8011613

- ECONOMICS FOR BUSINESS

MACROECONOMICS
Master of Science in Business Administration
University of Rome Tor Vergata

Mock Exam

Please, answer the following questions. Write your answers directly on the sheets you
received from the instructor. You can achieve a total of 30 points. There are 16
multiple-choice questions, followed by 2 exercises. Multiple-choice questions weight
for 16 points (1 point each), while exercises weight 14 point (7 points each). Multiple
choices are valued “1” if correct, “0” if unanswered and “-0.33” if wrong. As a
suggestion, we warmly recommend you to read all of the questions first. There is a
blank page attached at the end of the quiz to be used for scratch paper.

For quick and accurate evaluation of your exam, please do not forget to complete the
info below.

Good Luck!

NAME: _________________________________________

MIT ID NUMBER: _________________________________________

EMAIL: _________________________________________

Multiple-Choice Questions (16/30 points)

Please, circle the correct answer for each of the following 14 multiple-choice questions. For each
question, only one of the answers is correct. Each question counts 1 point.

1) Consider two economies that are identical, with the exception that one has a high marginal propensity to consume
(MPC) and one has a low MPC. If the money supply is increased by the same amount in each economy, the high MPC
economy will experience
A) A larger increase in output and a smaller decrease in the interest rate.
B) A smaller increase in output and a smaller decrease in the interest rate.
C) A larger increase in output and a larger decrease in the interest rate.
D) A smaller increase in output and a larger decrease in the interest rate.
E) None of the above.

Answer: A). There is a flatter IS curve in the high MPC economy.

2) Which of the following policy options would simultaneously increase interest rates and decrease output?
A) The Central Bank sells bonds through open market operations.
B) The Government increases its defence purchases.
C) The Central Bank expands the money supply.
D) The Government increases the tax rate.
E) Actions described in both A) and D).

Answer A). Selling bonds reduces the money supply in the economy. The lower money supply results in a higher interest
rate and lower output level (i.e., an upward shift in the LM curve); investment unambiguously declines. Option C
always increases investment, while options B and D have uncertain implications for investment.

3) The current government contract signed by the 5 star Movement and Lega Nord program is supposed to run a
government budget deficit. Assume that C = c0 + c1(Y-T). Which one of the following will cause this deficit to
become larger?
A) Expansionary monetary policy.
B) An increase in exports.
C) A decrease in equilibrium GDP.
D) A decrease in taxes.
E) A decrease in government purchases.

Answer: D). A government budget deficit means that T-G<0. Therefore, lower taxes will imply lower revenues for the
government and a higher government budget deficit.

5) Assume that C = c0 + c1(Y-T). Suppose that taxes increase and money supply increases in such a way that output is
constant in equilibrium (assume c1<1). These policy changes will produce
A) An increase in investment and a decrease in private consumption.
B) An increase in investment and a decrease in government spending.
C) An increase in investment and an increase in private saving.
D) A decrease in investment and an increase in public saving.
E) Uncertain.

Answer: A). In equilibrium, Y is constant and i decreases (IS moves to the left and LM shifts down). Recall that
investment, given by I(i,Y), depends negatively on the interest rate. So, as the interest rate decreases, investment
increases. Also, we know that: C=c0+ c1(Y-T), and private saving is given by Y-T-C = (1- c1)(Y-T)- c0. Therefore,
because T increases, private consumption and private saving both decrease. (G is constant, T-G increases.) So, B) is
incorrect because government spending is constant; C) is incorrect because private saving decreases; and D) is
incorrect because investment increases and public saving decreases.

6) At the end of 2017, among the top 10 risks to the global economy the Economist Intelligence Unit finds:
A) The ageing process of the world population
B) Prolonged fall in major stock markets
C) Persistence of weak economic growth around the world
D) China suffers a disorderly and prolonged economic downturn
E) Actions described in both B) and D).
Answer: E)

7) According to experts, the great recession has been initiated by:

A) a fall in oil price
B) an unexpected rise in interest rates around the world
C) a global liquidity bubble
D) an increase in public debt in US and EU
E) the causes are uncertain

Answer: C). Read Chapter 2 in Keeley, B. and Love, P. (2010), From Crisis to Recovery. The Cause, Course and
Consequences of the Great Recession, OECD Insights.

8) Is the housing market bubble related to the start of the Great Recession (GR) period?
A) No, the housing market is unrelated with the financial problems created by the GR.
B) Yes, the housing market has been the leading cause that started the GR period
C) Yes, the housing market is responsible of the GR because it contributed to increase the interest rates
D) No, because the housing market has been the only channel that allowed households to preserve their wealth
E) None of the above.

Answer: B). The burst of the housing market bubble has been responsible for the fall in the bank asset value and the
increase in liabilities. As a result, this lead to shutdown the interbank loan market and, therefore, the start of the credit
crunch period. Read Chapter 2 in Keeley, B. and Love, P. (2010), From Crisis to Recovery. The Cause, Course and
Consequences of the Great Recession, OECD Insights.

9) According to experts and and independent research centres, the effects of the Brexit on the UK economy:
A) will be uncertain
B) will be negative in the short term and will turn positive just after 2 year since the close of the procedure
C) will cause huge distributive effects among UK households, with the rich one getting richer
D) will increase the UK trade surplus due to an appreciation of the UK pund
E) None of the above

Answer: E). According to reports presented by several independent research institutes and by the EC the effects of the
Brexit should be negative for the UK economy, with the level of the losses being function of the type of agreement that
UK and EU will sign. Read the “Executive Summary” in Busse, M., Di Salvo, M., Emerson, M., Gros, D. and
Pelkmans, J., An Assessment of the Economic Impact Brexit on the EU27, March 2017.

10) How does a central bank influence economic activity in the short run?
A) by altering tax revenues and government expenditure
B) by setting inflation targets
C) by open-market operations that influence interest rates
D) by increasing household propensity to consume via wealth effects
E) Actions described in both B) and D).

Answer: C). Open market operations determines the amount of monetary base, that for a given demand of money
determines the interest rate of equilibrium. This last variable is what has an effect on the economic activity. Read Jones,
C.I., Monetary Policy and The Phillips Curve, Macroeconomics, pp. 309-346.

11) Why do central banks often exercise monetary policy by targeting an interest rate rather than by setting particular
levels of the money supply?
A) from a policy perspective it is easier to control interest rates
B) due to the deposit multiplier, central bank can control only monetary base not money supply
C) targeting money supply is more appropriate in presence on high inflation
D) in presence of a low inflation rates central banks prefer to control interest rate to stabilize the economies
E) Actions described in both C) and D).

Answer: E). Read Jones, C.I., Monetary Policy and The Phillips Curve, Macroeconomics, pp. 309-346, p. 335.
12) The inflation rate is defined as:
A) the percentage change in GDP
B) the percentage change of the implicit deflator of GDP
C) the percentage change in the real nominal GDP / GDP ratio
D) the rate of growth of nominal GDP
E) Both B) and C) are correct

Answer: B). Read Macroeconomics (7th edition) by Olivier Blanchard, Prentice Hall, 2017. p. 31.

13) Definition of Unemployment rate (UR): which of the following propositions are false?
A) the UR is reduced if the number of employed persons increases
B) the UR is defined by the ratio 1 - N / L
C) the UR is reduced if the number of discouraged workers who leave the labour force increases
D) the UR increases if the number of discouraged workers who leave the labour force increases
E) all previous propositions are correct

Answer: C). Read Macroeconomics (7th edition) by Olivier Blanchard, Prentice Hall, 2017. p. 27-28.

14. Phillips Curve (PC): which of the following propositions is correct?

A) the original PC shows a permanent trade-off between inflation and unemployment
B) if the original PC is valid, the economic policy authorities can always reach the pair ⎨π,u⎬ desired
C) if the original PC holds, the workers suffer from monetary illusion
D) government are happy about the existence of a trade-off between π and u.
E) all previous propositions are correct

Answer: A). Read Macroeconomics (7th edition) by Olivier Blanchard, Prentice Hall, 2017. Chap. 8.

15) What will be the most direct consequence of the introduction of the “Minimum Income scheme” (or Reddito di
cittadinanza) proposed by the 5 Star Movement?
A) will reduce the public deficit because the cost of the policy will be lower than the tax income revenues
B) will boost the economy through the Keynesian multiplier
C) will shift to the right the wage determination equation defined as W=PeF(u,z)
D) will reduce the unemployment rate
E) Actions described in both B) and C).

Answer: A). Read Macroeconomics (7th edition) by Olivier Blanchard, Prentice Hall, 2017. Chap. 8.

16) Why the concept of “output gap” is important for the Italian fiscal policy
A) the output gap determines the level of tax revenues for the government
B) it represents a measure of the cyclical conditions of Italy, thus determining the fiscal effort
C) it is strictly related to the value of the Euro in the exchange rate market, thus affecting the trade balance
D)
E) None of the above

Answer: B). See slide 9 in the PPT presentation by Mr. Cacciotti.

Exercise n.1
Consider the following data which refer to an income-expenditure model with the State. The consumption
function is 𝐶 = 40 + 0,7𝑌𝑑; the level of transfers is equal to 𝑇r = 20; fiscal revenues are expressed by the
function 𝑇=−10+2/7𝑌,

a) Compute the consumption function C = C(Y).

b) Calculate the value of the autonomous-expenditure multiplier.
c) Calculate the change in national product if the autonomous expenditure decreases by Δ𝐴=−40.
d) Show graphically and explain.

Use the space below to present your answer

Exercise n.2
Consider an economy with output equal to its natural level. Using the AS–AD model show and explain the
effects of a reduction in income taxes on the output and the price level in the short run and in the medium
run.

Use the space below to present your answer

THIS SPACE BELOW CAN BE USED FOR TAKING NOTES AND DOING CALCULATIONS TO
ANSWER THE MULTIPLE CHOICE QUESTIONS