NELSON MANDELA METROPOLITAN UNIVERSITY

SUMMERSTRAND CAMPUS (SOUTH) / VISTA CAMPUS / GEORGE CAMPUS

EC102 / ECS102 / PFEE 222 / INTRODUCTION TO MACROECONOMICS
SEMESTER TEST 1
2 SEPTEMBER 2011

TIME: 1 HOUR MARKS: 60

SPECIAL INSTRUCTIONS

1. Answer all questions.

2. Non-programmable calculators may be used.

3. Answer Section A on the multiple choice answer sheet provided by using a

dark HB pencil to colour-in the correct alternative.

4. Answer Section B in the exam book provided.

5. All graphs / diagrams must be fully labelled. Marks will be deducted for
missing labels.
SECTION A: MULTIPLE CHOICE QUESTIONS

1. If national saving (S) is R100,000, net taxes (T) amount to R100,000 and
government purchases of goods and services (G) are R25,000, how much
are households and businesses saving?

A) R25,000.
B) R225,000.
C) -R25,000.
D) None of the above

2. Choose the best statement.

A) GDP equals aggregate expenditure and equals aggregate income.

B) An increase in government purchases increases aggregate expenditure but
does not change GDP.
C) An increase in compensation of employees increases aggregate income but
does not change GDP.
D) GDP always equals aggregate expenditure and sometimes equals aggregate
income.

3. GDP using the expenditure approach equals the sum of personal consumption
expenditures plus

A) gross private investment.

B) gross private investment plus government expenditure on goods and
services.
C) gross private investment plus government expenditure on goods and services
minus imports of goods and services.
D) gross private investment plus government expenditure on goods and services
plus net exports of goods and services.

4. The income approach to measuring GDP sums together

A) compensation of employees, rental income, corporate profits, net interest,

proprietors’ income, subsidies paid by the government, indirect taxes paid,
and depreciation.
B) compensation of employees, rental income, corporate profits, net interest,
proprietors’ income, indirect taxes paid, and depreciation and subtracts
subsidies paid by the government.
C) the sales of each firm in the economy.
D) the costs of each firm in the economy and then subtracts indirect business
taxes and depreciation.

5. Two reasons why valuing goods at their market prices is different than
valuing them at their factor costs include

A) depreciation and investment.

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B) exports and imports.
C) personal taxes and corporate taxes.
D) indirect taxes and subsidies.

6. The old, traditional base-year method of calculating real GDP compared

A) the quantities of goods produced in consecutive years using prices in both

years and averaging the percentage changes in the value of output.
B) quantities produced in different years using prices from a year chosen as a
reference period.
C) quantities produced in different years with the prices that prevailed during the
year in which the output was produced.
D) prices at different points in time using a sample of goods that is
representative of goods purchased by households.

7. Which of the following relationships is correct?

A) Nominal GDP = (GDP Deflator/Real GDP) × 100

B) Real GDP = (Nominal GDP × GDP Deflator)/100
C) GDP Deflator = (Nominal GDP/Real GDP) × 100
D) Real GDP = Nominal GDP × 100

Table 1: GDP values of a fictitious economy

Year Nominal GDP Real GDP GDP deflator
(billions of (billions of
Rands) Rands)

2004 2500 ________ 105

2005 ________ 2400 117

8. Using the data in Table 1 above, what is the value of real GDP in 2004?

A) R2137 billion
B) R2520 billion
C) R2381 billion
D) R2051 billion

9. The labour force is the sum of the

A) working-age population and the number of unemployed people.

B) number of employed people and the working-age population.
C) number of employed people and the number of unemployed people.
D) total population and the number of unemployed people.

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10. Suppose the country of Tiny Town experienced frictional unemployment. This
frictional unemployment would

A) definitely signal that the country is in a recession.

B) be considered a natural occurrence in a growing economy.
C) signal that there are more job leavers than job losers.
D) signal that the number of discouraged workers is growing.

11. When the automobile replaced horse-drawn carriages as the principal means
of transportation, firms producing horse-drawn carriages went bankrupt and
permanently laid off all their workers, thereby increasing

A) frictional unemployment.
B) structural unemployment.
C) frictional and cyclical unemployment.
D) cyclical unemployment.

12. When the unemployment rate is below the natural unemployment rate,

A) real GDP is greater than potential GDP.

B) real GDP is less than potential GDP.
C) real GDP equals potential GDP.
D) None of the above is possible because it is impossible for the unemployment
rate to be less than the natural rate.

13. The consumer price index (CPI)

A) compares the cost of the typical basket of goods consumed in period 1 to the
cost of a basket of goods typically consumed in period 2.
B) compares the cost in the current period to the cost in a reference base period
of a basket of goods typically consumed in the base period.
C) measures the increase in the prices of the goods included in GDP.
D) is the ratio of the average price of a typical basket of goods to the cost of
producing those goods.

14. Substitution bias in the CPI refers to the fact that the CPI

A) takes into account the substitution of goods by consumers when relative

prices change.
B) takes no account of the substitution of goods by consumers when relative
prices change.
C) substitutes quality changes whenever they occur without taking account of
the cost of the quality changes.
D) substitutes relative prices for absolute prices of goods.

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15. The classical dichotomy can best be defined as the

A) idea of a self-regulating economy.

B) separation of real and nominal variables.
C) belief that the government must help the economy grow.
D) separation of the government and the rest of the economy.

16. The production possibilities frontier for leisure and real GDP is bowed
________ because of ________ opportunity cost as people give up more
leisure time in order to produce more GDP.

A) outward; decreasing
B) outward; increasing
C) inward; constant
D) inward; increasing

17. The production function relating real GDP to labour hours

A) has a constant slope.

B) has a negative slope.
C) has a positive slope and becomes steeper as employment increases.
D) has a positive slope and becomes less steep as employment increases.

18. Which of the following is TRUE regarding the labour market?

I) The labour supply curve slopes upward because firms maximize

profits as they hire more workers.
II) If the real wage rate falls, the quantity of labour firms demand
increases.
III) The demand for labour curve slopes downward because as the real
wage rate falls, workers demand to work fewer hours.

A) I and II
B) I and III
C) II only
D) I, II and III

19. Which of the following statements about job search is correct?

A) At the equilibrium wage rate, there is still some job search.

B) Job search is not affected by the presence of efficiency wages.
C) The extent of job search does not change because everyone needs a job.
D) Why people search for jobs is difficult to explain in the South Africa.

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20. Loanable funds originate from

I) private saving by households.

II) borrowing by international investors.
III) government budget surpluses.

A) I only.
B) I and III only.
C) I and II only.
D) I, II, and III.

[20 x 2 = 40]

SECTION B: LONG QUESTIONS

1. The table below shows the transactions in Dreamland’s economy during the
course of 2010:

Item Amount
(Millions of Rands)
Wages paid 100
Consumption expenditure 120
Taxes 40
Transfer payments 15
Profits 35
Investment 30
Government expenditure 50
Exports 30
Imports 40

1.1 Calculate Dreamland’s GDP. (2)

1.2 What approach did you use to make this calculation? (2)

1.3 What is the country’s level of national saving? (2)

1.4 How is Dreamland’s investment financed? (2)

1.5 On the basis of these 2010 figures, would you regard Dreamland as a ‘net
importing’ or ‘net exporting’ economy? Explain why? (2)

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2. Use the following information, and answer all the questions below:

Real GDP 2005 = R258 369 million

Real GDP 2004 = R247 875 million
Real GDP 2000 (base year) = R212 121 million
Total Population 2004 = 42 million

2.1 Calculate the economic growth rate of this country for 2005. (2)

2.2 Assuming that this country’s population growth rate and 2005 economic
growth rate are maintained, calculate the approximate number of years it
will take for real GDP to double. (2)

2.3 Calculate this country’s GDP per capita for 2004. (2)

3. List the FOUR benefits of paying an ‘efficiency wage’? (4)

[20]

GRAND TOTAL [60]

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 MEMORANDUM: SEMESTER TEST 1 – 2 SEPTEMBER 2011

SECTION A: MULTIPLE CHOICE

Question Answer

1 A
2 A
3 D
4 B
5 D
6 B
7 C
8 C
9 C
10 B
11 B
12 A
13 B
14 B
15 B
16 B
17 D
18 C
19 A
20 D

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SECTION B: LONG QUESTIONS

1. The table below shows the transactions in Dreamland’s economy during the
course of 2010:

Item Amount
(Millions of Rands)
Wages paid 100
Consumption expenditure 120
Taxes 40
Transfer payments 15
Profits 35
Investment 30
Government expenditure 50
Exports 30
Imports 40

1.1 Calculate Dreamland’s GDP. (2)

GDP = C + I + G + (X – M) = R120 + R30 + R50 + (R30 – R40) = R190 million. √√

1.2 What approach did you use to make this calculation? (2)

The expenditure approach √ is used, which measures GDP as the sum of total expenditure
that took place in 2010. √

1.3 What is the country’s level of national saving? (2)

The country’s national saving is the sum of household saving and government saving.
Household saving is GDP minus net taxes – consumption.
Net taxes equal taxes minus transfer payments: R40 – R15 = R25 million.
So household saving is R190 – R25 – R120 = R45. √
Government saving equals net taxes minus government purchases: R25 – R50 = -R25.
Thus, national saving is R45 + (-R25) = R20. √

1.4 How is Dreamland’s investment financed? (2)

Investment is financed according to I = S + (T – G) + (M – X). √ Because Dreamland’s
government saving (T – G) is negative, its investment is financed by household saving, S,
and borrowing from the rest of the world, (M – X): R30 = R45 + (-R25) + R10. √

1.5 On the basis of these 2010 figures, would you regard Dreamland as a ‘net
importing’ or ‘net exporting’ economy? Explain why? (2)
Net importing economy. √ (X < M) √

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2. Use the following information, and answer all the questions below.
Real GDP 2005 = R258 369 million
Real GDP 2004 = R247 875 million
Real GDP 2000 (base year) = R212 121 million
Total Population 2004 = 42 million

2.1 Calculate the economic growth rate of this country for 2005. (2)

2.2 Assuming that this country’s population growth rate and 2005 economic
growth rate are maintained, calculate the approximate number of years it will
take for real GDP to double. (2)

Rule of 70 = 70 / 4.23% = 16,55 years or 16-and-a-half years. √√

2.3 Calculate this country’s GDP per capita for 2004. (2)

3. List the FOUR benefits of paying an ‘efficiency wage’? (4)

 The benefit of a higher wage is indirect:

 it enables a firm to attract high-productivity workers, √
 it stimulates greater work effort √
 It lowers the quit rate so that the firm experiences lower labour turnover and
labour training costs √
 It lowers recruiting costs because the firm always faces a steady stream of
available new workers. √

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