THE INTERNATIONAL UNIVERSITY– VIETNAM NATIONAL UNIVERSITY – HCMC
SCHOOL OF ECONOMICS, FINANCE, AND ACCOUNTING
MID-TERM EXAMINATION
SEMESTER 2 2023 – 2024
Date: 24 April 2024
Duration: 90 minutes
Student ID: .................................. Name:................................................
SUBJECT: INTRODUCTION TO MACROECONOMICS
School of Economics, Finance, and Lecturer
Accounting
Signature:
Signature:
Dr. Hoang Thi Anh Ngoc
Full name: Dr. Nguyen Ba Trung
Dr. Bui Thi Thao Hien
Dr. Do Hoang Phuong
MA. Duong Minh Hoang
Proctor 1: Proctor 2:
GENERAL INSTRUCTION(S)
1) This is a closed-book examination. However, students can bring ONE A4 sheet of handwritten notes
and calculator(s) to the exam room.
2) Electronic decides and mobile phone are strictly prohibited.
3) No discussion and no sharing Materials.
4) Please round the results of ALL questions to 2 decimal places, e.g. 0.23
GOOD LUCK!
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Question 1 (20 pts)
The economy of country A produces three goods: computers, DVDs, and pizza. The
accompanying table shows the prices and output of the three goods for the years 2020, 2021, and
2022.
Computers DVDs Pizzas
Price Quantity Price Quantity Price Quantity
2020 $900 10 $10 100 $15 2
2021 $1,000 10.5 $12 105 $16 2
2022 $1,050 12 $14 110 $17 3
a. Calculate nominal GDP in country A for each of the three years. What is the percent change
in nominal GDP from 2020 to 2021 and from 2021 to 2022? (10 points)
b. Calculate real GDP in country A using 2020 prices for each of the three years. What is the
percent change in real GDP from 2020 to 2021 and from 2021 to 2022? (10 points)
Answers
a. NGDP2020 = $10,030 ; NGDP2021 = $11,792; NGDP2022 = $14,191
% change in NGDP 2020-2021 = 17.6%
% change in NGDP2021-2022 = 20.3%
b. RGDP2020=$10,030, RGDP2021=$10,530; RGDP2022=11,945
% change in RGDP2020-2021 = 5.0%
% change in RGDP2021-2022 = 13.4%
Question 2: (20 pts)
Suppose we have a hypothetical economy where people consume only three goods (A, B, and C).
The prices of the three goods and their quantities consumed in three consecutive years are as
follows:
Price Quantity Price Quantit Price Quantity
Year of A of A of B y of B of C of C
Year 1 $10 100 $20 150 $30 200
Year 2 $12 110 $25 160 $35 210
Year 3 $15 120 $28 170 $40 220
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a. Calculate the Consumer Price Index (CPI) for Year 2 and Year 3, using Year 1 as the base
year. (10 pts)
b. Calculate the inflation rate between Year 2 and Year 3. (5 pts)
c. Discuss two possible flaws with the CPI calculation. (5 pts)
Cost of basket (Year 1 as the base year)
Year1 (10 × 100) + (20 × 150) + (30 × 200) = 10000 (2 points)
Year2 (12 × 100) + (25 × 150) + (35 × 200) = 11950 (2 points)
Year3 (15 × 100) + (28 × 150) + (40 × 200) = 13700 (2 points)
Answers
CPIYear 2 = [(Cost of basket in Year 2) / ( Cost of that same basket in Year 1)]) × 100
CPIYear 2 = (11950/10000) × 100 = 119.5
CPIYear 3 = [(Cost of basket in Year 3) / ( Cost of that same basket in Year 1)]) × 100
CPIYear 3 = (13700/10000) × 100 = 137.
Inflation rate (year2-year3) = (137/119.5)-1 = 14.64%
a. Possible flaws with the CPI calculations (students only need to discuss two to get full points)
Substitution bias:
o Over time, some prices rise faster than others.
o Consumers substitute goods that become relatively cheaper.
o The CPI misses this substitution because it uses a fixed basket of goods.
o Thus, the CPI overstates increases in the cost of living.
Introduction of a new good:
o Introducing new goods increases variety, allowing consumers to find products that
more closely meet their needs.
o In effect, money becomes more valuable.
o The CPI misses this effect because it uses a fixed basket of goods.
o Thus, the CPI overstates increases in the cost of living.
Unmeasured quality change:
o Improvements in the quality of goods in the basket increase the value of each dollar.
o The statistical agency cannot fully account for quality changes, as quality is hard to
measure.
Thus, the CPI overstates increases in the cost of living.
Question 3: (20 pts)
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a. Some economists assert that it is possible to raise the standard of living by reducing
population growth. However, others argue that population growth contributes to an
improved standard of living. In your opinion, which argument is valid? Explain and give an
example of the policy supporting your argument. (8 pts)
b. The table below lists the number of people by labor force classification for the country of
Shelbyville.
Employed 80 million
Unemployed 20 million
Not in the Labor Force 60 million
i. What is the size of the labor force, and the size of the adult population? (6 pts)
ii. What is unemployment rate and labor force participation rate? (6 pts)
Answers
a. Students can choose to support population growth or population control with explanations:
Population growth: More people = more labors, more scientists, more consumers
Population control: Stretching natural resources, diluting the capital stock
b. Labor force = 100m, adult population = 160m
u-rate = 20/100 = 20%, LFPR = 100/160 = 62.5%
Question 4 (20 pts)
a. A corporate bond from Infitech (a fictitious company) has a term of 5 years and offers a 7%
interest rate per year. After the maturity date, how much, in total, will an investor who buys
$10 million of this bond receive from the company? (6 pts)
b. Infitech also intends to issue 10-year bonds to the market. To successfully attract buyers,
how should the company set the interest rate for these 10-year bonds? Explain your
reasoning for the level of interest rate you recommend. (6 pts)
c. In the case that Infitech opts not to issue bonds, what are the alternative channels through
which it can access funds from the financial system? (8 pts)
Answers
a. The investor will receive the principal at 10 mil + interest payments for 5 years at
7%x5x10mil=3.5mil. The total amount is 13.5.
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b. The offered interest rate must be higher than 7% to attract buyers (5 points). This compensates
for various risks associated with the longer term, such as inflation, market rate fluctuations, and
the possibility of bankruptcy…
c. The company can seek loans from banks; or it can issue more shares on the market, e.g. via the
stock exchange.
Question 5 (20 pts)
Assume that a bank has on its asset side reserves of 1000 and loans of 6000 and on its liability
side deposits of 7000. Assume that the required reserve ratio is 10 percent.
a. How much is the bank required to hold as reserves given its deposits of 7000? (5pts)
b. How much are its excess reserves? (5pts)
c. By how much can the bank increase its loans? (5pts)
d. Suppose a depositor comes to the bank and withdraws 400 in cash. Show the bank’s new
balance sheet, assuming the bank obtains the cash by drawing down its reserves. Does the
bank now hold excess reserves? Is it meeting the required reserve ratio? If not, what can it
do? (5pts)
Answers
a. Required Reserves = Required Reserve Ratio × Deposits Required Reserves = 0.10 × 7000
Required Reserves = 700
b. Excess Reserves = Actual Reserves – Required Reserves Excess Reserves = 1000 – 700
Excess Reserves = 300
c. Since excess reserves are positive, the bank can has free lending capacity and thus it can
increase lending to businesses and consumers. Here the bank can do two things: either
increase deposits or decrease reserves. Suppose the bank chooses to issue new loans through
raising new deposits. The bank has 1000 of reserves so it can raise up to 1000/0.1 = 10000 in
deposits. If 10000 of deposits are raised, the bank is then able to issue total loans for an
amount equal to the difference between deposits and reserves, which is: 10000 − 1000 =
9000. In this case the bank is issuing 3000 in additional loans. Then the balance sheet of the
bank becomes:
Note that the bank can increase its loans by 3000 only if each loan is deposited at the same
bank. Indeed in this case the bank totally absorbs the effect of the multiplier. Alternatively,
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the bank can just choose to run down reserves and use its reserves surplus to issue loans.
Reserves can be run down exactly of the amount of excess reserves, that is 300. In this case
the balance sheet would look like:
In this case the bank issues new loans of 300. Still, at economy-wide level, the money
supply
will increase by 300/0.1 = 3000 because excess reserves that the bank is injecting into the
system will be amplified through the multiplier effect. The only difference with the situation
analyzed above is that borrowers here choose to deposit loans in other banks.
d. Suppose a depositor comes to the bank and withdraws 400 in cash. Show the bank’s
new balance sheet, assuming the bank obtains the cash by drawing down its reserves.
Does the bank now hold excess reserves? Is it meeting the required reserve ratio? If
not, what can it do?
The bank’s balance sheet would be as follows:
The bank no longer holds excess reserves:
Excess Reserves = Actual Reserves – Required Reserves
Excess Reserves = 600 – (0.10 × 6600)
Excess Reserves = 600 – 660
Excess Reserves = -60
The bank is also not meeting the required reserve ratio of 10%:
Actual Reserve Ratio = Reserves / Deposits
Actual Reserve Ratio = 600 / 6600
Actual Reserve Ratio = 9.09%
In order to meet the required reserve ratio of 10%, the bank can:
(1) Attract more deposits (thereby increasing both deposits and reserves by the same
amount)
from new or existing clients. In particular, if an additional 66.67 are deposited into the bank
(thereby increasing deposits and reserves by 66.67), then the bank would meet the required
reserve ratio of 10%.
(2) Borrow money from the Fed or the interbank market. Again, if the bank borrows 66.67
(thereby increasing deposits and reserves by 66.67), then the bank would meet the required
reserve ratio of 10%.
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(3) Recall loans (thereby increasing reserves and decreasing loans by the same amount
without
affecting deposits). In particular, if the bank recalled 60 in loans (that ultimately come from
other banks), then it would meet the required reserve ratio of 10%.
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