EXAM COVER SHEET

RMIT University Examinations

EXAMINATION DETAILS

Course code/s: ECON-1042

Course name/s: MACROECONOMICS 2

Date of exam: Friday June 15

Time of exam: 9.15 AM

Duration of exam: 2 hours plus 15 minutes reading time................................................................................

Total no. of pages (incl. cover sheet): 6...............................................................................................................

ALLOWABLE MATERIALS AND INSTRUCTIONS TO CANDIDATES:

1. Write your full name and student number on each examination booklet together with
the number of examination books used. Students must not write during reading time.

2. The examination paper contains 10 questions.

3. Students must attempt any 6 of these questions. Each question is worth 20 marks.
NOTE: Questions 1, 3, & 4 comprise 2 parts, namely A, and B; either of which can
be selected. Commence each question on a new page. Carry out the instructions on the
front cover of the examination booklet.

4. In most questions, it is expected that students will use diagrams as an aid to explanation.
Please remember that all diagrams used should be fully labelled and their meaning
should be explained in the written part of the answer.

5. At the beginning of the writing period fill out all the information required on the front of the
examination booklet USING BLOCK CAPITALS AND UNDERLINING YOUR SURNAME.
6. Use of calculators is permitted. However they must be NON-PROGRAMMABLE.

7. NOTE: You must be a properly enrolled student in this course to be eligible to sit
this exam and to receive an official result. You are not entitled to sit this exam and
no result will be recorded if you are not properly enrolled or have gained special
permission from the Course Co-ordinator to sit this exam at this time.

Question 1

For this question you can choose to answer either (A), or (B), but NOT
BOTH.

A.

The traditional transmission mechanism links the money and product markets
through the investment demand curve. Assume that the Central Bank decreases
the size of the required reserve ratio (or “RRR”); explain in detail how this will
impact upon the product or goods market.

However this mechanism has a number of problems. Identify and explain how
those specific problems affect the transmission mechanism

Your answer should include all relevant diagrams.

(20 marks)

B.

Assume that in the current Australian economy, the investment demand curve is
relatively inelastic, and that cash and bonds are relatively close substitutes.

Compare and contrast the effect of a decrease in domestic money supply, Mo,
upon the overall level of economic activity, in both the traditional transmission
mechanism, and in the IS-LM model. Are there any major differences?

Your answer should include all relevant diagrams.

(20 marks)

Question 2

“When discussing the effectiveness of fiscal policy, the “crowding-out” effect is

of great importance.” Explain in detail what is meant by the total, partial, and
zero “crowding-out” effects, and the technical reasons why they occur.

Your answer should also discuss also the factors that determine the extent of
crowding out in the face of a fiscal or budgetary expansion.

Are there any options open to governments and/or central banks to moderate the
effect of crowding out?

Illustrate your answer using the relevant IS-LM diagrams.

(20 marks)
ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 2
 Question 3

For this question you can choose to answer either (A), or (B), but NOT
BOTH.

A.

Explain in detail how the Short Run Aggregate Supply Curve (or SRAS) can be
derived from an individual firm’s supply curve.

Your answer should include all relevant diagrams and identify those factors,
which influence the slope and shift parameters of the SRAS.

B.

Explain how the Aggregate Demand Curve is derived, or obtained, from the IS-
LM model. What are the factors that determine or influence both the slope and
shift parameters of the Aggregate Demand Curve? What happens, ceteris
paribus, when the government of the day conducts an expansionary fiscal or
budgetary policy, in terms of the AD-AS model?

Your answer should include all relevant diagrams.

(20 marks)

Question 4

For this question you can choose to answer either (A), or (B), but NOT
BOTH.

A.

In the Classical view, Savings was assumed to always equal Investment. This
was demonstrated through the Loanable Funds model.

Assume that there is a significant reduction in Investment expenditure in the

economy due to a reduction in overall business and investor confidence.
Explain how this particular model operated and its role in Classical economic
ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 3
 theory.

Your answer should include all relevant diagrams.

(20 marks)

B.

“The problems of Monetary and Deflationary impotence or (weakness) were

overcome by the introduction of the Pigou or “Real Balance” Effect. This meant
that the economy would at least theoretically automatically adjust to a full-
employment equilibrium level of output (or Yf).”

Explain and comment upon this statement.

Your answer should include all relevant diagrams.

(20 marks)

Question 5

“The Monetarist model of the business or trade cycle is dependent on the

Fooling
process. The Fooling process or model is in turn dependent upon the
assumption of Backward-Looking or Adaptive Expectations”

Explain in detail how this “Fooling” is said to occur, and how it relates to the
Monetarist explanation of the business or trade cycle, using the concept of
Backward-Looking or Adaptive Expectations.

(20 marks)

Question 6

According to the New or Post–Keynesian explanation of the Business or Trade

Cycle, it was a major improvement upon earlier explanations because it did not
assume away variations in real GDP; it did not assume total wage rigidity (or
stickiness); and it did not assume adaptive expectations, amongst its other
features.

Explain in detail the various aspects of the New or Post- Keynesian explanation
of the Business or Trade Cycle.

Your answer should explain these aspects, using all relevant diagrams.

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 4

 (20 marks)

Question 7

In the Adaptive Expectations or Accelerationist or Expectations-Augmented

version of the Phillips curve, it is claimed that there can be a trade-off between
inflation and unemployment, but only in the short-run. However in the long-run
no such trade-off is possible.

Explain how an increase in aggregate demand – due to an increase in domestic

money supply – can produce a temporary or short-term increase in output; but
not a long-run change.

What are the implications for both inflation and unemployment?

Your answer should include all relevant diagrams.

(20 marks)
.

Question 8

In his policy prescription to reverse, if not totally eliminate, an inflationary

spiral, Milton Friedman argued for the adoption of a money rule as the most
important anti-inflation policy. However he also argues for the adoption of
other policies to support the money rule approach.

Explain how the money rule can operate and outline the other supplementary
policies recommended or suggested by the Monetarist school.

Your answer should include all relevant diagrams.

(20 marks)

Question 9

Assuming that supply-side inflation exists, there must be a relevant and detailed
or comprehensive model that describes it. Explain in detail any such model of
ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 5
 supply-side inflation that you have examined, and the assumptions that underpin
or support it.

Your answer should include all relevant diagrams.

.
(20 marks)

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 6

 Question 10

“The FOREIGN EXCHANGE MARKET can be derived from the Current

Account within the overall Balance of Payments of an individual economy.
Specifically, it can be derived from Exports and Imports components within the
Balance of Payments.”

Explain the meaning and implications, or effects, of this statement, using all
relevant diagrams.

(20 marks)

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 7

 EXAM HEADER SHEET

RMIT University Examinations

Instruction Sheet for Exam Supervisors

Examination Details:
Date of exam: 15/6/07....................... Time of exam: 9.15 AM............ Duration of exam:
2 HOURS & 15 MINUTES
Course code/s: ECON-1042...................................................................................................................................
Course name/s: MACROECONOMICS 2................................................................................................................

School Contact Details:

Academic Contact Name:
Academic Contact Phone Ext:
Mobile No.:
School Admin Contact Name:
School Admin Phone Ext:
School:
Portfolio:
GREG MAYNES.....................................................................................................
9925 5875...............................................................................................................
0425 738 010..........................................................................................................
BELINDA WEBSTER..............................................................................................
9925 5858...............................................................................................................
ECONOMICS, FINANCE & MARKETING...............................................................
BUSINESS..............................................................................................................

Stationary Requirements:
Please specify () the following:-

This examination is a:

 closed book exam or

 open book exam please specify (e.g. notes / text book) ......................................................................................

This examination requires:

 script books. Please specify number of script books per student (e.g. 1)

Is a script book required for each section of the exam (e.g. Part A & Part B)?  Yes
 No

 multiple choice answer sheet/s (general purpose answer sheet (GPAS) – 200R)

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 8

  use of calculators. Please specify which level of calculators: CALCULATORS ARE
ALLOWED. HOWEVER THEY MUST NOT HAVE THE CAPACITY TO STORE
TEXT.

 other e.g. graph paper, tracing paper, coloured scrap paper, consolidated work sheet
...................................................................................................................................................................

A copy of this exam paper is to be sent to the library:  Yes  No

To be completed by Senior Exam Supervisor prior to exam To be completed by

Exam Supervisor
commencing: after attendance
taken
Location of exam: ................................................................... No of students
attending
Number of students: ................................................................... No of absentees ...................................
Supervisor name/s: ...................................................................

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 9

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 10
 EXAM COVER SHEET

RMIT University Examinations

EXAMINATION DETAILS

Course code/s: ECON-1042

Course name/s: MACROECONOMICS 2

Date of exam: Friday June 15

Time of exam: 9.15 AM

Duration of exam: 2 hours plus 15 minutes reading time................................................................................

Total no. of pages (incl. cover sheet): 6...............................................................................................................

ALLOWABLE MATERIALS AND INSTRUCTIONS TO CANDIDATES:

4. Write your full name and student number on each examination booklet together with
the number of examination books used. Students must not write during reading time.

5. The examination paper contains 10 questions.

6. Students must attempt any 6 of these questions. Each question is worth 20 marks.
NOTE: Questions 1, 3, & 4 comprise 2 parts, namely A, and B; either of which can
be selected. Commence each question on a new page. Carry out the instructions on the
front cover of the examination booklet.

4. In most questions, it is expected that students will use diagrams as an aid to explanation.
Please remember that all diagrams used should be fully labelled and their meaning
should be explained in the written part of the answer.

5. At the beginning of the writing period fill out all the information required on the front of the
examination booklet USING BLOCK CAPITALS AND UNDERLINING YOUR SURNAME.

6. Use of calculators is permitted. However they must be NON-PROGRAMMABLE.

7. NOTE: You must be a properly enrolled student in this course to be eligible to sit
this exam and to receive an official result. You are not entitled to sit this exam and
no result will be recorded if you are not properly enrolled or have gained special
permission from the Course Co-ordinator to sit this exam at this time.

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 11

ECON-1042 MACROECONOMICS 2 CITY CAMPUS FINAL EXAM INATION - SEM 1 2007 12