ECS2602 -MACROECONOMICS ASSIGNMENT 1 SEMESTER 1 – 2019.

ECS2602 -MACROECONOMICS ASSIGNMENT 1 SEMESTER 1 – 2019. Answer all questions on a mark-reading sheet. 1. Which of the following statements are correct? a. In this module we only study the demand side of the economy, which includes the goods market and the financial market. The labour market forms part of the supply side analysis and is therefore excluded from this module. b. Gross domestic product (GDP) is the total value of all goods and services produced within the boundaries of a country in a particular period. c. If total nominal output increases by 2% during a specific year and the general price level increases by 4% the real GDP will decrease and the nominal GDP will increase. d. The impact of fiscal and monetary policy on the level of output and income is an important topic in this module. e. An expansionary monetary policy entails an increase in the interest rate to bring about a decrease in the money supply in order to decrease the demand for goods in the economy. 1. a, b, c and d 2. Only b, d and e 3. Only a, c and d 4. Only c and d 5. Only b, c and d Explanation: Statement b is correct - The GDP is the total value of all final goods and services produced within the boundaries of a country during a particular period (usually one year). Statement c is correct. If the rise in the general price level is more that the rise in nominal production (or output) then the real production (GDP) declines while the nominal production (GDP) increases. Statement d is correct - In this module, the emphasis is mainly on developing your understanding of different models on the determination of output and income (Y) and the impact of fiscal and monetary policy on the level of output and income. 2. Which of the following statements are correct? a. Expansionary monetary policy during a recession is an example of stabilisation policy. b. The main instrument of fiscal policy is the budget, while the main policy variable is the interest rate. c. A contractionary monetary policy implies a decrease in government spending and an increase in taxation. d. An increase is taxes implies the implementation of an expansionary fiscal policy. e. A decrease in the money supply implies the implementation of a contractionary monetary policy. 1. a, b and e 2. b, c, d and e 3. Only a and b 4. a, d and e 5. Only a and e Explanation: Statement a is correct – expansionary monetary policy is a stabilisation policy that can be used during a recession. Statement e is correct - A contractionary monetary policy is a decrease in the nominal money supply in order to cool down economic activity by decreasing the demand for goods. Page 2 of 14 3. Gross domestic expenditure (GDE), which is the total value of spending on final goods and services within the borders of a South Africa … 1. includes imports but excludes exports. 2. excludes exports but includes imports. 3. includes both imports and exports. 4. excludes both imports and exports. Explanation: Gross Domestic Expenditure (GDE), which is the total value of spending within the borders of a country (C + I + G), including imports but excluding exports, since spending on exports takes place outside the borders of the country – Study Guide page 15) 4. Gross domestic product (GDP) … a. is the total value of all goods and services produced within the boundaries of a country in a particular period. b. can be measured in real terms and is therefore a measure of economic growth. c. is also known as output, production and income. d. includes imports and excludes exports. 1. a, b and c 2. b, c and d 3. Only a and b 4. a, c and d 5. Only b and c Explanation The GDP is the total value of all final goods and services produced within the boundaries of a country during a particular period (usually one year). GDP is an official measure of how much output was produced in a country or region during a specified time period. It is also the broadest, best-known and most frequently used measure of economic activity. – study guide page 2 5. An autonomous (or exogenous) variable in our model means that the variable … a. is not influenced by the level of output and income in the economy. b. is determined by exogenous factors such as business confidence, regulations and political influences. c. is influenced by the level of output and income in the economy. d. increases or decreases if income in the economy increases or decreases. 1. Only a 2. Only b 3. Only c 4. Only d 5. a and b Explanation: Study guide page 18 6. Which of the following are endogenous variables in the goods market model? 1. The level of output and income and investment spending. 2. Marginal propensity to consume and the level of output and income. 3. The level of output and income. 4. Investment spending. Page 3 of 14 Explanation: 7. Which of the following is true in terms of consumer spending? a. An increase in the marginal propensity to consume will change the vertical intercept of the consumption function. b. Autonomous consumption decreases if the availability of credit decreases. c. The equilibrium level of output and income will decrease if the marginal propensity to save decreases. 1. a, b and c 2. Only a and b 3. Only a and c 4. Only b and c 5. None of the options 1 to 4 is correct Explanation: Study guide page 16 Question 8 is based on the following diagram: 8. Which of the following statements are correct? a. Induced consumption is equal to 100 if income is 200. b. Autonomous consumption is equal to 100 if income is 200. c. The marginal propensity to consume is equal to 0.15. It means that if the income of households increases by 100, the first round increase in consumer spending will be 15. d. An increase in autonomous consumption will influence the slope of the consumption curve. e. If the marginal propensity to save by households increases, the marginal propensity to consume will be lower. In other words, the slope of the C curve will be flatter. 1. a, c and d 2. b, c, d and e 3. Only b, c and e 4. Only b and e 5. Only a and e Page 4 of 14 Explanation: Statement a refers to autonomous consumption. Statement b is correct. Statement c is correct since 0.15 x R100 million = R15 million. Statement d is incorrect because any change in autonomous consumption will affect the position of the consumption curve and not the slope of the curve. Statement e is correct.