• Answer ALL questions. Each question carries 10 marks. Sub-questions (a) and (b) are not necessarily related to each other.
• Draw diagram/s yourself. Do not electronically copy them from a book, lecture slides, or the Internet sources.

QUESTION 1

1. (a) Imagine that the Philippines produces only two goods, durian and papaya. The country neither exports nor imports any goods. The following table includes price and production data.

Calculate nominal GDP, real GDP, deflator, and inflation rate for the country.        [Marks 6]

 (1) (2) (3) (4) (5) (6) (7) (8) (9) Year Durian (mill) Price of durian (RM) Papaya (mill) Price of papaya (RM) Nominal GDP Real GDP GDP Deflator Inflation Rate 2016 (base year) 5 10 20 8 2017 6 10 22 8 2018 6 12 22 10 2019 7 13 25 11

1. (b) Casey worked all the year round and deposited her savings into a bank in Malaysia. She received nominal interest rate of 8 percent a year. Malaysia’s CPI increased from 160 to 167 during the year. What was the real interest rate that Casey earned? What would have been her real interest rate if she had decided not to deposit?                         [Marks 4]

Use as much space as needed to write the answer

 (1) (2) (3) (4) (5) (6) (7) (8) (9) Year Durian (mill) Price of durian (RM) Papaya (mill) Price of papaya (RM) Nominal GDP Real GDP GDP Deflator Inflation Rate 2016 (base year) 5 10 20 8 2017 6 10 22 8 2018 6 12 22 10 2019 7 13 25 11

QUESTION 2

1. (a) Suppose Indonesia’s central bank continually pursues an expansionary monetary policy. Using the AD-AS framework, show how this will affect aggregate demand curve(s) and long-run aggregate supply curve of real output in the country. Diagram required.

[Marks 7]

1. (b) Does the stagflation concept explain Indonesia’s macroeconomic condition in part (a)? Explain.                                                                                                             [Marks 3]

QUESTION 3

1. (a) Suppose you are appointed to the position of key advisor for the central bank in China. Explain to the bank how its monetary policy may affect a dollar’s purchasing power of goods and services in the country. Diagram(s) required.                                                                [Marks 5]
2. (b) Suppose an economy has an excess supply of workers. Should firms reduce or increase the wage? Explain this with the standard economic theory and the efficiency-wage theory.  [Marks 5]

QUESTION 4

1. (a) Suppose a country imports oil. The world oil price has recently decreased, affecting the country’s domestic aggregate supply. Explain how policymakers find the trade-off between unemployment and inflation in the short run in the country. Diagram(s) required. [Marks 5]
2. (b) The natural rate of unemployment is 5% in a given country. The country’s central bank mistakenly believes that the rate should be 6% and successively pursues a monetary policy to make it at 6%. Demonstrate how this will affect the economy. Diagram required. [Marks 5]

QUESTION 5

1. (a) Suppose that the government has recently reduced the extant tax incentive for saving and simultaneously introduced an investment tax credit in India. Explain the impacts on, and implications for, loanable funds, net capital outflow, and real exchange rate in India. Diagram/s required.                                    [Marks 5]
2. (b) Suppose the government increases its expenditure by RM8 billion in a country. Explain how this may influence the real output. Diagram not required. [Marks 5]