Sample Final Exam - Aut 2014

Autumn 2014 Sample Final Exam
The questions in the exam are for illustrative purposes only and are different from those in the actual exams.
Solutions are provided for practice only. The actual exam will not have solutions.
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SURNAME:
(FAMILY NAME)
OTHER NAMES:
This paper and all materials issued must be returned at the end of the examination.
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23115 Economics for Business

th
Wednesday, 11 June 2014
Time Allowed: 2 hours and 10 mins

Includes 10 minutes of reading time.
Reading time is for reading only. You are not permitted to write, calculate or mark your
paper in any way during reading time.
This is a Closed Book exam

Please refer to the permitted materials below:
Permitted materials for this exam:
Calculators (non-programmable only)
Drawing instruments
i.e. Rulers, Set Squares and Compasses
Materials provided for this exam:
This examination paper
One (1) multiple choice answer sheet (GPAS-240R)
Students please note:
Ensure that your name and student number are correctly

recorded on this cover-sheet as well as on the General
Purpose Answer Sheet.
Part A comprises 30 multiple-choice questions and it is worth

15 marks. Each question is worth 0.5 marks.
All questions in part A are to be answered in pencil on the

General Purpose Answer Sheet. Read carefully the instructions
in the front page of the General Purpose Answer Sheet
Penalties will apply if instructions are not followed strictly.
Part B comprises 10 short answer questions and it is worth 25

marks. Each question is worth 2.5 marks.
Rough work can be done in the space provided at the back of

this page and at the end of this examination paper No rough
work is admitted on the General Purpose Answer Sheet. Be
sure you fully erase mistakes and stray marks from the
General Purpose Answer Sheet.
Disciplinary action will be taken against you if

you infringe university rules.
Do not open your exam paper until instructed.

Faculty of Business (Economics Discipline Group)
Page 1 of 31
Rough work space

Do not write your answers on this page.
Page 2 of 31
Sample Final Exam Autumn 2014
PART A MULTIPLE CHOICE QUESTIONS (15 Marks)

Record your answers in pencil on the General Purpose Answer Sheet. Be sure you fully erase mistakes
and stray marks from the General Purpose Answer Sheet.
1. Statistics such as GDP, the unemployment rate, the rate of inflation and the trade balance are:
a. both microeconomic and macroeconomic
b. neither macroeconomic nor microeconomic, but properly in the realm of political
science
c. microeconomic, since they affect individual households and firms
d. macroeconomic, since they tell us something about the entire economy
2. A farmer sells wheat to a miller for $100. The miller makes the wheat into flour and sells it to a baker for
$200. The baker makes the wheat into bread and sells it to a grocer for $300. The grocer sells the bread to the
public for $400. The effect on GDP is:
a. an increase of $1000
b. an increase of $100
c. an increase of $600
d. an increase of $400
3. Many things that society values, such as good health, high-quality education, enjoyable recreation
opportunities and desirable moral attributes of the population, are not measured as part of GDP.
a. Therefore GDP is not a useful measure of societys welfare
b. However, GDP is still a useful measure of societys welfare because these other
attributes are the responsibility of government
c. However, GDP is still a useful measure of societys welfare because it measures a
nations ability to purchase the inputs that can be used to help produce these
contributors to welfare
d. Therefore GDP is not a useful measure of societys welfare unless is it measured
per person
4. For any given year, the CPI is:
a. the price of the basket of goods and services in the base year divided by the price
of the basket in the given year, then multiplied by 100
b. higher than the previous year
c. the price of the basket of goods and services in the given year divided by the price
of the basket in the base year, then multiplied by 100
d. the price of the basket of goods and services in the base year divided by the price
of the basket in the given year, then divided by 100
5. According to the quantity equation, if M increases by 12% and V and P are constant, then:
a. Y will remain constant
b. Y will decrease
c. Y will increase by 12%
d. Y will decrease by 12%
6. Karls 1950 salary was $15 000. The CPI is 27 for 1950, and 150 for 2009. What is Karls salary in 2009
dollars?
a. $83 333
b. $27 000
c. $40 500
d. $22 500
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7. Which is the most accurate statement about the relationship between inflation and interest rates?
a. The nominal interest rate is the difference between the real interest rate and the rate
of inflation
b. The real interest rate is the difference between the nominal interest rate and the rate
of inflation
c. The real interest rate is the nominal interest rate times the rate of inflation
d. The nominal interest rate is the real interest rate times the rate of inflation
8. If an unemployed person stops looking for work, then, ceteris paribus:
a. the labour-force participation rate decreases
b. the size of the labour force falls
c. the labour-force participation rate increases
d. both A and B are correct
9. Most of the economys structural unemployment problem is attributable to:
a. relatively large numbers of workers who are jobless for relatively long periods of
time
b. relatively large numbers of workers who are jobless for relatively short periods of
time
c. relatively few workers who are jobless for relatively long periods of time
d. relatively few workers who are jobless for relatively short periods of time
10. Which of the following statements is correct about minimum wages?
a. Minimum wages are a predominant cause of unemployment in the economy
b. Minimum wages do not cause unemployment
c. Minimum wages have an important effect on certain groups with particularly high
unemployment rates
d. Minimum wages are binding in every labour market equally
11. The unemployment rate is never zero because:
a. some wages are always above the market equilibrium level
b. there will always be some people who choose not to work
c. of the presence of discouraged workers
d. of maximum wage laws
12. Wages at a rate greater than the minimum level can:
a. create productivity gains if managed correctly
b. encourage higher quality candidates to apply for positions
c. encourage a labour surplus
d. all of the above
13. Private saving is:
a. the amount of income that businesses have left after paying for the factors of
production
b. the amount of tax revenue that the government has left after paying for its
spending
c. the amount of income that households have left after paying their taxes and paying
for their consumption
d. always equal to investment
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14. What would happen in the market for loanable funds if the government were to decrease the tax on
interest income?
a. The demand for loanable funds would increase
b. The demand for loanable funds would decrease
c. The supply of loanable funds would decrease
d. The supply of loanable funds would increase
15. Under a fractional-reserve banking system, banks:
a. hold only a fraction of their deposits as reserves
b. generally lend out a majority of their deposits
c. can create money by lending out reserves
d. all of the above
16. If the cash rate is decreased, the RBA is trying to:
a. address excessive inflation in the economy
b. reduce the demand for money in the economy
c. discourage credit-based spending
d. none of the above
17. When the RBA is trying to control rising inflation, it:
a. decreases the interest rate that financial institutions can earn on overnight loans of
their currency
b. targets inflation is at 23 percent
c. increases the interest rate that financial institutions can earn on overnight loans of
their currency
d. all of the above
18. The most important variable affecting the demand for money in the long run is the:
a. nominal interest rate
b. real interest rate
c. price level
d. velocity of money
19. Nominal GDP measures:
a. the dollar value of the economys output of goods and services
b. the total quantity of goods and services produced
c. the total income received from producing goods and services in constant dollars
d. all of the above
20. The notion that nominal variables are heavily influenced by the quantity of money, and that money is
largely irrelevant to understanding the determinants of real variables, is called:
a. monetarism
b. the quantity theory
c. the Fisher effect
d. the classical dichotomy
21. The principle of monetary neutrality implies that an increase in the money supply will:
a. decrease the price level
b. lower nominal interest rates
c. lower the unemployment rate
d. not affect real interest rates
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22. Expected inflation redistributes wealth from _____.

a. creditors to debtors
b. owners of real property to owners of financial assets
c. debtors to creditors
d. the government to fixed income recipients
23. The demand for money depends on:
a. the interest rate
b. the average level of prices in the economy
c. income
d. all of the above
24. When the price level falls:
a. households try to increase their holdings of money
b. households try to reduce their holdings of money
c. households dont change their holdings of money
d. none of the above
25. A change in monetary policy that aims to expand aggregate demand can be described either as:
a. increasing the money supply or as raising the interest rate
b. decreasing the money supply or as raising the interest rate
c. decreasing the money supply or as lowering the interest rate
d. increasing the money supply or as lowering the interest rate
26. An increase in government purchases of $100 billion will shift the aggregate-demand curve to the:
a. left by more than $100 billion
b. left by more or less than $100 billion
c. right by more than $100 billion
d. right by more or less than $100 billion
27. Which of the following is not strongly affected by international trade?
a. Net foreign investment
b. Exchange rates
c. Domestic inflation
d. All of the above are strongly affected by international trade
28. If a country sells more goods and services abroad than it purchases from foreign countries, then its exports
are:
a. greater than its imports, and its net exports are negative
b. greater than its imports, and its net exports are positive
c. smaller than its imports, and its net exports are positive
d. smaller than its imports, and its net exports are negative
29. Appreciation of a currency will lead to:
a. an increase in net exports
b. a reduction in net exports
c. no change in net exports
d. any of the above is equally likely
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30. When a countrys central bank increases the money supply:

a. the price level rises and the countrys currency depreciates relative to other
currencies in the world
b. the price level falls and the countrys currency depreciates relative to other
c. the price level rises and the countrys currency appreciates relative to other
d. the price level falls and the countrys currency appreciates relative to other
e. the price level rises and the countrys currency is unaffected
--- END OF PART A --Sample Final Exam Autumn 2014
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PART B SHORT ANSWER QUESTIONS (25 marks)

Record your answers in the space provided.
1. Suppose people consume only two goods, apple pies and meat pies:
Apple pies
Meat pies
2012 price ($)

4
10
2012 quantity
60
100
2011 price ($)

3
8
2011 quantity
50
100
a) Calculate the nominal GDP for 2011 and 2012 (1 mark)

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b) Calculate the real GDP and the GDP deflator for 2012. Round your answer to 2 decimal places. (1 mark)
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c) Using the GDP deflator, calculate the inflation rate between 2011 and 2012. (0.5 marks)
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2. Why is the consumer price index (CPI) not a perfect measure of the cost of living? (2.5 marks)
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3. If the government were to lower the tax on interest income, what would be the effect of this in the market
for loanable funds? Illustrate and explain this effect in the graph below. Label each axis, curve and any
shift(s) carefully. (2.5 marks)
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4. Most spells of unemployment are short, however most unemployment observed at any given time is long
term.
a) If in 2014 there were 300 unemployed people where 280 were unemployed for a fortnight and 20 were
unemployed for a year, what is the total amount of unemployment? (0.5 marks)
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b) Explain why it would be hard to distinguish between a person who is unemployed and a person who is
not in the labour force. (1 mark)
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c) The Australian Bureau of Statistics (ABS) announces that 11.2 million people are employed and 0.5
million are unemployed. If the adult population is 18 million, then what is the labour force
participation rate? What is the unemployment rate? Round your answers to 2 decimal places. (1 mark)
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5. Figure 1:
CP
NON-BANK
PUBLIC
CP
BANKING
SYSTEM
RCB
CENTRAL BANK
Figure 1 above shows the money creation process.

a) The money creation process assumes that the economy initially begins with a lump sum, ! , with it
circulating to banks as deposits and then later lent out to borrowers. However as the process is
repeated, the amount of money lent out diminishes. Why do you think this is the case? (Note: Assume
that no additional lump sums are made each time ! is reached). (1 mark)
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b) In the Great Depression, the US financial system suffered many bank runs. Explain how, if one bank
fails, why this may have disastrous consequences on the economy, and what could be done to prevent
this. (1.5 marks)
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6. a) Explain how unexpected inflation could redistribute wealth among debtors and creditors. Who would be
worse off? Why? (1.5 marks)
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b) Given that petrol is key to the transport sector and all other sectors in Australia, why does the constant
changing of petrol prices not create menu costs? (1 mark)
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7. a) Money pays no interest if you keep a hundred-dollar bill for a year, then next year you will have a
hundred dollars. Other assets earn interest if you place $100 in a savings account or in government bonds,
you will have more than $100 next year. Why, then, are people ever willing to hold money? (0.5 marks)
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b) Briefly define expansionary and contractionary fiscal policy. (0.5 marks)

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c) Using an AD-AS diagram, explain what would happen in the short run if the government decreased
taxes but kept government spending constant. (0.5 marks)
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e) John Maynard Keynes developed the theory of liquidity preference. Using a money market diagram,
explain what this means. (1 mark)
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8. a) List two factors that might influence a countrys trade balance and list two factors that might influence a
countrys net foreign investment (2 marks)
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b) If the nominal exchange rate is 0.68 euros per dollar, and the average weekly rent in Australia is $250, then
what is the real exchange rate if the average weekly rent in Europe is $120? Round your answer to 2 decimal
places. (0.5 marks)
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Media Release
Number
2014-05
Date 1 April 2014
Embargo
For Immediate Release
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.
Growth in the global economy was a bit below trend in 2013, but there are reasonable prospects of a pick-up
this year. The United States economy, while affected by adverse weather, continues its expansion and the euro
area has begun a recovery from recession, albeit a fragile one. Japan has recorded a significant pick-up in
growth. China's growth remains generally in line with policymakers' objectives, though it may have slowed a
little in early 2014. Commodity prices have declined from their peaks but in historical terms remain high.
Financial conditions overall remain very accommodative. Long-term interest rates and most risk spreads
remain low. Equity and credit markets are well placed to provide adequate funding, though for some emerging
market countries conditions are considerably more challenging than they were a year ago.
In Australia, the economy grew at a below trend pace in 2013. Recent information suggests slightly firmer
consumer demand over the summer and foreshadows a solid expansion in housing construction. Some
indicators of business conditions and confidence have improved from a year ago and exports are rising. But at
the same time, resources sector investment spending is set to decline significantly and, at this stage, signs of
improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of
improved conditions before committing to expansion plans. Public spending is scheduled to be subdued.
The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge
higher. It will probably rise a little further in the near term. Growth in wages has declined noticeably. If
domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be
expected over time, which should keep inflation consistent with the target, even with lower levels of the
exchange rate.
Monetary policy remains accommodative. Interest rates are very low and savers continue to look for higher
returns in response to low rates on safe instruments. Credit growth is slowly picking up. Dwelling prices have
increased significantly over the past year. The decline in the exchange rate from its highs a year ago will assist
in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past
few months. The exchange rate remains high by historical standards.
Looking ahead, continued accommodative monetary policy should provide support to demand, and help
growth to strengthen over time. Inflation is expected to be consistent with the 23 per cent target over the next
two years.
In the Board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand
and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to
be a period of stability in interest rates.
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9. a) Define what is monetary policy, and how it can be used to ensure the financial stability of the economy.
(0.5 marks)
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b) Explain how a decrease in the cash rate would affect aggregate demand. (0.5 marks)
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c) According to the RBA, long-term interest rates and most risk spreads remain low. If firms respond to this
optimistically, how would this affect the AD-AS model? Represent your answer using the diagram below.
(1.5 marks)
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10. a) The article mentions that the demand for labour has remained low and, as a result, the rate of
unemployment is on the rise. Indicate how this can be shown on the AD-AS diagram. (1 mark)
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b) Following on from part (a), explain and illustrate in the same graph how fiscal policy could be used to
rectify the economy. Be sure to label any equilibrium points and use them to explain your answer. (1.5
marks)
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--- END OF PART B --Sample Final Exam Autumn 2014
Page 19 of 31

Rough work space
Do not open your exam paper until instructed.

Page 20 of 31
Rough work space

Page 21 of 31
SOLUTIONS
PART A MULTIPLE CHOICE QUESTIONS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Page 22 of 31
D
D
C
C
C
A
B
D
C
C
A
D
C
D
D
D
C
C
A
D
D
C
D
B
D
D
C
B
B
A
PART B SHORT ANSWER QUESTIONS

1. Suppose people consume only two goods, apple pies and meat pies:
Apple pies
Meat pies
2012 price ($)

4
10
2012 quantity
60
100
2011 price ($)

3
8
2011 quantity
50
100
a) Calculate the nominal GDP for 2011 and 2012 (1 mark)

!"## =
!"## !"##
= 3 50 + 8 100
= 950
!"#! =
!"#! !"#!
= 4 60 + 10 100
= 1240
b) Calculate the real GDP and the GDP deflator for 2012. Round your answer to 2 decimal
places. (1 mark)
Real GDP is evaluated using the prices of the base year, 2011.
!"#! =
!"## !"#!
= 3 60 + (8)(100)
= 980
!"#!
100
!"#!
1240
=
100
980
= 126.53
!"#! =
c) Using the GDP deflator, calculate the inflation rate between 2011 and 2012. (0.5 marks)
Note that the GDP deflator for 2011 is 100 since 2011 is the base year.
2011 2012 =
= 26.53%
126.53 100
100%
100
2. Why is the consumer price index (CPI) not a perfect measure of the cost of living? (2.5 marks)
There are three main reasons why the CPI is not a perfect measure of the cost of living:
i.
Substitution bias That is, prices of goods normally fluctuate over time. As goods become more
expensive, consumers will substitute more expensive goods for cheaper ones (they will increase
demand for cheaper goods and decrease demand for more expensive goods). However, the CPI
assumes a fixed quantity in the basket of goods so does not take this into account.
ii.
Introduction of new goods The CPI assumes a fixed basket of the same goods so that years can
be compared with each other. However, over time more goods are added to the market, and the
CPI does not take this into account.
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iii.
Changes in quality Changes in quality lead to changes in desirability, tastes and value to the
consumer. For example, if the quality of a product increases but the price was held constant, this
would increase the standard of living since the value of a dollar rises. An example of this could be
a car that has more horsepower. The CPI does not measure changes in quality.
3. If the government were to lower the tax on interest income, what would be the effect of this in the market
for loanable funds? Illustrate and explain this effect in the graph below. Label each axis, curve and any
shift(s) carefully. (2.5 marks)
If the government lowered the tax on interest income, this would lead to an increase in savings and as such,
the supply of loanable funds curve would shift to the right. This would lead to a lower interest rate from ! to
! and a larger quantity of loanable funds supplied and demanded (represented by an increase from ! to
! ).
4. Most spells of unemployment are short, however most unemployment observed at any given time is long
term. unemployment (ch 28)
a) If in 2014 there were 300 unemployed people where 280 were unemployed for a fortnight and 20 were
unemployed for a year, what is the total amount of unemployment? (0.5 marks)
= 52 20 + 2 280
= 1040 + 560
= 1600
b) Explain why it would be hard to distinguish between a person who is unemployed and a person who is
not in the labour force. (1 mark)
There are two main reasons why this is the case. Firstly, there are some who report that they are unemployed
in order to receive unemployment benefits from the government when they may not actually be trying very
hard to get a job. Normally, the Australian Bureau of Statistics would consider these people to be out of the
labour force.
Secondly, discouraged workers report themselves to be out of the labour force when they actually want to
work. They are discouraged because they have looked for a job extended periods of time but have been
unsuccessful and have since given up. It would be more appropriate to class these people as unemployed.
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c) The Australian Bureau of Statistics (ABS) announces that 11.2 million people are employed and 0.5
million are unemployed. If the adult population is 18 million, then what is the labour force
participation rate? What is the unemployment rate? Round your answers to 2 decimal places. (1 mark)

100

+
=
100

0.5 + 11.2
=
100
18
= 65%

100

0.5
=
100
0.5 + 11.2
= 4.27%
5. Figure 1:
CP
NON-BANK
PUBLIC
CP
BANKING
SYSTEM
RCB
CENTRAL BANK
Figure 1 above shows the money creation process.

a) The money creation process assumes that the economy initially begins with a lump sum, ! , with it
circulating to banks as deposits and then later lent out to borrowers. However as the process is
repeated, the amount of money lent out diminishes. Why do you think this is the case? (Note: Assume
that no additional lump sums are made each time ! is reached). (1 mark)
When the non-bank public initially receives ! , it will choose to hold a certain portion of this as currency,
! , and the rest as deposits. Banks would then receive the deposits (D) and voluntarily keep some aside in the
form of excess reserves (E). Banks would also be required to keep a certain ratio of deposits aside as required
by the central bank (!" ). Thus, the amount that is lent out (L) eventually diminishes as the process is
repeated because of the leakage of ! and total reserves (E + !" ). The larger these leakages from the money
creation process, the less there will be available for loans, and the money supply would not increase by as
much.
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b) In the Great Depression, the US financial system suffered many bank runs. Explain how, if one bank
fails, why this may have disastrous consequences on the economy, and what could be done to prevent
this. (1.5 marks)
Banks are central to determining the money supply. Under a fractional-reserve banking system, banks do not
keep 100% of deposits as reserves. Instead, their total reserves are a small fraction of total deposits. As such,
if bank runs were to take place and continue for an extended period, then a bank may fail. This would have
disastrous effects on the economy because banks have ties to each other (as they lend to each other
frequently). As such, if one bank is in strife, this may put other banks in danger (as the bank would default on
its loans). This would result in a panic among the non-bank public. Even if one bank is in trouble, the nonbank public may question the stability of their banks as well. The central bank is aware of these
consequences, and so would act as lender of last resort by attempting to quell rumours quickly (before any
run can take place) by offering a quick loan to the bank in question so that it can meet its depositors
demands.
6. a) Explain how unexpected inflation could redistribute wealth among debtors and creditors. Who would be
worse off? Why? (1.5 marks)
If inflation is unexpected, debtors benefit and creditors lose. Creditors receive dollar payments from debtors
that have a lower real value than was expected.
For example, someone who borrows $500,000 today for 10 years at 5% borrows $500,000 of today's
purchasing power. When they repay the loan in 10 years, the creditor gets $500,000 cash but the real value of
this is much less (plus the real value of the interest payments has also been falling gradually over time). Had
the lender/creditor known about the inflation, they would have charged a higher nominal interest rate from
the start.
b) Given that petrol is key to the transport sector and all other sectors in Australia, why does the constant
changing of petrol prices not create menu costs? (1 mark)
There are very few costs associated with changes in petrol prices. Petrol companies can simply update the
prices in their systems or change the sign board. The costs of doing these are small, because companies dont
need to print catalogues for petrol prices.
7. a) Money pays no interest if you keep a hundred-dollar bill for a year, then next year you will have a
hundred dollars. Other assets earn interest if you place $100 in a savings account or in government bonds,
you will have more than $100 next year. Why, then, are people ever willing to hold money? (0.5 marks)
There are two reasons. One is that money is the most convenient medium of exchange in the economy. People
can use money to get the goods and services they want (that is, for consumption or purchasing an asset). You
cannot use government bonds to pay for an ice-cream.
The second reason is that money is also a store of value if people think that asset prices are going to fall in
the future, it is more sensible to sell the assets and hold their wealth in the form of money.
b) Briefly define expansionary and contractionary fiscal policy. (0.5 marks)
Fiscal policy is a policy response that the government may use to stabilize the economy. If expansionary, this
could be a planned increase in government expenditure, or a tax cut, to increase aggregate demand and
decrease the budget surplus. If contractionary (also known as tightening), this would be a planned decrease
in government expenditure, or an increase in taxes, to decrease aggregate demand and increase the budget
surplus.
Page 26 of 31
c) Using an AD-AS diagram, explain what would happen in the short run if the government decreased
taxes but kept government spending constant. (0.5 marks)
If the government decreased taxes but kept government spending constant, then households would have more
income and therefore would be able to increase consumption. This increase in consumption would induce a
shift in the AD curve to the right, resulting in a higher inflation rate from ! to ! and quantity of output from
! to ! . An additional multiplier effect might even be experienced if increased consumption rises enough
that investment by firms would increase in order to meet this new demand.
d) John Maynard Keynes developed the theory of liquidity preference. Using a money market diagram,
explain what this means. (1 mark)
Page 27 of 31
The theory of liquidity preference argues that the nominal interest rate adjusts to balance the supply and
demand for money. If the interest rate (the opportunity cost of holding money is the highest interest rate that
one could earn when investing in an asset) is at a level not equal to the equilibrium, people would try to
adjust their money holdings through buying and selling their assets (e.g. government securities/bonds). In the
graph above, the money demand curve is downward-sloping, because as the interest rate rises above the
equilibrium r* to ! (from Point A to B), then the opportunity cost of holding money increases and money
demand decreases because demand for interest-bearing assets (such as bonds) increases. The money supply is
fixed by the central bank, which implies that if money demand falls, eventually market forces will force the
interest rate to fall back to its equilibrium level. This is because the price of bonds are inversely related to the
interest rate.
The opposite can be said if the interest rate falls below the equilibrium r* to ! (from Point A to C). The
opportunity cost of holding money would thus fall, leading to an increase in money demand and thus lower
money supply. Once again, market forces would lead to the interest rate increasing back to its equilibrium so
money demand will equal the money supply.
8. a) List two factors that might influence a countrys trade balance and list two factors that might influence a
countrys net foreign investment (2 marks)
Factors that influence a countrys trade balance:
a. The taste of consumers for domestic and foreign goods
b. The prices of goods at home and abroad
c. The rates at which people can exchange domestic currency for foreign currencies
d. The cost of transporting goods from country to country
e. The policies of the government towards international trade
Factors that influence net foreign investment:
a. The real interest rate being paid on foreign assets.
b. The real interest rate being paid on domestic assets.
c. The perceived economic and political risks of holding assets abroad.
d. The government policies that affect foreign ownership of domestic assets.
b) If the nominal exchange rate is 0.68 euros per dollar, and the average weekly rent in Australia is $250, then
what is the real exchange rate if the average weekly rent in Europe for the same property is $120? Round your
answer to 2 decimal places. (0.5 marks)
=

0.68 250
=
120
= 1.42
! = 1.42 .
Rental in Australia is 1.42 times more expensive than in Europe.
Page 28 of 31
Media Release
Number
2014-05
Date 1 April 2014
Embargo
For Immediate Release
Statement by Glenn Stevens, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent.
Growth in the global economy was a bit below trend in 2013, but there are reasonable prospects of a pick-up
this year. The United States economy, while affected by adverse weather, continues its expansion and the euro
area has begun a recovery from recession, albeit a fragile one. Japan has recorded a significant pick-up in
growth. China's growth remains generally in line with policymakers' objectives, though it may have slowed a
little in early 2014. Commodity prices have declined from their peaks but in historical terms remain high.
Financial conditions overall remain very accommodative. Long-term interest rates and most risk spreads
remain low. Equity and credit markets are well placed to provide adequate funding, though for some emerging
market countries conditions are considerably more challenging than they were a year ago.
In Australia, the economy grew at a below trend pace in 2013. Recent information suggests slightly firmer
consumer demand over the summer and foreshadows a solid expansion in housing construction. Some
indicators of business conditions and confidence have improved from a year ago and exports are rising. But at
the same time, resources sector investment spending is set to decline significantly and, at this stage, signs of
improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of
improved conditions before committing to expansion plans. Public spending is scheduled to be subdued.
The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge
higher. It will probably rise a little further in the near term. Growth in wages has declined noticeably. If
domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be
expected over time, which should keep inflation consistent with the target, even with lower levels of the
exchange rate.
Monetary policy remains accommodative. Interest rates are very low and savers continue to look for higher
returns in response to low rates on safe instruments. Credit growth is slowly picking up. Dwelling prices have
increased significantly over the past year. The decline in the exchange rate from its highs a year ago will assist
in achieving balanced growth in the economy, but less so than previously as a result of the rise over the past
few months. The exchange rate remains high by historical standards.
Looking ahead, continued accommodative monetary policy should provide support to demand, and help
growth to strengthen over time. Inflation is expected to be consistent with the 23 per cent target over the next
two years.
In the Board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand
and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to
be a period of stability in interest rates.
Page 29 of 31
9. a) Define what is monetary policy, and how it can be used to ensure the financial stability of the economy.
(0.5 marks)
Monetary policy is a policy response used by the central bank to control the inflation rate as well as ensuring
overall financial stability. The central bank does this by controlling an interest rate, the overnight borrowing
rate (or cash rate). By employing expansionary monetary policy, the central bank could reduce the cash rate,
which reduces the cost of borrowing to banks which they would then pass on to the non-bank public, thus
increasing the money supply. If the central bank were to use contractionary monetary policy, the central bank
could increase the cash rate which would increase the cost of borrowing for other banks, who would pass this
increased cost to the non-bank public. This would decrease the money supply.
The central bank would want to employ contractionary monetary policy (raising the cash rate) when the
economy is growing excessively and needs to be slowed down. Or it could use an expansionary monetary
policy (lowering the cash rate) if it believes that the economys rate of growth is sluggish and the non-bank
publics confidence needs to be boosted.
Alternatively, the central bank could choose to sell (contractionary) or buy (expansionary) government bonds
in order to control the money supply.
b) Explain how a decrease in the cash rate would affect aggregate demand. (0.5 marks)
By reducing the cash rate, the cost of borrowing for banks would be reduced. This saving would be passed on
to borrowers and demand for investment would increase. This causes the aggregate demand curve in the ADAS model to shift to the right.
c) According to the RBA, long-term interest rates and most risk spreads remain low. If firms respond to this
optimistically, how would this affect the AD-AS model in the short run? Represent your answer using the
diagram below. (1.5 marks)
If firms react optimistically to the lower interest rates and risk spreads, then investment would increase, thus
leading to a rightward shift in the AD curve. This would cause an increase in inflation from ! to ! and
quantity of output from ! to ! in the short run.
10. a) The article mentions that the demand for labour has remained low and, as a result, the rate of
unemployment is on the rise. Indicate how this can be shown on the AD-AS diagram. (1 mark)
Page 30 of 31
Because wage growth has declined considerably, this would be expected to amplify the increase in the natural
rate of unemployment. As such, both the SRAS and the LRAS curve would shift to the left (from point A to
point B) since the natural rate of unemployment has increased, leading to lower output levels and a higher
inflation rate.
b) Following on from part (a), explain and illustrate in the same graph how fiscal policy could be used to
rectify the economy. Be sure to label any equilibrium points and use them to explain your answer. (1.5
marks)
If the government uses expansionary fiscal policy to try and reduce unemployment, this would shift the AD
curve to the right (since it is an increase in government purchases or a reduction in taxes, which induce an
increase in consumption). As a result, the LRAS curve will shift back to its original natural rate of output from
! to ! . However this will come at a cost of higher inflation, moving from ! to ! and thus a new
equilibrium level at Point C.
Page 31 of 31

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Autumn 2014 Sample Final Exam

Textbooks (unless specified)

Notes (unless specified)

23115 Economics for Business

Wednesday, 11 June 2014

Time Allowed: 2 hours and 10 mins

This is a Closed Book exam

Permitted materials for this exam:

Calculators (non-programmable only)

Materials provided for this exam:

This examination paper

One (1) multiple choice answer sheet (GPAS-240R)

Students please note:

Ensure that your name and student number are correctly

Part A comprises 30 multiple-choice questions and it is worth

All questions in part A are to be answered in pencil on the

Part B comprises 10 short answer questions and it is worth 25

Rough work can be done in the space provided at the back of

Disciplinary action will be taken against you if

Do not open your exam paper until instructed.

23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Rough work space

Sample Final Exam Autumn 2014

Faculty of Business (Economics Discipline Group)

23115 Economics for Business

PART A MULTIPLE CHOICE QUESTIONS (15 Marks)

23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Sample Final Exam Autumn 2014

Faculty of Business (Economics Discipline Group)

23115 Economics for Business

Sample Final Exam Autumn 2014

23115 Economics for Business

Faculty of Business (Economics Discipline Group)

22. Expected inflation redistributes wealth from _____.

Sample Final Exam Autumn 2014

Faculty of Business (Economics Discipline Group)

23115 Economics for Business

30. When a countrys central bank increases the money supply:

--- END OF PART A --Sample Final Exam Autumn 2014

23115 Economics for Business

Faculty of Business (Economics Discipline Group)

PART B SHORT ANSWER QUESTIONS (25 marks)

2012 price ($)

2011 price ($)

a) Calculate the nominal GDP for 2011 and 2012 (1 mark)

Sample Final Exam Autumn 2014

Faculty of Business (Economics Discipline Group)

23115 Economics for Business

23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Sample Final Exam Autumn 2014

Faculty of Business (Economics Discipline Group)

23115 Economics for Business

Figure 1 above shows the money creation process.

23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Sample Final Exam Autumn 2014

Faculty of Business (Economics Discipline Group)

23115 Economics for Business

b) Briefly define expansionary and contractionary fiscal policy. (0.5 marks)

Sample Final Exam Autumn 2014