Macroeconomics Practice Questions and Answers

This article provides practice questions and answers on macroeconomics covering topics such as income method, unemployment, inflation, AS-AD curve, monetary policies, and balance of payments. It also includes examples of different types of transactions and their impact on the economy.

Question 1
a) Income method
= 495 + 1690 + 2670 – 45 + 350
= 5160
b) Expenditure method
= 590 + 195 + 680 + 2995+ 685 – 555
= 4590
c) Gross national expenditure
= 685 + 590 + 195 + 2995
= 4465
d) Net domestic product
= 5160 – 350
= 4810
e) NPD is a better measure than GDP since it only accounts for the real monetary value of
national income
f) Gross national product
= 5160 + 45
= 5205
g) Net national product
= 5205 – 350
= 4855
h) Current account balance
Exports – Imports
680 – 555
= 125
i) Gross national savings
=2670 +1690 + 495 – 590 – 195 – 2995
= 1075

j) Gross national savings with tax
= 1075 – 17
= 1068
k) GDP = 4873
MPC = 0.683
C = 4873 * 0.683
= 3328.3
L) New value of GDP
= 4 -3-3+4
= 2
New value of GDP = 4590 + 2
= 4592
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Question 2
a) Unemployed is defined as a person actively looking for work and is available for work or
someone who is waiting to start a new job. This means that an unemployed person should be
sending out applications or engaging in job interviews. This means that a person who is just
sitting at home after graduation and not looking for work is not qualified to be called
unemployed.
b) Frictional unemployment is inevitable because the economy is always changing with new
trends causing some firms to expand while others shrinking or other regions expanding while
others shrinking. (2 marks)
c)Structural unemployment is caused when there is a technological change in the industry. The
government can assist when they provide its citizens with opportunity to train for the required
skills. It is different from cyclical unemployment since cyclical unemployment happens with the
life cycle of a production of a product eg agricultural products. (4 marks)
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Question 3
a) Demand pull inflation
Y1 Y2
P2
P1

b) Cost push inflation
c) Differences
Demand pull inflation is caused when the aggregate demand increases pushing the prices higher
than they ought to be due to the law of demand. Cost push inflation occurs when the factors of
production become expensive leading to reduction of aggregate supply volumes causing scarcity
which pushes the price upwards.
d) Causes of demand pull inflation
Demand pull inflation can be caused when the money supply is higher than the increase in the
level of output.
Demand pull inflation can also be caused by increase in government spending, increase in
investments or an increase in exports.
Causes of cost push inflation
Cost push inflation can result from wages increasing above the competitive level which increases
cost of production.
It can also result from increase in profit margins by monopolies and oligopolies.
It may also result from an unexpected fall in the supply of necessary consumer goods.
Y2 Y1
P2
P1

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Question 4
a) Difference between the Keynesian and Monetarist views on Inflation
Keynesianism reflects the role of fiscal policy in stabilizing the economy while the monetarist
view argues on the importance of controlling the money supply to support inflation. According
to the Keynesian view it is necessary that the fiscal policy takes control of the market instead of
waiting for the markets to clear. According to the monetarist policy, an expansionary fiscal
policy will more likely cause crowding out of the market. Another difference is that the
Keynesian view argues that there is a trade off between unemployment and inflation while the
monetarist view argues that there is only a trade off between unemployment and inflation in the
short term.
b) Shape of the Aggregate supply curve to the Keynesian – Monetarist controversy
In the monetarist view, the AS curve is a straight line since money supply is constant while in the
Keynesian view, the AS curve is curved since the fiscal policy can stimulate economic growth.
According to the monetarist view, there is wage price flexibility and that supply creates its own
demand, this means that in the long term, there is full employment. For this reason, the AS curve
will be a straight line. On the other hand, Keynes argued that there is wage price rigidity. This is
causes the AS curve to be a curved shape as a result of the forces that lead to the rigidity of
wages and prices.
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Question 5
Using AS – AD curve
Show how, economic activity and price level is affected
a) Destruction in economy capital stock due to earthquake – Decrease in aggregate supply,
increase in price level
b) Increase in personal income tax – Decrease in aggregate demand, decrease in price level
c) Increase in exports- Increase in aggregate demand, increase in price level
d) Improvement in marketing and selling skills of managers – Increase in aggregate
demand, increase in price level

e) Cost push inflation
Question 6
a
b
c
d

a) I agree with the statement. This is because, it is the role of the Central bank to create monetary
policies that increase or decrease money supply. Further it is the Central bank that is able to
provide its reserves to the local banks as a lender of last resort. If the Central bank sets a
contractionary monetary policy , there will be a reduction in the money supply in banks due to
increase in the required reserve ratio and selling of the bonds owned by banks. (4 marks)
b) There is no impact on the overall money supply since there is only change in the local location
of the money. I have just transferred the money from another bank account into my bank
account.
c) The maximum amount that the bank can lend out is $1000 * 90% = $900. The reserve rate
provides the minimum reserves that the bank should maintain as money available for loans from
deposits. It provides security for the lender through the bank and also allows the bank to
maintain liquidity.
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Question 7
Selling of government securities into banks, no
a) Increase in government expenditure financed by borrowing from banking sector-
possibly. This is because increase in government expenditures may increase money
supply as people have more money to use for their personal expenses. However since the
mone is obtained from the banking sector, it may reduce the amount of money avaialbe
for loans.
b) Purchase of government securities by rhe Central Bank from the banking sector- yes –
this is because banks have more money to disburse to the general public
c) It is agreed by the Treasurer and the Governer of the Central Bank to reduce the target of
inflation - no
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Question 8
a) DVD recorders imported into the nation from Japan – Import of Goods
b) Insurance cover purchased in the nation by overseas residents – Short term financing
inflows
c) The nation gives overseas aid to a developing country – Capital transfers sent overseas
from the nation
d) US car company set up a factory in the nation - Investment in the nation from overseas
e) Some of the nations residents take a holiday in Brazil – Other income outflows
f) Interest earned by the nation residents on overseas asset – Other income inflows
g) Running down to the stock of foreign exchange in the Central Bank of the nation =
Drawing on reserves

h) Migrants to the nation transferring property to the nation – Capital transfers to the nation
from overseas
i) New deposits made in banks in the nations by overseas residents – Adding to reserves
j) The nations palm oil is sold to the United Kingdom - Export of goods