Professor Fikret auevi

School of Economics and Business

University of Sarajevo
Sarajevo, 12 January 2016
QUESTIONS FOR EXAM PREPARATION
Principles of Economics PRINCIPLES OF MACROECONOMICS
1. What would be the value of the equilibrium national income when investment and savings
are in equilibrium, and when autonomous consumption equals 500 units of national currency,
investment is 900 units of national currency, and the marginal propensity to consume is equal
to 0.6:
a) 4,200
b) 3,500
c) 2,333
d) 3,233
e) 7,000
Ye=(I+A)/MPS
MPS=1-MPC
2. National income is equal to the sum of:
a) salaries, wages and other compensation for work, income from rents, revenues
collected from net interest and collection of direct and indirect taxes
b) household spending on goods and services, gross fixed investment plus changes in
inventories, government expenditure on goods and services, and net exports of goods
and services
c) salaries, wages, and other compensation for work, income from exports of goods and
services, net revenues from collection of interest and profits earned during the year
d) salaries, wages and other compensation for work, income from rents, revenues from
exports of goods and services and the profits earned during the year
e) salaries, wages, and other compensations for work, income from rents, net
interest and profits earned during the year
f) none of the previous answers is correct.

3. The multiplier of aggregate demand in an open economy increases (two correct answers):
a) When the marginal propensity to consume increases, taxes fall and the marginal
propensity to import decreases.
b) When the marginal propensity to consume decreases, taxes rise and the marginal
propensity to import decreases.
c) When the marginal propensity to save decreases, taxes rise and the marginal
propensity to import increases.
d) When the marginal propensity to save decreases, taxes fall and the marginal
propensity to import decreases.

e) When the marginal propensity to save decreases, taxes remain unchanged, and the
marginal propensity to import increases.
4. If the ministry of finance of a country conducts restrictive fiscal policy and the central bank
of the same country conducts an expansionary monetary policy such a combination of
economic policy measures will:
a) shift the IS schedule to the left, shifting the LM schedule to the left, increase in
interest rate, reduction in the share of government spending in aggregate demand and
increase in the share of investment in aggregate demand;
b) shift the IS schedule to the left, shifting the LM schedule to the right, increase in
interest rate, increase in the share of government spending in aggregate demand and a
decrease in the share of investment in aggregate demand;
c) shift the IS schedule to the right, shifting the LM schedule to the right, decrease in
interest rate, increase in the share of government spending in aggregate demand and a
decrease in the share of investment in aggregate demand;
d) shift the IS schedule to the left, shifting the LM function to the right, decrease in
interest rate, reduction in the share of government spending in aggregate demand
and increase in the share of investment in aggregate demand.

5. If the government decides to devalue its currency, with unchanged conditions and elastic
demand for domestic goods abroad as well as elastic demand for imported goods in the
domestic market where the absolute value of the elasticity of demand abroad is greater than
the absolute value of the elasticity of demand in the domestic market such economic policy
measures will result in:
a) increase in the prices of domestic goods in foreign markets, the rise in prices of
imported goods in the domestic market and, consequently, a greater drop in demand on
the international market for domestic goods relative to the decline in demand for
imported goods in the domestic market;
b) fall in the prices of domestic goods in foreign markets, the rise in prices of
imported goods in the domestic market and, consequently, a higher relative
increase in demand for domestic goods abroad in relation to the relative decline
in demand for imported goods in the domestic market;
c) the fall in prices of domestic goods in foreign markets, the rise in prices of imported
goods in the domestic market and, consequently, a smaller relative increase in demand
for domestic goods in foreign markets in relation to the relative decline in demand for
imported goods in the domestic market;
d) fall in the prices of domestic goods in foreign markets, the fall in prices of imported
goods in the domestic market and, consequently, a smaller relative increase in demand
for domestic goods abroad in relation to the increase in demand for imported goods in
the domestic market.

6. The exchange rate is:

a) the price of a foreign currency expressed in units of the domestic currency;
b) claims of residents to other actors of the economy expressed in one of the most important
currency in the world;
c) the claim of a resident to non-residents expressed in the currency of the resident;
d) the claim of a resident to non-resident expressed in the currency of a non-resident;
e) price of foreign currency expressed in relation to the quantity of gold

7. State the five functions of the central bank, and explain what are the three main instruments
of monetary policy, and how these instruments are used by the central bank when pursuing
expansionary, and how when it conducts restrictive monetary policy?
1.
2.
3.
4.
5.

Issuing money and managing money supply

Managing financial stability and liquidtiy
Managing the lending capacity of commercial banks
Acting as the fiscal agent of the state
Supervising operations of the banking system

Main instruments of monetary policy

1. Open market operations
2. Changes to required reserves
3. The discount rate policy
Expansionary monetary policy (to increase money supply):
1. Buying gouverment securities
2. Cutting required reserves
3. Cutting discount rate
//Obratno je kada je restrictive monetary policy
8. Calculate how much will the national income (and output) change in an economy as a
result of expansionary fiscal policy based on the increase in government expenditures if:
a) The government increased spending on goods and services in the amount of KM 900
million. The marginal propensity to consume is 0.7, the rate of income tax is 20% and
the marginal propensity to import is 0.1.
b) The government increased spending on goods and services in the amount of KM 700
million. The marginal propensity to consume being at 0.9, income tax has been

reduced from 20% to 10% and the marginal propensity to import has increased from
0.1 to 0.2.
a) National income and output will increase by 1 677 mil. (AD=Mp x Y)
b) National income and output will increase by 2 307 mil. (Mp=1/1-MPC(1-t)+MPI)
9. Match each lettered concept with the appropriate numbered phrase:
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)

Investment demand
Autonomous consumption
Potential output
Short-run equlibrium output
Marginal propensity to save
Consumption function
Savings function
Aggregate demand schedule
Marginal propensity to consume
Unplanned inventory change
Multiplier

1) The part of conumption expenditures which is unrelated to the level of income.

2) Firms' desired or planned additions to their physicial capital (factories and machines)
and to inventories.
3) An unanticipated increase or decrease in the level of stocks held by firms.
4) A relationship showing the level of planned savings at each level of personal
disposable income.
5) A curve which shows the amount that firms and households plan to spend on goods
and services at each level of income.
6) The level of output the economy would produce if all factors of production were fully
employed.
7) The ratio of the change in equilibrium output to the change in autonomous spending
that causes the change in output.
8) The fraction of each extra pound of disposable income that households wish to use for
saving.
9) The fraction of each extra pound of disposable income that households wish to use to
increase consumption.
10) The level of output in an economy when aggregate demand or planned aggregate
spending just equals the output that is actually produced.
11) A relationship showing the level of aggregate consumption desired at each level of
personal disposable income.
1)

2)

3)

4)

5)

6)

7)

8)

9)

10)

11)