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Semester II Examinations 2007/
Exam Code(s) 1BA Exam(s) 1 st^ Arts (Economic and Social Studies) St. Angela’s College, Sligo
Module Code(s) EC Module(s) Introductory Macroeconomics
Paper No. Repeat Paper
External Examiner(s) Professor Cillian Ryan Professor Robert E. Wright Internal Examiner(s) Mr. Brendan Kennelly *Mr. Stephen McNena
Instructions: Instructions : There are three sections in this exam.
You must attempt SIX questions altogether. You must attempt at least one question from each section, and any three other questions. Each question is worth equal marks.
Duration 2 hours No. of Pages 5 Department(s) Economics Course Co-ordinator(s) Cormac Forkan, St. Angela’s College, Sligo
Requirements : MCQ Handout Statistical Tables Graph Paper Yes, if requested by students Log Graph Paper Other Material
Section A
Instructions: please answer AT LEAST one question from this section.
Question 1.
(a) Using a well-labelled diagram, draw the full circular flow model for an open economy.
(b) (i) Write down the equation for Personal Disposable Income.
(ii) Calculate PDI using the following data: Y = €175bn Tr = €15bn Td = €20bn (iii) What can households do with their disposable income?
(c) Explain the difference between GDP and GNP. What is the difference known as? Why is this difference important in Ireland?
(d) Distinguish between changes in nominal GDP and changes in real GDP.
(e) List two reasons why GDP-per-capita may not be a reliable indicator of the quality of life in a country.
Question 2.
(a) Inflation is measured by a Consumer Price Index (CPI). Briefly describe the Consumer Price Index and explain how it is constructed.
(b) Describe any one of the three possible problems with the accuracy of the Consumer Price Index as a measure of inflation.
(c) The CPI and the GDP deflator are both measures of price inflation. How do they differ?
(d) Use an equation to explain the difference between nominal interest rates and real interest rates. Also use the equation to show that real interest rates may be negative.
Question 6.
(a) What is the principal function of money?
(b) Discuss how the quantity of money in the economy is measured.
(c) Explain carefully how the “money creation” process works.
(d) Explain any one of the three instruments of monetary policy that a central bank can use to influence the money supply.
(e) Write out the quantity theory of money equation, as used in the classical theory of inflation. Explain the four terms in the equation.
(f) Using the quantity theory of money equation, explain what will happen over the long run in an economy where the money supply is growing at 8% pa, and where real output is growing at 2.5% pa. Assume a constant velocity of money. Show all calculations.
Question 7.
(a) (i) What is meant by the trade balance?
(ii) Explain what happens when a country’s national savings are greater than its investment expenditure. (iii) Calculate NX using the following data: Private sector savings €30bn Private sector investment €20bn Government budget balance - €5bn
(b) (i) What is a nominal exchange rate?
(ii) Discuss two economic effects of a weaker exchange rate.
(c) Look at the table of euro-yen exchange rates below:
Month Euro (€) – Japanese yen (¥)
January 2005 ¥ January 2006 ¥ January 2007 ¥ January 2008 ¥
(i) During which month is the euro weakest? (ii) Over the three years, which currency appreciates and which currency depreciates? (iii) As an Irish firm exporting to Japan, which exchange rate would you prefer? Why? (iv) As Sony, exporting electronic equipment made in Japan to the eurozone, which exchange rate would you prefer? Why?
Section C: Short-run economic fluctuations
Instructions: please answer AT LEAST one question from this section.
Question 8.
(a) Draw a Long-Run Aggregate Supply curve. Explain the relationship between the price level and the output level in the long-run.
(b) What causes the Long-Run Aggregate Supply curve to shift?
(c) Draw a Keynesian Short-Run Aggregate Supply curve. Explain the relationship between the price level and the output level in the short-run.
(d) (i) Draw a typical Aggregate Demand curve.
(ii) Why does the Aggregate Demand curve slope downwards? (iii) What causes the Aggregate Demand curve to shift?
Question 9.
(a) Suppose the economy is growing very strongly in the short term, with output above its long-run equilibrium level. Policymakers respond by implementing contractionary policies.
(i) On a typical AD/AS diagram, show the initial position, with the high level of Aggregate Demand. (ii) Give an example of a contractionary policy. (iii) On the same diagram, show the effects of the contractionary policy. Explain the outcome.
(b) Illustrate and explain the effect of a house price crash on an AD/AS diagram. Explain the results.
(c) Use AD/AD diagrams to show how demand-side policies might cause inflation.
