Macro Tutorials

University of the Witwatersrand
School of Economic and Business Sciences

Economics 1B (ECON1009)
Macroeconomics Tutorial Program: 2012
Please refer to the Economics 1 Handbook for notes relating to tutorials
First Semester: Teaching Blocks 1 & 2
Tutorial Co-ordination
If you have questions about the economics 1 tutorial programme, speak to your tutor or
contact the Economics 1 head tutor, Mr A. Jardine. His office is room 234, on the 2nd floor
of the New Commerce Building (NCB), email: witsecon1@gmail.com
If you have any issues with the tutor or the head tutor, you can contact the tutor coordinator
of the School of Economic and Business Sciences, Mr M. Dhlamini. His office is room 234,
on the 2nd floor of the New Commerce Building (NCB), email: witsecon@gmail.com
Tutorials
Tutorials are a vital component of the course. When you write tests and examinations (see
below), the questions you will be expected to answer will be similar in nature to those in the
tutorials. It is essential, therefore, to prepare tutorials thoroughly and revise them in
preparation for tests and examinations. You are required to prepare written solutions to each
tutorial question before the tutorial class. Your tutor will check that you have done this, and
will, from time to time, take in your written tutorials so that s/he can review the progress of
the tutorial group.
Under no circumstances should you arrive at tutorials expecting the tutor to give full
answers with no class participation. The tutors have been instructed NOT to hand out
model answers to tutorial questions. It is up to you to use the tutorials to test your own
understanding and to get feedback on your answers to the tutorial questions!
In order to participate meaningfully in tutorials, you need to come to each tutorial fully
prepared. You should adopt the following approach.
Read through the tutorial to see which aspects of the course are covered.
Study these sections as though you were preparing for a test or examination.
Attempt each question in the tutorial under examination conditions, i.e. write out your
responses without referring to your notes or book.
Where there are questions which you have not been able to do or you feel your answer is
inadequate, consult your notes or book and use these to help you. When your tutor asks
you for your answer to a tutorial question, you should be able to give a good explanation
of the answer to the whole class.
If you still feel unsure about your answer, identify precisely why you think there is a
problem. Your tutor will then be in a much better position to help you to understand
specific sections of the work.
Tutorials are an opportunity for you to discuss the course more broadly with the rest of the
class. The tutor is there to facilitate this discussion and explain particular aspects of the
work. As there is unlikely to be sufficient time in each tutorial to cover all the tutorial
questions, you need to identify the areas which you find difficult and use the opportunity to
discuss these with the class and the tutor.
Thorough preparation is your key to doing well in this course. You need to get as much
practice as you can in actively doing economics yourself. Passively watching the
lecturer or tutor do economics for you will not provide you with a particularly
rewarding learning experience.
COURSE OUTLINE
The chapter numbers given below refer to the 7th edition of Economics by Parkin, Powell
and Matthews. The dates provide a guideline only: some groups may run ahead of schedule,
while others may fall behind. Please consult the notice board for any changes.
1ST SEMESTER: MACROECONOMICS: (ECON1009 repeat students)
Block 1
Week & Date
Topic
Homework
Tutorial work
Tests
Chapter
Reference
Week 1
13 - 17 Feb
A first look at
macroeconomics
Measuring GDP
Ch 20
Ch 21
Read ch20, 21 & 22
Week 2
20 - 24 Feb
Measuring GDP (cont.)

Monitoring jobs and the price
level
Ch 21
Ch 22
Read ch25
Ignite tut 1 submission
(ch20,21&22)
The Keynesian Model

Ch 25+app.
(excl. pgs
Mathematical Note
580-581)
(Short-run aggregate demand)
Read ch24
Tutor consultation (tut 1)
Ignite tut 2 submission (ch25)
The Classical model

(Long-run aggregate supply)
Essay skills
Ch 24
Read ch23
Ignite tut 3 hand-in (ch24)
Week 5
12 - 16 Mar
Aggregate supply and

aggregate demand
Ch 23
Read ch26
Week 6
19 - 23 Mar
(4 days)
Fiscal policy
Test prep.
Ch 26
Test prep.
Week 7
26 30 Mar
Revision/Review/Catch-up
N/A
Read ch27
Week 3
27 Feb - 2 Mar
Week 4
5- 9 Mar
TEST 1 (Ch 20-25)

(Tues 27th March,17h15)
31 Mar 9 Apr: Study Break
Block 2
Week & Date
Topic
Homework
Tutorial work
Tests
Chapter
Reference
Fiscal policy recap.

Money and banking
Ch 26
Ch 27
Read ch28
Week 9
16 - 20 April
Monetary policy
Ch 28
Read ch29
Week 10
23 - 27 Apr
(4 days)
Fiscal and monetary

interactions
Ch 29
Read ch12
The ISLM model

Inflation
Ch 29 app.
Ch 30
Read ch14
Ignite tut 9 submission
(ch29 app. & ch30)
Week 12
7 - 11 May
International finance
Test prep
Ch 33
Test prep
Ignite tut10 submission
(ch30&33)
Week 13
14 - 18 May
Revision/Review/Catch-up
N/A

TEST 2 (Ch 20-30)
(Tues 13th May,17h15)
Week 14
21 - 25 May
Exam prep
Ch 20-33
(excl. Ch
31 & 32)
Exam prep
Week 8
9 - 13 Apr
(4 days)
Week 11
30 May - 4 Jun
(4 days)
28 May 22 June: Exams

23 June 15 July: Winter Vac
Macro tutorial 1
Chapters 20, 21 & 22
Written Question 1
a) Real GDP is used to compare economic welfare over time and across countries. List and
discuss three limitations of real GDP as a measure of the above.
b) Briefly describe the difference between nominal and real GDP.
Written question 2
There are two approaches to measuring the unemployment rate in South Africa: the narrow
approach and the broad approach. The narrow approach is the one outlined in the Parkin
textbook. The narrow approach treats discouraged workers* as economically inactive and
thus not part of the workforce, whereas the broad approach includes discouraged workers in
the workforce. Which measure do you think is more appropriate for South Africa and why?
When answering this question provide 2 reasons why the narrow approach may be better and
2 reasons why the broad approach may be better. Then provide 2 disadvantages of using the
narrow approach and 2 disadvantages of using the broad approach.
* Discouraged workers are people who have lost hope of finding a job and so have stopped
looking for one.
Written Question 3
Define natural unemployment and full employment.
Use the following table to answer Written Question 4 and MCQs 1, 2 and 3
Year
Potential GDP
Actual GDP
Natural rate of Unemployment
2000
1200
1200
25%
2001
1400
1500
25%
2002
1600
1600
25%
2003
1800
1700
25%
2004
2000
2000
25%
Written Question 4
Based on the table above, draw a diagram of Fantasylands actual real GDP and potential real
GDP. On the horizontal axes show the years (Time) and on the vertical axes show actual and
potential GDP.
MCQ 1
In which year does Fantasyland experience an Okun gap?
A.
B.
C.
D.
E.
2000
2001
2002
2003
2004
MCQ 2
Okuns gap is usually quantified using Okuns Law which states that for every 1% that the
unemployment rate exceeds the natural rate of unemployment, real GDP is roughly 2% lower
than potential GDP.
Based on Okuns law what is the actual unemployment rate in Fantasyland for 2003?
A.
B.
C.
D.
E.
0%
21.43%
24.1%
25.69%
27.78%
MCQ 3
Assume that Fantasyland has a working age population (i.e. aged between 15 and 65) of 35
million. Of these, 13.7 million are employed while 8.1 are unemployed. What is the
unemployment rate?
A.
B.
C.
D.
E.
23.14%
37.16%
39.14%
59.12%
62.23%
MCQ 4
In 1980, the nominal value of GDP was R15400 million, while in 2000, the nominal value of
GDP was R17690 million. Using 1970 as the base year (i.e GDP deflator of 1970 = 100), the
GDP deflator of 1980 was 136 and the GDP deflator of 2000 was 162. Using 1970s prices,
we can say that real GDP between 1980 and 2000 has:
A.
B.
C.
D.
E.
Increased by approximately R2290 million

Decreased by approximately R400 million
Decreased by approximately R 2300 million
Increased by approximately R400 million
Cannot be answered with the given information
MCQ 5
When economists speak of full-employment they mean that:
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
everyone who wants a job is employed

there is still some frictional unemployment
there is still some structural unemployment
there is no cyclical unemployment
only (i) is correct

only (i) and (iv) are correct
only (ii) and (iii) are correct
only (ii), (iii) and (iv) are correct
only (i), (ii) and (iii) are correct
Macro tutorial 2
Chapter 25
Written question 1
The following information refers to an open-mixed economy. Suppose that initially the
government neither taxes nor has any expenditure on domestic output. Assume fixed prices.
Except for the marginal propensity to consume, all figures are in currency units.
C = 150 + 0.75Y
Ig = 125
G = 0 and T = 0
X = 80
M = 205
where C is consumption, Y is real GDP, Ig is planned investment (gross), X is exports, M is

imports, G is government spending and T is the lump-sum tax.
(i)
Derive an equation for aggregate expenditure (AE) as a function of real GDP (Y).
(ii)
Using your equation from question (i), calculate AE for each R100 increase of GDP
(starting with no real output, i.e. GDP=0, up to GDP = R1000) and draw the
Aggregate Expenditure model. (Hint: use R100 steps for both axes and copy the table
below into your workbook and fill it in).
(iii)
Suppose that exports decrease to X = R75 and imports increase to M = 275. Draw the
new aggregate expenditure function in the diagram and briefly explain (in less than
1/3 of a page) how equilibrium is re-established in the economy.
Y
0
AE1(Q1:ii)
100
200
300
400
500
600
700
800
900
1000
Y
0
AE2(Q1:iii)
100
200
300
400
500
600
700
800
900
1000
MCQ 1
Using your answers to (ii), what is the equilibrium value of real GDP (Y) using the short-run
aggregate expenditure model?
A.
B.
C.
D.
E.
R300
R400
R500
R600
R700
MCQ 2
Using the short-run aggregate expenditure model and your answer to (iii), what is the new
equilibrium value of real GDP (Y)?
A.
B.
C.
D.
E.
R300
R400
R500
R600
R700
MCQ 3
Suppose that the economy is at the equilibrium calculated in MCQ 2 and that fullemployment (i.e. potential) GDP is R1000. What is the value of the GDP gap?
A.
B.
C.
D.
E.
-R300
-R400
-R500
-R600
-R700
MCQ 4
Assume that there was an initial increase in investment spending of R1000 and that the MPC
is equal to 0.8. Also assume that imports and taxation are independent of real GDP (Y).
Which of the following statements is/are true?
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
the multiplier is 4
after the initial spending of R1000, R200 is saved by the household that
received the R1000 as income
the total change in GDP resulting from the initial R1000 change in spending is
R5000
the marginal propensity to save is 20% of disposable income
only (i) is correct

(i), (ii), (iii) and (iv) are correct
MCQ 5
Assume a linear consumption schedule where a > 0 (a = autonomous consumption). When
the disposable income increases then:
A.
B.
C.
D.
E.
the marginal propensity to consume increases

the marginal propensity to save increases
the average propensity to consume increases
the average propensity to save increases
the average propensity to consume remains constant
Macro tutorial 3
Chapter 24
Written question 1
Suppose the SA government increases spending on education. Using the classical (long run)
model and diagrams of the labour market and production function, illustrate the effects such a
policy may have. Your explanation should include 1/3 of a page of written explanation.
(Hint: Explain the process whereby this policy may affect GDP.)
Written question 2
Using the classical model, illustrate (using diagrams) and briefly (less than 1/3 of a page)
discuss 2 other possible reasons for high unemployment in SA and the consequences of high
unemployment to South Africas economy.
MCQ 1
The classical model suggests that South Africas potential GDP can be increased from two
sources: increased productivity and greater resource endowment. In the classical framework,
which of these activities can bring about economic growth?
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
An increase in the amount of physical capital available

Closing down schools
Chasing away farmers
Immigration of skilled Zimbabwean farm workers into South Africa
Only (i) is correct.

Only (i) and (iv) are correct.
Only (ii) and (iii) are correct.
Only (iii) and (iv) are correct.
Only (i) and (iii) are correct.
MCQ 2
Flexibility in real wages determines the slope of the:
A.
B.
C.
D.
E.
long run supply curve of labour

short run aggregate demand curve
long run aggregate supply curve
short run aggregate supply curve
long run aggregate demand curve
MCQ 3
Improvements in the South African education system will result in, ceteris paribus:
(i)
(ii)
(iii)
(iv)
(v)
A.
B.
C.
D.
E.
an upward shift of the production function.

a movement along the labour supply curve.
an increase in the marginal product of labour and the labour demand curve
will shift to the right.
real wages increasing.
the natural rate of unemployment decreasing.
Only (i), (ii) and (iv) are correct.

Only (iii), and (iv) are correct.
Only (i), (ii), (iv) and (v) are correct.
Only (iii), (iv) and (v) are correct.
(i), (ii), (iii), (iv) and (v) are correct.
MCQ 4
South Africa suffers from unusually high unemployment officially about 25%. One
possible reason is the presence of a minimum wage. Minimum wage can result in
unemployment above the natural rate when (Hint: remember the work covered chs 6 and 17):
A.
B.
C.
D.
E.
the quantity of labour supplied is greater than the quantity of labour demanded and
the minimum wage is not binding.
the minimum wage is set below the full employment equilibrium price level.
the quantity of labour supplied is greater than the quantity of labour demanded and
the minimum wage is binding.
the quantity of labour demanded is greater than the quantity of labour supplied and
the minimum wage is not binding.
none of the above
MCQ 5
Use this figure, which illustrates the classical model labour market, to answer the following
question. The original supply and demand curves are denoted S0 and D0 respectively. The
letter P in parentheses indicates the price level.
Money wage rate
S1 (P=150)
b
S0 (P=100)
D1 (P=150)
D0 (P=100)
L Full Employment
Labour
Consider the following statements:

(i)
(ii)
(iii)
(iv)
(v)
The quantity of labour demanded varies inversely with the money wage rate
When the demand for labour shifts from D0 to D1, this is an indication that the
general price level has declined.
A movement from point a to point b indicates an increase in the money
wage rate.
A movement from point a to point b represents an increase in real wages.
The movement from point a to point b shows that, as a result of an
increase in the real wage rate, firms decide to hire fewer workers and to
produce less output.
Which of the following options is/are correct?

A.
B.
C.
D.
E.
Only (ii),(iii) and (iv) are correct

Only (i), (iii) and (v) are correct
Only (i) and (v) are correct
Only (i) and (iii) are correct
Only (i) is correct
Macro tutorial 4
Chapters 23
Written question 1
Austerity Plans in Europe may cause more harm than good
In May many European countries brought in measures to reduce public deficits, reassure
the markets and stop the fall of the euro. These measures were encouraged by the European
Commission and the International Monetary Fund. Both entities wanted to reassure the
markets about the value of the euro and the capacity of some European countries to pay back
their debt.
Ireland was the first to bring in austerity measures. In 2009 Dublin adopted two plans to cut
the public deficit to 11.5% of GDP in 2010, after it reached 14.3% in 2009. At the beginning
of May Greece adopted a plan to reduce its public deficit (14% of GDP last year) and to bring
it back under the European threshold of 3%. The Greek government said it would try to
achieve this before 2014. This massive austerity plan combines higher taxes with lower
salaries in the public sector, lower social welfare, retirement reforms and labour market
reforms. Portugal, Spain, and Italy have brought in cost-cutting measures, and others, like
France and Germany, are likely to follow suit. Non-eurozone countries like the UK,
Denmark and Romania have recently announced that severe austerity treatment is in the
pipeline.
These measures were intended to reassure the world about the health of the European
economy, but have started to raise worries. Many of these European countries are in a
recession and unemployment rates in these countries continue to increase. Economists
worry that setting up too many austerity plans at the same time may halt economic
recovery in Europe.
Reference
Denous, W. (2010, June 5). Austerity Plans In Europe May Cause More Harm Than Good .
Retrieved August 2011, from The Beginner: http://www.thebeginner.eu/all-in-finance/228austerity-plans-in-europe-may-cause-more-harm-than-good
Answer the following question: With reference to the Keynesian model of aggregate
expenditure as well as the theories of aggregate demand and both long- and short-run
aggregate supply, clearly explain how austerity measures can halt economic recovery and
lead to an increase in unemployment. Your explanation should include diagrams and about a
page of written explanation.
MCQ 1
Complete the following statement: At below full-employment equilibrium, ________ real
GDP exceeds ________ real GDP and there is a __________ gap. This can be cause by a
_________ shock to aggregate demand or aggregate supply.
A.
B.
C.
D.
E.
actual, potential, inflationary, positive.

potential, actual, inflationary, positive.
potential, actual, recessionary, positive.
potential, actual, recessionary, negative.
actual, potential, recessionary, negative.
MCQ 2
Which of the following is/are correct in the classical model:
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
A government budget deficit can be financed by purchasing bonds in the

loanable funds market
The short run aggregate supply curve is upward sloping because of the
assumption that real wages do not adjust fully to changes in prices
In the long run, government can increase potential GDP by increasing
government spending
The nominal interest rate is approximately the real interest rate plus the
inflation rate
(i) only
(i) and (iii) only
(ii) and (iii) only
(ii) and (iv) only
(ii), (iii) and (iv) only
MCQ 3
Which of the following statements regarding the short-run AD-AS model is correct?
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
A recessionary gap occurs when equilibrium real GDP is greater than the fullemployment level of real GDP
If an economy is originally at full employment, an increase in the real interest
rate will result in the economy moving to a below full-employment
equilibrium.
If an economy is at an equilibrium real GDP level that is above fullemployment, an increase in the nominal wage rate will result in an increase in
the price level.
If an economy is at an equilibrium real GDP level that is below-full
employment, the appreciation in the currency of that economy could result in
it recovering towards full employment.

Only (iii) and (iv) are correct.
Only (ii),(iii) and (iv) are correct.
Only (i), (iii) and (iv) are correct.
MCQ 4
If we are at the natural rate of unemployment, an increase in aggregate demand will lower
unemployment in the short-run:
A.
B.
C.
D.
E.
regardless of workers' price rise estimate

if workers overestimate the consequent price rise
if workers underestimate the consequent price rise
if workers perfectly anticipate the consequent price rise
None of the above
MCQ 5
Which of the following statements is/are correct?
(i)
(ii)
(iii)
(iv)
(v)
A.
B.
C.
D.
E.
Aggregate demand does not influence potential real GDP.

An increase in the price of domestic currency in the foreign exchange market
increases aggregate demand.
Advances in technology shift the long-run aggregate supply schedule only.
The relative price of inputs remains constant in the long run.
An increase in expected inflation accompanied by an advance in technology
will have an ambiguous effect on real GDP in the short run.

Only (iii) and (iv) are correct
Only (iii) and (v) are correct
Only (v) is correct.
Macro tutorial 5
Chapter 26
Written Question 1
a)
Describe (in words) the change in aggregate supply that would result from each of the
following changes in determinants ceteris paribus. (i) A rise in the average price of
inputs; (ii) An increase in worker productivity; (iii) Government antipollution
regulations become stricter; (iv) A new subsidy program is enacted for new business
investment in productive equipment; (v) Energy prices decline.
b)
What determines the equilibrium price level and level of real domestic output in the
aggregate demandaggregate supply model (1 paragraph)?
c)
What happens to bring the ADAS system back into equilibrium when prices are (i)
below and (ii) above the equilibrium level (1 paragraph each)?
MCQ 1
Automatic stabilizers ensure that:
A. the government budget is always balanced
B. tax structure automatically eases the tax burden during recessions and increases the tax
burden during recoveries
C. tax structure automatically decreases government spending during recessions and
increases the spending during peaks
D. tax revenues change inversely with changes in GDP
E. the government does not overspend its budget
MCQ 2
Which of the following tools can the South African Government use to pursue an
expansionary fiscal policy?
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
Selling bonds to the public

Increase government spending
Decrease taxes
Increase taxes

MCQ 3
Assume that the government pursues a contractionary fiscal policy to fight inflationary
pressure in the economy. Which of the following are potential outcomes?
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
Aggregate demand will decrease due to higher interest rates.

Interest sensitive expenditure increases and offsets some of the contractionary
fiscal policy objectives.
Exports decrease due to an exchange rate appreciation.
Imports decrease due to an exchange rate depreciation.
only (i) and (iii) are correct

only (ii) and (iv) are correct
MCQ 4
In the long run and when starting from a position of full employment:
A.
B.
C.
D.
E.
an expansionary fiscal policy will result in an increase in the equilibrium level of real
GDP with no change to the equilibrium price level.
a contractionary monetary policy will result in an decrease in the equilibrium level of
real GDP and an increase in the equilibrium price.
an expansionary fiscal policy will result in no change in the equilibrium level of real
GDP and an increase in the equilibrium price level.
a contractionary monetary policy will result in no change in the equilibrium level of
real GDP and an increase in the equilibrium price level.
an expansionary monetary policy will result in an increase in the equilibrium level of
real GDP and a decrease in the equilibrium price.
MCQ 5
A simultaneous and equal increase in government spending and taxes will:
A.
B.
C.
D.
E.
have no impact on GDP

help to relieve an inflationary gap
increase GDP
decrease GDP
none of the above is/are correct
Macro tutorial 6
Chapter 27
Written question 1
The main purpose of required reserves is to promote bank liquidity and protect depositors.
Evaluate the statement above Do you agree or disagree with the statement and give reasons
for you answer. Your explanation should include 1/3 of a page of written explanation.
Written question 2
Why are reserves listed in the assets column of a banks balance sheet (1 paragraph)?
MCQ 1
Initially, all commercial banks in South Africa have zero excess reserves. The Reserve Bank
then buys securities to the value of R200 000 from ABSA. In addition, the desired reserve
ratio of all banks is 8% and the currency drainage ratio is 60%. Which of the following is/are
correct? (All values to be rounded off to two decimal places)
(i) The intial increase in the monetary base is R 120 000
(ii) R 75 000 is drained off as currency
(iii) Immediately after the purchase, the banking system will have excess reserves of
R 184 000
(iv) The total amount of money created by the entire banking system is R 470 000
A.
B.
C.
D.
E.
Only (i) and (ii) are correct.

Only (i), (ii) and (iii) are correct.
Only (ii), (iii) and (iv) are correct.
Only (ii) and (iv) are correct.
Only (i), (iii) and (iv) are correct.
MCQ 2
Use the following diagram of the money market to answer the question that follows. Assume
that money supply is independent of the interest rate (i.e. money supply is vertical). Assume
that the initial equilibrium in the money market is shown by the intersection of S m and Dm1
with the equilibrium interest rate i1, in the short run. Which of the following options is
correct?
i
Sm
i2
i1
i3
Dm3
Dm1
Dm2
Qmoney
A. With an increase in real output, the demand for money will shift to Dm3 and the interest
rate falls to i3.
B. The shift of Dm1 to Dm2 creates an excess quantity of money demanded and people start
selling bonds. The price of bonds decreases which increases the interest rate.
C. When people decide to hold less money at any given interest rate, the price of bonds
decreases and the interest rate increases to i2.
D. The shift of Dm1 to Dm3 creates an excess quantity of money supplied in the money
market and people start selling bonds. The price of bonds decreases which increases the
interest rate.
E. A decrease in real output will not affect the demand for money and the interest rate
remains at i1.
MCQ 3
Initially all Commercial Banks have zero excess reserves, except Zee Bank which has the
following:
Excess reserves: R50000
Currency drain ratio: 60%
Desired reserves: 10%
What is the new initial value of Commercial Banks Deposits?
A.
B.
C.
D.
E.
R 20 000
R 31 250
R 42 857
R45 000
R15 000
MCQ 4
A decrease in the income tax rate can cause which of the following to occur?
(i)
(ii)
(iii)
(iv)
(v)
A.
B.
C.
D.
E.
An increase in potential GDP

A decrease in the equilibrium level of labour
An increase in the equilibrium level of capital
A decrease in real GDP
An increase in aggregate demand
Only (i) is correct

Only (iii), (iv) and (v) are correct
Only (ii) and (iv) are correct
Only (iii) and (v) are correct
MCQ 5
Use the information in the table below to answer the following question (values are in
billions of Rands):
Monetary Base
Quantity of money
Desired currency holdings
60.8
75.25
34.65
The money multiplier is approximately:

A.
B.
C.
D.
E.
4.753
8.367
0.893
1.238
-2.349
Macro tutorial 7
Chapters 28
Written question 1
In 2008, the South African economy experienced excessively high inflation. Most
economists believe this was due to high oil prices. Others believe it was a result of interest
rates that were kept too low.
Illustrate using the AD-AS model how (i) high oil prices and (ii) low interest rates can lead to
inflation. (Hint: do each case separately, each case requires about 1/3 of a page of writing).
MCQ 1
Suppose the monetary policy committee believes that the reason for high inflation is that they
set interest rates too low. Which of the following tools can the South African Reserve Bank
use to pursue a contractionary monetary policy?
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
Selling bonds to the public

Increasing the required reserve ratio
Increasing the Repo rate
Increase government spending

MCQ 2
If inflation is high and actual real GDP is above potential real GDP, the South African
reserve Bank (SARB) should _______ the supply of reserves to the banking system; the
money supply curve will shift to the _______ ; the equilibrium interest rate will _______; the
quantity of loanable funds in the market will _______; and aggregate expenditure will
_______.
A.
B.
C.
D.
E.
increase; left; increase; decrease; decrease

decrease; left; increase; decrease; increase
decrease; left; increase; decrease; decrease
decrease; right; decrease; increase; decrease
increase; right; decrease; increase; increase
MCQ 3
Suppose the SARB buys R100 million government securities in the open market. Which of
the following effects is/are associated with such an action?
(i)
(ii)
(iii)
(iv)
(v)
(vi)
A.
B.
C.
D.
E.
An increase in short run interest rates

An increase in the monetary base
A decrease in the long term real interest rate
A decrease in the supply of loanable funds
An increase in investment
An increase in net exports
Only (i), (iv) and (v) are correct

Only (ii), (iii), (v) and (vi) are correct
Only (ii), (v) and (vi) are correct
Only (iii) and (vi) are correct
Only (i), (ii), (iii) and (v) are correct
MCQ 4
Given the scenario shown in the graph below, what would you recommend the Governor of
the South African Reserve Bank do so that she meets her mandate of maintaining price
stability?
P
LAS
SAS
AD
Real GDP
A.
B.
C.
D.
E.
Lower the bank rate and buy securities.

Raise the bank rate and buy securities.
Lower the bank rate and sell securities.
Raise the bank rate and sell securities.
None of the above.
MCQ 5
Assume the following situation in the South African economy:
LAS
P
SAS
AD
Real GDP
The South African Reserve Bank (SARB) should ________ the supply of reserves to the
banking system; the money supply curve will shift to the________; the equilibrium interest
rate will ________ ; the quantity of loanable funds in the market will________ ; and
aggregate expenditure will _______ .
A.
B.
C.
D.
E.
Increase; left; increase; decrease; decrease.

Decrease; left; increase; decrease; increase.
Decrease; right; increase; decrease; decrease.
Increase; right; increase; increase; decrease.
Increase; right; decrease; increase; increase.
Macro Tutorial 8
Chapter 29
Written question 1
Suppose current real GDP equals long-run potential real GDP and that the monetary policy
committee adopts an easy (i.e. expansionary) monetary policy believing it will increase real
GDP. Discuss the likely outcomes of such a policy. Use diagrams to illustrate your answer.
MCQ 1
Which of the following is/are correct?
(i)
(ii)
(iii)
(iv)
(v)
A.
B.
C.
D.
E.
Fiscal policy has no effect on aggregate demand when the quantity of money
demanded is highly sensitive to the interest rate
For an economy that is at full employment, an increase in government
spending will completely crowd out investment
Fiscal policy has the largest effect on aggregate demand when expenditure is
completely insensitive to the interest rate
Monetary policy has the largest effect on aggregate demand when expenditure
is highly sensitive to the interest rate
Monetary policy has no effect on aggregate demand when the quantity of
money demanded is completely insensitive to the interest rate
Only (i) and (iii) are correct

Only (i), (ii) and (iv) are correct
Only (ii), (iii) and (iv) are correct
Only (ii), (iii) and (v) are correct
MCQ 2
Which one of the following statements is/are correct regarding the second round effects of a
contractionary fiscal policy?
(i)
(ii)
(iii)
(iv)
(v)
A.
B.
C.
D.
E.
Money demand increases, which causes the interest rate to increase.

The decrease in output and subsequent change in money demand causes
people to buy more bonds. This causes the price of bonds to increase and
interest rates to decrease.
A decrease in the price level causes money supply to increase.
The decrease in the price level and the subsequent change in money supply
decreases interest sensitive expenditure.
The overall interest rate increase is shown as a movement along the interest
sensitive expenditure curve.
Only (i) and (ii) are correct

Only (ii) and (iii) are correct
Only (iii) and (iv) are correct
Only (ii), (iii) and (iv) are correct
Only (ii), (iii) and (v) are correct
MCQ 3
Following an increase in government spending, the first round effects result in a shift of the
aggregate demand curve ________. The second round effects see ________ in the demand
for money which leads to ________ in the interest rate. This now shifts the aggregate demand
curve ________ as a result of the change in the interest rate.
A.
A.
B.
C.
E.
rightwards, an increase, an increase, leftwards

leftwards, a decrease, a decrease, rightwards
rightwards, a decrease, an increase, leftwards
rightwards, a decrease, an increase, leftwards
rightwards, an increase, a decrease, leftwards
MCQ 4
All things equal, an expansionary monetary policy is most effective when:
A.
B.
C.
D.
E.
The interest elasticity of

money demand is high.
money demand is low.
money demand is low.
money demand is high.
None of the above.
aggregate spending is high and the interest elasticity of

aggregate spending is high and the interest elasticity of
aggregate spending is low and the interest elasticity of
aggregate spending is low and the interest elasticity of
MCQ 5
Suppose that the South African economy is in a recession. The SARB decides to use
monetary policy in an attempt to get the economy functioning at full employment. Under
which of the following economic conditions will this be the most effective:
A.
B.
C.
D.
E.
Low responsiveness of expenditure to the interest rate and high responsiveness of the
quantity of money demanded to the interest rate
High responsiveness of expenditure to the interest rate and high responsiveness of the
Low responsiveness of expenditure to the interest rate and low responsiveness of the
High responsiveness of expenditure to the interest rate and low responsiveness of the
None of the above are correct
Macro tutorial 9
Chapter 29 app & 30
Written Questions 1
Suppose current real GDP is below long-run potential real GDP and that the monetary policy
committee adopts an easy monetary policy and the government increases spending. Discuss
the likely outcomes of such a policy. Use diagrams to illustrate your answer.
MCQ 1
The real interest rate is the nominal interest rate:
A.
B.
C.
D.
E.
minus the inflation rate

minus the growth rate
plus the inflation rate
divided by the inflation rate
divided by growth rate
MCQ 2
When the annual inflation rate is higher than people have anticipated then:
A.
B.
C.
D.
E.
fixed income earners benefit

debtors are hurt
flexible income receivers are more affected than any other group
creditors are harmed
savers benefit
MCQ 3
Which of the following statements is/are correct?
(i)
(ii)
(iii)
(iv)
A.
B.
C.
D.
E.
The short-run Phillips curve shows that if inflation rises above its expected
rate, the unemployment rate falls below its natural rate.
The short-run Phillips curve shows that if inflation rises above its expected
rate, the unemployment rate rises above its natural rate.
The long run Phillips curve shows the relationship between inflation and
unemployment when the actual inflation rate equals the expected inflation rate.
A change in the natural rate of unemployment shifts the long run Phillips
curve but not the short-run Phillips curve.
Only options (i) and (iii) are correct.

Only options (ii) and (iii) are correct.
Only options (i) and (iv) are correct.
Only options (i), (iii) and (iv) are correct.
Only options (ii), (iii) and (iv) are correct.
MCQ 4
Consider the IS-LM model. A contractionary monetary policy action in conjunction with an
expansionary fiscal policy action will result in which of the following options?
A.
B.
C.
D.
E.
A definite increase in the interest rate and a definite decrease in the equilibrium level
of output.
A definite increase in the interest rate and an indefinite change in the equilibrium
level of output.
A definite decrease in the interest rate and an indefinite change in the equilibrium
level of output.
A definite decrease in the interest rate and a definite increase in the equilibrium level
of output.
An indefinite change in the interest rate and an indefinite change in the equilibrium
level of output.
MCQ 5
This year, while the government has increased lump sum taxes and expenditure on education,
the actions of COSATU have resulted in the wages of nurses and teachers rising. In the Gulf
of Mexico, BPs oil rig exploded, causing transport and food prices to rise. Which of the
following statements is/are true?
(i)
(ii)
(iii)
(iv)
A.
A.
B.
C.
E.
Higher wages and increased transport costs will likely cause cost-push
inflation.
Higher wages and increased lump sum taxes will likely cause cost-push
inflation.
Increased transport costs and increased government expenditure by
government will likely cause demand-pull inflation.
Increased government spending on education in conjunction with increased
lump sum taxes will likely cause demand-pull inflation.

Only (i) and (iv) are correct.
Macro tutorial 10
Chapter 30 & 33
Written question 1
South Africa currently adopts a flexible exchange rate policy whereas China adopts a fixed
exchange rate. List 3 advantages and 3 disadvantages of each and briefly (3 5 sentences)
explain why South Africa adopts a flexible exchange rate policy.
Written question 2
Apple has recently launched the iPhone 4. South African consumers have a choice of either
purchasing the phone locally or directly from the USA. Suppose the following:
Price of iPhone 4 in USA: $300
Price of iPhone 4 in SA: R2700
Current exchange rate: R8/$
Does purchasing power parity (PPP) hold? If not, fully explain the transmission mechanism
that leads to PPP. (The USA price includes all costs such as transportation, exchange rate fees
etc.)
MCQ 1
Use the following diagram to answer the following question. It shows the Rand price of 1
Dollar.
Rand per
Dollar
S$
D$
Quantity of Dollars
American consumers discover that Mrs Balls Chutney is tastier than Heinz Ketchup. When
they import more of Mrs Balls Chutney from South Africa, then under a flexible exchange
rate regime:
A. the demand for Dollars increases and the Rand depreciates.

B. the supply of Dollars increases and the Rand appreciates.
C. the demand for Dollars decreases and the Rand appreciates.
D. the supply of Dollars decreases and the Rand depreciates.
E. nothing, because the flexible exchange rate prevents the change in the exchange rate.
MCQ 2
Assume that a calculator costs R56 in South Africa and $7 in the United States. If the
exchange rate is R6/Dollar ($) and purchasing power parity does not prevail then:
(i)
People will sell Rands on the foreign exchange market and the value of the
Rand will fall.
(ii) People will sell Dollars on the foreign exchange market and the value of the Rand
will fall.
(iii) People will buy Dollars on the foreign exchange market and the value of the
Dollar will rise.
(iv) People will buy Rands on the foreign exchange market and the value of the Rand
will rise.
(v) People will buy Rands on the foreign exchange market and the value of the
Dollar will rise.
A.
B.
C.
D.
E.

Only (iv) and (v) is correct.
Only (ii), (iii) and (v) are correct.
MCQ 3
Near the end of 2008, the Rand to Euro exchange rate was almost R14/euro. Assuming that
South Africa and the EU are the only two areas in the world and that the exchange rate is now
R10/Euro, we can say that:
(i) the rand has depreciated since 2008.
(ii) the rand has increased in value since 2008.
(iii) the quantity of rands that people plan to buy in the foreign market has increased
from 2008.
(iv) the quantity of euro that people plan to sell in the foreign market has increased
from 2008.
(v) the quantity of South African goods exported has decreased since 2008 as a result
of the change in the exchange rate.
A.
B.
C.
D.
E.

Only (ii), (iii), (iv) and (v) are correct.
Only (ii) and (v) are correct.
Only (i) and (v) are correct.
All of the above are correct.
MCQ 4
Which of the following best describes a policy moving the economy to the left along a shortrun Phillips curve?
A.
B.
C.
D.
E.
A contractionary monetary policy designed to reduce inflation

An expansionary monetary policy designed to reduce inflation
An expansionary monetary policy designed to reduce unemployment
A contractionary monetary policy designed to reduce unemployment
None of the above options is/are correct
MCQ 5
An increase in South Africas interest rates will most likely lead to the following:
A.
B.
C.
D.
E.
A reduction in the demand for South Africas goods and services in the international
market
An increase in the demand for other currencies besides the Rand in the foreign
exchange market
A depreciation of the South African Rand
An increase in exports by South Africa
An increase in the supply of the Rand in the foreign exchange market

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University of the Witwatersrand

School of Economic and Business Sciences

Read ch20, 21 & 22

Measuring GDP (cont.)

The Keynesian Model

The Classical model

Aggregate supply and

TEST 1 (Ch 20-25)

31 Mar 9 Apr: Study Break

Fiscal policy recap.

Fiscal and monetary

The ISLM model

Tutor consultation (tut 10)

28 May 22 June: Exams

Chapters 20, 21 & 22

Increased by approximately R2290 million

everyone who wants a job is employed

only (i) is correct

where C is consumption, Y is real GDP, Ig is planned investment (gross), X is exports, M is

only (i) is correct

the marginal propensity to consume increases

An increase in the amount of physical capital available

Only (i) is correct.

long run supply curve of labour

an upward shift of the production function.

Only (i), (ii) and (iv) are correct.

Consider the following statements:

Which of the following options is/are correct?

Only (ii),(iii) and (iv) are correct

actual, potential, inflationary, positive.

A government budget deficit can be financed by purchasing bonds in the

Only (i) and (iii) are correct.

regardless of workers' price rise estimate

Aggregate demand does not influence potential real GDP.

Only (ii) and (iii) are correct.

Selling bonds to the public

only (i) and (iv) are correct

Aggregate demand will decrease due to higher interest rates.

only (i) and (iii) are correct

have no impact on GDP

Only (i) and (ii) are correct.

An increase in potential GDP

Only (i) is correct

The money multiplier is approximately:

Selling bonds to the public

only (i) and (iv) are correct

increase; left; increase; decrease; decrease

An increase in short run interest rates

Only (i), (iv) and (v) are correct

Lower the bank rate and buy securities.

Increase; left; increase; decrease; decrease.

Only (i) and (iii) are correct

Money demand increases, which causes the interest rate to increase.

Only (i) and (ii) are correct

rightwards, an increase, an increase, leftwards

The interest elasticity of

aggregate spending is high and the interest elasticity of

Chapter 29 app & 30

minus the inflation rate

fixed income earners benefit

Only options (i) and (iii) are correct.

Only (i) is correct.

A. the demand for Dollars increases and the Rand depreciates.

Only (i) and (iii) are correct.