QUESTION 1 (10 Marks)
1.1) Explain the natural unemployment rate and its relationship with the inflation rate. (3)
1.2) How will the crisis affect the natural rate of unemployment? (3)
1.3 What are the factors for labor-market rigidities? (4)
QUESTION 2 (10 Marks)
2.1) Based on your knowledge, you obtained from the IS-LM-PC model, graphically illustrate
and discuss what effect a low repo rate by the South African Reserve Bank will have on
output and inflation. (4)
2.2) Graphically illustrate and discuss the effects of an increase in the price of oil on the
natural rate of unemployment in South Africa using the wage setting (WS) and price setting
(PS) relationship. (4)
2.3 Explain why economists do not use exchange rates to compare standards of living
across countries. Also, discuss what economists do to avoid these problems. (2)
QUESTION 3 (10 Marks)
3.1) Explain the Malthusian trap. (1)
3.2 Graphically illustrate and discuss the effects of an improvement in the state of
technology on output per worker and capital per worker. (4)
3.3) What is the relationship between output, saving, and investment? (3)
3.4) Explain what is meant by the fertility and appropriability of the research process. (2)
Multiple Choice Questions
1.1) A reduction in the aggregate price level, P, will most likely have which of the following
effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
1.2) Which of the following is considered out of the labor force?
A) the unemployed
B) those temporarily laid off who will soon be recalled
C) those who worked full time, but in a family business
D) those individuals who have started searching for employment for the first time
E) none of these
1.3) The labor force is defined as
A) the sum of the employed and unemployed.
B) the total number employed.
C) the total number of working age individuals in the population.
D) the sum of the number of employed, unemployed and discouraged individuals.
1.4) Which of the following variables is most directly determined in the labor market?
A) stock prices
B) nominal wages
C) interest rates
D) all of these
E) none of these
1.5) In the wage setting relation W = PeF(u,z), the variable z does not include which of the
following variables?
A) the minimum wage
B) unemployment benefits
C) the extent to which firms mark up prices over their marginal cost
D) all of these
E) none of these
1.6) Based on wage setting behavior, we know that a reduction in the unemployment rate
will cause
A) no change in the real wage.
B) a reduction in the real wage.
C) an increase in the real wage.
D) an upward shift of the WS curve.
1.7) Which of the following individuals first discovered the relationship between
unemployment and inflation?
A) Solow
B) Samuelson
C) Friedman
D) Phillips
1.8) For this question, assume that the Phillips curve equation is represented by the
following equation: πt - πt-1 = (m + z) - αut. Given this information, the natural rate of
unemployment will be equal to
A) m + z.
B) (m + z - α).
C) α(m + z).
D) 0.
E) none of these
1.9) Suppose policy makers underestimate the natural rate of unemployment. In a situation
like this, policy makers might implement a policy that
A) attempts to maintain output below the natural level of output.
B) results in deflation.
C) attempts to maintain output below the natural level of output and results in deflation
D) results in steadily rising inflation.
1.10) Which of the following does not represent a "labor market rigidity" to which critics refer
when discussing unemployment in Europe?
A) generous unemployment insurance
B) restrictive monetary and fiscal policies
C) a high degree of employment protection
D) relatively high minimum wages
E) none of these
1.11) An increase in the price of oil will likely cause which of the following?
A) increase the markup in the Phillips curve equation
B) increase the sum "m + z" in the Phillips curve equation
C) increase the natural rate of unemployment
D) all of these
E) none of these
1.12) Which of the following individuals first discovered the relationship between
unemployment and inflation?
A) Solow
B) Samuelson
C) Friedman
D) Phillips
1.13) The original Phillips curve implied or assumed that
A) the markup over labor costs was zero.
B) the expected rate of inflation would be zero.
C) the actual and expected rates of inflation would always be equal.
D) all of these
E) none of these
1.14) Suppose policy makers overestimate the natural rate of unemployment. In situations
like these, policy makers will likely implement policies that result in
A) less unemployment than necessary.
B) an unemployment rate that is "too low."
C) a lower inflation rate than necessary.
D) a steadily increasing inflation rate.
E) overly expansionary monetary and fiscal policy.
1.15) In the Phillips curve equation, which of the following will cause a reduction in the
current inflation rate?
A) a reduction in the expected inflation rate
B) an increase in the unemployment rate
C) a reduction in the markup, m
D) all of these
E) none of these
1.16) Okun's law shows that when the unemployment rate is above the natural rate,
A) inflation is higher than expected.
B) inflation is lower than expected.
C) output is below potential.
D) output is above potential.
1.17) For this question, assume that the economy is initially operating at the natural level of
output. An increase in consumer confidence will cause
A) a reduction in the real wage in the medium run.
B) an increase in the real wage in the medium run.
C) no change in the real wage in the medium run.
D) ambiguous effects on the real wage in the medium run.
1.18) As fiscal consolidation takes place, the central bank should
A) decrease the policy rate.
B) increase the policy rate.
C) increase inflation rate.
D) decrease money supply.
1.19) When the policy rate increases,
A) IS curve does not change.
B) IS curve shifts to the right.
C) IS curve shifts to the left.
D) LM curve shifts upward.
E) LM curve shifts downward.
1.20) Of the following, the most often used measure of changing living standards is
A) the growth rate of nominal GDP.
B) the growth rate of real GDP.
C) the growth rate of nominal GDP per capita.
D) the growth rate of real GDP per capita.
E) unemployment per capita.
1.21) When switching from the "current exchange rate" method to the "purchasing power
parity" method, India's standard of living in dollars
A) decreases.
B) remains essentially the same.
C) rises, but still remains far below that of the U.S.
D) rises almost to the level of the U.S.
E) leapfrogs over that of the U.S.
1.22) Which of the following must occur to sustain economic growth in the long run?
A) technological progress
B) capital accumulation
C) a higher saving rate
D) all of these
1.23) For this question, assume that the saving rate decreases. We know that this decrease
in the saving rate will cause which of the following?
A) a temporary decrease in the level of output per capita
B) no permanent change in the level of output per capita
C) a temporary decrease in the rate of growth of output per capita
D) a permanently lower rate of growth of output per capita
E) none of these
1.24) Which of the following will cause an increase in output per worker in the long run?
A) an increase in the saving rate
B) a reduction in the depreciation rate
C) an increase in the stock of human capital
D) all of these
1.25) In the absence of technological progress, which of the following remains constant in
the steady state equilibrium?
A) investment per worker
B) output per worker
C) saving per worker
D) all of these
E) investment per worker and output per worker
1.26) When an economy is operating at the steady state, we know that
A) steady state saving equals consumption.
B) steady state saving is less than total consumption.
C) steady state saving is equal to depreciation per worker.
D) steady state saving exceeds depreciation each year by a constant amount.
E) none of these
1.27) The countries with the lowest output per capita
A) are rich with human capital, but have little physical capital.
B) are rich with physical capital, but have little human capital.
C) are poor in both human and physical capital.
D) have low living standards in spite of relatively high levels of both human and physical
capital.
E) may or may not be poor in human capital, depending on whether the exchange rate or
purchasing power parity method is used for comparison.
1.28) Which of the following will cause an increase in output per effective worker?
A) an increase in population growth
B) an increase in the rate of depreciation
C) a reduction in the saving rate
D) an increase in the rate of technological progress
E) an increase in the saving rate
1.29) Which of the following is always true after an economy reaches a balanced growth
equilibrium?
A) the growth rate of output equals the rate of depreciation
B) population growth is zero
C) the growth rate of capital is equal to the growth rate of the effective work force
D) the growth rate of capital is equal to the savings rate
E) none of these
1.30) Which of the following best describes a situation where research is considered
relatively fertile?
A) research that translates into many new products
B) research that costs the firms relatively little money
C) research that cannot be easily copied by other firms
D) all of these
E) none of these
1.31) Patents represent
A) the protection given to new products by the law.
B) how R&D spending translates into new ideas.
C) the extent to which firms benefit from the results of their own R&D spending.
D) the rate of technological progress.
