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An economy is currently in equilibrium and the following figures refer to elements in its national accounts:           $ Billion Consumption (total)  60 Investment           5 Government expenditure      8 Imports    10 Exports      7  
(a) What is the current equilibrium level of GDP?  (1 mark)  
(b) What is the level of injections?  (1 mark)  
(c) What is the level of withdrawals?  (1 mark)  
(d) Assuming that tax revenues are $7 billion, what is the value of savings? (1 mark)  
(e) If GDP now rises to $80 billion and, as a result, the domestic consumption of domestically produced goods rises to $58 billion, what is the MPCd?  (i.e. marginal propensity to consume domestic goods) (2 marks)  
(f) What is the value of the multiplier?  (2 marks)  
(g) Given an initial level of GDP of $80 billion, assume that spending on exports rises by $4 billion, spending on investment rises by $1 billion, while government expenditure falls by $2 billion; and that all of these events happen within the same fiscal period.    
By how much will GDP change? (1 mark)  
What will be the new GDP value (1 mark)   
Question 2:  
(a) Which of the following are final goods and services and which are intermediate goods and services?  Please explain why in your answer.  (4 marks – 1 mark each)  
(i) A windscreen purchased by a motor vehicle spare parts supplier;  
(ii) A new bulldozer to be used by a construction company;  
(iii) A household cleaning service purchased by a family from a domestic cleaning service company;  
(iv) Coking coal  
(b) An economy produces final goods and services with a market value of $800 billion in a given year, but only $750 billion worth of goods and services is sold to domestic or foreign buyers.  
Is this nation’s GDP $800 billion or $750 billion?  Explain your answer.  (2 marks)  
(c) Explain why a new truck sold for use by a transport company is a final good, even though it is a fixed investment (capital) used to produce other goods.  (2 marks)  
Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP?  Please explain your reasoning.  (2 marks)
Question 3:    
(10 marks total - 2.5 marks each part)  
(a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation;    (1.25 for each diagram, and 2.5 marks for the explanation);    
(b) Provide (describe) two (2) causes of each type of inflation   
 (2.5 marks for 2 demand-pull causes and 2.5 marks for 2 cost-push causes)   
Question 4:  
(a) Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero?  Why or why not should this be the case?  (5 marks)  
(b) How did the classical economists interpret long-run unemployment?  (2.5 marks)   
(c) How does structural and cyclical unemployment differ and how concerned should policymakers be about these types of unemployment?  (2.5 marks)   
Question 5: (2.5 marks each part)  
Using the aggregate demand – aggregate supply (AD-AS) diagram, show how the four economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event)  
(a) An improvement in the marketing and selling skills of firm managers;  
(b) An increase in personal income tax;  
(c) An increase in exports;  
(d) A significant destruction in an economy’s capital stock because of war;   
Question 6: (a) The consumer price index (i.e. CPI) is the most commonly used measure of changes in the general level of prices in Australia.  Discuss some of the advantages and disadvantages of using this measure.  (4 marks)  
(b) Explain why some people ‘lose’ from inflation and why do some people ‘win’ from inflation?  (6 marks)   
Question 7:  
Which of the following would cause a growth in the money supply? Answer yes, no, or possibly and explain your answer (i.e. please provide reasons).  (1 mark for each correct anaswer plus 1 mark for each correct reason)  
(a) The selling of government securities to banks;  
(b)  A fall in interest rates;  
(c)  An increase in government expenditure, financed by borrowing from the banking sector;  
(d)  The purchase of government securities by the Central Bank from the banking sector;   
(e)  It is agreed by the Treasurer and the Governor of the Central Bank to reduce the target rate of inflation.   
Question 8: The following are the various elements within a nation’s balance of payments account:  (i) Imports of goods (−)  (ii) Exports of goods (+)  (iii) Imports of services (−)  (iv) Exports of services (+)  (v) Other income outflows (−)  (vi) Other income inflows (+) (vii)    Capital transfers sent overseas from the nation (–)  (viii) Capital transfers to the nation from overseas (+)  (ix) The nation’s investments overseas (−)  (x) Investment in the nation from overseas (+)  (xi) Short-term financial outflows (−)  (xii) Short-term financial inflows (+)  (xiii) Adding to reserves (−)  (xiv) Drawing on reserves (+)  
 Into which of the above categories would you put the following?  (total 10 marks – 1 mark each)  (a)  DVD recorders imported into the nation from Japan;  (b)  Insurance cover purchased in the nation by overseas residents;  (c)  The nation gives overseas aid to a developing country;  (d)  A US car company sets up a factory in the nation;  (e)  Some of the nation’s residents take a holiday in Bali;  (f)  Interest earned by the nation’s residents on overseas assets;  (g)  Running down the stock of foreign exchange in the Central Bank of the nation;  (h)  Migrants to the nation transferring property to the nation;  (i)  New deposits made in banks in the nation by overseas residents;  (j)  The nation’s palm oil is sold in the United Kingdom.   
Question 9:  
(a) Illustrate and explain using a diagram, the difference between the Keynesian and monetarist views on how changes in interest rates affect changes in aggregate demand.    
(2.0 marks for diagram plus 2.0 marks for explanation)  
(b) Using diagrams and formula, illustrate and explain the difference between the Keynesian and monetarist views on how an increase in money supply causes inflation.  
 (2.0 marks for diagram plus 2.0 marks for explanation)  
(c) What is the difference bwteen discretionary fiscal policy and automatic stabilisers?   Note:  Your explanation should provide an example. (1 mark for explanation plus 1 marks for an example)

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