ECON 211 ANSWERS

(2 marks each)

1. How come a small business finds it much harder and much dearer to rent new buildings for doing business in India than in Australia?

A. Indian banks have more stringent criteria for issuing loans to small businesses.

B. The population level is much lower in Australia compared to the supply of housing.

C. The share of national income that goes to the capital owners is smaller in India.

D. Australia has a lower national saving to GDP ratio.

2. If the New Zealand Government increases GST, how would the rate of real interest and investmentchange?

A. The interest rate increases while the investment rate decreases.

B. Both the interest rate and the investment rate increase.

C. The interest rate decreases while the investment rate increases.

D. Both the interest rate and the investment rates remain unchanged.

3. In the Solow growth model, technological change is ______, whereas in endogenous growth theories, technological change is ______.

a. assumed; explained

b. constant; persistent

c. explained; assumed

d. persistent; constant

4. If the marginal product of capital net of depreciation equals 10 per cent and the rate of population growth equals 2 per cent, then this economy will be at the Golden Rule steady state if the rate of technological progress equals _____ per cent.

A) 0

B) 2

C) 8

D) 10

5. If the production function of the New Zealand economy is Cobb–Douglas with capital share 0.3, output growth is 3 percent per year, depreciation is 4 percent per year, and the Golden Rule steadystate capital–output ratio is 4.29, to reach the Golden Rule steady state, the national saving rate in New Zealand must be: A) 17.5 percent.

B) 25 percent.

C) 30 percent.

D) 42.9 percent.

6. Assume that a civil war in Syria reduces the country's labor force; but it does not directly affect its capital stock. If the economy was in a steady state before the war and the saving rate does not change after the war, then, over time, capital per worker will ______ and output per worker will ______ as it returns to the steady state.

A) decline; increase

B) increase; increase

C) decline; decrease

D) increase; decrease

7. A sudden depreciation of the NZD against the USD with no changes to net exports in either country could result from:

A) an increase in the budget deficit (G – T) in New Zealand.

B) the RBNZ’s announcement to decrease the OCR.

C) a decrease in the investment tax credit in the US.

D) the US FED’s announcement to increase money supply.

8. A sudden increase in the exchange value of NZD against the USD without any changes in the net exports could result from:

A) an increase in the budget deficit(G –T).

B) a decrease in the net capital outflow(S –I).

C) the US FED’s announcement to increase money supply.

D) the RBNZ’s announcement to decrease the OCR.

9. The Fisher equation predicts that:

(a) an increase of 1 percentage point in the real interest rate will reduce the rate of inflation by 1 point;

(b) an increase of 1 percentage point in the inflation rate will increase the real interest rate by 1 point;

(c) an increase of 1 percentage point in the nominal interest rate will increase the inflation rate by 1 point;

(d) an increase of 1 percentage point in the inflation rate will increase the nominal interest rate by 1 point.

10. In a small open economy, if the government encourages investment, say through an investment tax credit, investment:

a. increases and is financed through an increase in exports.

b. increases and is financed through an inflow of foreign capital.

c. does not increase; the interest rate rises instead.

d. increases and is financed through an increase in national saving.

Use the following Exhibit to answer question 11:

Exhibit: Saving and Investment in a Small Open Economy

11. In a small open economy, if the world interest rate is r1 then the economy has:

(a) a trade surplus;

(b) balanced trade;

(c) a trade deficit;

(d) negative capital outflows.

Use the following to answer question 12:

Exhibit: Policies Influence Real Exchange Rate

12. Which of the panels illustrates the impact of contractionary fiscal policies in the rest of the world but without any changes in policies at home on the real exchange rate?

(a) (A)

(b) (B)

(c) (C)

(d) (D)

13. If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

a. increasing taxes

b. increasing investment tax credits

c. imposing protectionist trade policies

d. increasing government spending

14. Assume that a war breaks out abroad, and foreign savers choose to save more in a safer country, New Zealand. Then, in New Zealand the real interest rate: a. and net exports will both fall.

b. will fall and net exports will rise.

c. will rise and net exports will fall.

d. and net exports will both rise.

Use the following to answer question 15:

Exhibit: Supply Shock

15. Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

(a) (A)

(b) (B) (c) (C)

(d) (D)

Exhibit for Question 16: Shift in Aggregate Demand

16. In this graph, initially the economy is at point E, with the price P0 and output 𝑌𝑌. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, the short-run and the long-run aggregate supply. Now assume that a demand shock, such as a hike in the OCR, shifts the aggregate demand curve. The economy moves first to point ______ and then, in the long run, to point ______. a.D; A

b. C; B

c. B; C

d. A; D

17. In an economy with the Keynesian consumption function, an increase in the government purchases of unproductive goods and services raises income:

a. in the short run, but leaves it unchanged in the long run, while lowering investment.

b. and the interest rate in both the short and long runs.

c. and the interest rate in the short run, but leaves both unchanged in the long run.

d. in the short run, but leaves it unchanged in the long run, while lowering consumption.

18. If a financial crisis causes people to panic in a way to increase their demand for money, at any given level of income and at any given interest rate, then, within the IS–LM framework, the interest rate ______ and the output ______.

a. increases; increases

b. increases; decreases

c. decreases; increases

d. decreases; decreases

19. Exhibit: IS–LM Fiscal Policy

Based on the graph in the above Exhibit, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

A) r2, Y2

B) r3, Y2

C) r2, Y3

D) r3, Y3

20. All of the following may have contributed to the financial crisis and economic downturn of 2008–2009 except:

a. falling house prices.

b. stock market volatility.

c. low interest rates.

d. high inflation.

21. Some economists argue that monetary union will not work as well in Europe as it does in the UnitedStates for all of the following reasons except:

a. labour is not as mobile in Europe as it is in the United States.

b. there is no strong central government that can use fiscal policy in Europe as there is in the United States.

c. there is no common language in Europe as there is in the United States.

d. there is no European central bank as there is in the United States.

22. In the Mundell–Fleming model, if political turmoil raises the risk premium in a country's interest rate, then the exchange rate will ______.

a. remain constant

b. increase

c. either increase or decrease, depending on whether the IS* or LM* curve shifts more.

d. decrease

23. In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:

a. be horizontal.

b. slope upward to the right.

c. be vertical.

d. be steeper than it would be if some firms had flexible prices.

24. The life-cycle model predicts that if the proportion of the population that is elderly increases over the next 20 years, then the national saving rate ______ over the next 20 years.

(a) will increase

(b) will remain unchanged

(c) will decrease

(d) may first increase and then decrease

25. If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

a. they make the last payment on their automobile loan.

b. previously announced tax reductions are implemented.

c. they receive an anticipated raise.

d. they receive an unexpected inheritance.