Department of Economics, Faculty of Economics and Business

  CODE: A

UNIVERSITAS PADJADJARAN

  Department of Economics, Faculty of Economics and Business Principle of Macroeconomics Review

  Time : 90 Minutes Closed Books and Notes Permitted materials: Non-programmable calculator; Dictionary General Instructions

  1. Read the brief instructions before answering the questions.

  2. Read the questions carefully and don’t panic! 3.

  Do not ever cheat during the test in any way. Any illegal actions will get an appropiate punishment.

  4. Do not write anything on the question paper. The question paper is used. If you have given up on all questions, please just leave the room and get some fresh air!

FILL IN THE BLANK [10 POINTS]

  

Instructions : answer all questions, fill the blank space with a word or phrase, no need to answer with

a long explanation.

  1. When the value of money rises, the number of dollars needed to buy a representative basket of goods decreases, and so the price level ______

2. Countries with relatively high inflation should have currencies, and countries with relatively low inflation should have currencies.

  3. A trade policy which is limited a quantity of import is called _____ 4.

  A decrease in the price level makes consumers feel more wealthy, which in turn encourages them to spend more quantities of goods and services demanded is called _________

  5. When policymakers using tax or government expenditures to influence aggregate demand, then it is called _____

TRUE OR FALSE [10 POINTS]

  

Instructions : answer all questions, give a reason if below statements are false but none if statements

are true.

  1. Velocity in the country of Aquilonia is always stable. In 2002, the money supply was $100 billion, nominal GDP was $500 billion, and the real interest rate was 3 percent. In 2003, the money supply was $105 billion and real GDP did not change from its level in 2002. The nominal interest rate in 2003 was approximately 8 percent.

  2. When budget deficit happen, it will make supply curve in the market for loanable funds shift to the right which increase both real interest rate and NCO while decreasing supply the market for foreign currency exchange.

  3. Capital flight tends to reduce interest rates and cause the country’s currency to depreciate.

  4. In the long run, an economy’s production of goods and services depends on its supplies of labor, capital, and natural resources and advance technology used to turn these factors of production into goods and services.

  5. If money supply is decreasing more than the increasing in money demand, interest rate will increase.

MULTIPLE CHOICE [10 POINTS] 1.

  Given : GDP Deflator = 220 Real GDP = $ 35.000 Quantity of Money = $ 275 Quantity of Output Real = 1250 How much the price level and velocity of money? a.

  61.6 and 280 b.

  15909.1 and 57.85 c. 1.6 and 1988.6 d.

  12.72 and 21.62 2. Suppose the inflation rate increase from 5% to 6.5%. In this case central bank and people tend to … a.

  Decrease interest rate so people can invest more b.

  Decrease interest rate so people can avoid shoeleather cost and menu cost c. Increase interest rate so people can save more d.

  Increase interest rate so people can borrow more 3. If Indonesia national income (Y) is 4500, consumption expenditure (C) is 1400, the government spending (G) is about 1100, investment was about 1500, how much its national saving and net export ? a.

  3100 & 400 b.

  3400 & 500 c. 4200 & 400 d.

  2000 & 500 4. Factors That increasing Net Exports are below, except ...

  a.

  Consumers prefer goods produce domestically b.

  The exchange rates appreciate c. The price of goods in domestic are cheaper d.

  The government reducing tarrifs for imported goods 5. Which one is not an impact of budget deficit? a.

  Real interest rate is increased b.

  Capital inflow is decreased c. Supply of currency in the market for foreign currency is decreased d.

  Real exchange rate is appreciated 6. When the real interest rate changed from 5% to 6%, what will happen in market for loanable fund? a.

  Demand of loanable fund is increase b.

  Supply of loanable fund is decrease c. Supply of loanable fund is increase d.

  No change in demand and supply 7. An Adverse Shift in Aggregate Supply means a decrease in one of the determinants of aggregate supply shifts the curve to the left can cause? Except...

  a.

  Output falls below the natural rate of employment b.

  Unemployment rises c. Unemployment fall to the its natural rate d.

  The price level rises 8. Why Might the Short-Run Aggregate-Supply Curve Shift? a.

  Shifts Arising from Consumption b.

  Shifts Arising from Investment c. Shifts Arising from Saving d.

  Shifts Arinsing from Capital 9. Given MPS=0.2 ; in 2010 government expenditure is $10 million. How many the demand aggregate? a.

  $50 million b. c.

  $ 5 million d.

  $1.25 million 10. What will happen in AD curve when there is moneter injection? a.

  AD curve shift to left b.

  AD curve shift to right c. AD curve move to left d.

  AD curve move to right

  ESSAY [70 Points]

Instructions : YOU MUST done the COMPULSORY questions and CHOOSE ONLY ONE OPTIONAL

questions for each category. If there is no compulsory question then you only choose one of the

optional questions.

  MONEY GROWTH AND INFLATION [15 POINTS] Compulsory Question Suppose that velocity is constant and real GDP grows at a rate of 2% per yar.

  a.

  Explain why the government can increase the MS at a rate of 2% per year without causing inflation! Prove it with help of some simple math! b.

  Is inflation bad? Defend both yes or no answer to this question.

  OPEN ECONOMY MACROECONOMICS:BASIC CONCEPT [15 POINTS] Compulsory Question a.

  What is the differences of open economy and close economy? b.

  Explain the relationship among saving, investment, and net capital outflow! c. Explain the factors that effect export, import, and net export! d.

  Describe the economic logic behind the theory of purchasing power parity?

  A MACROECONOMIC THEORY OF THE OPEN ECONOMY [15 POINTS] Compulsory Question

  Suppose the interest rate in Indonesia is 6% with 4% of inflation and the real interest rate in US is 4% with 2.5% inflation. Explain the effect of those interest rate two countries to the net capital outflow, trade balance, and real exchange rate in Indonesia! (use graph)

  AGGREGATE DEMAND AND AGGREGATE SUPPLY [15 POINTS] Optional Question 1.

  Please analyze these following conditions! What will happen to the equilibrium of aggregate demand/aggregate supply? What is the effect on the price level and quantity of goods & services? a.

  All firms in Morocco increase the supply of capital almost 75%, and at the same time, government in Morocco decides to raise the tax for 25%. It can be concluded that the effect of increasing the capital is threefold greater than the effect of raising the tax. Assume that other conditions are being the same. Draw the curve to help the explanation! b. There is a big hurricanes and destroy all the factories in Maldives. Besides that, the exchange rate of Maldives is depreciating toward other currencies. The effect of the hurricanes is two times bigger than the effect of currency’s depreciation. Assume other things are not affected by these events. Draw the curve! c.

  The government of Zimbabwe increases its spending by 50%, and at the same time there is a better change of business patterns in Zimbabwe that leads to higher production of 50%.

  So that the effect of increasing in government spending is equally strong as the effect of increasing in the country’s production. Other things are stay the same, draw the curve to support the explanation! d. The political risk and economic uncertainty make investors in Guatemala crowd the investment out of the country, and in the same time there are epidemic diseases that makes many citizens of Guatemala dead and it decreases the number of employment eventually. So, the effect of crowding out investment is fivefold higher than the effect of employee reduction. Assume the other things are being equal and draw the curve!

  2. Effect from investment Wealth effect Sticky-price theory

  Effect from consumption Misperception theory Effect from labor Exchange rate effect Effect from capital Sticky-wage theory Effect from expected price Interest rate effect Effect from tax a.

  Please classify the terms above into two different major groups! (Hint: Aggregate Demand and Aggregate Supply)! b.

  Find from the terms above, which are the three of them that is used in the cause of downward sloping of Aggregate Demand curve! Explain all the terms! c.

  Which are three of the terms that explain why the Aggregate Supply curve is upward sloping? Please explain what the meaning of those terms is! d.

  Please select all terms that connect into the shifting of Aggregate Demand curve! Explain to which direction of shifting will be, if there is a decrease in those terms! (explain one by one of those terms) e. Collect all of terms that could explain the shifting of Aggregate Supply curve! To which direction of shifting if there is an increase in those terms? (explain one by one of those terms)

  

THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND [10 POINTS]

Optional Question

  1. Bank Indonesia expands the money supply.

  on a.

  Use the theory of liquidity preference to illustrate in a graph the impact of this policy

  the interest rate. this b.

  Use the model of aggregate demand and aggregate supply to illustrate the impact of change in the interest rate on output and the price level in the short run.

  c.

  When the economy makes the transition from its short-run equilibrium to its long-run equilibrium, what will happen to the price level? d.

  How will this change in the price level affect the demand for money and the equilibrium interest rate? e.

  Is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

  2. Suppose the government reduces taxes by Rp 40 billion, that there is no crowding out, and that the marginal propensity to consume is 0.85.

  a.

  What is the initial effect of the tax reduction on aggregate demand? b. What additional effects follow this initial effect? What is the total effect of the tax cut on aggregate demand?