TEMASEK POLYTECHNIC

SCHOOL OF BUSINESS
AY 2014/2015 MID-SEMESTER TEST
(April Semester)

MACROECONOMICS (BEC1002)
SUBJECT LEVEL: 1

TIME ALLOWED: 1 HOUR

INSTRUCTIONS TO CANDIDATES

1. This paper consists of 9 pages (including cover page).

2. Answer ALL questions.

3. Write your answers in the space provided within the question paper.

Name
Admission No.
Tutorial Class
Seat No.

Page 1 of 9
Section A: Multiple Choice Questions (10 MCQ x 2 marks = 20 marks)
Please write the correct answers in the brackets provided.

1.1 Which of the following is not a macroeconomic issue?

(A) US consumer sentiment surges.

(B) Burma seeks investment and jobs.
(C) Egypt and Russia to boost trade ties.
(D) Europe’s car sales break losing streak.
(E) High inflation cost the UK economy £10bn over last 3 years.
( )

1.2 Which of the following causes the PPF curve to shift outwards?

(A) Increase in money supply.

(B) Rise in the cost of living in a country.
(C) Rise in imported final goods and services.
(D) Increase in the needs and wants of people.
(E) Higher productivity from more training of workers.
( )

1.3 With reference to the PPF diagram below, point X reflects the economic
situation of
Timber
Products

Jewellery

(A) a fall in Japan’s birth rates.

(B) over-stretching of resources.
(C) lower prices of both products in Japan.
(D) the depletion of oil deposits in the US.
(E) factory workers’ peaceful protest in Myanmar.
( )

1.4 Potential GDP is the value of final goods and services produced within a
country
(A) during a recession.
(B) when unemployment rate is zero.
(C) at the trough of the business cycle.
(D) when all available resources are fully employed.
(E) throughout the expansion phase of the business cycle.
( )

1.5 In a country, as people save more money and spend less, _______tends to occur.

(A) a deflation.
(B) an inflation.
(C) an expansion.
(D) lower unemployment.
(E) an increase in the amount of resources.
( )

Page 2 of 9
1.6 There are several hundred thousands of illegal migrants from neighbouring
countries working illegally in the UK. As a result, UK’s GDP is

(A) unaffected.
(B) easier to predict.
(C) overstating its economic performance.
(D) understating its economic performance.
(E) a closer reflection of an economy’s performance.
( )

1.7 Ukraine’s civil unrest harms the country in the long term and affects its potential
output. Which of the following best describes the effects?

(A) SRAS falls due to scarcity of resources.

(B) AD falls due to a lack of aggregate spending.
(C) SRAS falls due to a rise in cost of production.
(D) LRAS and SRAS fall due to a decrease in available resources.
(E) LRAS and SRAS fall due to reallocation of resources towards
financing the war.
( )

1.8 When consumer price index’s annual percentage changes from -4% to -3% the
following year, there is

(A) a widening of an inflationary gap.

(B) a narrowing of a recessionary gap.
(C) inflation caused by SRAS shifting left.
(D) recession caused by SRAS shifting left.
(E) deflation resulting in a downward movement along the AD curve.
( )

1.9 A stagflation arises when

(A) coffee bean prices rise.

(B) COE of family cars rises.
(C) the consumer price index falls.
(D) prices of imported raw materials rise.
(E) the government has to pay more to build hospitals.
( )

1.10 To cure cyclical unemployment during a recession, the government should

(A) adopt an expansionary fiscal policy.

(B) encourage households to save more money.
(C) increase job fairs and job internet search sites.
(D) subsidize firms to reduce their production costs.
(E) provide more subsidized courses to the unemployed for job skill re-
training.
( )

Page 3 of 9
Section B : Short Questions (80 marks)

2. The table below shows the economic data (based on current market prices) of
the island nation of Tuvalu, for the year 2009. Use the data to answer the
following questions from 2(a) to 2(e). Correct your answer to 1 decimal place.
(30 marks; 6 marks per part)

List A List B
GDP $27m Working-age population 9,500
Household expenditure $0.3m Number of employed 8,400
Firm's expenditure $8m Number of unemployed 750
Government expenditure $7m
Import expenditure $0.4m

(a) (i) Identify the missing component from List A based on the formula of
calculating GDP by expenditure method and calculate the value of it.
(ii) How can you tell whether the GDP indicated in List A is nominal GDP or
real GDP? Briefly explain.

(b) (i) With the data in List A, if Tuvalu’s potential output is at $30m and the
GDP deflator is 93 in 2009, state the formula and calculate real GDP.
(ii) Identify the type of macroeconomic equilibrium that the country is
experiencing and illustrate with a diagram.

Page 4 of 9
(c) (i) State the formula and calculate the economic growth rate of Tuvalu in
2011 based on the data given below.
(ii) Which phase of the business cycle was the economy in 2011?

2010 2011 2012

Real GDP ($) 31m 34m 32m

Formula:

(d) (i) State the formula and calculate labour force participation rate for 2009.
(ii) Calculate how many people within the working age group are not working
and also not actively looking for a job.

(e) Identify the types of unemployment that exist in 2010 when the economy is not
suffering from a recession. Briefly state how the government can reduce the
respective type(s) of unemployment.

Page 5 of 9
 3(a) Norway recently discovered of one of the world’s largest oil finds amounting
to nearly 3.3 billion barrels of crude oil. Explain and illustrate how the event
will affect Norway’s Production Possibility Frontier for the production of fish
and crude oil.
(5 marks)

____________________________________________________________

3(b) Using the AD-AS model, explain and illustrate the impact on potential GDP
when Norway’s number of work hours fall for all jobs across all the industries.
(5 marks)

Page 6 of 9
4(a) Thailand's economy is expected to contract this year following a huge decline
in consumption and investment in light of the political impasse. Thailand’s
tourism sector has also suffered. Using the AS-AD model with an initial full
employment equilibrium level, illustrate and explain how the price level, real
GDP and the employment rate of Thailand will be affected.
(9 marks)

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

4(b) Apart from the political turmoil in Thailand, there has been an increase in the
minimum wage rate by 300 baht across many labour intensive industries this
year. Illustrate and explain with an initial below full-employment equilibrium
level, what sort of economic problem will result due to a rise in the wage rate.
How will this affect Thailand’s price level and real GDP?
(9 marks)

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

Page 7 of 9
4(c) In relation to part 4(b), briefly explain how the Thai government can cure the
economic problem.
(2 marks)

_______________________________________________________________

_______________________________________________________________

5. Read the excerpt below and answer the following questions.

Kevin Green, REF chief executive, told The Daily Telegraph, the UK’s economic
recovery was picking up at such a pace there were now growing concerns about a
shortage of available skilled staff across the country, in areas from cloud computing to
engineering and even call centre staff.

He said: "This has been building since the Spring. It shows there is now real growth
and real (higher) demand in the economy.

"Employers are getting more confident, there is demand coming back into the
economy and people don't think the current size of the workforce is big enough for
them."

He added: "Employees are also becoming more confident. Many have been working
hard for three years now without a pay rise, and they're now thinking they'll risk
moving for get a bit more money."

The cost of living has been rising at two times the rate of pay growth since the end of
last year. A report from the British Retail Consortium last night revealed that food
price inflation rose to 2.9 per cent in September, led by sugar, jam and chocolate.

Adapted from “Jobs joy as full-time salaries rise at the fastest pace for over five years”, The Telegraph 26th May
2014.

(a) Identify the components of aggregate demand and explain how changes in them
will lead to rising cost of living and real GDP. Identify the type of economic
situation that has occurred.
(8 marks)

Page 8 of 9
(b) Over time, rapid economic recovery from higher demand tends to lead to a
shortage of available workers across the country. Explain and illustrate what the
impact is on the equilibrium price level and real GDP.

(10 marks)

(c) Briefly explain why a recession may not always lead to a recessionary gap.
(2 marks)

**End of paper***

Page 9 of 9