Macroeconomics

Practical exam with solutions

Question 1: Disease X occurred and severely affected the ABC country. Disease X has a mortality rate of up to
40%. The number of deaths has exceeded 28,000.
1.1. Among the five factors determining long-term economic growth in ABC, such as physical capital, human
capital, productivity, technology, and institutions, which factor(s) do you think is/are most affected by the disease?
Explain why.
1.2. How will the aggregate supply and aggregate demand of ABC’s economy be affected? Provide clear reasons
for changes in aggregate supply (short-term and long-term) or aggregate demand, and draw the AS-AD graph to
illustrate.
1.3. A vaccine for Disease X has been developed and widely used. As a result, the disease is controlled. Explain
the effects on aggregate supply and aggregate demand, and draw the AS-AD graph to illustrate.

1.4. The chart below illustrates the relationship between the GDP of country ABC and the price level using the
aggregate supply - aggregate demand model. It shows that the aggregate supply curve (AS) intersects the
aggregate demand curve (AD) at the potential output level (the economy is at full employment). Assume that a
shock causes the aggregate demand to shift to the right. What will happen to the GDP and price level? Draw an
illustration.

Solutions:
1.1. The disease affects health, thereby directly reducing human capital, which includes a decrease in the labor
force as well as a reduction in the quality of the workforce. This, in turn, leads to a reduction in labor productivity.
1.2. A reduction in human capital and productivity decreases both short-term and long-term aggregate supply.
Both aggregate supply curves shift to the left, causing prices to increase and income to decline.
 Giá
LRAS2 LRAS1

AS2

AS1
P2
P1

AD1

Y2 Y1 GDP

1.3. When a vaccine is available to stabilize the disease, human capital improves, leading to an increase in labor
productivity, which helps both short-term and long-term aggregate supply to increase again.

Giá
LRAS1 LRAS2

AS1

AS2
P1
P2

AD1

Y1 Y2 GDP

1.4. A demand shock causing the aggregate demand curve to shift to the right means, according to the
information in the problem, that the equilibrium price level increases, but GDP remains unchanged because the
GDP has already reached the full employment level.
Question 2: President Donald Trump's administration implemented trade policies with China, imposing tariffs on
goods imported from China. In response to the U.S. policy, China:
1. Increased tariffs on goods imported from the U.S.
2. Devalued its currency (Yuan - Renminbi).
3. Subsidized export businesses.
4. Redirected exports to third countries to avoid U.S. tariffs.
This trade war resulted in the sharp decline of the U.S. stock market and a wave of investment cuts by businesses
across the U.S. On the consumer side, due to the rising prices of goods because of U.S. tariffs, especially for
middle and lower-income groups, there was a heavy reliance on essential imported goods from China for daily
needs. Domestic prices also increased because businesses depend on cheap raw materials from China. As a result,
U.S. households had to cut back on spending due to the wealth effect.

2.1. Do you think China's policies were effective in responding to the trade war? Knowing that China's export
value to the U.S. is tremendous so that the tariff barriers would cause significant damage to China.
2.2. Assuming the economy is at long-term equilibrium. Using the AS-AD model, illustrate and analyze the short-
term and long-term shifts of the U.S. economy affected by the economic shock from the U.S.-China trade war (a
demand shock). Specifically, explore the two following scenarios:
• Scenario 1: The U.S.-China trade war ends soon.
• Scenario 2: The U.S.-China trade war drags on, and the economy enters a long-term recession. Point out
that the economy will fall into a long-term recession without government intervention.
2.3. Do you think the government should use fiscal policy, monetary policy, or both to address the recession?
(Specify each policy and provide examples if possible).

Solutions:
2.1 You should provide your personal opinion. Here is a reference answer:
Yes, but the Chinese government also had to bear the cost. Specifically:
China's policies were timely and shrewd, responding by devaluing its currency, subsidizing export businesses,
and redirecting exports to third countries. However, China's retaliatory policy would escalate trade tensions. The
U.S. is a major trade partner for China, and prolonged tension would lead to significant economic damage for
China. The Chinese government should engage in trade negotiations with the U.S. to resolve the trade war
tension.

2.2. You should provide your personal opinion. Here is a reference answer:
The economy is in long-term equilibrium, where LRAS = SRAS1 = AD1 at point A on the graph. This is the long-
term equilibrium point. At this point, production reaches potential output, and the unemployment rate is at its
natural level.
The U.S.-China trade war creates a negative demand shock due to the U.S. tariff policy on Chinese imports, which
raises the prices of both imported and domestic goods, as many U.S. businesses rely on cheap imported materials
from China, increasing production costs. At this point, consumers reduce spending and businesses cut investment,
causing aggregate demand to shift left, AD1 → AD2. The curve AD2 intersects SRAS1 at point B, the short-term
equilibrium. At this point, output decreases, prices decrease, and unemployment increases.
Two macroeconomic scenarios can occur:
• Scenario 1: The trade war ends soon. The two countries reach a trade agreement. At this point, the
aggregate demand curve will shift back to the original long-term equilibrium, and the recession will end.
In other words, the short-term equilibrium at point B will self-adjust back to the long-term equilibrium at
point A.
• Scenario 2: The trade war continues. The U.S. increases tariffs, and China continues to retaliate. The
recession persists at point B with low price levels, leading to a reduction in nominal wages. This stimulates
businesses to increase production, and the short-run aggregate supply curve shifts right from SRAS1 to
SRAS2.
The long-term equilibrium is at point C on the graph. At this point, output returns to its potential level, but the
equilibrium price level is lower, so nominal GDP decreases compared to the long-term equilibrium at point A.
In Scenario 2, to prevent the equilibrium from shifting from B to C, the government needs to intervene early using
fiscal and monetary policy tools to prevent a prolonged recession.

2.3. You should provide your personal opinion. Here is a reference answer:
In a recession, the government should apply expansionary fiscal policy, expansionary monetary policy, or both,
to counter the recession (using a combination of fiscal and monetary policy). Specifically:
• Expansionary fiscal policy: Increases aggregate demand through:
 o Tax cuts: Reduce VAT on essential goods, cut household income tax, reduce corporate income
taxes, etc.
o Increased government spending: Stimulate the market by increasing government purchases.
o Increased transfer payments: Support businesses or households in difficulty through social welfare
or subsidies.
• Expansionary monetary policy: Increases aggregate demand through increasing the money supply and
lowering interest rates using tools such as:
o Open market operations: Purchasing government securities or treasury bills.
o Lowering required reserve ratios: Reducing required reserves at commercial banks.
o Lowering discount rates: Reducing the central bank's refinancing rate to commercial banks, such
as the discount or refinancing rate.

Question 3: An economy has 3 groups of products: A, B, and C. Prices are calculated in $/kg, while output is
measured in tonnes (kg).
Year (i) 𝑃𝐴,𝑖 𝑄𝐴,𝑖 𝑃𝐵,𝑖 𝑄𝐵,𝑖 𝑃𝐶,𝑖 𝑄𝐶,𝑖
2021 1 80 2 120 3 150
2022 2 120 4 150 6 180
2023 3 150 6 180 9 210
Calculate:
3.1. Nominal GDP (Yn) for each year.
3.2. Real GDP (Y) and the GDP Deflator Index (DFI) for each year, with 2021 as the base year.
3.3. The GDP growth rate (g) for 2022 and 2023.
3.4. The inflation rate (π) based on the GDP Deflator Index for 2022 and 2023.
Solutions:
GDP Deflator Growth rate Inflation rate
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 Real GDP
Year 𝒊 𝒀𝒏𝒊 𝒀𝒊 𝑫𝑭𝑰𝒊
𝒀𝒏𝒊 𝒀𝒊 𝑫𝑭𝑰𝒊 = 𝒙𝟏𝟎𝟎 𝒈𝒊,𝒊−𝟏 = −𝟏 𝝅𝒊,𝒊−𝟏 = −𝟏
𝒀𝒊 𝒀𝒊−𝟏 𝑫𝑭𝑰𝒊−𝟏

1 ∗ 80 + 2 ∗ 120 + 3
2021* 770 100
∗ 150 = 770.

2 ∗ 120 + 4 ∗ 150 1 ∗ 120 + 2 ∗ 150 1920 960 200

2022 𝑥100 = 200 − 1 = 24.67% − 1 = 100%.
+ 6 ∗ 180 = 1920. + 3 ∗ 180 = 960. 960 770 100

1140
3 ∗ 150 + 6 ∗ 180 1 ∗ 150 + 2 ∗ 180 3420 −1 300
2023 𝑥100 = 300 960 − 1 = 50%.
+ 9 ∗ 210 = 3420. + 3 ∗ 210 = 1140. 1140 200
= 18.75%

Question 3.5. Suppose we do not consider price changes but focus only on output. Can we conclude whether the
total output of a year has increased or decreased compared to the previous year? How is this related to the change
in Real GDP?
Solutions:
If the output of product X increases by 1 unit, while the output of product Y decreases by 1 unit, and if these are
two different goods, we may find it difficult to conclude how the total output has changed compared to the
previous year without considering the price factors. Real GDP helps solve this problem by calculating GDP
based on the prices of the base year. In this case, we can see that Real GDP increases because the increase in
output of product X brings a higher market value than the reduction in output of product Y.
Question 3.6. Do you think Real GDP can be a good indicator of a country’s standard of living?
Solutions:

No, Real GDP is not a good indicator of a country’s standard of living because:
• Activities or transactions in the black market, such as the economic activities of households, unregistered
business activities, or illicit transactions, are often not recorded in GDP.
• Indicators related to the healthcare system, education, life expectancy, environment, life satisfaction, etc.,
are not considered when calculating GDP.

Question 3.7. I love the subject of Macroeconomics because it provides important and useful knowledge that
helps me understand more about the movements of the macroeconomy both domestically and globally. In your
opinion, is this perspective correct or incorrect?
Solutions:

Correct. The subject of Macroeconomics helps me better understand how economic agents (businesses,
households, and the government) interact with each other, the role of economic indicators in managing
macroeconomic policies, as well as the role of macroeconomic policies in response to economic shocks both
domestically and globally.