🎯 Mock Final Exam — Macroeconomics

USYD ECON1002 style · 20 MCQ (40 marks) + 3 analytical questions (60 marks) · 2 hours

Exam technique

Read each question carefully and watch for keywords like "short run", "long run", "current account", and "real exchange rate"
For calculations, write the formula first and then substitute values
For diagrams, label axes, equilibrium points, and shifts clearly

Section A: 20 MCQ

2 marks each

Question 1

When actual output is above potential output in the AD-AS model, which sequence is most likely in the adjustment process?

Type: Multiple Choice

A) Inflation rises; SRAS shifts left; output moves back toward potential
B) Inflation falls; SRAS shifts right; output moves farther above potential
C) Inflation rises; AD shifts right; output moves farther above potential
D) Inflation is unchanged; LRAS shifts right immediately

Show Answer

Answer: A) Inflation rises; SRAS shifts left; output moves back toward potential

When output is above potential, labour and product markets are tight. Wages and costs rise, so SRAS shifts left and inflation rises until output returns to potential.

Question 2

Which shock would most likely shift both aggregate demand and short-run aggregate supply to the right?

Type: Multiple Choice

A) A rise in government spending with no supply-side effect
B) A positive productivity shock that lowers costs and raises confidence
C) A rise in oil prices
D) A fall in consumer confidence

Show Answer

Answer: B) A positive productivity shock that lowers costs and raises confidence

A productivity improvement can lower costs, shifting SRAS right, while also improving expectations and investment, shifting AD right.

Question 3

In the AD-AS model, which curve determines the long-run output level and which determines the inflation rate?

Type: Multiple Choice

A) AD determines output; SRAS determines inflation
B) SRAS determines output; LRAS determines inflation
C) AD determines inflation; LRAS determines output
D) LRAS determines inflation; AD determines output

Show Answer

Answer: C) AD determines inflation; LRAS determines output

In the long run, output is pinned down by LRAS/potential output, while the price level and inflation are determined by AD conditions and monetary policy settings.

Question 4

Suppose the AD curve is Y = 20,000 - 20,000π and potential output is Y* = 19,200. If inflation is 8%, what output does the AD curve imply in the short run, and what inflation rate is consistent with long-run equilibrium when output returns to potential?

Type: Calculation

A) 18,400 and 4%
B) 18,400 and 8%
C) 19,200 and 8%
D) 20,000 and 4%

Show Answer

Answer: A) 18,400 and 4%

Short run output at π = 8%:

Y = 20,000 - 20,000(0.08) = 20,000 - 1,600 = 18,400

Long-run equilibrium requires Y = Y* = 19,200:

19,200 = 20,000 - 20,000π

20,000π = 800

π = 0.04 = 4%

Question 5

If the money supply rises by 20% and velocity and real output are unchanged in the long run, what happens to the price level?

Type: Multiple Choice

A) It falls by 20%
B) It rises by 20%
C) It rises by less than 20%
D) It is unchanged

Show Answer

Answer: B) It rises by 20%

With MV = PY, if M rises by 20% and V and Y are constant, then P must rise by 20%.

Question 6

Which outcome is most consistent with a positive aggregate demand shock if the central bank does not respond?

Type: Multiple Choice

A) Lower inflation and lower output
B) Higher inflation and output at potential
C) Higher inflation and higher output in the short run
D) Lower inflation and higher output permanently

Show Answer

Answer: C) Higher inflation and higher output in the short run

A positive AD shock raises both output and inflation in the short run. Without a monetary policy response, output may eventually return to potential while the price level remains higher.

Question 7

Which outcome is most consistent with an adverse supply shock such as a flood?

Type: Multiple Choice

A) Inflation rises and output falls
B) Inflation falls and output rises
C) Inflation and output both rise
D) Inflation and output both fall

Show Answer

Answer: A) Inflation rises and output falls

A negative supply shock shifts SRAS left, raising costs and reducing output. That creates stagflation: higher inflation and lower output.

Question 8

Given Y = K^0.75 L^0.25, K = 625, and L = 4096, what is the marginal product of labour?

Type: Calculation

A) 0.061
B) 0.25
C) 0.75
D) 0.125

Show Answer

Answer: A) 0.061

MPL = ∂Y/∂L = 0.25 K^0.75 L^-0.75

K^0.75 = 625^0.75 = 125

L^0.75 = 4096^0.75 = 512

So:

MPL = 0.25 × 125 / 512 = 31.25 / 512 = 0.0610

Question 9

In growth accounting, if output grows at 4% and labour grows at 3% with capital deepening and TFP growth accounting for the remaining 1 percentage point, what is the capital share parameter α in the standard decomposition?

Type: Multiple Choice

A) 0.10
B) 0.25
C) 0.40
D) 0.75

Show Answer

Answer: B) 0.25

In the standard Cobb-Douglas growth-accounting setup, the residual capital share used here is α = 0.25.

Question 10

For a Cobb-Douglas production function with steady-state condition k* = (θ/(d+n))^4, which statement is correct?

Type: Multiple Choice

A) A higher depreciation rate raises k*
B) A higher θ raises k*
C) A higher population growth rate raises k*
D) A higher d+n raises k*

Show Answer

Answer: B) A higher θ raises k*

Because k* rises with the saving/investment parameter θ and falls with the break-even term d+n.

Question 11

Country A has a higher depreciation rate than Country B, with all else equal. Which country will have lower steady-state consumption per worker?

Type: Multiple Choice

A) Country A
B) Country B
C) Both the same
D) It cannot be determined

Show Answer

Answer: A) Country A

Higher depreciation means more output must be devoted to replacing worn-out capital, leaving less for consumption in steady state.

Question 12

If an economy is below its steady state, what happens to capital per worker over time?

Type: Multiple Choice

A) It falls because saving is too low
B) It rises because saving exceeds replacement investment
C) It stays constant because the economy is in equilibrium
D) It rises only if population growth is zero

Show Answer

Answer: B) It rises because saving exceeds replacement investment

Below steady state, saving per worker exceeds break-even investment, so capital deepens over time.

Question 13

If one Australian dollar buys 52 rupees and one rupee buys 1.7 yen, what is the value of one Australian dollar in yen?

Type: Calculation

A) 52.0 yen
B) 88.4 yen
C) 70.0 yen
D) 91.4 yen

Show Answer

Answer: B) 88.4 yen

52 × 1.7 = 88.4

Question 14

If the British price level is P_UK = 9.0, the Australian price level is P_AU = 6.0, and the nominal exchange rate is e = 0.45 pounds per Australian dollar, what is the real exchange rate?

Type: Calculation

A) 0.30
B) 0.45
C) 0.67
D) 1.50

Show Answer

Answer: A) 0.30

rer = eP_AU / P_UK = 0.45 × 6.0 / 9.0 = 0.30

Question 15

An Australian resident buys US shares worth $100 million and later receives a foreign loan of $50 million. Foreigners buy Australian shares worth $75 million and lend $35 million to Australian borrowers. What is the net capital account / financial account position?

Type: Calculation

A) +$40 million
B) -$40 million
C) +$10 million
D) -$10 million

Show Answer

Answer: B) -$40 million

Outflows: 100 + 50 = 150

Inflows: 75 + 35 = 110

Net position: 110 - 150 = -40

Question 16

Where does an Australian tourist purchasing euros in Italy appear in the BOP?

Type: Multiple Choice

A) Current account credit
B) Current account debit
C) Financial account credit
D) Capital account credit

Show Answer

Answer: B) Current account debit

A tourist buying foreign currency to pay for services abroad is recorded as an import of travel services, which is a current account debit.

Question 17

Where does an RBA increase in the domestic money supply appear in the balance of payments?

Type: Multiple Choice

A) Current account credit
B) Financial account debit
C) It does not appear in the BOP directly
D) Capital account credit

Show Answer

Answer: C) It does not appear in the BOP directly

A domestic money supply change is not itself a cross-border transaction, so it is not directly recorded in the BOP.

Question 18

If the central bank tightens monetary policy, what happens to currency demand and the fundamental value of the currency in an asset-market model?

Type: Multiple Choice

A) Currency demand falls; fundamental value falls
B) Currency demand rises; fundamental value rises
C) Currency demand rises; fundamental value falls
D) Currency demand is unchanged; fundamental value rises

Show Answer

Answer: B) Currency demand rises; fundamental value rises

Higher interest rates attract capital inflows, increasing demand for the currency and raising its fundamental value.

Question 19

Under a floating exchange rate, which identity must hold?

Type: Multiple Choice

A) CAB + KAB = 1
B) CAB + KAB = 0
C) CAB = KAB
D) CAB = 0 always

Show Answer

Answer: B) CAB + KAB = 0

Under floating exchange rates, the current account and capital/financial account must balance, aside from statistical discrepancy.

Question 20

If private saving and investment are unchanged, what happens to the current account deficit when the budget deficit rises?

Type: Multiple Choice

A) It falls
B) It rises
C) It is unchanged
D) It becomes a surplus

Show Answer

Answer: B) It rises

By the twin deficits identity, a larger budget deficit reduces national saving and tends to widen the current account deficit.

Section B: 3 Analytical Questions

20 marks each

Question 1

Long-run adjustment, policy, and the open economy

(i) Draw and explain the Solow steady-state diagram. Show what happens when the economy starts below steady state.
(ii) Draw and explain an AD-AS diagram showing the effects of an expansionary fiscal policy in the short run and the long run.
(iii) Use an asset-market or capital-flows diagram to explain why a tightening of RBA monetary policy tends to appreciate the AUD.

Show Answer

Answer guide:

(i) Solow diagram - Draw sf(k) and (δ + n + g)k - Mark the steady state where they intersect - If k < k*, saving exceeds break-even investment, so k rises - If k > k*, break-even investment exceeds saving, so k falls

(ii) Fiscal expansion in AD-AS - Fiscal expansion shifts AD to the right - Short run: output rises and inflation rises - Long run: wages and prices adjust, SRAS shifts left, output returns to potential - Final result: higher price level, output back at Y*

(iii) RBA tightening and AUD appreciation - Higher domestic interest rates increase demand for AUD assets - Capital inflows rise, so demand for AUD rises - The AUD appreciates - A stronger AUD lowers net exports and can partly offset the initial monetary tightening

Question 2

Balance of payments and external accounts

Consider the following transactions:

Australian wool exported to China
Australian investor buys US shares
Foreign bank lends to an Australian company
Australian student receives a scholarship from a US university
The RBA buys foreign currency to add to reserves

(i) Classify each transaction as current account, capital account, or financial account, and as credit or debit.
(ii) Suppose the economy has CAB = -20 and KAB = +20 under a floating exchange rate. Explain why the BOP balances.
(iii) Suppose instead CAB = -20 and KAB = +15 under a fixed exchange rate. What must the central bank do?

Show Answer

Answer guide:

(i) Classification - Wool export to China: current account credit - Australian investor buys US shares: financial account debit - Foreign bank lends to AU company: financial account credit - Scholarship from US university: current account credit - RBA buys foreign currency for reserves: financial account debit / reserve accumulation

(ii) Floating exchange rate - CAB + KAB = -20 + 20 = 0 - The accounts balance exactly - Any net foreign-currency demand is offset by the exchange rate adjusting

(iii) Fixed exchange rate - CAB + KAB = -20 + 15 = -5 - The central bank must cover the $5 billion gap by selling reserves - So reserves fall by $5 billion to defend the peg

Question 3

Open economy saving-investment and the current account

(i) Draw the saving-investment diagram for an open economy and explain the identity NS - I = NX.
(ii) Explain the twin deficits hypothesis using the formula CAD = BD + (S_priv - I).
(iii) Is a current account deficit always bad? Discuss with reference to investment, external borrowing, and debt sustainability.

Show Answer

Answer guide:

(i) Saving-investment diagram - Plot national saving and investment as functions of the real interest rate - The gap between saving and investment equals net capital inflows / net exports - If NS < I, the country runs a current account deficit

(ii) Twin deficits - A higher budget deficit reduces public saving - If private saving and investment stay fixed, national saving falls - Therefore CAD rises - This is the twin deficits channel: fiscal deficits can widen the current account deficit

(iii) Is CAD always bad? - No. A current account deficit can be healthy if it finances productive investment that raises future income - It is harmful if it funds consumption, bubbles, or low-return projects - It becomes dangerous when foreign-currency debt, weak growth, and loss of investor confidence make refinancing difficult - So the key issue is not the size of the deficit alone, but whether the external borrowing is sustainable