ECS2602 - ASSIGNMENT 3 - SEMESTER 2

ECS2602 - ASSIGNMENT 3 -
SEMESTER 2

, ECS2602
ASSIGNMENT 3 – ONLINE ASSESSMENT (SEMESTER 2 – 2018)
POSSIBLE QUESTIONS AND SOLUTIONS

Question 1 of 15

This question is based on the following diagram of an IS-LM model for an open economy




A decrease in government spending causes ...
A. a decrease in the demand for goods and the level of output; a decrease in the demand for money and the
interest rate; a depreciation of the domestic currency and the trade balance deteriorates as exports
increases.
B. a decrease in the demand for goods and the level of output; a decrease in the demand for money and the
interest rate; a depreciation of the domestic currency and the trade balance improves as exports
increases.
C. a decrease in the demand for goods and the level of output; an increase in the demand for money and the
interest rate; a depreciation of the domestic currency and the trade balance improves as exports
increases.
D. a decrease in the demand for goods and the level of output; a decrease in the demand for money and an
increase in the interest rate; an appreciation of the domestic currency and the trade balance improves
as exports increases.

Feedback:

,Question 2 of 15

An expansionary fiscal policy, for example an increase in government spending (G), causes an increase in the
demand for goods (Z) and the level of output and income (Y) and consequently ...

A. an increase in the demand for money and the interest rate; a depreciation of the domestic currency and the
trade balance improves as exports increases.
B. an increase in the demand for money and the interest rate; an appreciation of the domestic currency and
the trade balance deteriorates as exports decr eases.
C. a decrease in the demand for money and the interest rate; a depreciation of the domestic currency and the
trade balance improves as exports increases.
D. an increase in the demand for money and the interest rate; an appreciation of the domestic currency and
the trade balance deteriorates as exports increases.

Feedback:




Question 3 of 15

Study the following question and complete the sentence: A decrease in the money supply causes ...

A. A capital inflow , a depreciation of the exchange rate and an improvement of the trade balance.

B. A capital outflow , a depreciation of the exchange rate and an improvement of the trade balance.

C. A capital inflow , an appreciation of the exchange rate and a deterioration of the trade balance.

D. A capital outflow , an appreciation of the exchange rate and an improvement of the trade balance.

Question 4 of 15

In the IS-LM model for an open economy monetary contraction implies that the …

1. LM curve will shift to the upwards and the interest rate increases.

2. LM curve will shift to the downwards and the interest rate decr eases.

3. nominal exchange rate decreases and a depreciation of the domestic currency takes place.

, A. Only 1

B. Only 3

C. Only 2

D. Only 2 and 3

E. Only 1 and 3

Question 5 of 15

Which of the following policy actions will cause net exports to worsen?

1. Expansionary fiscal policy.

2. Expansionary monetary policy.

3. Contractionary monetary policy.

A. Only 1

B. Only 1 and 2

C. Only 1 and 3

D. Only 2

E. Only 3

Question 6 of 15

Which of the following statement(s) is/are corr ect?

1. Workers are able to determine the real wage through nominal wage bargaining.

2. Through an increase in their nominal wages workers are able to increase their real wages.

3. An increase in the mark-up by firms causes a decrease in real wages.

A. Only 1

B. Only 2 and 3

C. Only 1 and 3

D. Only 2

E. Only 3

Feedback:

An increase in the mark-up by firms will cause a decrease in real wages. See the following example:

Howe ver, workers are not able to determine the real wage through nominal wage bargaining. The wage-setting
relationship does not tell us what the actual real wage will be. Workers can try to achieve a desired or targeted
real wage by bargaining for a nominal wage, but whether the desired or targeted real wage is achieved will
depend on what happens to the price level. And the price level is determined by the mark-up used by firms.

Therefore, workers are not able to increase their real wages through an increase in their nominal wages.

There is a positive relationship between the mark-up and the price per unit.