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Which of the following policy options would simultaneously increase interest rates and decrease output in an economy? (3)
a) The central bank sells bonds through open market operations
b) The central bank buys bonds through open market operations
c) The government increases purchases of defence equipment
d) The government increases the personal income tax rate
e) The country’s exports fall and imports rise
Explain your choice:
Why is the Paradox of Thrift named that way? When is it applicable and what are its effects in certain economic situations? (3)
Consider the following data: (4)
Annual Price of Goods in a Consumer’s Basket
Year Grubs Snars Jems Pols
2000 $2 $1.50 $2.10 $1
2001 $3 $2.50 $2.10 $1.75
2002 $4 $4.90 $2.12 $2.00

a) If the bundle of goods that is purchased by a typical consumer in any given year is 5 Grubs, 10 Snars, 3 Jems and 2 Pols and 2000 is the base or reference year, what is the rate of inflation between 2000 and 2002?
b) For the same bundle of goods, if 2000 is the base year, what is the Consumer Price Index (CPI) in 2001?
Show and describe all work. Indicate what you are doing in each step – not just numbers please.

Which of the following would cause the short-run Phillips curve to shift to the right? (3)
a) A decrease in the price of oil
b) An increase in the price of oil
c) An increase in consumption spending
d) An increase in net exports
e) An increase in the cost of borrowing for investment
Explain your choice and show why this happens including the effect on AD/SRAS by means of diagrams and words:
Suppose the United States has no exports. The only imports of the US are 400 Mercedes Benz cars worth US$50,000 each from Germany. Germany has no imports and only exports those 400 cars to the US. Neither the US nor Germany trade with any

other countries or engage in any transactions with other countries. Which one of the following statements must be true? (3)
a) The US has a capital account deficit
b) Germany has a current account deficit
c) Germans are buying US assets
d) The exchange rate of USD per Euro must be > 1
e) None of the above
Explain your choice in detail:
What would be the value of US-Germany trade?

Explain the savings = investment identity in terms of where and how investors get to borrow the funds that need for their projects. Start right at the beginning and indicate the flow of funds from households to investors. Use a diagram if needed. Who is the middleman or facilitator in all this? (6)
Why was the multiplier so crucial to Keynes in The General Theory in terms of explaining how nations spend their way out of recessions? Explain carefully and completely. If R.F. Kahn had not invented the multiplier and Keynes had not used it, would The General Theory have had the same impact? Why or why not? Explain. (8)
An investor is looking at building a factory to make gizmos. He estimates that it would cost $150,000 to build this factory from scratch. He reckons that his returns from the sale of gizmos would be $20,000 at the end of year 1, 35,000 in year 2, 40,000 in year 3, 60,000 in year 4 and 75,000 in year 5. The bank currently offers an interest rate of 8% on loans. The investor does his calculations and goes to present his proposal to the bank manager. Would the bank manager approve the loan? Why? Calculate the investor’s exact MEC? Make sure to show every step in the calculations to get full marks. Round off to whole numbers. (4)
The table below shows data about the country of Costa Erica in 2011
Total Population 30 million
Population 15 years old and younger 5 million
Working age population:
Working at least 1 hour per week 20 million
Not working and seeking work 1 million
Not working and not seeking work 4 million

a) What is the LFPR of Costa Erica?
b) What is the unemployment rate in Costa Erica?
c) Suppose the nation’s economy improves in 2012, and now 1 million citizens, who were not looking for work in 2011, now begin to look for jobs in 2012. How will this affect the LFPR and the unemployment rate in 2012?
Show all working to get marks. (6)

Syldavia is experiencing a severe recession. The government steps in and pumps money into the economy. This is phase one. At the end of phase one, the leader of Syldavia realizes that the pump-priming done by his finance minister was not enough to bring the economy around and so instructs the central bank governor to conduct expansionary monetary policy in phase 2 immediately. Select a tool that the central bank may use to do this and explain how it would work. Then show both effects on the same diagram, clearly indicating which is phase 1 and which is phase 2.
If at the end of phase 1, and during phase 2, the wage rate falls in Syldavia, show on a separate diagram what the economy would look like at the end of phase 2. The question

calls for two diagrams. Anything more or less than this will result in zero marks. Explain what is happening in phase 1, phase 2a and phase 2b clearly. (4)

Consider the following Balance of Payments data for Borduria. (all in $ billion)

Import of Services 25 Export of Goods 55
Inward Remittances 10 Returns to Foreigners for their holding of Financial Assets 15
Export of Services X Foreigners’ purchase of domestic property 5
Import of Goods 45 Returns to Domestic Holders of Foreign Financial Assets 10
Domestic purchases of Foreign Property 3 Domestic purchases of Foreign Financial Assets 14
Foreign Purchases of Domestic Financial Assets 8 Statistical Discrepancy 0
Net Addition/Subtraction of Foreign Reserves Y
Current Account Balance 10

Using the data above, carefully calculate X and Y, showing all steps in the calculations of X and Y. (4)

Which of the following assets is the LEAST liquid? (2)
A) a $50 bill
B) a $50 Amazon.com gift certificate
C) 100 shares of Microsoft stock
D) an economics textbook
Explain your choice in detail:

Sample Solution

11th Century Scotland was deemed a very much patriarchal society. There was a clear concept of hierarchy in society, which Shakespeare demonstrates at different points within the play. The witches have been said to represent women’s attempt to gain power in a society that’s set up to give power only to men. In Jacobean society, women would have been towards the bottom of the Chain of Being and certainly below men. Similarly to Lady Macbeth in act 1 scene 5, the Witches endeavour to make appear increasingly manly in an attempt to acquire more power. Shakespeare gives the characters of the witches beards (You should be women, yet your beards forbid me to interpret that you are so’) to symbolise this desire. Macbeth’s hallucinations, or visions present the impact of the supernatural. One example of a hallucination is when Macbeth asks, ‘Is this a dagger which I see before me’. The fact that Macbeth is seeing a floating dagger, in his mind is another demonstration of the supernatural. Here, the supernatural is essentially pressing Macbeth to murder Duncan. Shakespeare could be purposefully highlighting how evil the supernatural is as it is not only telling him to kill – but commit the act of regicide, which in the 11th Century, was possibly the worst crime anyone could commit, along with communicating with the supernatural. During Macbeth’s soliloquy he questions if the dagger is just ‘a dagger of the mind’ or a ‘false creation’. This causes Macbeth to question his own psychological state and whether the dagger is just a hallucination, caused the pressure of Duncan’s homicide and the pressure placed on him by his manipulative and cunning wife, Lady Macbeth. The audience at the time will have been shocked by this as Jacobean society saw king’s as almost holy since they respected the divine right of kings. Furthermore, here, Shakespeare is displaying the power that the supernatural has over events in the play since Macbeth has been driven to insanity by a supernatural prophecy.>

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