SECTION A: Multiple Choice Questions (30 marks)

Answer all questions on the Answer Sheet provided.  For each question choose ONLY ONE of the options (a-d) provided.  No marks will be deducted for wrong answers.

1.   An economy is initially in long run equilibrium at full employment and at the central bank’s target rate of inflation.  All other things being equal, in response to which of the following shocks is stabilisation policy most likely to return the economy to its   initial equilibrium?

a.   A shift of the LRAS curve to the left

b.   A shift of the LRAS curve to the right

c.   A shift of the AD curve to the left or right

d.   A shift of the SRAS curve to the left or right

2.   An economy is initially in long run equilibrium at full employment and at the central bank’s target rate of inflation.  All other things being equal, in response to which of the following shocks is stabilisation policy likely to be accommodating?

a.   A shift of the AD curve to the left or right

b.   A shift of the SRAS curve to the left or right

c.   A shift of the LRAS curve to the left or right

d.   Both b and c.

3.   An economy is initially in long run equilibrium at full employment and at the central bank’s target rate of inflation.  All other things being equal, in response to which of the following shocks will the economy likely return to the initial equilibrium in the   long run without any intervention by policymakers?

a.   A shift of the LRAS curve to the left

b.   A shift of the LRAS curve to the right

c.   A shift of the AD curve to the left or right

d.   A shift of the SRAS curve to the left or right

4.   When an economy is below potential output in the short run, the SRAS curve shifts ________ because _________

a.   Upwards, firms have an incentive to cut prices

b.   Upwards, firms have an incentive to raise prices

c.    Downwards, firms have an incentive to cut prices

d.   Downwards, firms have an incentive to raise prices

5.   The AD curve is downward sloping because

a.   Inflation increases the real value of net assets

b.   Higher domestic inflation can result in an increase in net exports

c.   The central bank tends to reduce the real interest rate in response to lower inflation

d.   The central bank can shift its policy reaction function in response to inflationary pressure

6.   According to the Taylor Rule, in which of the following situations is a central bank most likely to respond by shifting its policy reaction function downwards?

a.   The economy’s expansionary gap is larger at every possible inflation rate.

b.   The economy’s contractionary gap is larger at every possible inflation rate.

c.   An economy is experiencing a contractionary gap and inflation is above the target rate.

d.   An economy is experiencing an expansionary gap and inflation is below the target rate.

7.   Which of the following government policies is most likely to shift the SRAS curve to the left?

a.   Increased spending on infrastructure

b.   Subsidised education and training programs.

c.   Subsidies for research and development expenses.

d.   An decrease in the amount workers can earn before they must start paying income tax

8.   An investor who is resident in China buys an Australian asset.  This transaction is recorded as a credit on the financial account of Australia’s balance of payments because:

a.   Australia’s foreign liabilities decrease

b.   It is an additional claim on Australia by a non-resident.

c.    It involves a payment by an Australian resident to a non-resident.

d.   It involves the transfer of Australian dollars from a resident to a non-resident.

9.   When an overseas resident exchanges Australian dollars for an equivalent amount of foreign currency, this is recorded as a debit on the financial account of Australia’s      balance of payments because:

a.   Claims by non-residents on Australia increase

b.   Australia’s claims against non-residents decline

c.    Foreign currency is being imported into Australia

d.   Australian dollars are being exported from Australia

10. BHP exports $1 billion of iron ore to China.  This transaction is recorded as a credit on Australia’s current account and as a debit on Australia’s financial account because:

a.   It generates a demand for Australian dollars and both Australian dollars and Chinese Yuan are imported into Australia.

b.   It generates a supply of Australian dollars and both Australian dollars and Chinese Yuan are imported into Australia.

c.    It generates a demand for Australian dollars and both Australian dollars and Chinese Yuan are exported from Australia.

d.   It generates a supply of Australian dollars and both Australian dollars and Chinese Yuan are exported from Australia.

11. A foreign resident working in Australia transfers money back to their home country. Which of the following best describes how this transaction is recorded on Australia’s balance of payments?

a.   Debit on the current account, debit on the financial account

b.   Debit on the current account, credit on the financial account

c.   Credit on the current account, debit on the financial account

d.   Credit on the current account, credit on the financial account

12. When a country fixes its exchange rate below its free trade value, its balance of payments is

a.   positive and its reserve assets increase

b.   positive and its reserve assets decrease

c.   negative and its reserve assets increase

d.   negative and its reserve assets decrease

13. Which of the following best describes how the Reserve Bank of Australia (RBA) implements a change in official interest rates?

a.   The RBA resets the policy interest rate corridor and uses foreign exchange swaps to guide the cash rate to its new target.

b.   The RBA announces a change in the case rate and then uses bond purchases and sales to guide the cash rate to its new target.

c.   The RBA announces a change in the case rate and then resets the policy interest rate corridor around the new target cash rate.

d.   The RBA resets the policy interest rate corridor and uses repurchase agreements (repos) to guide the cash rate to its new target.

14. The Reserve Bank of Australia uses open market operations (OMO) to

a.   Change the cash rate

b.   Keep the cash rate at its target level

c.    Reset the policy interest rate corridor

d.   Change the cash rate and keep it at its target level

15. When the Reserve Bank of Australia (RBA) wishes to reduce the official cash rate by 0.25% it

a.   Reduces both its lending rate and its deposit rate by 0.25%.

b.   Increases both its lending rate and its deposit rate by 0.25%.

c.    Increases its lending rate by 0.25% and reduces its deposit rate by 0.25%.

d.   Reduces its lending rate by 0.25% and increases its deposit rate by 0.25%.

16. When interest rates fall, the prices of existing bonds rise because

a.   Bonds pay a fixed coupon rate.

b.   The coupon rates on existing bonds will fall

c.   The coupon rates on existing bonds will rise

d.   The amount of principal and interest existing bonds will pay at maturity increases.

17. When the Reserve Bank of Australia reduces the official cash rate, the price of 10- year bonds increases because

a.   Borrowing becomes more attractive, and lending less attractive, in the 10- year bond market.

b.   Borrowing becomes less attractive, and lending becomes more attractive, in the 10-year bond market.

c.    Both borrowing and lending become more attractive in the 10-year bond market

d.   Both borrowing and lending become less attractive in the 10-year bond market

18. Which of the following is most likely to increase M3?

a.   A bank issues a new home loan to a client

b.   A consumer makes a repayment on their credit card

c.   A consumer uses their credit card to make a purchase

d.   Both (a) and (c)

19. Which of the following best describes the process of $1 billion of quantitative easing?

a.   The central bank prints $1 billion worth of electronic money.

b.   The central bank pays an insurance company $1 billion to purchase the insurance company’s government bonds.

c.   The central bank gives $1 billion to a commercial bank which then buys $1 billion of government bonds from an insurance company.

d.   The central bank buys $1 billion of government bonds from an insurance company; the insurance company’s bank credits $1 billion into the insurance company’s account; the central bank credits $1 billion reserves to the insurance company’s bank.

20. Which of the following best describes why purchasing power parity may not hold?

a.   Many goods are perfect substitutes.

b.   Many goods and services are traded freely.

c.   Goods and services are traded internationally.

d.   Firms price discriminate between different markets.

21. A country has a production function given by Y = AKa L1 −a .  If this country’s annual GDP growth rate is 2%, a = 0.4, annual capital growth is 4% and the labour force is  growing at 3% per year, what is its annual total factor productivity growth rate?

a.   1.4%

b.   -1.4%

c.   3.2%

d.   -3.2%

22. At a steady state in the Solow-Swan model, which of the following is most correct?

a.   Savings is equal to investment

b.   Savings is equal to replacement investment

c.   Savings per capita is equal to investment per capita

d.   Savings per capita is equal to replacement investment per capita

23. Consider an economy with nominal GDP of $100 billion and money supply M1 of $10 billion.  Use the quantity equation to calculate the velocity of M1 for this economy.

a.   10

b.   0.1

c.    10 billion

d.   0.1 billion

24. All other things being equal, if the Reserve Bank of Australia loosens monetary policy, the Australian dollar will depreciate in value because:

a.   The demand for, and supply of, Australian dollars increases

b.   The demand for, and supply of, Australian dollars decreases

c.   The demand for Australian dollars decreases and the supply of Australian dollars increases.

d.   The demand for Australian dollars increases and the supply of Australian dollars decreases.

25. Assume that the fundamental (i.e. free market) value of the Australian dollar is $US 0.70.  The Reserve Bank of Australia decides to fix the value of the Australian dollar at $US 0.80.  Which of the following is most likely to occur?

a.   An excess supply of Australian dollars and an Australian balance of payments deficit

b.   An excess supply of Australian dollars and an Australian balance of payments surplus

c.   An excess demand for Australian dollars and an Australian balance of payments deficit

d.   An excess demand for Australian dollars and an Australian balance of payments surplus

26. The Reserve Bank of Australia (RBA) is considered to be an independent central bank because

a.   The RBA controls its own budget

b.   Members of the RBA board are appointed for relatively long terms

c.   The RBA is not obliged to finance the Australian government’s budget deficit

d.   All of the above

27. When the RBA reduces interest rates to fight a recession

a.   PAE increases at every level of output and the contractionary gap becomes larger

b.   PAE decreases at every level of output  and the contractionary gap becomes larger

c.    PAE increases at every level of output and the contractionary gap becomes smaller

d.   PAE decreases at every level of output  and the contractionary gap becomes smaller

28. When the RBA increases interest rates to fight inflation

a.   PAE increases at every level of output and the expansionary gap becomes smaller

b.   PAE decreases at every level of output and the expansionary gap becomes smaller

c.    PAE increases at every level of output and the contractionary gap becomes smaller

d.   PAE decreases at every level of output  and the contractionary gap becomes smaller

29. When purchasing power parity holds, a country’s currency will tend to

a.   appreciate if it has higher inflation

b.   appreciate if it has lower inflation

c.   depreciate if it has higher inflation

d.   Both (b) and (c)

30. Which of the following best describes the role banks play in international trade transactions?

a.   Banks insure the goods being exported.

b.   Banks provide the financing for such transactions.

c.    Banks guarantee that sellers are paid for the goods they export.

d.   Banks guarantee that the goods exported are actually delivered.