ASB-1300 CORE ECONOMICS

Semester 2 Exam

General Feedback Statement

Answers to the multiple choice questions and notes on section B questions are attached below.
I will focus here only on generic observations about the performance of the class as a whole.
This should help you understand how you performed relative to the entire cohort.

The distribution of marks awarded were as follows:

Mark range (%) 70+ 60-69 50-59 40-49 30-39 0-29
Percentage of scripts
10% 17% 20% 31% 12% 9%
in range
The variance of marks is very high, with a significant number of students performing well.
There were a significant number of students whose marks were very poor, with 19% failing to
achieve a pass mark. However, this was much lower than the proportion of failures in the
semester 1 exam.

The average mark on section A was significantly lower than on section B. However, the
correlation in marks between the two sections was high.

The marks for section A were distributed as follows:

Mark range (/60) 42-60 36-41 30-35 24-29 18-23 0-17
Percentage of scripts
10% 16% 10% 16% 34% 16%
in range

The marks for section B were distributed as follows:

Mark (categorical) A/*/+/- B/+/- C/+/- D/+/- E/+/- F 1-4
Percentage of
9% 22% 29% 30% 5% 6%
answers in category

The main reason for students performing poorly on section B questions was a lack of knowledge
of the syllabus. Many students answered questions with reference to general knowledge rather
than the economic content of the syllabus. This was particularly the case with answers to
questions B4 and B5.
PRIFYSGOL BANGOR BANGOR UNIVERSITY

ARHOLIADAU SEMESTER 2 MAI 2017

SEMESTER 1 EXAMINATIONS MAY 2017

AMSER A GANIATEIR: 2 AWR

TIME ALLOWED: 2 HOURS

Ysgol Busnes Bangor / Bangor Business School

ASB 1300 – CORE Economics

Answer ALL questions from section A, using the MCQ response

form provided

AND

Answer 2 questions from section B.

Write each answer in a separate answer booklet.

Each question in section A is worth 2%. Section A is worth 60% in total.

Each question in section B is worth 20%. Section B is worth 40% in total.

SECTION A – answer ALL questions on the MCQ response sheet provided.
Each question in section A is worth 2%. Section A is worth 60% in total.

A1. Which of the following statements is correct?

a) Your material wealth is the largest amount that you can consume without
borrowing, which includes your house, car, financial savings and human
capital.
b) Income is the minimum amount that you can consume and leave your wealth
unchanged.
c) Investment in economics is saving in financial assets such as stocks and
bonds.
d) Depreciation is the loss in your financial savings due to unfavourable
movements in the market.
e) Bartering has limitations in a virtual economy.

A2. Money is the medium exchange including:

a) Cash only.
b) Deposits only.
c) Bank notes only.
d) Cash, Deposits and Bank notes.
e) None of the above.

A3. Which of the following statements is correct regarding the principal-agent

problem?
a) A principal-agent problem exists in loans due to a positive possibility of the
principal not being repaid.
b) The principal-agent problem can be resolved by writing a binding contract for
the borrower to exert full effort.
c) One solution for the principal-agent problem in loans is for the borrower to
not provide equity.
d) The principal-agent problem does not lead to credit rationing in the loans
market.
e) One solution for the principal-agent problem in loans is for the borrower to
provide equity.

A4. Which of the following statements is correct?

a) Participation rate = Labour force / population of working age
b) Unemployment rate = Unemployed / population of working age.
c) Employment rate = Employed / Labour force
d) Employment rate + Unemployment rate = 1
e) Participation rate = Unemployed / Labour force
A5. The table on the right shows the
2014 labour force statistics for the
UK and Greece in millions. Based
on this information which of the
following statements is correct?
a) The participation rate is 76% in
the UK.
b) The participation rate is 60% in Greece.
c) The employment rate in Greece was 18%.
d) The employment rate in the UK was 94%.
e) A quarter of the Greek population of working age was unemployed.

A6. The figure on the right shows the

relationship between real GDP growth on
the horizontal axis and change in
unemployment on the vertical axis for the
US between 1961 and 2011 (source:
OECD; World Bank World Development
Indicators).
The equation shown is the regression
result for the best fitting line. Based on
this information, which of the following
statements is correct?
a) The unemployment rate remains
stable when there is zero real GDP
growth.
b) The Okun coefficient is 1.14.
c) From the regression result the policy makers know that a 1% increase in real
GDP next year will lead to a fall in the unemployment rate of 39%.
d) The Okun coefficient is 1.
e) The Okun coefficient is 0.3768.

A7. Which of the following statements is correct regarding fiscal policy?

a) Expansionary fiscal policy (e.g. increasing the government deficit or reducing
the surplus) always has a stabilising effect for the economy.
b) Unemployment benefits and taxes automatically increase government
spending and cut taxation in a downturn, while they trim spending and raise
taxes in a boom. These are, therefore, automatic stabilisers.
c) In a recession the aim of a government fiscal expansion is to over-ride the
effects of automatic stabilisers.
d) As a family worried about mounting debts should cut spending and save
more, so should an economy adopt austerity measures when its debt level is
high to restore its public finances to balance.
e) In a recession the government would use fiscal contraction to enhance the
effects of automatic stabilisers.
A8. The diagram on the right
depicts the relationship
between government
austerity and recession.
Which of the following
statements is correct?
a) The aggregate demand
line shifts downward and
the economy moves from
point A to point B. Lower
output reduces tax
revenues to the
government and
increases spending on unemployment benefits, worsening the budget
balance.
b) Lower output reduces tax revenues to the government and reduces spending
on unemployment benefits, improving the budget balance.
c) Suppose that the government reduces spending, from G to G’. This pushes
the aggregate demand line down further and the economy moves to point C;
the government action relieves the recession.
d) Suppose that the government increases spending. This action worsens the
recession.
e) The recession feeds back to reduce government transfers and increase tax
revenue.

A9. Assuming that there is no government spending or trade, an economy’s

aggregate demand is given by its domestic consumption 𝐶 and investment 𝐼,
𝐴𝐷 = 𝐶 + 𝐼 = 𝑐0 + 𝑐1 𝑌 + 𝐼 . In the economy’s goods market equilibrium this
equals its output: 𝐴𝐷 = 𝑌. Solving for 𝑌 this yields:
𝑌 = [1/(1 − 𝑐1 )] (𝑐0 + 𝐼)
Given this equation, which of the following statements is correct?
a) The multiplier is given by 1 − 𝑐0 /(1 − 𝑐1 ).
b) The smaller the marginal propensity to consume 𝑐1, the larger the multiplier.
c) If 𝑐1 = 1/3, then a £1 million increase in investment would result in a £2
million increase in the output.
d) The boost in the economy’s output is the same whether the aggregate
demand shock comes from an increase in investment 𝐼 or in autonomous
consumption 𝑐0 .
e) The multiplier is given by 1/(1 − 𝑐0 ).
A10. Regarding inflation and unemployment
(see the diagram on the right) which of
the following statements is correct?
a) If we begin with employment at the
labour market equilibrium, and
inflation of zero, we note that the
economy can remain here,
although there is pressure for the
price level to rise.
b) Consider a lower level of
employment due to weaker
aggregate demand. A positive
bargaining gap opens up and
wages and prices will rise.
c) Firms increase wages in response to a fall in unemployment. The price level
rises as firms put up their prices in response to the rise in their labour costs.
d) If the bargaining gap is 1%, prices and wages will rise more than 1%.
e) The Phillips curve illustrates a positive relationship between inflation and
unemployment.

A11. Which of the following statements is correct regarding inflation and deflation?
a) Borrowers benefit from deflation as the value of their debt increases in real
terms.
b) Inflation transfers wealth from borrowers to lenders.
c) Falling prices benefit consumers and are therefore always good for the
economy.
d) Inflation makes it difficult for consumers and firms to attain the message
about scarcity of resources (sent by relative prices) and is therefore always
bad for the economy.
e) Deflation increases the real value of nominal debts. This is undesirable for
borrowers.

A12. How is Quantitative Easing (QE) supposed to work?

a) The central bank sells bonds and other financial assets: greater supply of
these assets pushes up their price.
b) The central bank buys bonds and other financial assets: this reduces private
demand for these assets and pushes down their price.
c) When the central bank buys bonds, it shifts the demand curve to the right,
which pushes up the price. The price of bonds rises: the yield or interest rate
on the assets falls.
d) The fall in interest rates reduces spending: Particularly on housing and
consumer durables.
e) When the interest rate the central bank directly controls is stuck at zero, it
cannot use QE to try to reduce the interest rate.
A13. Why may the process of creative destruction not lead to lower unemployment
rate?
a) Because the new technology improves the population’s quality of life but
never affects the unemployment rate.
b) Because new technology can only displace workers from their jobs.
c) Because technological progress means that wages will fall.
d) Because the Unions may excessively bargain for higher wages by restoring
their previous share of the economy’s output.
e) Because it implies destruction of inefficient technologies.

A14. Country 𝐴 has a lower Beveridge curve than country 𝐵. This indicates that:
a) For a common range of vacancy rates, the unemployment rate of 𝐴 is higher
than the vacancy rate of 𝐵.
b) Country 𝐴 matches workers to jobs more efficiently.
c) For a common range of unemployment rates, the vacancy rate of 𝐴 is higher
than the vacancy rate of 𝐵.
d) The slope of the Beveridge curve of country 𝐴 is higher than the slope of the
Beveridge curve of country 𝐵.
e) The unemployment rate in country 𝐵 is higher than the unemployment rate
in country 𝐴.

A15. The mark-up level at which the entry/exit of firms is zero is higher when there is:
a) Greater competition.
b) Lower expected long-run tax-rate.
c) Higher expected long-run cost of imported goods.
d) Lower human capital and lower infrastructure quality.
e) Lower risk of expropriation of owners at home.

A16. Which of the following statements about globalisation is correct?

a) The volume of capital flow observed in the last century shows periods of
interrupted globalisation.
b) Labour migration is probably the dimension of globalisation along which
international economic integration has advanced the most.
c) Falling import prices occur if and only if globalization is occurring.
d) Falling export prices occur if globalization is occurring.
e) Falling export prices occur only if globalization is occurring.
A17. Consider the diagram on the
right. Suppose Germany is
choosing whether to
specialise on producing
machine tools, in which she
has a comparative
advantage, or electrical
equipment. The economy
starts at point A. Suppose
Germany decides to
specialise in machine tools.
Which of the following
statements is correct?
a) Point E may indicate less
inclusive German Unions.
b) Point B indicates rising employment due to higher export of German machine
tools.
c) Movement from C to D are due to higher production of machine tools.
d) Movement from A to C are due to stronger unions obtaining higher
unemployment insurance.
e) Movement from B to C indicates reduced production of machine tools.

A18. Consider the diagram on the right. The

economy starts at point A, employing 4
million workers at a wage of $20 per hour
and a labour force of 5 million. Immigrant
workers join the labour force. This
increases the labour force from 5 million to
5.5 million workers. Which of the following
statements is correct?
a) Non inclusive Unions can explain the
initial shift of the wage curve (from A
to B).
b) Empirical evidence shows that in the
long-run wages remain low.
c) Immigration unequivocally decrease wages by lowering bargaining power of
workers.
d) The movement from A to B occurs if we assume immigrant workers substitute
to native workers.
e) The movement from A to B occurs if we assume immigrant workers
complement to native workers.
A19. The following describes the golden age of 1948 to 1973:
 The size of the government grew throughout the 1950s and 1960s.
 Workers’ trade unions and political parties were in a stronger position to
bargain for a share of the productivity gains.
 The modern welfare state was built in the 1950s, including the introduction
of unemployment benefits.
 The gold standard was replaced by the Bretton Woods System.
Which of the following statements is correct regarding the golden age?
a) Government increased in size, which made government decision-making too
rigid, which in turn hindered economic expansion.
b) The stronger bargaining position of workers meant that they would mostly
support innovation, despite temporary job destruction.
c) The introduction of unemployment benefits led to higher inflation,
destabilising economic growth.
d) The Bretton Woods System made it more difficult to devalue currencies,
leading to stabilisation of capital flows which contributed to economic growth.
e) Government size increased, which caused a reduction of employment and
wages.

A20. The diagram on the right

describes the general
movements in employment,
profits and wages in the
1950s to 1970s, using the
labour market model. In
addition, note that the post-
war accord collapsed in the
US in the 1960s, while it
survived in Sweden. Which
of the following statements
is correct regarding this
period?
a) With less powerful trade unions, the wage curve rapidly fell back in the US
leading to lower wages and higher unemployment.
b) With a powerful centralised labour movement, the wage curve was kept high
in Sweden causing high wage demand, low profits and low unemployment.
c) Due to the strong bargaining position of workers, the oil shock primarily hit
employers redistributing income from profit to wages, causing an end to the
fair-shares bargaining (the post-war accord) in the US.
d) The diagram reflects the effects of deflation and increase in money supply on
the application of new technology to the productive process.
e) The golden age ended because of aggregate demand problems, caused by
the oil shocks of the 1970s.
A21. The financial accelerator mechanism:
a) Is an example of negative feedback.
b) Helped overcome the Great Depression.
c) Causes an increase in the level of household debt.
d) Increases the stability and growth of the financial system.
e) Was among the solutions to the 2008 financial crisis.

A22. Which of the following are practical and effective policies to deal with carbon
emissions caused by driving a car?
a) A quota on individuals to limit their driving.
b) Coasian bargaining (one side paying the other side to drive or not to drive).
c) A tax on petrol.
d) Ownership of all affected assets.
e) A tax on electric cars.

A23. In the 2006 Stern Review, Professor Nicholas Stern used the discount rate of
1.4% (1.3% due to technological progress plus 0.1% for the possibility of
extinction). Professor William Nordhaus argued that the impatience of citizens
should be additionally considered, estimated to be around 3.0% per annum, and
suggested an overall discount rate of 4.3%. The following table shows the
present values of a
$100 payment in future,
discounted at the two
rates. Based on this
information, which of the
following statements is
correct?
a) Stern would recommend a lower carbon price than Nordhaus.
b) Nordhaus would approve a project that saves the generation in 50 years’ time
$100 in environmental damages if it costs less than $100 today.
c) Both Stern and Nordhaus consider future generations as less worthy of our
concern than the current generation.
d) Nordhaus’s estimation of the discount rate is more correct than Stern’s.
e) The damage of $100 for the future generations is worth much more to Stern
than to Nordhaus in present values.
A24. Which of the following statements is correct regarding price-based and quantity-
based policies?
a) Banning lead in petrol is a price-based policy.
b) A tax on carbon is a quantity-based policy.
c) An advantage of quantity-based policies is that the implementation can be
rapid and complete.
d) Quantity-based policies require more information to implement than price-
based policies.
e) Quantity-based policies do not make use of the information revealed through
the prices at which private economic actors are willing to transact.

A25. In 1980, professional employees earned 50% more than semi-skilled employees
on average. In 2010 the children of people who were professional employees in
1980 earned 33% more than the children of people who were semi-skilled
employees in 1980. What is the intergenerational elasticity?
a) 0.33 c) 0.5 e) 0.66
b) 0.4 d) 0.6

A26. 75% of a country’s population are employed, earning 60% of the total national
income. 15% of the population are unemployed, and earn no income. 10% of the
population are firm owners, earning 40% of the total national income. What is the
country’s Gini coefficient?
a) 0.36
b) 0.39
c) 0.48
d) 0.61
e) 0.64
A27. In Rawls’ theory of justice, the purpose of the veil of ignorance is:
a) To simplify society’s choice of the principles of justice.
b) To ensure that the poorest members of society achieve the maximum
feasible income.
c) To ensure that the distribution of income between rich and poor is as equal
as possible.
d) To prevent individuals from adopting principles of justice that unfairly
advantage themselves.
e) To ensure that no-one can be made better off without making someone else
worse off.

A28. A network external effect refers to a situation where:

a) A phone service provider offers existing customers incentives to subscribe
additionally to services such as broadband and/or pay TV.
b) The average cost of providing a service falls as the number of people using
it increases.
c) The value of a service increases as the number of people using it increases.
d) The government subsidises the installation of infrastructure needed to deliver
a network service, such as high-speed broadband.
e) The range of content provided by a subscription service increases as the
number of users increases.

A29. Which of the following is true in respect of government support for innovation?
a) The government can fund early-stage research through public agencies such
as universities, with a view to achieving future commercial applications.
b) The government should not invest in innovations whose returns are far ahead
in the future and uncertain.
c) The government should not support innovations that would not proceed
without a public subsidy.
d) Extending the duration of patents to protect the interests of innovators would
unambiguously increase the pace of innovation.
e) Eliminating patents to encourage the faster diffusion of successful new
technologies would unambiguously increase the pace of innovation.

A30. With reference to the payoff matrix for an innovation game shown on the right:
 B’s strategy
a) The innovations produced by Firms A Do not
and B are complements, and there are Innovate
innovate
no Nash equilibria.

Innovate
b) The innovations produced by Firms A 0 10

A’s strategy
and B are substitutes, and there are no 0 50
Nash equilibria.
c) {Do not innovate; Do not innovate} is the

innovate
Do not
only Nash equilibrium. 50 20
d) The innovations produced by Firms A 10 20
and B are complements, and {Innovate;
Innovate} and {Do not innovate; Do not innovate} are both Nash equilibria.
e) The innovations produced by Firms A and B are substitutes, and {Innovate;
Do not Innovate} and {Do not innovate; Innovate} are both Nash equilibria.

Please turn over for section B

SECTION B – answer 2 questions from this section.
Each question in section B is worth 20%. Section B is worth 40% in total.

QUESTION B1
What are the national accounts? Discuss the different components of GDP and provide
an example for each of them.

OUTLINE ANSWER:
 Definition of national accounts (like they are the system used to measure overall output and
expenditure of a country).
 Students should present the 3 equivalent ways to measure GDP (spending, production, Income).
 Present the different components of GDP by giving to each one a definition and an example:
1. Consumption (eg. Cars, food)
2. Investment (eg, construction of households, factories)
3. Government Expenditures (eg police, public education)
4. Exports
5. Imports
 Then, it should be presented the calculation of GDP using these components (an equation is a
sufficient).

QUESTION B2
Explain the relationship between expected inflation and employment using the Phillips
curve. Use a diagram to illustrate your answer.

Suggested answer:
The starting points are two assumptions:
• People are forward-looking: They take actions now in anticipation of things they expect to happen.
• People treat prices as messages: Therefore they also treat changes in prices as messages about what
will happen in the future, just as people treat a build-up of clouds as a prediction of rain.
This is because of the way that wage- and price-setters form their views about what will happen to
inflation, which is called expected inflation. The behaviour of inflation will reflect both elements.
In the Diagram, we observe that the labour market
equilibrium involves an unemployment rate of 6%, and
an inflation rate of 3%. If wage and price setters expect
prices to rise by 3% per annum, and the level of
aggregate demand is “normal”, and keeps
unemployment at 6%, then the economy can remain at
the labour market equilibrium with inflation remaining
constant at 3% per annum. Every year, wages and
prices will rise by 3% and the real wage will remain at
the intersection of the wage and profit curves. This is
point A.
Now consider a boom, which takes the economy to
lower unemployment at point B. Workers expect prices
to rise by 3% and will require a nominal wage increase
of 3% just to keep their real wage unchanged. But they
require an additional 2% rise to give them an expected
real wage rise on the wage curve, so wages increase by 5%. With their costs rising by 5%, firms will
increase prices by 5%. In the boom, inflation will be 5%.
When inflation is not zero, we can summarise the causal chain from the bargaining gap to inflation like
this:

QUESTION B3
Illustrate by means of a graph similar to the one seen in class, how comparative
advantage increases the feasible consumption frontiers of two countries involved in
the trade of two goods. Explain how a country with absolute advantage in the
production of both goods may still find it beneficial to trade with another country.

OUTLINE ANSWER: The student should be able to show in a simple two-goods quadrant how the
production/consumption frontiers of two countries expand when trade is allowed. In the second part,
he/she should be able to distinguish the definition of comparative and absolute advantage and explain
that the relative and not the absolute advantage is important to find trade mutually beneficial.

QUESTION B4
Assume that there is a conflict of interest in the level of pollution between citizens, who
dislike pollution, and the owner of a firm, who hires the citizens and is not affected by
pollution. Assume the firm pollutes as a consequence of the production process.
Describe what happens if:
a) the firm has all the bargaining power;
b) citizens have all the bargaining power; and
c) both the firm and citizens have some bargaining power.

A good answer will:

- show and discuss that if the firm has all the bargaining power then it would find the wage and
environmental quality package that minimised its costs while not violating the leave-town condition. To
do this it would find the point on the citizen’s reservation indifference curve at which the vertical distance
between the firm’s shutdown condition and the citizen’s leave-town condition was the greatest (point A
in the following graph).
- show that if citizens have all the
bargaining power then they will
reach their highest possible
indifference curve, while avoiding the
firm's shutdown condition (point B)
- show and discuss that if both the
firm and citizens have some
bargaining power they will reach a
point in between A and B, for
example point C.
QUESTION B5
Discuss the factors that influence the level of economic inequality in a country.

OUTLINE ANSWER:
Endowments are facts about an individual that may affect his or her income. Endowments include
what people have and what they are.
A person’s physical characteristics and capabilities form part of their endowment.
When nationality, race, gender or social class affect an individual’s chances of getting a job, these
form part of their endowment.
Classes are groups of people who, because of their differing endowments, engage in asymmetric
economic interactions with members of other groups. Examples include:
- Employers and employees
- Landlords and tenants
- Borrowers and lenders
Economic interactions are asymmetric because the actions open to one party (e.g. the employer) are
not open to the other (the employee).
Interactions between members of different classes are both economic and political, involving the
exercise of power by one party over another.
The employer decides who to hire, assigns tasks, and can terminate the employment. The employee
exercises limited discretion to go about their tasks within limits defined by the employer.
Economic inequality exists both between classes, and within classes, when employees with different
skills are paid different wages or have different prospects of getting a job.
Institutions and technology can affect the value of a particular endowment. Being physically strong
was a valuable endowment in agriculture, until mechanization made physical strength less important
in determining earnings.
Introduction of labour-saving technology can reduce the number of workers a firm needs, making
existing employees more vulnerable to job loss and reducing the likelihood of finding a job for the
unempoyed.
For individuals who need to borrow, the nature of lending institutions matters. In a modern financial
system, a bank may be willing to lend at a much lower interest rate than a traditional village money-
lender.
Earnings may be determined by the interaction of supply and demand for the worker’s endowments;
or they may be set by law; or they may be influenced by the bargaining power of a trade union.

Diwedd / End