DEPARTMENT OF ECONOMICS ECIOO: INTRODUCTION TO ECONOMICS FINAL EXAMINATION - SEMESTER 2, 2008 Time Allowed 3 hours plus 10 minutes reading 100 marks (60% offinal grade) INSTRUCTIONS 1. This exam has three sections: a. Section A: 20 marks b. Section B: 20 marks c. Section C: 20 marks 2. Answer all questions in sections A and B. Answer Two questions in section C. 3. Write your answers in the answer booklet provided. 4. For questions in section C, begin answering each question on a fresh page. S. You can use calculators. 6. This exam is worth 60% ofyour overall mark. The minimum exam mark is 24/60.
Section A: Multiple Choice Questions Write the letter of the most appropriate answer in the Answer Booklet. This section is worth 20 marks, 1. Economics can be best defined as the study of A. resource allocation in a competitive market driven system. B. how government, households and firms influence business decision making, C. how limited resources affect the efficiency ofgovernment households and firms. D. how scarce resources are allocated to their most efficient uses in government, househoids and firms. 2. Which of the following will not entail an outward shift of the production possibilities curve? A: an upgmdihg ofthe quality ofa nation's human resources, B: the reduction ofunemployment. C: an increase in the quantity ofa society's labour force. D: the improvement ofa society's technological knowledge, 3. Assume a household consumes $100 worth of goods and services per week if their weekly income is zero and they spend an additional $SO per week for each $100 of income. IfC represents consumption and Y represents income, the equation that summarises this relationship is: A: C so + 100 Y B: C= 100 +.S Y C: C= 100 + SO Y D: C=SO+.1 Y 4. In the following question you are asked to determine, other things being equal, the effects of a given change in a determinant of demand or supply for product X upon: (i) the demand (D) for, or supply (S) of, X, (ii) the equilibrium price (P) of X and (iii) the equilibrium quantity (Q) ofx. An increase in income, ifx is a normal good, will: A: increase D, increase P, and increase Q. B: increase D, increase P, and decrease Q. C: increase S, increase P, and increase Q. D: decrease D, increase P, and increase Q 5. Inflation leads to A. a redistribution ofincome away from fixed income earners B. everybody being affected to the same degree 2
C. lower taxation revenues ofthe central government D. increase in the purchasing power ofthe Fiji dollar. 6. Ifthe price ofnormal good X rises, the income effect: A: and substitution effect will induce the consumer to buy less ofx. B: and substitution effect will induce the consumer to buy more ofx. C: will induce the consumer to buy more ofx, and the substitution effect will induce him to buy less. D: will induce the consumer to buy less of X, and the substitution effect will induce him to buy more. 7. A decision by the central government to encourage industry to decentralise its operation to country locations would mostly aimed at correcting J A seasonal unemployment. B. structural unemployment. C. cyclical unemployment. D. frictional unemployment. 8. For food items such as bread and milk, income elasticity tends to be A. zero. B. greater than one. C. equal to one. D. greater than zero. 9. The marginal rate of substitution measures: A: the magnitude ofthe substitution effect. B: the total utility received by a consumer when equilibrium is achieved. C: the extra utility which a consumer derives from successive units of a product. D: the consumer's willingness to substitute one product for another so that total utility will remain constant. lo:the effect of contractionary monetary policy on aggregate demand can be: A a higher level of economic growth. B. a lower budget deficit. C. a lower value ofthe dollar. D. an increase in welfare payments. 3
11. The kinked demand curve model he]ps to explain price rigidity because: A: there is a gap in the marginal revenue curve, within which changes in marginal cost will not affect output or price. B: demand is inelastic above and elastic below the 'going' price. c: the model assumes firms are engaging in some form ofcollusion. D: the associated marginal revenue curve is perfectly elastic at the 'going' price. 12. The market system fails to produce public goods because: A: there is no need or demand for such goods. B: private firms cannot restrict the benefits of such goods to consumers who are willing to pay for them. C: public enterprises can produce such goods at a lower cost than can private enterprises. D: their production seriously distorts the distribution of income. 13. Olivia Ariderson grows tomatoes for home consumption. This activity is: A: excluded from GDP in order to avoid double counting. B: excluded from GDP because an intermediate good is involved. C: productive activity, but is excluded from GDP because no market transaction occurs. D: included in GDP because it reflects production. 14. An increase in aggregate expenditures (aggregate expenditures model) resulting from some factor, other than a change in the price level, is equivalent to: A: a rightward shift ofthe aggregate demand curve in the AD-AS model. B: a leftward shift of the aggregate demand curve in the AD-AS model. c: a movement downward along a fixed aggregate demand curve in the AD-AS model. D: a decrease in aggregate supply in the AD-AS model. 15 Which ofthe following is correct? A: The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises. B: The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises. C: The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate. D: The asset demand for money is downsloping because bond prices and the interest rate are directly related. 4
16. If the Reserve Bank were to purchase government securities in the open market, we would anticipate: A: lower interest rates, an expanded GDP, and depreciation of the dollar. B: lower interest rates, an expanded GDP, and appreciation of the dollar. C: higher interest rates, a contracted GDP, and depreciation of the dollar. D: lower interest rates, a contracted GDP, and appreciation ofthe dollar. 17. The elasticity ofresource demand will be greater, the: A: smaller the portion of the product's total costs accounted for by the resource. B: less the elasticity of demand for the product it is producing. C: larger the number of substitute resources which are available. D: more rapid the rate ofdecline in its marginal product. 18. Economidts are frequently critical ofthe minimum wage because it: A: has a deflationary effect upon the price level. B: tends to reduce the number ofavailable job opportunities. C: conflicts with policies designed to equalise the distribution ofincome. D: causes labour shortages in affected markets 19. A rightward shift ofthe production possibilities curve means that: A: both potential real GDP and potential real GDP per person have increased. B: potential real GDP per person has increased, but potential real GDP may have either increased or decreased. C: potential real GDP has increased, but real potential GDP per person may have either increased or decreased. D: both potential real GDP and potential real GDP per capita., have decreased. 20. Appreciation ofthe Pa'anga (Tonga's currency) will tend to: A: decrease the prices of both Tongan imports and exports. B: increase the prices of both Tongan imports and exports. C: decrease the prices of the goods that Tonga imports, but increase the prices to foreigners ofthe goods that Tonga exports. D: increase the prices of the goods that Tonga imports, but decrease the prices to foreigners ofthe goods that Tonga exports. 5
Section B: Calculations and Graphical Analysis and Short Answers. This section is worth 20 marks. Table here 21. Refer to Table above which gives the statistical information ofthe national income of small open economy. a) Calculate GDP, at market prices, using Income approach. b) What is the algebraic expression for aggregate demand? c) What1s autonomous consumption? d) Why is intermediate consumption not included in Expenditure approach to measuring GDP? (5 marks) 22. Refer to Figure 1 below on 'Inflationary spiral' where AD and AS are aggregate demand and supply respectively a) What is an inflationary spiral? b) How would this come about? c) What are the components of AD? d) What is deflation? Figure 1 here 6
Price ($) Dalo ( bundle) Demanded S 100 10 SO 12 60 14 40 23. Refer to the data above. a) Use the mid-point foimula, calculate the price elasticity of demand when the price of dalo per bundle fell from $10 to $S in Port Villa's market on July 2008. b) If demand for dalo is price elastic, what would be the effect on the faimer's revenue when dalo prices rise? cl Suppose demand for dalo rises from 8 to 10 kilograms when income increased from $200 to $280. Calculate the income elasticity of demand for dalo. d) From your answer in c) what kind ofgood dalo is? (5 marks) 24. Given the following infoimation about the structure of an economy C = 300 + 0.8 DI, T 100 + 0.2 Y, I = 300, G 900, X - M = 150 where: C = consumption, DI = disposal income, T = taxes, Y spending, X exports, M == imports Income, G = government a) Find the equilibrium level ofgdp (hint: Y (income) = Expenditure C + I + G + (X - M ) at equilibrium level GDP). b) Calculate government's operating surplus or deficit. c) Assuming that investment increased by 100, calculate the new equilibrium level of income, how much has this changed. d) Calculate the size ofthe expenditure multiplier. (5 marks) 7
Section C: Essay Questions. Attempt any TWO questions. Write about 1 and half page on each. Each question is worth 10 marks. 25. Explain the phenomenon ofprice rigidity in firms that are oligopolistic in nature. Use graphs in your answer. 26. Explain the effects of devaluation ofa country's currency on its balance of payments, foreign reserves and interest rate. 27. Discuss the fiscal policy measures that you would recommend to "fine tune ll your economy during a recessionary period. 28. What is aggregate demand and how is it affected by falling price level? Use graph(s) in your answer. 29. Discuss tke factors that determine the demand for fish in the Honiara's Fish Market on Saturday morning before Mothers' Sunday. 30. GDP is an inappropriate measure of comparing standards of living. Discuss. The End 8
EC100: INTRODUCTION TO ECONOMICS FIGURES Table 1 for Q. 21 Items $m Changes in stock 2,000 Compensation ofemployees 32;000 Consumption offixed capital 6,000 Exports 26,000 Final government consumption expenditure 10,000 Final private consumption expenditure 43,000 Government fixed capital fonnation 7,000 Imports 24,000 J. Indirect Taxes 8,000 Intennediate consumption 36,000 Operating surplus 26,000 Private gross fixed capital fonnation 8,000 Raw materials 32,000 Subsidies 500 Figure 1 for Q. 22 P3 P2 PI Full/employment Output (Y)