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๐ŸŽฏ Mock In-Semester Test โ€” Macroeconomics

15 questions ยท Mixed topics ยท USYD ECON1002 style ยท ~35 minutes

Exam technique

  • Read each question carefully โ€” underline key words
  • For MCQ: eliminate obviously wrong answers first
  • For calculations: write out the formula before substituting numbers
  • For short answers: one clear sentence with the key term is often enough

Section A โ€” Multiple Choice (10 questions)

Question 1

The ABS reports that in a town of 1,000 working-age adults: 600 are employed, 100 are actively looking for work, and 300 have given up looking. What is the unemployment rate?

  • A) 10%
  • B) 14.3%
  • C) 16.7%
  • D) 25%
Show Answer

Answer: B) 14.3%

Labour force = Employed + Unemployed = 600 + 100 = 700. Discouraged workers are not in the labour force. Unemployment rate = 100 / 700 ร— 100 = 14.3%

Question 2

Australia's nominal GDP is $2,400bn and the GDP deflator is 120. What is real GDP?

  • A) $2,880bn
  • B) $2,000bn
  • C) $2,400bn
  • D) $1,200bn
Show Answer

Answer: B) $2,000bn

Real GDP = Nominal GDP / Deflator ร— 100 = 2,400 / 120 ร— 100 = $2,000bn

Question 3

The government increases spending by $10bn. With MPC = 0.75 and import propensity = 0.05, what is the total increase in equilibrium income?

  • A) $10bn
  • B) $25bn
  • C) $33.3bn
  • D) $40bn
Show Answer

Answer: C) $33.3bn

Multiplier = 1 / (1 โˆ’ 0.75 + 0.05) = 1 / 0.30 = 3.33. ฮ”Y = 3.33 ร— \(10bn = **\)33.3bn**

Question 4

Which of the following is classified as structural unemployment?

  • A) A builder who is temporarily between construction projects
  • B) A steel worker who lost their job when their plant closed due to automation
  • C) A teacher who was laid off during a recession
  • D) A new graduate searching for their first job
Show Answer

Answer: B)

Structural unemployment arises from a mismatch between skills and available jobs โ€” often due to technological change or industry decline. A) is frictional, C) is cyclical, D) is frictional.

Question 5

The money supply increases by 8% and real GDP grows by 3%. Assuming velocity is constant, inflation equals approximately:

  • A) 3%
  • B) 5%
  • C) 8%
  • D) 11%
Show Answer

Answer: B) 5%

From the quantity theory: %ฮ”M = %ฮ”P + %ฮ”Y โ†’ 8% = %ฮ”P + 3% โ†’ %ฮ”P = 5%

Question 6

Australia's current account deficit means:

  • A) The government is running a budget deficit
  • B) Australia is importing more goods and services than it exports
  • C) Australia is a net borrower from the rest of the world (financial account surplus)
  • D) Both B and C
Show Answer

Answer: D) Both B and C

A current account deficit means: (1) imports > exports on the trade/income account, and (2) by the BOP identity, a matching financial account surplus โ€” Australia is borrowing (net) from abroad.

Question 7

The RBA raises the cash rate. Which effect is NOT part of the monetary transmission mechanism?

  • A) Higher mortgage repayments reduce household consumption
  • B) AUD appreciates, reducing net exports
  • C) Higher rates reduce business investment
  • D) The government raises income tax rates
Show Answer

Answer: D)

Government tax decisions are fiscal policy, not part of the RBA's monetary transmission mechanism. A, B and C are all standard transmission channels.

Question 8

An economy has a NAIRU of 4.5% and actual unemployment of 3.0%. According to the expectations-augmented Phillips curve, inflation will:

  • A) Stay constant
  • B) Fall below expected inflation
  • C) Rise above expected inflation
  • D) Equal the inflation target
Show Answer

Answer: C) Rise above expected inflation

When u < u_n, the labour market is tighter than the natural rate. Firms bid up wages and prices, causing inflation to accelerate above expected inflation. ฯ€ = ฯ€แต‰ + ฮฑ(u_n โˆ’ u); since u_n > u, the second term is positive.

Question 9

Which expenditure component is typically the most volatile over the business cycle?

  • A) Government spending (G)
  • B) Consumption (C)
  • C) Investment (I)
  • D) Net exports (NX)
Show Answer

Answer: C) Investment

Business investment depends on interest rates and "animal spirits" (expectations about future profits) โ€” both highly variable. Consumption is smoother (permanent income hypothesis); G is relatively stable; NX reflects two-country dynamics.

Question 10

In the Solow model, an economy is below its steady-state capital stock. We can expect:

  • A) Capital per worker to fall as depreciation exceeds saving
  • B) Output per worker to decline
  • C) Capital per worker to rise as saving exceeds break-even investment
  • D) No change โ€” the economy is already in equilibrium
Show Answer

Answer: C)

Below k, saving per worker sf(k) > break-even investment (ฮด+n+g)k. Net investment is positive โ€” capital per worker rises toward k.

Section B โ€” Calculations (3 questions)

Question 11

GDP components and the output gap

Country A has the following national accounts data: C = $1,200bn, I = $300bn, G = $400bn, Exports = $250bn, Imports = $200bn. Potential GDP is $2,000bn.

(a) Calculate nominal GDP.
(b) Calculate the output gap as a percentage of potential GDP.
(c) Is this an inflationary or recessionary gap?

Show Answer

(a) GDP = C + I + G + (X โˆ’ M) = 1,200 + 300 + 400 + (250 โˆ’ 200) = $1,950bn

(b) Output gap = (1,950 โˆ’ 2,000) / 2,000 ร— 100 = โˆ’2.5%

(c) Negative output gap โ†’ recessionary gap (actual output below potential; unemployment above NAIRU)

Question 12

Multiplier and fiscal policy

The economy has a recessionary gap of $60bn. MPC = 0.8, tax rate t = 0.25, import propensity m = 0.05.

(a) Calculate the spending multiplier.
(b) How much additional government spending is needed to close the gap?
(c) Alternatively, how much tax cut would be needed?

Show Answer

(a) Multiplier = 1 / (1 โˆ’ c(1โˆ’t) + m) = 1 / (1 โˆ’ 0.8ร—0.75 + 0.05) = 1 / (1 โˆ’ 0.6 + 0.05) = 1/0.45 = 2.22

(b) ฮ”G = Gap / k = 60 / 2.22 = $27bn

(c) Tax multiplier = โˆ’c/(1โˆ’c(1โˆ’t)+m) = โˆ’0.8/0.45 = โˆ’1.78. ฮ”T = โˆ’60/1.78 = โˆ’$33.7bn (tax cut of $33.7bn)

Question 13

Debt sustainability

Australia's government debt is 50% of GDP. Nominal GDP is growing at 5% per year and the average interest rate on government debt is 4%.

(a) If the government runs a balanced budget (primary surplus = 0), what happens to the debt/GDP ratio over time?
(b) What primary surplus (as % of GDP) is needed to stabilise the debt/GDP ratio?

Show Answer

(a) Change in debt/GDP โ‰ˆ (r โˆ’ g) ร— debt/GDP = (4% โˆ’ 5%) ร— 50% = โˆ’0.5pp per year. The ratio falls gradually โ€” the economy is growing faster than the interest rate, so even a balanced budget reduces the debt ratio.

(b) To stabilise: primary surplus = (r โˆ’ g) ร— debt/GDP = (0.04 โˆ’ 0.05) ร— 0.50 = โˆ’0.005 = โˆ’0.5% of GDP. Since this is negative, no surplus is needed; even a small deficit is sustainable.

Section C โ€” Short Answer (2 questions)

Question 14

Explain automatic stabilisers (4 marks)

What are automatic stabilisers? Give two examples relevant to Australia. Explain how they reduce the size of the fiscal multiplier.

Show Answer

Automatic stabilisers are features of the tax and transfer system that automatically cushion economic fluctuations without requiring new government decisions.

Australian examples: 1. Progressive income tax โ€” in a boom, rising incomes push households into higher tax brackets, withdrawing more purchasing power. In a recession, falling incomes reduce the tax take automatically. 2. JobSeeker (unemployment benefits) โ€” payments rise automatically during recessions, supporting household income without parliamentary action.

Effect on multiplier: Automatic stabilisers are equivalent to a higher effective tax rate t. Since k = 1/(1โˆ’c(1โˆ’t)+m), a higher t reduces the multiplier โ€” both fiscal shocks and demand shocks have a smaller effect on output. The economy self-corrects more quickly.

Question 15

Central bank independence (4 marks)

Why is the RBA designed to be operationally independent from the government? What risk does independence create, and how does the RBA's accountability framework address it?

Show Answer

Why independence: Politicians face election pressure to keep interest rates low (boosting short-run growth/employment) even when inflation warrants rate rises. An independent RBA can make unpopular decisions (e.g., 13 rate hikes 2022โ€“23) without electoral consequences, improving the credibility of the inflation target.

Risk: Democratic accountability โ€” an unelected body making major economic decisions. If the RBA pursues its own preferences unchecked, it may not reflect public priorities.

Accountability framework: The RBA is operationally independent but goal-dependent โ€” the inflation target (2โ€“3%) is set by the government in agreement with the RBA. The Governor appears before parliamentary committees. Minutes of board meetings are published. The 2024 Reserve Bank Act amendments strengthened dual mandate accountability (price stability and full employment) and governance reforms including an independent Monetary Policy Board.

Good luck! Check your answers against the Formula Sheet and Quiz Bank.