Economics 248 Assignment 2 (version B) This assignment has a maximum total of 100 marks and is...

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Economics 248 Assignment 2 (version B)

This assignment has a maximum total of 100 marks and is worth 10 percent of your total grade for this course. You should complete it after completing your course work for Units 4, 5, and 6. Answer each question clearly and concisely.

The Canadian consumer confidence rebounded sharply in September 2012. This is a significant rebound since the plunge in October 2008. According to some analysts, the good news from Europe and the jump in the stock market appear to have had an effect on Canadian consumer confidence. (10 marks)

a. Explain the various factors that buoyed the Canadian consumer confidence in 2012.

b. Explain and draw a graph to illustrate how a rise in consumer confidence can change real GDP and the price level in the short run.

c. If the economy was operating at full- employment equilibrium, describe the state of equilibrium after the increase in consumer confidence. In what way might consumer expectations have a self-fulfilling prophecy?

d. Why do changes in consumer spending play such a large role in the business cycle?

e. Explain how the economy can adjust in the long run to restore full-employment equilibrium. Draw a graph to illustrate this adjustment process.

a. Differentiate between monetary policy instruments and monetary policy tools .

(5 marks)

b. Describe the two key tools of monetary policy, and describe how they would be used by the Bank of Canada to implement a contractionary monetary policy. (5 marks)

The economy of Kenya is in recession, and the recessionary gap is large. The World Bank hires you as its economist and asks you to (10 marks)

a. describe the discretionary and automatic fiscal policy actions that might occur.

b. describe a discretionary fiscal stimulation package that could be used that would not bring a budget deficit.

c. describe the risks of discretionary fiscal policy in this situation.

d. explain the argument that lower corporate tax rates can increase tax revenue in Kenya. Consider the Laffer curve in your explanation.

a. Explain the concept of the multiplier, and explain the role of the marginal

propensity to save (MPS) in determining the size of the multiplier.

(4 marks)

b. Explain how the size of the multiplier will change when one brings in the role of the marginal tax rate. (2 marks)

c. Using the concepts in parts (a) and (b) above, calculate the slope of the AE curve and the size of the multiplier if MPS = 0.35. Then, calculate the revised slope of the AE curve and the multiplier when you know that the imports and the marginal tax rate will reduce the slope of the AE curve by another 0.20.

(4 marks)

The economy has seen the unemployment rate decrease from 8.56 percent to 6.15 percent, the inflation rate increase from 1.4 percent to 3.2 percent, and there has been a 17 percent increase in consumer spending and a 22.5 percent increase in investment spending in the same time period.

a. Given the above, what would you predict about the overall direction of the economy? Explain your answer by referring to each of the indicators cited.

(5 marks)

b. Describe the fiscal policy that will already be automatically operating, as well as the appropriate discretionary fiscal policy that the government should adopt, given the above situation. (3 marks)

c. Describe the appropriate monetary policy that the Bank of Canada should be operating, given the above situation. (2 marks)

Describe the contrasting views of the Keynesians and the monetarists with regard to an appropriate expansionary policy to bring an economy out of a period of high unemployment caused by a weak aggregate demand. (10 marks)

Suppose that Canada can produce 1500 tons of wheat or 500 tons of steel. Suppose that Brazil can produce 1000 tons of wheat or 1500 tons of steel. (10 marks)

a. What is the opportunity cost of 1 unit of wheat in Canada? Show your work.

b. What is the opportunity cost of 1 unit of steel in Brazil? Show your work.

c. Which country has a comparative advantage in producing steel? Explain why.

d. Suppose that trade takes place between Canada and Brazil. Which good will Brazil import from Canada? Explain why.

a. Describe an export subsidy, and explain the gains and losses that might arise

from such practice. (5 marks)

b. Why are developing countries in Africa especially affected by export subsidies in industrial countries? (5 marks)

In 2012, the Canadian dollar appreciated against the US dollar. Explain the effects of this appreciation on each of the following. (10 marks)

a. Canadian importers of goods from the US

b. Canadian firms that sell commodities to US buyers

c. American tourists who come to Canada

d. US investors who had purchased Canadian securities prior to this currency appreciation

Global Insight (GI) forecasting firm predicted that the Canadian economy will bounce back by a stronger than expected 1.0% on annualized basis in the third quarter of 2012 and with a further 0.1% in the fourth quarter of 2012. The firm also expects moderate growth overall in 2013. (10 marks)

a. What evidence does GI present to support the view that Canada had entered a recovery?

b. Use a short-run Phillips curve to explain why the inflation rate may increase over the course of 2012.

c. Under what circumstances might the inflation rate not increase during 2012?

And one more question:

If the nominal GDP is $559 billion in the base year, and it rises to 577 in Year 1, and 605 in Year 2, what is the real GDP in each year, given that the price index has risen from 100 to 104.5 in the first year and up to 108.3 in the second year?
If the price index 20 years before the base year was 41.2, and the nominal GDP for 20 years before the base year was 191.0, what was the real GDP for that year? Show your work in all cases. (10 marks)

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Robert · Accepted Answer

1.  
a) There are various factors that have had positive impact on the Canadian consumer 
confidence index. Although some analysts feel that the improvement in European 
conditions has benefitted the consumer index in Canada and also the jump in the 
strong market. However the increase in job prospects in the country and also the 
increase in income level is directly related to the growth of the economy and the 
consumer spending. All these factors contributed to the Canadian consumer 
confidence and is also indicated in the Canadian consumer confidence index.
b) The increase in the consumer confidence would boost the spending in the 
economy and thus the inflation would go up. This increased inflation would mean 
that higher profits will be there for the companies and thus the GDP would 
improve. The below graph shows the increase in GDP levels of the two economies 
with the increase in inflation rate. 
 
As shown above the GDP of the economy has gone up with the increase in 
inflation and that means the increase in consumer confidence. 
c) The changes in consumer spending are very important for the growth in the 
economy. With the increased consumer spending the demand will be created in 
the market and thus the wealth will be generated. The increased spending would 
also mean that the increased wealth will be invested in the market. Thus the 
consumer spending is important for the growth of the business and the economy.  
d) The adjustment of the economy in the long run for the full employment can be 
explained with the help of below diagram.
The aggregate supply curve would move upwards as shown in the above diagram and 
thus the supply curve will become horizontal. Thus although the demand curve will 
moving upwards the supply curve will become vertical. Thus in the long run the 
supply of labor will reach the realistic levels wherein the unemployment will start to 
occur. This will restored in the long run by the self correcting mechanism. Thus if the 
wages will be higher the employment will come down and if the wages are less it will 
increase corresponding to the long run aggregate supply curve.   
2.  
a) The monetary policy is conducted by the central bank of a country. The monetary 
policy instruments are the quantities that can be directly controlled by an 
economic policy maker. The monetary tools refer to the ways of implementing 
these monetary instruments. The monetary policy tools include the short term 
rates or the open market operations and the reserve requirements of the banks. The 
monetary policy tools are the ways to implement the monetary policy instruments. 
For example the short term rates instrument will include the tools like managing 
the interest rates applicable in the market and the reserve requirements of the 
banks so that the flow of money in the economy is managed.
b) The two tools that can be used as the contractionary monetary policy i.e. which 
will be implemented in order to reduce the supply of money in the market are 
increasing the interest rates and thus the supply of money will reduce. The second 
way to follow the contractionary monetary policy is to increase the reserves that 
the banks have to keep with the central bank. This will increase the funds that are 
available with the central bank. This is done by increasing the rates the bank 
receives by keeping the reserves with the central bank known as the Reverse Repo 
Rate.
3.  
a) Since the recessionary gap is large, the government might take steps that will 
boost the economy. Thus the steps that might be taken by the government would 
include decrease in taxes and increased spending of the government. This would 
mean that there will be immense pressure on the government firstly to sustain if 
the situation takes a long time to recover and secondly should be able to maintain 
the equilibrium in the economy as the overspending by the government would 
impact the economy severely.
The automatic fiscal policy is the set of stabilizers that act in a counter way to the 
economic conditions so as to maintain the balance with the implication of the 
policy changes. These include the corporate profits, income taxes etc.

Economics 248 Assignment 2 (version B) This assignment has a maximum total of 100 marks and is worth 10 percent of your total grade for this course. You should complete it after completing your course...

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