑ → C↑), investment spending has increased (Y↑ → I↑), and the
exchange rate has been unchanged since the interest rate has not changed.

The correct answer is:

Now Y1, consumption spending and investment spending has increased, and the exchange rate is
unchanged.
Question 4

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The following chain of events can represent the impact of an expansionary fiscal policy on the goods and
financial market and exchange rate in an open economy:

Select one:

A.

T↑: Z↑ → Y↑ → Md↑ → M↑ → ἶ → E unchanged

B.

G↑: Z↑ → Y↑ → Md↑ → M↑ → ἶ → E↑

C.

G↑: Z↑ → Y↑ → Md↑ → M↑ → ἶ → E unchanged

D.

T↓: Z↑ → Y↑ → Md↑ → M↑ → ἶ → E↑

Feedback

Your answer is correct. The impact of expansionary fiscal policy is increased government spending
and/or a decrease in taxes. Since the level of output and income increases, the demand for money and
the quantity of money will increase. Since the central bank sets the interest rate, the interest rate will be
unchanged (i = ἶ), and therefore, the exchange rate is also unchanged.

The correct answer is:

G↑: Z↑ → Y↑ → Md↑ → M↑ → ἶ → E unchanged

Question 5

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This question is based on the following diagram:

Which one of the following statements is INCORRECT?

Select one:

A.

The above diagram illustrates the IS-LM model for an open economy where equilibrium output and the
equilibrium interest rate are given by the intersection of the IS and the LM curves.

B.

The IS curve is downward sloping because an increase in the interest rate leads directly, through
investment, and indirectly, through the exchange rate, to a decrease in demand and the level of output
and income.

This statement is correct.

C.

Given the interest parity relation, the equilibrium interest rate determines the equilibrium exchange
rate.

D.

The LM curve is horizontal at the interest rate set by the central government.

Feedback

Your answer is incorrect.

The correct answer is:

The LM curve is horizontal at the interest rate set by the central government.

Question 6

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Which one of the following chain of events indicates the impact of a depreciation of the nominal
exchange rate on demand for goods and the level of output and income in the goods market for an open
economy?

Select one:

A.

E↑ → X↓ → NX↓ → Z↓ → Y↓

B.
I↓ → E↓ → X↑ → Z↑ → Y↑

C.

E↓ → i↑ → I↓ → Z↓ →Y↓

D.

E↓ → X↑ → NX↑ → Z↑ → Y↑

Feedback

Your answer is correct. The question refers to the impact of depreciation; therefore, the chain of events
will start with a depreciation in the exchange rate. The depreciation of the nominal exchange rate will
lead to an increase in exports that will improve the trade balance, the demand for goods and the level of
output and income increase.

The correct answer is:

E↓ → X↑ → NX↑ → Z↑ → Y↑

Question 7

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This question is based on the following diagram of an IS-LM model for an open economy.

Which one of the following statements is correct?

Select one:

A.
The diagram above illustrates the impact of an expansionary fiscal policy on the exchange rate.

B.

The diagram above illustrates the impact of an expansionary monetary policy on the exchange rate.

C.

The diagram above illustrates the impact of a contractionary fiscal policy on the exchange rate.

D.

The diagram above illustrates the impact of a contractionary monetary policy on the exchange rate.

Feedback

Your answer is incorrect. A decrease in the interest rate refers to an expansionary monetary policy. A
positive relationship exists between the interest rate and the exchange rate. Therefore: i↓ → E↓ (a
depreciation of the exchange rate).

The correct answer is:

The diagram above illustrates the impact of an expansionary monetary policy on the exchange rate.

Question 8

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Which one of the following chain of events is correct?

In an IS-LM model for an open economy, the impact of depreciation strengthens the impact of a
decrease in the interest rate on the level of output and income. The following chain of events can
represent this.

Select one:

A.

E↓ → X↓ → Z↓ → Y↑

B.

E↓ → IM↓ → Z↓ → Y↓

C.

E↓ → X↑ → Z↑ → Y↑

D.

E↓ → IM↑ → Z↑ → Y↑

The correct answer is:

E↓ → X↑ → Z↑ → Y↑

Question 9

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The following question refers to an IS-LM model in an open economy.

Which of the following statements is correct regarding the impact of an increase in taxes in an open
economy?

Select one:

A.

The trade balance improves since imports are lower and exports are higher.

B.

The IS curve will shift to the left. In the goods market, the demand for goods decreases and the level of
output and income declines.

C.

The LM curve is upward-sloping, and an appreciation of the exchange rate occurs.

D.

On the financial market, the interest rate declines since the demand for money is lower.

Feedback

Your answer is correct. An increase in taxes is the same as fiscal contraction. The first impact of an
increase in taxes is on the goods market. The IS curve will shift to the left. The increase in taxes causes a
decline in the demand for goods, and the level of output and income decreases. Since the central bank
sets the interest rate, the interest rate will be unchanged, as well as the exchange rate and the LM curve
is horizontal. The decrease in the level of output and income results in a decrease in imports, and since
exports are unchanged, there is an improvement in the trade balance.

The correct answer is:

The IS curve will shift to the left. In the goods market, the demand for goods decreases and the level of
output and income declines.

Question 10

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This question is based on the following diagram of an IS-LM model for an open economy:

Which one of the following statements is INCORRECT?

The above diagram can illustrate _____.

Select one:

A.

The impact of contractionary fiscal policy on the level of output and income in an open economy.

B.

An increase in the budget deficit and the impact on the exchange rate.

This statement is the only INCORRECT statement. A budget deficit occurs when the government
spending is greater than government income (taxes). If government spending decreases and/or taxes
increase (implementation of a contractionary fiscal policy), it implies that the budget deficit will
decrease (and will not increase).

C.
An increase in taxes and the impact on the exchange rate.

D.

A decrease in government spending and the impact on the exchange rate.

Feedback

Your answer is correct.

The correct answer is:

An increase in the budget deficit and the impact on the exchange rate.

Question 11

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Which one of the following factors will NOT improve the bargaining position of workers?

Select one:

A.

A higher level of output and a lower unemployment rate.

B.

An increase in unemployment benefits.

C.
Labour laws that protect workers from being dismissed.

D.

The less expensive it is to dismiss workers.

Feedback

Your answer is correct. The more expensive it is to dismiss workers (and not the less expensive), the
more it will improve the bargaining position of workers. Remember that a higher unemployment rate
erodes workers’ bargaining position, while a lower unemployment rate will increase workers’ bargaining
position. Institutional factors such as labour laws and unemployment benefits will influence the
bargaining position. A lower level of output and a higher unemployment rate (Y↓ → N↓ → u↑) will
decrease the workers’ bargaining position.

The correct answer is:

The less expensive it is to dismiss workers.

Question 12

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In the determination of nominal wages (W) in the labour market, a ____

Select one:

A.

Higher unemployment rate will decrease nominal wage demands.

B.

Higher unemployment rate will increase nominal wage demands.

C.

Change in institutional factors will not influence nominal wage demands.

D.

Decrease in the expected price level will increase nominal wage demands.

Feedback

Your answer is correct. The question refers to the wage-setting equation W=PeF(u, z). A change in
institutional factors will influence nominal wage demands. A positive relationship exists between the
expected price level and the nominal wage demand; therefore, an increase in the expected price level
will increase nominal wage demands. A negative relationship exists between the unemployment rate
and the nominal wage demands; therefore, a higher unemployment rate will decrease nominal wage
demands.

The correct answer is:

Higher unemployment rate will decrease nominal wage demands.

Question 13

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According to the wage determination equation, an increase in the expected price level will ____

Select one:
A.

Leave nominal wage demands unchanged.

B.

Increase the real wage.

C.

Decrease the real wage.

D.

Increase nominal wage demands.

Feedback

Your answer is correct. According to the wage determination equation W=Pe(u, z), a positive
relationship exists between the expected price level and the nominal wage demands.

The correct answer is:

Increase nominal wage demands.

Question 14

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Which one of the following statements is INCORRECT?

According to the price-setting relation, _____

Select one:

A.

An increase in the real wage, given the markup, will decrease the price per unit of output.

This statement is the only INCORRECT statement. This question refers to the price-setting equation: P =
(1 + m)W. A positive relationship exists between the nominal wage and the price per unit of output.

B.

A decrease in the markup, given the nominal wage, will decrease the price per unit of output.

C.

An increase in the markup, given the nominal wage, will increase the price per unit of output.

D.

A decrease in the nominal wage, given the markup, will decrease the price per unit of output.

Feedback

Your answer is correct.

The correct answer is:

An increase in the real wage, given the markup, will decrease the price per unit of output.

Question 15
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Which one of the following statements is INCORRECT?

The natural rate of unemployment _____

Select one:

A.

Changes when any exogenous variables change, such as unemployment benefits and a change in firms’
markup.

B.

Determined by the wage determination relationship and the price determination relationship.

C.

Is the unemployment rate where the real wage is implied by the price determination relationship is
equal to the bargained (targeted) real wage as determined by the wage determination relationship.

D.

Changes when wage determination factors such as the unemployment rate, labour legislation and
unemployment benefits change.

This statement is the only INCORRECT statement. A change in the natural unemployment rate occurs
when any of the exogenous variables change. The unemployment rate is excluded regarding the wage
determination relationship since it is not an exogenous factor. Important wage determination factors
are factors that influence the bargaining position of labour, such as labour legislation and
unemployment benefits.

Feedback

Your answer is correct.

The correct answer is:

Changes when wage determination factors such as the unemployment rate, labour legislation and
unemployment benefits change.

Question 16

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Which one will increase the real wage implied by price-setting (price determined real wage)?

Select one:

A.

An increase in the level of output and income leads to a decrease in unemployment.

B.

The improved bargaining position of workers due to labour legislation.

C.

An increase in consumption spending by households.

D.

A lower markup by firms.

The correct answer is:

A lower markup by firms.

Question 17

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This question is based on the following wage-setting and price-setting relationships.

Which one of the following statements is correct?

Select one:

A.

At point A, the nominal wage is equal to the targeted real wage.

B.

At point A, there is no unemployment.

C.

At the equilibrium position, the targeted real wage is equal to the real wage implied by price setting, and
the unemployment rate is equal to the natural unemployment rate.
D.

Equilibrium in the labour market occurs at point A where the quantity demanded for labour is equal to
the quantity supplied of labour, and there is no unemployment.

The correct answer is:

At the equilibrium position, the targeted real wage is equal to the real wage implied by price setting, and
the unemployment rate is equal to the natural unemployment rate.

Question 18

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Which one of the following statements is INCORRECT regarding the labour market?

Select one:

A.

When unemployment is high, some unemployed people give up looking for a job and are discouraged
workers. They are counted as unemployed in the strict and expanded definition of unemployment.

This statement is the only INCORRECT statement. When unemployment is high, some unemployed
people give up looking for a job and are known as discouraged workers. They no longer counted as
unemployed in the strict definition of unemployment, but the unemployment rate based on the
expanded definition does take discouraged workers into account.

B.

Employment is the number of people who have a job, while unemployment is the number of people
who do not have a job but are looking for one.
C.

The unemployment rate is defined as the ratio of the unemployed to the labour force or the
unemployment rate = unemployment ÷ labour force.

D.

The labour force is the sum of those either working or looking for work, in other words, the sum of
employment and unemployment.

Feedback

Your answer is correct.

The correct answer is:

When unemployment is high, some unemployed people give up looking for a job and are discouraged
workers. They are counted as unemployed in the strict and expanded definition of unemployment.

Question 19

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Which one of the following statements is correct?

According to the Phillips curve, the negative slope indicates that ____

Select one:

A.

High unemployment leads to decreasing inflation, and low unemployment leads to increasing inflation.
B.

High unemployment leads to decreasing expected inflation, and low unemployment leads to increasing
expected inflation.

C.

High unemployment leads to increasing inflation, and low unemployment leads to decreasing inflation.

D.

Low unemployment leads to increasing employment, and high unemployment leads to decreasing
employment.

Feedback

Your answer is correct. Remember that we will refer to the original Phillips curve for distinction
purposes and only the term Phillips curve to indicate the modified Phillips curve or the expectations
augmented Phillips curve. For low unemployment, the change in inflation is positive. For high
unemployment, the change in inflation is negative; in other words, high unemployment leads to
decreasing inflation, and low unemployment leads to increasing inflation.

The correct answer is:

High unemployment leads to decreasing inflation, and low unemployment leads to increasing inflation.

Question 20

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Which one of the following statements is correct?

According to the modified Phillips curve, there is a negative relation between the change in inflation and
the unemployment rate because workers and firms will consider the higher inflation rate of the previous
year and expect that inflation will be higher this year. Therefore, the ____

Select one:

A.

Unemployment rate does affect the actual inflation rate.

B.

Unemployment rate does affect the change in the inflation rate.

C.

Unemployment rate does affect the expected inflation rate.

D.

Unemployment rate does not affect the change in the inflation rate.

Feedback

Your answer is correct. If the previous year’s inflation rate were high, workers and firms would consider
this higher inflation rate and revise their expectations this year. Therefore, the expected inflation rate
will be even higher. Workers and firms started changing the way they formed expectations. They started
assuming that if inflation had been high last year, inflation was likely to be high this year as well, and
therefore, the unemployment rate does affect the CHANGE in the inflation rate.

The correct answer is:

Unemployment rate does affect the change in the inflation rate.

Question 21

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Which one of the following statements is correct?

Select one:

A.

When the actual unemployment rate is lower than the natural rate of unemployment, the inflation rate
is constant.

B.

When the actual unemployment rate is lower than the natural rate of unemployment, the inflation rate
decreases.

C.

When the actual unemployment rate is lower than the natural rate of unemployment, the inflation rate
increases.

D.

When the actual inflation rate is lower than the natural rate of unemployment, the expected inflation
rate increases.

The correct answer is:

When the actual unemployment rate is lower than the natural rate of unemployment, the inflation rate
increases.

Question 22

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If the natural rate of unemployment changes, the ____

Select one:

A.

Natural level of employment stays the same, and the natural level of output (or potential output) will
change.

B.

Natural level of employment and natural level of output (or potential output) will also change.

C.

Natural level of employment and the natural level of output (or potential output) will be unchanged.

D.

Natural level of employment will change, and the natural level of output (or potential output) will not
change.

The correct answer is:

Natural level of employment and natural level of output (or potential output) will also change.

Question 23

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Study the following PC curve and answer the question:

Which one of the following statements about the PC curve is INCORRECT?

Select one:

A.

At points to the left of Yn, the output gap is negative.

B.

At point Yn, the inflation rate is zero.

This statement is the only INCORRECT statement. At point Yn, the change in the inflation rate is zero.

C.

At point Yn, the change in the inflation rate is zero.

D.

At points to the right of Yn, the output gap is positive.

Feedback

Your answer is correct.

The correct answer is:

At point Yn, the inflation rate is zero.

Question 24

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Study the following PC curve and answer the question:

Which one of the following statements is correct?

Select one:

A.

At point a, the positive output gap causes the change in the inflation rate to increase.

B.

At point a, the positive output gap causes the change in the inflation rate to decrease.

C.

If the output gap is positive, the change in the inflation rate decreases.
D.

If the output gap is positive, the inflation rate decreases.

Feedback

Your answer is correct. At point a, the positive output gap causes the change in the inflation rate to
increase. As the change in inflation increases, so does the inflation rate.

The correct answer is:

At point a, the positive output gap causes the change in the inflation rate to increase.

Refer to the BOTTOM figure in the diagram. At point a, output level Y is higher than Yn. Identify the
INCORRECT option about the short-run equilibrium position.

Select one:

A.

The inflation rate is on the rise.

B.

The economy is overheating.

C.

There is no pressure on inflation.

This statement is the only INCORRECT statement. At point a, the output level Y is higher than potential
output Yn. The output level Y implies that the change in inflation equals ∏ – ∏(-1), and output (Y) is
above potential. In the short run, the inflation rate is increasing, the economy is overheating, and,
therefore, it puts pressure on inflation.

D.

The change in inflation is equal to ∏ – ∏(-1).

Feedback

Your answer is correct.

The correct answer is:

There is no pressure on inflation.

Which one of the following options is the INCORRECT reason why the SARB cannot immediately increase
the policy interest rate to a point where Y=Yn, to achieve stable inflation?

Select one:

A.

SARB may want to adjust the policy rate slowly and see what happens.

B.

To determine the actual and potential unemployment rate is complicated, so the SARB cannot
immediately increase.

C.

Since firms and consumers can react quickly to changes in the policy rate, the SARB may want to adjust
the policy rate quickly.
This statement is the only INCORRECT statement. The SARB wants to keep the economy where Y= Yn,
but it becomes more complicated. It is difficult to know where Yn is exactly and how far Y is from Yn and
determine how close actual unemployment is to the natural rate of unemployment. Therefore, the SARB
may want to adjust the policy rate slowly and see what happens.

D.

It is not easy for SARB to know where Yn is exactly and how far is Y from Yn.

Feedback

Your answer is correct.

The correct answer is:

Since firms and consumers can react quickly to changes in the policy rate, the SARB may want to adjust
the policy rate quickly.

Question 27

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Which one of the following statements is correct?

The medium-run position in the IS-LM-PC model is a position where ____

Select one:

A.

Only output is equal to the natural level of output, and inflation is constant.
B.

Only output is equal to the natural level of output, inflation is constant, and the real interest rate is
equal to the so-called “natural rate of interest”.

C.

Output is equal to the natural level of output, unemployment is equal to the natural rate of
unemployment, and inflation is constant. The real interest rate is equal to the so-called “natural rate of
interest”.

D.

Only output is equal to the natural level of output, and unemployment is equal to the natural rate of
unemployment.

Feedback

Your answer is correct. The medium-run position is where output is equal to the natural level of output,
unemployment is equal to the natural rate of unemployment, inflation is constant, and the real interest
rate is equal to the so-called “natural rate of interest”.

The correct answer is:

Output is equal to the natural level of output, unemployment is equal to the natural rate of
unemployment, and inflation is constant. The real interest rate is equal to the so-called “natural rate of
interest”.

Which one of the following statements is correct?

The diagram above illustrates that the economy is in a recession at point a because at the …

Select one:
A.

Current policy rate, the output is equal to Y, which is far below the natural level of output Yn. Thus, the
output gap is negative, and inflation is decreasing.

B.

Current policy rate, the output is equal to Y, which is far below the natural level of output Yn. Thus, the
output gap is positive, and inflation is decreasing.

C.

Policy rate rn, the output is equal to Y, which is far below the natural level of output Yn. Thus, the
output gap is negative, and inflation is decreasing.

D.

Current policy rate, the output is equal to Y, which is far below the natural level of output Yn. Thus, the
output gap is negative, and inflation is increasing.

Feedback

Your answer is correct. At the policy (or real) interest rate r, the level of output and income is below the
natural level at the initial equilibrium position a. The output gap is negative, and therefore inflation
decreases.

The correct answer is:

current policy rate, the output is equal to Y, which is far below the natural level of output Yn. Thus, the
output gap is negative, and inflation is decreasing.

Question 29

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Study the following diagram of Country Lombo and answer the question. The country experiences an
unacceptable budget deficit, and to deal with this budget deficit, the government decides to increase
taxes.

Which one of the following statements about the adjustment from the initial equilibrium to the short-
run equilibrium is INCORRECT?

Select one:

A.

The government increases taxes. The IS curve will shift from IS to IS1, and at the given policy rate rn,
output decreases from Yn to Y1, and inflation decreases.

B.

The increase in taxes or fiscal contraction leads to a recession since income decreases, decreasing
consumption spending and investment spending.

C.

The decrease in consumption spending results from higher taxes and lower income, and the decrease in
investment spending is due to lower income.

D.

The short-run equilibrium is at point a where output is at potential output, the policy rate is equal to rn,
and inflation is decreasing.

This statement is the only INCORRECT statement. Inflation is stable at point a since output is at its
potential. At point a1, the output gap is negative since output (Y) is below potential output (Yn) and
inflation decreases. As income goes down and taxes increase, consumption decreases on both counts
and as output decreases, investment also decreases (because a positive relationship exists between
income and investment). Thus, in the short run, both consumption and investment decrease.

Feedback

Your answer is correct.

The correct answer is:

The short-run equilibrium is at point a where output is at potential output, the policy rate is equal to rn,
and inflation is decreasing.

Study the following diagram of Country Lombo and answer the question. The country experiences an
unacceptable budget deficit, and to deal with this budget deficit, the government decides to increase
taxes.

Which one of the following statements is CORRECT?

At the new equilibrium point a2 ___

Select one:

A.

Output is the same as it was before fiscal consolidation, taxes are higher, consumption is lower than the
initial level, and investment spending is higher since r↓ → I↑ → Z↑ → Y↑ and Y↑ → I↑.

B.

Output is the same as it was before fiscal consolidation, taxes are lower, consumption is back to the
initial level, and investment spending is higher since r↓ → I↑ → Z↑ → Y↑ and Y↑ → I↑.

C.
Output is the same as it was before fiscal consolidation, taxes are lower, consumption is higher, and
investment spending is higher since r↓ → I↑ → Z↑ → Y↑ and Y↑ → I↑.

D.

Output is the same as it was before fiscal consolidation, taxes are higher, consumption is back to the
initial level, and investment spending is lower since r↑ → I↓ → Z↓ → Y↓ and Y↓ → I↓.

The correct answer is:

Output is the same as it was before fiscal consolidation, taxes are higher, consumption is lower than the
initial level, and investment spending is higher since r↓ → I↑ → Z↑ → Y↑ and Y↑ → I↑.