The University of Sydney
School of Economics
ECON1002
Practice Final Exam
The actual final exam will be 120 minutes (+30 minutes upload time) during the uni-
versity exam period.
Examinable Material and Expectations:
1. The final exam will cover material from the whole course, although focusing mostly on material
since the mid-semester test. Anything covered in the lectures, in the tutorials, or the online
quizzes is examinable.
2. The final exam consists of three parts:
ˆ PART A: consists of 20 multiple choice questions and is worth 20 marks. All questions
are of equal value. Unanswered or incorrect answers are given a mark of zero. No marks
will be deducted for wrong answers.
ˆ PART B: consists of three analytical questions and is worth 15 marks. In answer-
ing questions, be precise, showing all of the steps, and indicate if you are making any
assumptions along the way.
ˆ PART C: consists of a short essay question and is worth 15 marks. Answer ONE of the
two questions provided. You are encouraged to use relevant theories to help you clarify
your arguments.
Practice Final Exam Questions:
PART A:
1. In addition to the response of the Reserve Bank to inflation, the aggregate demand curve
could be downward sloping because:
(a) household purchasing power rises with inflation
(b) the real value of fixed income payments fall with inflation
(c) lower rates of inflation generate more uncertainty for business
(d) the price of domestic goods and services sold overseas decreases with inflation
(e) lower rates of inflation prompt governments to decrease their spending
2. Everything else being equal, an exogenous increase in consumption spending due to improved
consumer sentiment would:
(a) shift the aggregate demand curve to the left
(b) shift the aggregate demand curve to the right
(c) leave the position of the aggregate demand curve unchanged but lead to an upward shift
in the short-run aggregate supply curve
(d) leave the position of the aggregate demand curve unchanged but lead to a downward
movement along the aggregate demand curve
(e) leave the position of the aggregate demand curve unchanged but lead to an upward
movement along the aggregate demand curve
3. Assume an economy is initially at the full employment equilibrium level of output in the
aggregate demand – aggregate supply model. Everything else being equal, a cut in marginal
tax rates could:
(a) raise output in the short run and lower inflation in the short run
(b) lower output in the short run and have no effect on inflation in the long run
(c) raise output in the long run and have an ambiguous effect on inflation in the long run
(d) lower output in the short run and have an ambiguous effect on inflation in the long run
(e) have no effect on output in the short run and raise inflation in the long run
4. An increase in the cost of production shifts the curve .
(a) aggregate demand; to the right
(b) aggregate demand; to the left
(c) short-run aggregate supply; upward
(d) long-run aggregate supply; to the left
(e) short-run aggregate supply; downward
5. While the initial effect of a(n) shift in the curve is a rise in output,
the ultimate effect is only a rise in the inflation level.
(a) rightward; long-run aggregate supply
(b) upward; short-run aggregate supply
(c) leftward; aggregate demand
(d) downward; short-run aggregate supply
(e) rightward; aggregate demand
6. A supply shock that improves production technology would produc-
tion costs and shift the aggregate supply curve .
(a) negative; lower; downward
(b) negative; raise; upward
(c) positive; lower; downward
(d) positive; raise; downward
(e) positive; raise; upward
7. Stagflation is a situation of
(a) stable prices and falling output
(b) stable prices and rising output
(c) falling prices and falling output
(d) rising prices and rising output
(e) rising prices and falling output
8. A movement down an aggregate demand curve results from:
(a) an increase in the level of inflation
(b) a decrease in the level of inflation
(c) an increase in the money supply
(d) a decrease in the money supply
(e) a negative supply shock
9. Consider an economy, with a production function given by Y = AK0.3L0.7. This economy’s
annual GDP growth rate is 5%. Also assume that L and K are both growing at annual rates
of 2%. The growth rate of total factor productivity for this economy is:
(a) 2.0%
(b) 3.0%
(c) 4.0%
(d) 5.0%
(e) 5.0%
10. In the Solow-Swan model, if saving is less than replacement investment then, other things
being equal,
(a) the capital-labour ratio will fall and the marginal product of capital will fall
(b) the capital-labour ratio will rise and the marginal product of capital will fall
(c) the capital-labour ratio will fall and the marginal product of capital will remain un-
changed
(d) the capital-labour ratio will fall and the marginal product of capital will rise
(e) the capital-labour ratio will rise and the marginal product of capital will rise
11. The convergence hypothesis of the Solow-Swan model implies that:
(a) countries with relatively high per capita capital stocks tend to grow more quickly than
countries with lower per capita capital stocks
(b) countries with relatively low per capita capital stocks tend to grow more quickly than
countries with higher per capita capital stocks
(c) countries with relatively low per capita capital stocks tend to reach their steady state
more quickly than countries with higher per capita capital stocks
(d) countries with relatively high per capita capital stocks tend to reach their steady state
more quickly than countries with higher per capita capital stocks.
(e) all countries will grow at the same rate regardless of the level of per capita capital stock
12. Consider the following Solow-Swan model in which output per capita is given by YL =
A
(
K
L
)0.5
, the total factor productivity parameter is 2, the savings rate is 50%, the depre-
ciation rate is 20% and the population growth rate is 5%. The steady state value of the
output per capita for this economy is:
(a) 1
(b) 2
(c) 4
(d) 8
(e) 16
13. If total production in the economy is described by the Cobb-Douglas production function
Y = AKαL1−α and α = 0.25, then the share of output going to labour is:
(a) 0.25
(b) 0.75
(c) 0.25Y
(d) 0.75Y
(e) 0.75Y/L
14. Consider an economy which is described by the Solow–Swan model. Let the saving rate be
θ = 0.8, the population growth rate n = 0.05 and the rate of depreciation d = 0.05. If per
capita income Y/L = 100 and the per capita stock of capital stock K/L = 600, then:
(a) replacement investment is 60, saving is 80 and K/L will decrease towards the steady
state per capita capital stock
(b) replacement investment is 80, saving is 80 and K/L is at the steady state per capita
capital stock
(c) replacement investment is 80, saving is 60 and K/L will decrease towards the steady
state per capita capital stock
(d) replacement investment is 60, saving is 80 and K/L will increase towards the steady
state per capita capital stock
(e) replacement investment is 80, saving is 60 and K/L will increase towards the steady
state per capita capital stock
15. If the nominal exchange rate is 4.367 Polish zloty per Australian dollar, and 1.59 South
African rand per Polish zloty, then there are South African rand per Australian
dollar.
(a) 0.364
(b) 0.229
(c) 2.727
(d) 6.944
(e) 0.144
16. The demand for euros in the foreign exchange market equals 8000 - 2000e and the supply
of euros in the foreign exchange market equals 3000 + 3000e, where e is the nominal ex-
change rate expressed in Australian dollars per euro. The fundamental value of the euro is
euros per Australian dollar or Australian dollars per euro.
(a) 2.2; 0.45
(b) 0.5; 2
(c) 1; 1
(d) 2; 0.5
(e) 2; 2
17. Suppose an Australian citizen buys a plane ticket on Swiss Air, travels to Zurich, buys
chocolate, and brings it back to Australia. The plane ticket is an for Australia
and the chocolate is an for Australia.
(a) export of a service; export of a good
(b) import of a service; import of a good
(c) export of a good; export of a service
(d) import of a good; import of a service
(e) export of a good; import of a good
18. An Australian manufacturer borrows $1,000,000 from a US bank in order to pay for a new
machine (priced at $1,000,000) imported from Germany. This transaction will be recorded in
Australia’s balance of payments as:
(a) debit of $1,000,000 on both the current and capital accounts
(b) credit of $1,000,000 on both the current and capital accounts
(c) credit of $1,000,000 on the current account and a debit of $1,000,000 on the capital
account
(d) a debit of $1,000,000 on the current account and a credit of $1,000,000 on the capital
account
(e) a debit of $1,000,000 on the current account and a credit of $1,000,000 on the current
account
19. What happens to the Australian current and capital accounts if a Canadian bank purchases
$5,000 Australian dollars from an Australian bank and then sells the $5,000 Australian dollars
to a Canadian who spends it all on a surfing holiday in Australia?
(a) a current account debit of $5,000 and a capital account debit of $5,000
(b) a current account debit of $5,000 and a capital account credit of $5,000
(c) a current account credit of $5,000 and a capital account debit of $5,000
(d) a current account credit of $5,000 and a capital account credit of $5,000
(e) a current account credit of $5000 and a current account debit of $5000
20. A country with a high saving rate tends to have a domestic real interest rate
that will capital inflows.
(a) high; attract
(b) high; discourage
(c) high; not affect
(d) low; attract
(e) low; discourage
PART B:
1. Suppose an economy is experiencing a contractionary gap. In response, the central bank eases
monetary policy. With the aid of an AD-SRAS-LRAS diagram, and in words, describe the
transition of the economy from the short run to the long run following the implementation of
this policy. (4 points)
2. Country A described by the Solow-Swan model has the following production function:
Y
L
=
(
K
L
)0.25
where Y is aggregate output, K is capital and L is labour. Also, assume the population
growth n0 = 2% and depreciation d = 3%.
(a) Solve for country A’s saving rate θA and steady-state capital-labour ratio K/L
∗ if steady-
state output per worker is Y/L∗ = 2. (3 points)
Assume country B is characterised by the same population growth rate and depreciation as
country A, but has the production function:
Y
L
= 2
(
K
L
)0.25
(b) Compute the saving rate θB that country B needs in order to achieve the same standard
of living as country A with a steady-state output per worker of Y/L∗ = 2. (2 points)
(c) How does the saving rate in country B compare to that of country A? Explain the
economic intuition for your answer. (2 points)
3. In 2020, the economy of Macroland exported $400 billion of goods and $300 billion of services
while it imported $500 billion of goods and $350 billion of services. Furthermore, the rest of
the world purchased $250 billion of Macroland’s assets.
(a) Compute Macroland’s balance of payment on the current account and the capital account
in 2020. (2 points)
(b) What was the value of Macroland’s purchases of assets from the rest of the world in
2020? (2 points)
Part C:
In the final exam, two questions will be provided and you only need to answer ONE of the two
questions by writing a short essay. Read the questions carefully and think which of them appeals
to you more and how to compose a good answer. You are encouraged to use relevant theories to
help you clarify your arguments.
Below is a sample practice essay question. (15 points)
The Global Financial crisis, which had its roots in the 2007 meltdown in the U.S. mortgage market,
hurt economies around the globe and weakened private consumption, firm investment and interna-
tional trade. Central banks around the world responded by cutting interest rates aggressively as the
crisis unfolded. Yet, as interest rates were driven to their lower bound, central banks encountered
a policy challenge related to the limitation on the extent to which conventional monetary policy
can be expansionary. Write a short essay to explain the consequences of the Global Financial crisis
and the role of macroeconomic policy in responding to it. In writing your answer, make sure to
address the following points:
i. Discuss the macroeconomic effects of the Global Financial Crisis. How did the crisis affect
the demand side of the economy?
ii. Evaluate the policy action of central banks to manage the demand shocks during the Global
Financial crisis.
iii. Discuss the policy options that governments and central banks have at their disposal when
they cannot pursue conventional monetary policy at the zero lower bound.