ECON 2301 – Principles of Macroeconomics

ECON 2301 – Principles of Macroeconomics. Question 1 – 5 points (Multiple Choice Questions)

 

• The following is an assumption of fiscal policy –

 

1. The market is always stable
2. There are in-built mechanisms in the economy to bring it back to stability

 

1. Government cannot steer the market/economy to long term stability

 

1. The market is inherently unstable

 

• During inflationary periods, when tax rates rise and government spending decreases, the following happens to the level of water in the bathtub model –

 

1. Level of water rises

 

1. Level of water falls
2. Level of water does not change

 

1. Level of water drops to zero level

 

• One of the myths about public debts is –

 

1. It shifts burden to future generations
2. It causes crowding-out effect

 

1. It causes some income and wealth redistribution
2. It has led to a rise in foreign-held debt

 

• The functions of money are all of the following except –

 

1. It is a medium of exchange

 

1. It will lose all its value over time
2. It functions as a standard or unit of value

 

1. It is a store of value

 

• An item that is declared to have purchasing power value by the government is called –

 

1. Commodity money
2. Barter money

 

1. Fiat money
2. Intrinsic money

 

Question 2 – 3 points

 

The population of the Maldives island in 2018 was 444,259. The nominal public debt in Maldives was $848.8 million and the inflation rate was 4% in 2018. What is the public debt per capita in Maldives?

 

Question 3 – 3 points

 

1. Draw the Laffer Curve and show the relationship between federal tax rates and tax revenues.

Please label the axes                                                                                                                                          (2)

 

1. Draw the point on the curve at which the government would like to be on the curve? Why? (1)

 

Question 4 – 4 points

 

You are given with the following data –

 

• Sandy has $100,000 in her checking accounts

 

• Hermon has $2,000 worth of traveler’s checks

 

• Kenny just got a loan approved from Chase and the loan funds came to his checking account for an amount of $50,000

 

• Dawson has $75,000 in his savings account

 

• Wallis State Bank, a local community bank, has a checking account with the U.S. Federal reserve and the balance is $500,000

 

• Yousef has $2,500 in his money market account

 

• Diane has $500 in cash

 

1.	What is M1 in this case?	(2)
2.	What is M2 in this case?	(2)

 

 

Question 5 – 5 points

 

Complete the table below for Price Index, inflation rate and real money supply for Sri Lanka –

 

 

Ye ar	National Money Supply	Inflation Rate	Price Index	Real Money Supply
2010	$25 million	0%	100
2011	$27.5 million	1%	101
2012	$29 million	2%
2013	$28 million		104
2014	$30 million	6%

 

ECON 2301 – Principles of Macroeconomics

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