+ECS2602-Macroeconomics

Exam paper questions

What institution issues treasury bills?

The treasury
How to calculate the multiplier. Formula & calculations

Calculate autonomous spending. Formula & calculations.

The formula is C = A + MD. That is to say, C (consumer spending) equals A (autonomous
consumption) added to the product of M (marginal propensity to consume) and D (true
disposable income).

Calculate equilibrium level output and income. Formula & calculation

Calculate the income gap between the current level of output and income and the full
employment level of output and income. Formula & calculation.

Government spending can be used to reach full employment in the goods market. By how
much should the government spending change? Show your calculations and indicate the
direction of the change in government spending.
Taxes can be used to reach full employment in the goods market. By how much should
taxes change? Show calculations and indicate the direction of the changes in taxes.

Use the goods market model (axes below) to present the above economy graphically.
Clearly indicate the following on the diagram

The multiplier effect in the economy results from the behaviour of households. Briefly explain
why.
The multiplier effect refers to the increase in final income arising from any new injection
of spending. ... Marginal propensities show the proportion of extra income allocated to
particular activities, such as investment spending by UK firms, saving by households,
and spending on imports from abroad.

Taxes are part of autonomous spending in the goods market model. Briefly explain why a
decrease in taxes increase the demand for goods and shifts the demand for goods curve
upwards in the goods market, equal to c(T) and not T.

Explain briefly in words why the net effect of an equal increase in government spending and
taxes (in other words, the balanced budget) will still have a stimulatory effect on the level of
output and income.

Identify the three factors that impact on the nominal wage in the wage-setting relationship.
Any factor, other than the unemployment rate, that increases the bargaining power of
workers will cause the wage-setting relationship to change. Expected price level, institutional
factorsuu

Briefly explain why it is possible for labour to increase the real wage through nominal wage
bargaining

List the components of the “domestic demand for goods”. Give an example which would lead
to an increase in the domestic demand for goods
The determinants of C, I and G are the same factors that were explained in learning units 2
and 4. Consumption (C) is a function of disposable income (YD); investment (I) is a function
of the level of output and income (Y) and the real interest rate (r); and government spending
(G) is regarded as exogenous.
Use the following diagram to illustrate and explain in words why an explain in words why an
expansionary monetary policy causes a decrease in the interest rate in the financial market

Define a government budget deficit

A budget deficit is an indicator of financial health in which expenditures exceed revenue.
The term budget deficit is most commonly used to refer to government spending rather
than business or individual spending, but can be applied to all of these entities.

Which stabilisation policy can be used to reduce a budget deficit?

A contractionary fiscal policy entails a decrease in the demand for goods in the economy by
decreasing government spending and/or increasing taxes. A result of such a policy is that
the budget deficit decreases.

Uses the IS-LM model and chain of events (or words) to illustrate and explain how negative
impact of a budget deficit reduction on the level or output and income can be counteracted
by monetary policy. Clearly indicate the variables measured on the axes below.

Define a depreciation of the nominal exchange rate.

The nominal exchange rate E is defined as the number of units of the domestic
currency that can purchase a unit of a given foreign currency. ... (Under the fixed
exchange rate regime, a downward adjustment of the rate E is termed revaluation.) An
increase in this variable is termed nominal depreciation of the currency.

Use the following two diagrams (given the initial equilibrium level Y1) to show graphically
((illustrate) the impact of the following two events on the level of output and income and on
the trade balance
(i) An increase in the “domestic demand for goods” Diagram A
(ii) An increase in the “demand for domestic goods” in Diagram B
Compare the impact on the level of output and income and on the trade balance
Use the following diagram to show graphically (illustrate) and to explain the impact of
depreciation of the R/$ exchange rate of the level of output and income and on the trade
balance.
By using the following diagram to illustrate on the diagram and briefly explain in words why a
decrease in the level of output and income causes a decrease in equilibrium interest rate.

Study the following diagram which represents an IS-LM model for an open economy and
answer the questions that follow:
 - What cause the shift of the LM curve in the above diagram? Clearly indicate the
change in the direction of the factor
- Use the above diagram to explain the possible impact of the shift of the LM curve on
the (i) interest rate, (ii) the financial account of the balance of payments, (iii) the
exchange rate, (iv) the trade balance and (v) the level of output and income

Study the AS-AD model below and answer the questions that follow

- List one factor that will shift the AD curve to AD1. Clearly indicate the change in the
direction of the factor.
- Identify the short run and the medium to long run equilibrium positions in the above
diagram..
- Study the movement from point a to point b. The change in three variables are
summarised in the table below. Explain the reason for the change in these variable
 - Study the movement from point b to point c. The changes in three variables are
summarised in the table below. Explain the reason for the change in these variables

By using the two diagrams below show the difference between a decrease in investment
spending and a decrease in the marginal propensity to consume on the equilibrium output
and income level in the goods market model.
Use an IS-LM model to illustrate on the diagrams below and to compare the impact of a
contractionary fiscal policy with that of an expansionary monetary policy.

Use the following IS-LM model for an open economy to explain the possible impact of a
decrease in government spending on the goods market, the financial market, the exchange
rate and the trade balance
You can use a chain of events or words to explain the impact
Use the following diagram to answer questions a, b and c

a) What is the value of the natural rate of unemployment?

b) Define the natural rate of unemployment
c) Show graphically on diagram A below what would happen to the natural rate of
unemployment if the bargaining power workers is eroded by labour legislation
ii) Show graphically on diagram B below what would happen to the natural rate of
unemployment if firms were forced by anti-monopolistic legislation to decrease their mark-up
List one factor that will shift the AD curve rightwards in the AS-AD model. Clearly indicate
the change in the direction of the factor.

List one factor that will shit the AS curve upwards in the AS-AD model. Clearly indicate the
change in the direction of the factor

Study the following diagram. At point a (the short run) the actual price level is lower than the
expected price level. Explain the adjustment process from the short run (point a) to the
medium run (label the medium run point c on the diagram). Clearly indicate on the diagram
the shift of and/or movement along the curve(s) to reach the medium run

Explanation of the adjustment to the medium run.

Use the following two goods market models to illustrate the difference between the impact of
an increase of 200 in government spending (Diagram A) and the impact of a simultaneous
increase of 200 in government spending and an increase of 200 in taxes (Diagram B) on the
level of output and income
Label all axes and curves and clearly indicate the following on both diagrams
- Autonomous spending values
- The values of the equilibrium level of output and income
- The size and direction of the change in government spending, taxes and the level of
output and income

Use a demand for money curve to illustrate the effect of

a) An increase of the interest rate in Diagram A on the quantity of money demanded
b) A decrease of the level of output and income in Diagram B on the demand for money
 a) During periods of low economic growth, the output and income levels decline in the
economy. It is also possible to move into a recession, in other words a decrease in
real GDP for two or more consecutive periods (where a period is three months)

Use the following IS-LM model to illustrate graphically and explain by using chain of events
how a combination of fiscal and monetary policies can be used to counteract the negative
impact on the economy of low growth to increase the output and income level and to reach
the full-employment level. Clearly indicate the full-employment level on the diagram.

b) Explain by using a chain of events what the impact of the combination of monetary
and fiscal policies needed to reach the full employment level of output and income
will be on the equilibrium interest rate
Using the following diagrams, indicate what happens to the level of output and income and
the trade balance if
(i) Exports increase
(ii) Government spending increases
(iii) Compare the results in (i) and (ii) above regarding the level of output and income
and the trade balance.
Clearly indicate the shifts of and/or movements along the curves on the diagrams

Explanation

Draw a diagram of the IS-LM model for an open economy in the space below to indicate
what will happen to the nominal exchange rate if a contractionary monetary policy is applied.
Explain the impact of this policy on the financial market, the goods market, the exchange
rate and the balance by using chain of events and/or words.
Explanation

Use the following AS-AD model to answer the question below

Assuming that the rightward shift of the AD curve from AD to AD1 is caused by an increase
in government spending. Explain the impact of this action on the goods market, the financial
market and the labour market in the medium to long run (the movement from point b to c)

Which of the following statements with regards to the consumption function C = c0 + cYD
are correct?
a) A change in the marginal propensity to consume will result in a change in
consumption
b) A change in income will change in the marginal propensity to consume
c) A change in consumption will cause a change in disposable income
 d) c0 and c are exogenous variables in the consumption function
e) YD is the endogenous variable in the consumption function.
i. Only a, d and e
ii. Only b, d and e
iii. Only a, b d and e
iv. Only a and d
v. A, b, c, d and e

The following question is based on the following information regarding a goods market
model for a closed economy with a government sector

The multiplier is equal to ______ and the equilibrium level of output and income is equal to
_____
1. 6 5640
2. 25 2500
3. 4 3840
4. 6 5400
5. 25 2350

The impact on the equilibrium interest rate of an increase in income with simultaneous
expansionary open market operations by the central bank is
1. A lower equilibrium interest rate
2. A higher equilibrium interest rate
3. Uncertain (the equilibrium interest rate can be higher, lower or the same)

The following questions based on the following diagram

Which of the following statements is/are correct?

 a) If the central bank wishes to increase the interest rate in the economy it sells bonds
on the open market and the Ms curve shifts to the left
b) If the central bank wishes to increase the interest rate in the economy it buys bonds
on the open market and the Ms curve shifts to the left
c) The demand for money function (or Md curve) will shift because of changes in the
interest rate and there will be a movement along the curve because of changes in
income
d) The demand for money function (or Md curve) will shift because of changes in
income and there will be a movement along the curve because of changes in the
interest rate
i. A and c
ii. A and d
iii. B and c
iv. B and d
v. Only a

If the financial market is in a liquidity trap

a) Monetary policy is ineffective in bringing about a decrease in the interest rate
b) Financial money market participants are willing to hold less money at the same
interest rate
c) A decrease in the interest rate can be brought about by buying of bonds by the
central bank
d) There is a high demand for bonds
i. Only a
ii. Only c
iii. A and c
iv. A, b and d
v. B, c and d

Which of the following statements is/are correct?

a) To derive the IS curve, we change the level of output and income to determine the
effect on the interest rate
b) To derive the IS curve, we change the interest rate to determine the effect on the
demand for goods
c) To derive the LM curve, we change the level of output and income to determine the
effect on the interest rate
d) To derive the AD curve, we change the price level to determine the effect of the level
of output and income
i. Only a
ii. Only c
iii. A and c
iv. A, b and d
v. B, c and d

The following question is based on the following diagram

Which one of the following statements is correct?
1. Goods market equilibrium exists on at point a and b
2. At point c the level of autonomous spending is lower than at point a
3. At point c the level of autonomous spending is the same as at point a
4. At point a the demand for goods is lower than at point b

Which one of the following statements is INCORRECT?

1. The steepness of the IS curve depends on the interest sensitivity of investment
spending and the output and income sensitivity of investment spending
2. The size of the multiplier and the income sensitivity of the demand for money are
factors that will have an impact on the effectiveness of fiscal policy
3. A relatively more inelastic IS curve indicates a greater interest sensitivity of
investment spending.
4. “Crowding out” of investment spending will occur if the output and income sensitivity
of investment spending is high

The following question is based on the LM curve is this diagram

Which of the following statement s is/are correct?

a) At point a the demand for money is higher than at point b
b) At point c the money supply is higher than at point a
c) At point a, point b and point c the financial market is in equilibrium
i. A, b and c
 ii. Only a
iii. Only b
iv. Only c
v. Only a and c

Which one of the following policy actions in the IS-LM model is appropriate if the objectives
are to decrease the budget deficit and decrease the interest rate?
1. An expansionary fiscal policy and an expansionary monetary policy
2. An expansionary fiscal policy and a contractionary monetary policy
3. A contractionary fiscal policy and a expansionary monetary policy
4. An expansionary fiscal policy and a contractionary fiscal policy
5. It is not possible to achieve the policy objectives

Which one of the following statements is correct?

The exogenous variable in the IS-LM model are
1. Government spending and invest spending
2. Investment spending and money supply
3. Interest rate and government spending
4. Government spending and money supply
5. Level of output and income and the interest rate

From the perspective of South Africa, an increase (appreciation) in the nominal exchange
rate will cause the following to happen
1. The Rand becomes less expensive to foreigners
2. Foreign goods are more expensive to South Africans
3. Foreign currency is more expensive to South Africans
4. South African goods are more expensive to foreigners
5. Imports are more expensive

Given the following information

- Interest rate of RSA bonds 6%
- Interest rate on USA bonds 9%
Which one of the following statements is correct?
1. If is expected that the R/$ exchange will be unchanged in a year’s time, financial
market participants will be indifferent between RSA and USA bonds
2. If the expected appreciation of the rand is 2% in a year’s time, investment in RSA
bonds are more attractive and financial market participants will buy RSA bonds
3. If the expected appreciation of the rand is 4% in a year’s time in a year’s time,
investment in RSA bonds are more attractive and financial market participants will
buy RSA bonds
4. If the expected depreciation of the rand is 3% in a year’s time, investment in RSA
bonds are more attractive and financial market participants will buy RSA bonds
In an open economy the impact of an increase in the interest rate on the demand for goods
and the level of output and income in the goods market can be illustrated by the following
chain of events

The following question is based on the following information. Country ABC is facing a
recession and an unacceptable budget deficit. To deal with the budget deficit taxes are
raised and to deal with the recession the money supply is increased
Which of the following statements is/are correct?
a) The IS curve will shift to the right and the LM curve will shift downwards
b) The IS curve will shift to the left and the LM curve will shift downwards
c) The results of these policy actions are that the interest rate increases, a capital inflow
occurs, the domestic currency appreciates and the trade balance worsens
d) The results of these policy actions are that the interest rate declines, a capital outflow
occurs, the domestic currency depreciates and the trade balance improves
i. A and d
ii. B and d
iii. A and c
iv. B and c
v. Only b

Which of the following statements is/are correct?

According to the price-setting relation a(n)
a) Decrease in the unemployment rate, will increase nominal wage demands
b) Decrease in the markup of firms, given the nominal wage, will decrease the price per
unit
c) Decrease in the nominal wage, given the markup of firms, will increase the price per
unit
d) Increase in the unemployment rate, will decrease nominal wage demands
i. A, b and c
ii. A, b and d
iii. Only b and d
iv. Only a
v. Only b

Which of the following statements is/are correct?

The natural rate of unemployment
a) Increase if there is an increase in the bargaining position of workers
b) Increase if there is a decrease in the markup
 c) Decreases if there is an improvement in the protection of workers through labour
legislation
d) Increases if the unemployment rate increases
i. A and d
ii. B, c and d
iii. Only c and d
iv. Only a
v. Only b

The following question is based on the following diagram

Which one of the following statements is incorrect?

1. At point c the actual price level is lower than expected price level
2. At point b the output level is higher than the natural level of output
3. At point b the real wage is the higher compared to point a
4. As the level of output increases the price level rises
5. The AS curve will shift upwards when the expected price level increases

The chain of events represent the

1. IS relation in the open economy
2. Effect of a monetary expansion in the AS-AD model
3. Derivation of the AD curve
4. Effect of an expansionary fiscal policy in the AS-AD model
5. LM relation in the open economy

The neutrality of money refers to the impact of a ______________ policy which means that
only ___________ variables changes in the AS-AD model in the medium to long run
1. Contractionary monetary nominal
2. Contractionary monetary real
3. Expansionary monetary nominal
4. Expansionary monetary real
5. Expansionary fiscal nominal
Which of the following statements is/are correct?
A) The GDP is the total value of all final and intermediate goods and services produced
within the boundaries of a country during a particular period
B) An increase in nominal GDP will always lead to an increase in real GDP
C) Given a population growth rate of 3% per annum in South Africa, a real economic
growth rate of between 2% and 3% is needed for the real GDP per capita to increase
D) The so-called “jobless growth” refers to a situation where employment stays the
same or even declines during periods of positive economic growth
a. A, b, c, and d
b. Only a, b, and c
c. Only b and c
d. Only a and d
e. Only d

Study the diagram and answer the following question

The net effect of the budget balance on the level of output and income is
1. Equal to 0 (zero)
2. An increase of 1 000
3. An increase of 200
4. An increase of 100
5. A decrease of 40

Contractionary monetary policy involves the

1. Selling of bonds by the central bank on the open market to increase the supply of
money and the interest rate will decrease
 2. Selling of bonds by the central bank on the open market to decrease the supply of
money and the interest rate will increase
3. Buying of bonds by the central bank on the open market to decrease the supply of
money and the interest rate will increase
4. Buying of bonds by the central bank on the open market to increase the supply of
money and the interest rate will decrease.

The impact on the equilibrium interest rate of an increase in income with simultaneous
expansionary open market operations by the central bank is
1. A lower equilibrium interest rate
2. A higher equilibrium rate
3. Uncertain (the equilibrium interest rate can be higher, lower or the same)

An upward movement along the IS curve is the result of a(n)

1. Increase in investment spending
2. Increase in government spending
3. Improvement in consumer confidence in the economy
4. Increase in the interest rate
5. Decrease in taxation

Study the following LM curve and answer the following:

Which of the following statements is/are correct?

a) At point a the demand for money is higher than at point b
b) At point c the money supply is higher than at point a
c) At point a, point b and point c the financial market is in equilibrium
i. A, b, c
ii. Only a
iii. Only b
iv. Only c
v. Only a and c
Comparing the impact in the IS-LM model for a closed economy of an expansionary
monetary policy with an expansionary fiscal policy on investment spending the result is that
1. In both cases investment spending definitely increases
2. In the case of fiscal policy investment spending is indeterminate and in the case of
monetary policy invest spending is higher
3. In both cases investment spending is indeterminate
4. In both cases investment spending is definitely lower
5. In the case of fiscal policy investment spending is higher and in the case of monetary
policy investment spending is lower

Which one of the following combinations are endogenous variables in the IS-LM model?
1. Y0 part of the consumption function and the marginal propensity to consume (c)
2. Autonomous investment spending (I) and government spending (G)
3. The supply of money (M*) and taxation (T)
4. The part of investment (I) that is dependent on income and the interest rate as well
as the part of the demand for money (M0) that is determined by the interest rate and
the level of output and income.

Given the following

- Interest rate on RSA bonds 7%
- Interest rate on USA bonds 3%
Which one of the following statements is correct?
1. If the expected depreciation of the rand is more than 4% financial market participants
will buy RSA bonds
2. If the expected depreciation of the rand is more than 4% financial market participants
will buy USA bonds
3. If the expected depreciation of the rand is 5% financial market participants will be
indifferent between RSA and USA bonds
4. If the expected appreciation of the rand is 5% financial market participants will buy
USA bonds

An increase in the real exchange rate implies that

a) South African goods are relatively cheaper than the goods produced in the rest of the
world
b) SA goods area relatively more expensive than the goods produced in the rest of the
world
c) Exports will increase
d) Exports will decrease
i. A and c
ii. B and c
iii. A and d
iv. B and d
v. Only d

Which of the following statements are correct?

Imports are a function of the
a) Level of domestic output and income
b) Level of output and income of the trading partners
c) Real wage
d) Real exchange rate
i. A, c, and d
ii. B, c, and d
iii. Only a and d
iv. Only b and d
v. Only a and c

Which one of the following statements is correct?

The impact of a decrease in domestic demand on the trade balance, for instance through a
decrease in government spending, can be presented by the following chain of events

In the IS-LM model for an open economy fiscal contraction implies that the
a) IS curve will shift to the left and the interest rate decreases
b) IS curve will shift to the right and the interest rate increases
c) Nominal exchange rate decrease and a depreciation of the domestic currency takes
place
d) Nominal exchange rate increases and an appreciation of the domestic currency takes
place
i. A and d
ii. B and d
iii. A and c
iv. B and c

Comparing the impact of a contractionary monetary policy with an expansionary fiscal policy
in the IS-LM model for an open economy on the exchange rate and trade deficit the results
are that
1. In both cases the exchange rate appreciates and the trade deficit decreases
2. In both cases the exchange rate appreciates while the trade deficit for fiscal policy
increase and for monetary policy it decreases
3. For fiscal policy the exchange rate depreciates and the trade deficit increases while
for monetary policy the exchange rate appreciates and the trade deficit decreases
4. For fiscal policy the exchange rate appreciates and the trade deficit decreases while
for monetary policy the exchange rate depreciates and the trade deficit increases
5. In both cases the exchange rate appreciates and the trade deficit increases

Which factor will NOT increase the bargaining position of workers?

 1. Better labour laws and regulations to protect the workers
2. Better unemployment benefits
3. Positive labour market conditions
4. Lower unemployment rate
5. An increase in the level of output and income

Which of the following statements are correct?

a) The bargained real wage at the natural rate of unemployment is 0 96

b) At point a the bargained real wage is higher than the implied (or feasible) real wage
c) The implied real wage is lower than the bargained real wage at point c
d) The natural rate of unemployment will decrease if the bargaining power of workers
were eroded by labour legislation
e) An increase in the markup of firms will shift he PS curve upward
i. A and c
ii. A and d
iii. B, c and e
iv. Only b and d
v. B, d and e

In the determination of nominal wages (W) in the labour market

1. A change in institutional factors will have influence on nominal wage demands
2. A decrease in the expected price level, will increase nominal wage demands
3. Better unemployment benefits will decrease nominal wage demands

According to the price-setting relation which one of the following will increase the price per
unit?
1. An increase in the unemployment rate
2. An increase in the markup of firms
3. An increase in the expected price level
4. An increase in the output and income level
An upward shift of the aggregate supply curve (AS curve) can be presented by the chain of
events as follows

Which of the following statements are correct?

a) To derive the IS curve the interest rate changes in the goods market
b) To derive the LM curve the demand for money changes to give a picture of what
happens in the financial market
c) The AD curve gives a picture of what happens in the goods market, the financial
market and the labour market when the price level changes
d) The AS relation captures the effects of output and income on the price level and is
derived from the wage-setting relation and price-setting relation in the labour market
i. A, b, c, and d
ii. Only a and b
iii. Only a, c and d
iv. Only a, b and d
v. Only a and d

Microeconomics studies _________ while macroeconomics studies _______

1. businesses; people.
2. what is happening in the economy currently; what happened in the past.
3. the performance of the private sector; the performance of the government.
4. the overall price level; price determination in a single industry
5. individual decision makers; the economy's overall performance.

Which of the following statements is/are correct?

a. Real GDP is the most used measure of how much output was produced in a country
during a specific year.
b. Real GDP is the most commonly used indicator of the level of total economic activity that
took place in a country during a specific year.
c. If the population increases at a faster rate than the real GDP, the real per capita GDP will
increase.
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

Which of the following variable are endogenous 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.

The difference between expenditure on the gross domestic product and gross domestic
expenditure (GDE) is that …
1. expenditure on the gross domestic product includes both imports and exports, while GDE
includes exports and excludes imports.
2. expenditure on the gross domestic product includes exports and excludes imports, while
GDE includes both imports and exports.
3. expenditure on the gross domestic product includes exports and excludes imports, while
GDE includes imports and excludes exports.
4. expenditure on the gross domestic product includes imports and excludes exports, while
GDE includes exports and excludes imports.

In South Africa, grants such as the Old Age Pension and the Child Support Grant are
termed:
1. Transfer payments and they are a part of government’s final consumption expenditure.
2. Transfer payments and they are excluded from government’s final consumption
expenditure.
3. Donations and they are a part of government’s final consumption expenditure.
4. Donations and they are excluded from government’s final consumption expenditure.

The biggest contributor to gross fixed capital formation in South Africa is:
1. General government
2. The foreign sector
3. Private business enterprises
4. Public corporations
The demand for goods is influenced by the following factors:

a. The behaviour of households.

b. Government spending and taxes.
c. The variables that influence investment spending.

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

A decrease in income will cause a decrease in …

a. autonomous consumption.
b. induced consumption.
c. disposable income.

1. a, b and c
2. Only a and b
3. Only a and c
4. Only b and c
5. Only c

Which of the following is true in terms of consumption 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

Which of the following statements is/are correct?

a. A change in the marginal propensity to consume will cause a change in consumption

spending.
b. If the marginal propensity to consume increases, consumption spending will increase.
c. If the marginal propensity to consume decreases, savings will increase.
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

The following is based on the following diagrams. Consider the consumption functions of
country A and country B

Which of the following statements is/are correct?

a. The consumption function for country A is: C = 2 000 + 0.7Y D.

b. The consumption function for country B is: C = 1 000 + 0.9Y D.
c. In country A autonomous consumption is higher than in country B.
d. In country B induced consumption is definitely higher than in country A if the level of
disposable income is R5 000.
e. If the level of disposable income is R5 000 in both countries then consumption
spending in country B is higher.

1. a, b, c, d and e
2. Only a, b, c and d
3. Only b, c, d and e
4. Only a, b, d and e
5. Only a, b and c

To counter the impact of a decrease in consumer confidence and investor confidence on

the level of output and income, the government can …

a. increase government spending and decrease taxes which is represented by an

upward shift of the demand for goods curve and via the multiplier effect the level of
output and income increases.
b. decrease government spending and increase taxes which is represented by a
downward shift of the demand for goods curve and via the multiplier effect the level of
output and income increases.
c. use an expansionary fiscal policy.
d. use a contractionary fiscal policy.

1. b and c
2. a and b
3. c and d
4. a and c
5. b and d

Based on the following goods market model:

In the goods market model a decrease in taxes will result in …

a. a downward shift of the ZZ curve.

b. an increase in autonomous consumption.
c. an increase in disposable income.
d. an increase in the level of output and income.
e. a decrease in induced consumption.

1. a, b, c and d
2. Only a, b and d
3. b, c and e
4. Only a, c and d
5. Only c and d

Based on the following goods market model:

Which of the following are correct in terms of the goods market model?

a. G↑ → Z↑ → Y↑ → YD↑ → C↑
b. I↑ → Z↑ → Y↑ → YD↑ → C↑
c. T↓ → Z↑ → Y↑ → YD↑ → C↑
d. c0↑ → Z↑ → Y↑ → YD↑ → C↑
e. The ZZ curve will shift upwards if autonomous investment spending increases.

1. a, b, c, d and e
2. Only a, b and c
3. Only a, b, d and e
4. Only b, c and d
5. Only a, c and d

Based on the following goods market model:

Which of the following are correct in terms of the goods market model?

a. Autonomous consumption is represented by c0 + Ī + G – cT.

b. Induced consumption is presented by cYD.
c. The demand for goods determines the amount of goods that producers produce and
they will only change their output (production) if the demand for goods changes.
d. Equilibrium is presented by Y = c0 + c(Y−T) + Ī + G or Y = 1/1–c(c0 + Ī + G – cT).

1. a, b, c and d
2. Only a, b and d
3. Only b, c and d
4. Only a, b and c
5. Only a, c and d

Which of the following statements is/are correct?

a. Spending by households, private firms and government on residential and non-

residential capital goods is termed gross capital formation.
b. Financial investment does not directly create production capacity and is therefore not
included in our analysis.
c. In the goods market model an increase in investment leads to an increase in savings.
1. a, b and c
2. Only a and b
3. Only a and c
4. Only b and c
5. Only a

Given the following information, answer questions 17 and 18 that follow:

Autonomous consumption = R100 million
Investment spending = R300 million
Government spending = R200 million
Taxes = R60 million
Marginal propensity to consume = ¾ (0.75)
Full-employment level of output and income = R2 460 million

The equilibrium level of output and income is ...

1. R138.75 million
2. R2 640 million
3. R2 220 million
4. R416.25 million
5. R2 580 million

Which of the following will ensure that full-employment will be reached?

a. An increase in government spending of R60 million.

b. A decrease in taxes of R80 million.
c. An increase in government spending of R30 million and a decrease in taxes of R40
million.
1. a, b and c
2. Only a and b
3. Only b and c
4. Only a and c
5. Not a, b or c

Based on the following data for the country PORTHOS for 2017
Marginal propensity to consume = 0.5
Autonomous consumption = R600 million
Investment spending = R40 million
Government spending = R280 million
Taxes = R300 million
Which of the following statements are correct?
a. The value of the multiplier is equal to 2.
b. The budget surplus is R20 million.
c. The equilibrium level of output and income is R1 540 million.
d. Total consumption is R1 220 million.
1. Only a, b and c
2. Only a, b and d
3. Only b, c and d
4. Only a, c and d
5. a, b, c and d

Based on the following data for the country PORTHOS for 2017
Marginal propensity to consume = 0.5
Autonomous consumption = R600 million
Investment spending = R40 million
Government spending = R280 million
Taxes = R300 million
An economist, Dr Alfred Khumalo, calculated that the gap between the current level of
output and income and the full employment level of income is R110 million.

Which of the following will ensure that the equilibrium level of output and income is equal
to the full employment level of output and income?

a. An increase in government spending of R80 million which will result in a budget deficit
of R10 million.
b. A decrease in taxation of R160 million which will result in a budget deficit of R90
million.
c. An increase in government spending of R40 million and a decrease in taxation of R80
million which will result in a budget deficit of R50 million.
1. Only a
2. Only b
3. Only c
4. a and b
5. None of the options 1 to 4

Based on the following data for the country PORTHOS for 2017
Marginal propensity to consume = 0.5
Autonomous consumption = R600 million
Investment spending = R40 million
Government spending = R280 million
Taxes = R300 million
The President of the country Mr Cold Water is not interested in full employment. He is
only interested in winning the general elections during the current fiscal year and
decided to cut taxes by R150 million.
By how much will the level of output and income increase if taxes are cut by R150
million?

1. R150 million.
2. R300 million.
3. R75 million.
4. R50 million.

Based on the following data for the country PORTHOS for 2017
Marginal propensity to consume = 0.5
Autonomous consumption = R600 million
Investment spending = R40 million
Government spending = R280 million
Taxes = R300 million
Which of the following statements is/are correct referring to the balanced budget?

a. A balanced budget is one where the change in government spending alone will lead to
a change in the level of output and income.
b. Assume that c = 0.8. The government increases its spending by 200 and taxes
increase also by 200, then the increase in the level of output and income will be 400 due
to the increase in government spending and the decrease in the level of output and
income will be 200 due to the increase in taxes. The net effect is an increase of 200 in
the level of output and income.
c. Assume that c = 0.6. The government increases its spending by 300 and taxes
increase also by 300, then the increase in the level of output and income will be 750 due
to the increase in government spending and the decrease in the level of output and
income will be 450 due to the increase in taxes. The net effect is an increase of 300 in
the level of output and income.
d. The net effect of a balanced budget, in other words where ↑G = ↑T will be expansive.
e. The balanced budget multiplier is equal to one; that is for every 1 unit increase in
government spending which is matched by a simultaneous 1 unit increase in taxes,
output and income increase by 1 unit.

1. a, b, c, d and e
2. Only a, b, c and e
3. Only b, c, d and e
4. Only b, c and d
5. Not option 1, 2, 3 or 4

Based on the following data for the country PORTHOS for 2017
Marginal propensity to consume = 0.5
Autonomous consumption = R600 million
Investment spending = R40 million
Government spending = R280 million
Taxes = R300 million

Based on the following data for the country PORTHOS for 2017
Marginal propensity to consume = 0.5
Autonomous consumption = R600 million
Investment spending = R40 million
Government spending = R280 million
Taxes = R300 million
If government spending and taxes increase by the same amount (R500 million), the
effect on the ZZ curve will be:

1. The ZZ curve will not shift.

2. The ZZ curve will shift upwards.
3. The ZZ curve will swivel downwards.
4. The ZZ curve will shift downwards.
5. The ZZ curve will swivel upwards.

The following is based on the following diagram. Assume that G and T increase by R100
Which of the following statements is/are correct?

a. The multiplier is 4.
b. If government spending increases by R100, the equilibrium level of output and income
will be R1 500 and the Z curve will shift to Z1.
c. If taxes then increase by R100, cT will be R80, the equilibrium level of output and
income will be R1 100 and it will be represented by point a in the above diagram.
d. The above diagram and questions imply the working of the balanced budget multiplier.
e. Although there is an increase of R100 in taxes, there will still be an expansionary net
effect of R500 on the equilibrium level of output and income.

1. a, b, c and e
2. b, c, d and e
3. Only a, c and e
4. Only b and d
5. Not option 1, 2, 3 or 4

Which of the following are exogenous variables in the financial market?

1. The interest rate.

2. Real money supply and the total demand for money.
3. Interest rate, the demand for money and the nominal money supply.
4. Nominal money supply and the part of the demand for money that is influenced by
expectations, business confidence, and political and social factors.

A ________ relationship exists between the demand for money (M d) and the interest
rate, an increase in the interest rate will cause a _______ .

1. negative; downward movement along the Md curve

2. negative; upward movement along the Md curve
3. positive; upward movement along the Md curve
4. positive; downward movement along the Md curve
An increase in income will cause:

1. The demand for money to increase and the M d curve will shift to the right.
2. The demand for money will decrease and the M d curve will shift to the left.
3. The demand for money will increase and there will be an upward movement along the
Md curve.
4. The demand for money will decrease and there will be a downward movement along
the Md curve

Exogenously determined money supply implies that …

1. as the interest rate increases the money supply will also increase.
2. the supply of money is determined by the demand for money and the interest rate.
3. money supply is determined by the central bank.
4. money demand is determined by the central bank.
5. the money supply curve is perfectly elastic.

Based on the following diagram which represents changes in the supply of money. The
horizontal axis represents millions of rand

Which of the following statements are correct?

At the initial interest rate of 10% …

a. An increase in the supply of money from M S to MS1 results in a surplus of money of

R50 million.
b. An increase in the supply of money from M S to MS1 results in a shortage of money of
R50 million.
c. A decrease in the supply of money from M S to MS2 results in a surplus of money of
R50 million.
d. A decrease in the supply of money from M S to MS2 results in a shortage of money of
R50 million.
1. Only a and d
2. Only b and d
3. Only a and c
4. Only b and c

Based on the following diagram which represents changes in the supply of money. The
horizontal axis represents millions of rand

A shift from MS to MS2 represents the impact of an …

1. expansionary monetary policy where the central bank buys treasury bills on the open
market and consequently the interest rate increases.
2. expansionary monetary policy where the central bank sells treasury bills on the open
market and consequently the interest rate increases.
3. contractionary monetary policy where the central bank sells treasury bills on the open
market and consequently the interest rate increases.
4. contractionary monetary policy where the central bank buys treasury bills on the open
market and consequently the interest rate increases.

Assuming that the face value of a treasury bill is R150 000, the price paid for the bill is
R138 000 and the date to maturity is one year, the rate of return is …

1. 7.14% and it will decrease if the price paid for the treasury bill decreases to
R135 000.
2. 7.14% and it will increase if the price paid for the treasury bill decreases to R135 000.
3. 8.70% and it will decrease if the price paid for the treasury bill increases to R145 000.
4. 8.70% and it will increase if the price paid for the treasury bill increases to R145 000.

Assuming that the face value of the treasury bill is R250 000 and the date to maturity is
one year. Which of the following statements is/are correct?
(The rate of return is rounded off to one decimal point.)
a. If the price paid for the treasury bill is R245 000 the rate of return is 2.0%.
b. If the price paid for the treasury bill is R243 000 the rate of return is 2.9%.
c. If the price paid for the treasury bill is R242 750 the rate of return is 3.0%.
d. If the price paid for the treasury bill is R210 000 the rate of return is 19.0%.

1. Only a, b and c
2. Only a, b and d
3. Only b, c and d
4. Only a, c and d
5. a, b, c and d

Which of the following statements is/are correct?

a. An increase in income shifts the demand for money curve to the right.
b. An increase in the interest rate is represented by an upward movement along the
demand for money curve.
c. The money supply is determined by the central bank and is represented by a
horizontal line, because it is not a function of the interest rate.

1. a, b and c
2. Only a and c
3. Only a and b
4. Only b and c
5. Only a

If the financial market is in a liquidity trap it implies that …

a. the return on holding bonds is extremely high.

b. there is a high demand for money.
c. there is a high demand for bonds.
d. the return on holding bonds is extremely low.

1. a, b and d
2. Only c
3. Only a and c
4. Only b and d
5. Only b

A decrease in income with simultaneous contractionary open market operations by the

central bank shifts the …

1. demand for money curve to the left and the money supply curve to the left.
The equilibrium interest rate is indeterminate.
2. demand for money curve to the right and the money supply curve to the left.
The equilibrium interest rate is higher.
3. demand for money curve to the left and the money supply curve to the right.
The equilibrium interest rate is indeterminate.
4. demand for money curve to the right and the money supply curve to the left.
The equilibrium interest rate is lower.

Which of the following are fully exogenous variables in the IS-LM model?

1. Level of output, interest rate, investment, consumption spending.

2. Government spending, taxation, money supply, marginal propensity to consume.
3. Interest rate, demand for money, supply of money.
4. Consumption spending, investment, government spending.

Which of the following statements are correct?

In the IS-LM model:

a. Investment is influenced only by the interest rate.

b. Investment is influenced by exogenous factors such as expectations, business
confidence and regulations.
c. Investment is influenced by the interest rate and the level of output and income.
d. Investment is negatively related to the interest rate and the level of output and
income.
e. Investment is negatively related to the interest rate and positively related to the level
of output and income.

1. a and b
2. b, c and e
3. b, c and d
4. a and e
5. Only c and e

Which of the following statements is/are correct?

a. To derive the IS curve, we change the interest rate to determine the effect on the level
of output and income.
b. To derive the IS curve, we change the level of output and income to determine the
effect on the interest rate.
c. The IS curve represents combinations of output and income levels and interest rates
where the financial market is in equilibrium, given that all autonomous variables are
unchanged.
d. The IS curve represents combinations of output and income levels and interest rates
where the goods and financial markets are in equilibrium, given that all autonomous
variables are unchanged.
1. Not a, b, c or d
2. Only a
3. Only b
4. Only c
5. a and d

Which of the following statement(s) is/are correct?

a. A shift of the IS curve occurs when the interest rate changes.
b. A change in investment spending due to a change in autonomous investment is
represented by a movement along the IS curve.
c. A change in investment spending due to a change in the interest rate is represented
by a movement along the IS curve.

1. Not a, b or c
2. Only a
3. Only b
4. Only c
5. a and b

Question based on the following diagram

Which of the following statements are correct?

a. Goods market equilibrium exists only at points a and b.

b. At point c the level of autonomous spending is higher than at point a.
c. At point a the interest rate is higher than at point b, therefore investment spending will
be lower at point a compared to point b.
d. At point a the demand for goods is lower than at point b.

1. a, b, c and d
2. Only a, c and d
3. Only b, c and d
4. Only c and d
5. Only b and c

In deriving the LM curve, we assume that an increase in income in the financial market
…

1. shifts the Ms curve to the right causing the interest rate to increase.
2. shifts the Ms curve to the left causing the interest rate to decrease.
3. shifts the Md curve to the right causing the interest rate to increase.
4. shifts the Md curve to the left causing the interest rate to increase.
Following question is based on the following diagram

A movement from point a to point b on the LM curve implies that ...

1. the money supply in the economy decreases causing the interest rate to increase.
2. an increase in the level of output and income increases the money supply and the
interest rate decreases.
3. an increase in the level of output and income increases the demand for money and
the interest rate increases.
4. an increase in the interest rate decreases investment spending in the economy.
5. the money supply in the economy increases causing the level of output and income to
increase.

An expansionary fiscal policy, for example an increase in government spending, will …

a. shift the IS curve to the right.

b. have an impact on the financial market first and then on the goods market.
c. increase the level of output and income and therefore the supply of money will be
higher.
d. definitely increase investment spending.
e. decrease the interest rate, which will lead to an increase in investment spending.

1. a, b and c
2. d and e
3. a and d
4. Only b and c
5. Only a

An increase in the nominal money supply …

a. refers to a contractionary monetary policy.

b. will have an impact on the financial market first and then on the goods market.
c. will lead to a decrease in the interest rate because the demand for money increases.
d. results in investment spending definitely increasing.
e. leads to an increase in the level of output and income (Y). This increase in Y will
increase investment spending and consumption spending through the multiplier process.

1. a, b, d and e
2. b, c, d and e
3. Only b, d and e
4. Only b and d
5. Only c

Which of the following statements are correct?

a. If the marginal propensity to consume changes from 0.5 to 0.8 the size of the
multiplier will increase and the greater the impact of a given change in government
spending (G) on the level of output and income (Y) will be.
b. The greater the interest sensitivity of investment spending and the greater the output
and income sensitivity of investment spending, the more effective an increase in
government spending will be in increasing the level of output and income.
c. The steepness of the IS curve depends on the interest sensitivity of investment
spending and the output and income sensitivity of investment spending.
d. If a small change in the interest rate leads to a great impact on investment spending it
means that investment spending is very sensitive to a change in the interest rate.
Consequently this greater impact on investment spending will have a greater impact on
output and income and the IS curve will be flatter.

1. a, b, c and d
2. Only a, b and c
3. Only c and d
4. Only a, c and d
5. Only a and d

When comparing a contractionary fiscal policy with an expansionary monetary policy in the IS-
LM model the results regarding the interest rate and investment spending are as follows:
Answer 1
In the IS-LM model, which one of the following policy actions will cause a decline in the
budget deficit without a corresponding decline in the level of output and income given
that the relative shifts of the IS curve and the LM curve are the same?

1. A contractionary fiscal policy and an expansionary monetary policy.

2. An expansionary fiscal policy and an expansionary monetary policy.
3. A contractionary fiscal policy and a contractionary monetary policy.
4. An expansionary fiscal policy and a contractionary monetary policy.

Comparing the impact of an increase in government spending in the goods market

model with the impact of an increase in government spending in the IS-LM model:

a. In both models the level of output and income will increase.

b. In both models consumption spending will be higher.
c. The interest rate will be unchanged in the goods market model and lower in the IS-LM
model.
d. Investment spending will be unchanged in the goods market model but definitely
higher in the IS-LM model.
1. a, b and c
2. b, c and d
3. a, b and d
4. Only a and b
5. None of the options 1 to 4

Which of the following statements are correct?

a. Diagram A illustrates an expansionary fiscal policy and an expansionary monetary

policy.
b. Diagram B illustrates a contractionary fiscal policy and a contractionary monetary
policy.
c. Diagram A illustrates a contractionary fiscal policy and a contractionary monetary
policy. For example, an increase in taxation combined with a decrease in the money
supply.
d. A contractionary fiscal policy for example a decrease in government spending
combined with an expansionary monetary policy e.g. an increase in the money supply is
illustrated in Diagram B.
e. Refer to diagram B. The possible reason for the shift of the IS curve to the left is a
decrease in government spending and for the downward shift of the LM curve is an
increase in the demand for money.

1. Only c and d
2. b, c and d
3. a, b, d and e
4. c, d and e
5. Only b and c

Which of the following refers to a depreciation of the rand?

a. R1 = $0.30 to R1 = $0.25
b. R1 = $0.25 to R1 = $0.30
c. R1 = $0.50 to R1 = $0.55
d. $1 = R8 to $1 = R7
e. $1 = R7 to $1 = R8
1. a and c
2. Only b and c
3. a and e
4. b, c and d
5. b and e

An increase in the nominal exchange rate between RSA and the USA implies that …

1. more rands must be paid for a dollar, leading to higher imports and possibly a trade
deficit.
2. fewer rands must be paid for a dollar, leading to lower imports and possibly a trade
surplus.
3. fewer rands must be paid for a dollar, leading to lower exports and possibly a trade
deficit.
4. more rands must be paid for a dollar, leading to lower exports and possibly a trade
surplus.
An increase in the real exchange rate implies that …

a. SA goods are now relatively cheaper than the goods produced in the rest of the world.
b. SA goods are now relatively more expensive than the goods produced in the rest of
the world.
c. exports will increase.
d. exports will decrease.

1. a and c
2. b and c
3. a and d
4. b and d
5. Only d

Which of the following statements are correct regarding the current account of the South
African balance of payments?

a. The money spent by tourists who visit South Africa is included in service receipts.
b. A trade balance deficit indicates that exports exceeded imports.
c. Income receipts refer to income earned by South African residents in the rest of the
world, while income payments refer to income earned by non-residents in South Africa.
d. To calculate the trade balance net gold exports is included.
e. The rand value of net gold exports is included in the merchandise exports figure.

1. a, b and d
2. a, c and d
3. b and c
4. Only a and d
5. b and e

A trade balance deficit indicates that …

1. government spending exceeds tax revenue.

2. merchandise exports exceed merchandise imports.
3. tax revenue exceeds government spending.
4. imports of services exceed exports of services.
5. merchandise imports exceed merchandise exports.

Given the following information:

Interest rate on RSA bonds: 12%
Interest rate on USA bonds: 8%

Which one of the following statements is correct?

1. If the expected depreciation of the rand is 5% financial market participants will be

indifferent between RSA and USA bonds.
2. If the expected appreciation of the rand is 5% financial market participants will buy
USA bonds.
3. If the expected depreciation of the rand is 5% financial market participants will buy
USA bonds.
4. If the expected depreciation of the rand is 5% financial market participants will buy
RSA bonds.

The ____________________ condition implies that if an investor’s only concern is the

expected rate of return when choosing to invest in either domestic or foreign financial
investment, he/she would consider the difference in the interest rate and the
_________________________.

1. multilateral parity; expected changes in the exchange rate

2. interest rate relation; expected economic growth
3. multilateral interest parity; expected changes in the exchange rate
4. interest parity; expected changes in the exchange rate
5. interest parity; expected economic growth

Which of the following statements are correct?

a. The “domestic demand for goods” and the “demand for domestic goods” are the
same.
b. Part of domestic demand falls on foreign/imported goods.
c. Foreign demand for domestic goods is also known as exports.
d. Domestic demand for foreign goods is also known as imports.

1. a, b, c and d
2. Only a, b and c
3. Only b and d
4. Only c and d
5. Only b, c and d

Regarding the determinants of exports, which of the following are correct?

a. Y↓ → X↓
b. Y*↓ → X↓
c. Y*↑ → X↓
d. ε↑ → X↑
e. ε↑ → X↓

1. a and e
2. a and d
3. b and e
4. b and d
5. c and e

Following is based on the following diagram

Which of the following statements are correct?

a. At an income level of R320 million, imports exceed exports.

b. At an income level of R80 million a trade deficit occurs.
c. A trade surplus occurs at an income level of R80 million because imports exceed
exports.
d. Point b is the trade balance point because exports equal imports.
e. At an income level higher than the income level of R200 million, a trade deficit occurs
because imports exceed exports.

1. a, b, d and e
2. b, c and d
3. Only d and e
4. a, c and d
5. Only a, d and e

Which of the following statements are correct?

a. The goods market is in equilibrium when domestic output is equal to the demand for
domestic goods.
b. The goods market is in equilibrium when domestic output is equal to the domestic
demand for goods.
c. Equilibrium output is associated with a trade deficit only.
d. Equilibrium output is associated with a trade surplus only.
e. Equilibrium output can be associated with a trade deficit or a trade surplus.

1. a and c
2. b and c
3. a and d
4. b and d
5. a and e

Following question is based on the following diagram

At any income level lower than R80 million a trade surplus occurs because if …

1. Y↑ → IM↑ → NX↓
2. Y↓ → IM↓ → NX↓
3. Y↑ → X↑ → NX↓
4. Y↓ → X↑ → NX↑
5. Y↓ → IM↓ → NX↑

Give the equilibrium level of output and income position in the following diagram, what
happens to the level of output and income and the trade balance if government spending
decreases?

1. The level of output and income decreases and the trade deficit decreases as imports
decrease.
2. The level of output and income decreases and the trade deficit decreases as exports
decrease.
3. The level of output and income increases and the trade deficit increases as imports
increase.
4. The level of output and income decreases and trade balance is reached as imports
increase.

A decrease in domestic demand, for instance through a decrease in government

spending, can be presented by the following chain event:

1. G↑ → Z↑ → Y↑ → IM↑ → NX↓
2. G↓ → Z↓ → Y↓ → IM↓ → NX↓
3. G↓ → Z↓ → Y↓ → IM↓ → NX↑
4. G↓ → Z↓ → Y↓ → X↓ → NX↑
5. G↓ → Z↓ → Y↓ → X↑ → NX↓

An increase in the demand for domestic goods takes place if …

1. imports increase.
2. exports increase.
3. investment spending declines.
4. consumption spending declines.
5. government spending declines.

An increase in exports …

1. increases the demand for foreign goods.

2. increases the demand for domestic goods.
3. increases domestic expenditure.
4. is recorded on the financial account of the balance of payments.
5. gives rise to a trade deficit if the initial equilibrium position is a trade balance.

Which of the following factors will shift the NX curve to the left?

a. A decrease in imports.
b. A decrease in exports.
c. A decrease in government spending.
d. An increase in domestic demand for foreign goods.
e. A decrease in foreign demand for domestic goods.
1. a, b, c and d
2. b, c and e
3. Only a, c and d
4. Only b and e
5. Only d
Given the goods market equilibrium in the following diagram, what would the likely
impact of a depreciation of the domestic currency be?

1. The domestic level of output and income will increase and there will be a trade deficit.
2. The domestic level of output and income will decrease and there will be a trade
surplus.
3. The domestic level of output and income will decrease and there will be a trade deficit.
4. The domestic level of output and income will be unchanged and there will be a trade
surplus.
5. The domestic level of output and income will increase and there will be a trade
surplus.

The following question is based on the following diagram

The above diagram illustrates the following chain of events:

1. G↑ → Z↑ → Y↑ → IM↑ → NX↓
2. G↓ → Z↓ → Y↓ → IM↓ → NX↑
3. X↑ → Z↑ → Y↑ → IM↑→ NX↑
4. X↓ → Z↑ → Y↓ → IM↓ → NX↓
5. Y↑ → G↑ → Z↑ → Y↑ → IM↑ → NX↓

For the Marshall-Lerner condition to hold a(n) …

1. depreciation must eventually lead to an increase in exports and an improvement in the

trade balance.
2. appreciation must eventually lead to an increase in exports and an improvement in the
trade balance.
3. depreciation must eventually lead to an increase in imports and deterioration in the
trade balance.
4. appreciation must eventually lead to an increase in imports and an improvement in the
trade balance.

The following is based on the following:

Compare the impact on the level of output and the trade balance of an increase in
foreign demand with that of an increase in domestic demand.
Hint: Complete the following diagram and then answer the question.

Which of the following statements are correct?

a. An increase in foreign demand and an increase in domestic demand will shift the
demand curve ZZ1 upwards and the level of output and income increases in both
instances.
b. An increase in foreign demand will shift the NX curve to the right while an increase in
domestic demand will cause a downward movement along the NX curve.
c. An increase in foreign demand will shift the NX curve to the right while an increase in
domestic demand will cause an upward movement along the NX curve.
d. In the case of an increase in foreign demand the trade balance will improve and in the
case of an increase in domestic demand the trade balance worsens.
e. In the case of an increase in foreign demand a trade surplus occurs and in the case of
an increase in domestic demand a trade deficit occurs.

1. a, b, c, d and e
2. Only b, c and d
3. Only b, d and e
4. Only a, b, d and e
5. Only b and e