BSP2001

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BSP2001 FINAL REVIEW

APPENDIX Note: The following list of equations will be included in the Appendix of the BSP2001 final exam question set. Money Multiplier: IS curve: LM curve: AD curve: AS curve: [1+cu] / [re + cu] where = [+Io+Go+cTR+NXo] ; G=1/[1-c(1-t)]

Y = G ( bi)

i = (1/h)[kY MS/P + m0] P = (bMS)/hY- h P = Pe [1 + (Y Y*)] where =[+cTR+++NXo]; =G/[1+kGb/h] where = /(wY*) u* = (z + u a)/ = e (u u*)

Natural rate of unemployment:

Expectations-augmented Philips Curve: Taylor Rule:

it = t + r* + ( t - *) + [100 X (Yt - Yt* )/Yt*] (1+it) = (1+ift)[ext+1/et] R = ePf/P

Uncovered Interest Parity: Real Exchange Rate:

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Sem12013/2014

SAMPLE MCQS

[Table 1] Consumption expenditures Investment expenditures Government purchases Government transfer payments Exports Indirect business taxes Net factor income Imports 1000 500 200 100 300 75 80 50

1) [Refer to Table 1]. What is Gross National Product for this economy? A) 1400 B) 1850 C) 1875 D) 1950 E) 2030

2) Which of the following is true of the IS curve? A) An increase in interest rate will increase the cost of borrowing; thus reducing investment and income. B) A decrease in interest rate will increase the cost of borrowing; thus decreasing investment and income. C) An increase in interest rate will decrease the cost of borrowing; thus decreasing investment and income. D) A decrease in interest rate will increase the cost of borrowing; thus increasing investment and income. E) An increase in interest rate will increase the cost of borrowing; thus increasing investment and income.

3) Under a flexible exchange rate regime, expansionary fiscal policy _______. A) cannot change the level of investment. B) is very effective because crowding out cannot occur. C) has no effect on the trade balance. D) will cause a deterioration of the trade balance. E) is always accommodated by expansionary monetary policy.

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4) If the marginal propensity to save (MPS) is 0.2 and the income tax rate is 0.25, the multiplier for transfer payment is approximately A) 1 B) 2 C) 2.5 D) 4 E) 5

5) Which of the following statements about unemployment is true? <1> The natural rate of unemployment occurs at the level where GDP is at its potential level. <2> Cyclical unemployment is the difference between natural rate of unemployment and actual unemployment. <3> Unemployment increases when output increases. <4> Frictional unemployment occurs when there is a mismatch of skills between the job requirements and skills of the labor force. A) B) C) D) E) Only <1> is true. Only <2> and <4> are true. Only <1> and <2> are true. Only <1>, <2> and <4> are true. All statements are true.

6) Assuming that the economy is initially at its potential output level, which of the following explains the adjustments in the ASAD framework? <1> An increase in the budget deficit increases prices and output in the short run; over time, the wage-setters revise their price and wage expectations upwards, and the AS curve shifts left. <2> A decrease in the budget deficit reduces prices and output in the short run; over time, the wage-setters revise their price and wage expectations downwards, and the AS curve shifts left. <3> A decrease in oil price increases prices and output in the short run; over time, the AS curve continues to shift right to achieve potential output level. <4> An expansionary monetary policy increases the price level with output remaining at potential level in the medium run. A) B) C) D) E) <1> only. <2> and <4>. <1> and <4>. <1>, <3>, and <4>. <2>, <3>, and <4>.

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7) What t can the gov vernment do to finance a budget defi icit? A) The T governm ment can sell bonds to the e domestic market. m B) The T governm ment can sell bonds to the e Central Ban nk. C) The T governm ment can buy bonds from other countr ries. D) (A) ( and (B). E) All A of the abo ove.

fixed exchan nge rate regim me with perf fect capital mobility, m ___ _____. 8) In a f A) th here is full cr rowding out t when expan nsionary fisc cal policy is used. B) th here is no cro owding out when w expansionary fisca al policy is used. u C) fi iscal policy is i more effec ctive than monetary m poli icy due to fu ull crowding out. D) fi iscal policy is i less effect tive than monetary policy y due to no crowding c ou ut. E) fi iscal policy is i equally as s effective as s monetary p policy relativ ve to GDP ch hanges.

[Figure e AA] er to Figure AA) A Assume e that the eco onomy is ini itially at Poin nt A. An equ ual decrease 9) (Refe in bot th governme ent purchase es and lump-sum tax will l result in __ ______ in the short run equili ibrium and _______ _ in the t medium run equilibrium. A) Point H; Point G. B) Point E; Point B C) Point H; Point A D) Point E; Point A E) Point I; Point G

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10) Given a Cobb Douglas production function with constant returns to scale, the contribution of capital to output growth can be estimated by _______. A) multiplying the growth rate of capital by the growth rate of technological progress. B) multiplying the growth rate of capital by the capital share in production. C) subtracting the growth rate of labor from the growth rate of technological progress. D) multiplying the capital-labor ratio by the labor share in production. E) multiplying the total factor productivity by the capital share in production.

11) According to the neoclassical growth model, an increase in the savings rate A) increase the steady-state level of output per capita. B) decreases the steady-state capital-labor ratio. C) increases the growth rate of output in steady state. D) decreases total factor productivity. E) All of the above.

[Article XYZ] LONDONThe Bank of England's preferred measure of broad money supply picked up in November although the pace of growth remained weak, underscoring the likelihood that the central bank will keep policy on hold for some time. Figures released by the BOE Tuesday showed that broad money supply, excluding those financial institutions whose activities distort underlying trends, rose 3.5% in November in three-month annualized terms. The pace was faster than the 2.7% monthly-rise in OctoberThe BOE has highlighted growth in broad money supply as a key indicator of the effectiveness of its 200 billion ($309.46 billion) quantitative easing policy of buying U.K. government bonds with freshly created central bank money Analysts said the figures reinforced the view that the U.K. economy is gradually healing, but that the central bank is likely to remain in wait-and-see mode until the recovery strengthens Meanwhile, a YouGov poll published Tuesday showed U.K. public inflation expectations for the year ahead rose to a two-year high in the last month of 2010 as price growth remained at elevated levels. The poll found that average annual inflation expectations were 3.5% in December, up from 3.3% in November and the fastest rate of growth since September 2008. The BOE pays most attention to measures of long-term inflation expectations, which tend to be less volatile. But five-to-10-year expectations also reached their highest rate since May 2008, increasing to 3.8% in December from 3.5% in November. Source: Natasha Brereton, U.K. Broad Money Supply Picks Up The Wall Street Journal, 4 Jan 2011

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12) [Refer to Article XYZ]. Which of the following is true? A) The growth in UK money supply will lead to a rightward shift of the LM curve as well as a rightward shift of the AD curve. B) The growth in UK money supply will lead to a rightward shift of the LM curve as well as a rightward movement along the AD curve. C) The growth in UK money supply will lead to a rightward shift of the IS curve as well as a rightward shift of the AD curve. D) The growth in UK money supply will lead to a rightward shift of both the IS and LM curves as well as a rightward shift of the AD curve. E) The growth in UK money supply will lead to a rightward shift of both the IS and LM curves as well as a rightward movement along the AD curve.

13) [Refer to Article XYZ]. Following BOEs policy implementation, what will most likely occur? A) The British pound will appreciate thus resulting in a decrease in net exports and income. B) The British pound will appreciate thus resulting in an increase in net exports and income. C) The British pound will depreciate thus resulting in an increase in net exports and income. D) The British pound will depreciate thus resulting in a decrease in net exports and income. E) Capital flows into and from UK will result in ambiguous changes to the British pound exchange rate and net exports.

14) [Refer to Article XYZ]. Assuming that UK is initially at its potential output level. The BOEs policy would most likely lead to _______ in the medium run equilibrium. A) an increase in output level and an increase in price level B) an increase in output level and a decrease in price level C) a decrease in output level and an increase in price level D) an unchanged output level and a decrease in price level E) an unchanged output level and an increase in price level

15) [Refer to Article XYZ]. Given the change in UK public inflation expectations, this will cause _______ the AS curve; and _______ the expectations-augmented Philips curve. A) a rightward shift of; a leftward shift of B) a leftward shift of; a rightward shift of C) a leftward shift of; an upward movement along D) a rightward shift of; a downward movement along E) an upward movement along; an upward movement along

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