Macro Economics 1.1 You need to follow an appropriate format explained below. Not following appropriate format will cause loss of some marks . · All written answers must be clearly typed and printed....

Macro Economics

1.1 You need to follow an appropriate format explained below. Not following appropriate format will cause loss of some marks.

·All written answers must be clearly typed and printed. Hand-written answers are NOT allowed.

·All assignment questions and sub-questions should be typed in order at the heading.

·Separate each main question by different page. For example, if Question 1 (a) (b) (c) and (d) are answered on pages 1-2, then start Question 2 on page 3, etc.

· You should include appropriate and relevant diagrams, charts and tables together with your descriptive analytical answers.

1.2 The answers to the assignment questions should be written clearly and concisely with the main points only, and avoid irrelevant points.

·Do spelling and grammar check in MS Word, once completed.

Question 1– 10 marks

The table lists some macroeconomic data forXanadu in 2012.

(a) CalculateXanadu’s GDP in XXXXXXXXXXmark)

(b) Explain the approach (expenditure or income) that you used to calculate GDP. (1 mark)

An economy produces only apples and oranges. The base year is 2011, and the table gives the quantities produced and the prices.

(c) Calculate nominal GDP in 2011 and XXXXXXXXXXmark)

(d) Calculate real GDP in 2011 and 2012 expressed in base-year prices. (2 mark)

The tables describe an economy’s labour market and its production function in 2010.

(e)What are the equilibrium real wage rate, the quantity of labour employed in 2010, labour productivity and potential GDP in 2010? (1 mark)

(f)In 2011, the population increases and labour hours supplied increase by 10 at each real wage rate. What are the equilibrium real wage rate, labour productivity and potential GDP in 2011? (2 mark)

(g)In 2011, the population increases and labour hours supplied increase by 10 at each real wage rate. Does the standard of living in this economy increase in 2011? Explain why or why not. (2 mark)

Question 2– 10 marks

ABS reported the following data for October 2011:

Labour force participation rate:65.6per cent

Working-age population:18,429,726

Employment-to-population ratio:62.2

Calculate the

(a) Labour force. (1 mark)

(b) Employment. (2 mark)

(c) Unemployment rate. (2 mark)

TheLucky Country reported the following CPI data:

June XXXXXXXXXX

June XXXXXXXXXX

June XXXXXXXXXX

(d) Calculate the inflation rates for the years ended June 2011 and June 2012. Explain how the inflation rate changed in 2012? (1 mark)

(e) Explain why might these CPI numbers be biased? (2 mark)

(f) What would be alternative price indexes and how would the alternative price indexes help to avoid the bias in the CPI numbers? (2 mark)

Question 3 – 10 marks

IMF Warning over Slowing Growth

The global economy may face a marked slowdown next year as a result of the turmoil in financial markets, the International Monetary Fund has warned. The IMF said the global credit squeeze would test the ability of the economy to continue expanding at recent rates. While future economic stability could not be taken for granted, there was plenty of evidence that the global economy remained durable, it added.

BBC News, October 10, 2007

(a) Explain how turmoil in global financial markets might affect the demand for loanable funds, investment, and global economic growth in the future.(4 mark)

Bernanke’s Asian Savings Glut Theory Blasted

U.S. Federal Reserve chairman Ben Bernanke says that high saving rates in Asia (that he called a “glut of savings”) were to blame for the extraordinarily low bond rates during the first half of the “noughties”, as well as U.S. soaring house prices and current account deficit. Claudio Borio, research director at the Bank for International Settlements, says Bernanke is wrong and excessive lending by financial institutions caused low interest rates.

Source: The Australian, 6 June 2011

(b)Graphically illustrate and explain the impact of the “glut of savings” on the real interest rate and the quantity of loanable funds. (3 mark)

(c)How do the high saving rates in Asia impact investment in other countries? (3 mark)

Question 4 – 10 marks

The table shows a bank’s balance sheet. The desired reserve ratio on all deposits is 5 per cent.

(a) What, if any, are the bank’s excess reserves? How much will the bank loan? If there is no currency drain, what are the bank’s excess reserves, if any, after it has made the first loan?(2 mark)

(b) If there is no currency drain, what is the quantity of loans and total deposits when the bank has no excess reserves?(2 mark)

(c)Suppose that the currency drain ratio is 10 per cent of deposits and the desired reserve ratio is 1 per cent. If the Reserve Bank sells $100,000 of securities on the open market, calculate excess reserves after the first round. Calculate the money multiplier.(3 mark)

Using graphs, explain the change in the nominal interest rate in the short run if

(d)Real GDP increases.(1 mark)

(e)The money supply increases.(1 mark)

(f) The price level rises.(1 mark)

Question 5– 10 marks

Using appropriate graph, explain your answers to following questions.

(a)Yesterday, the current exchange rate was $1.05 U.S. dollar perper Australian dollar and traders expected the exchange rate to remain unchanged for the next month. Today, with new information, traders now expect the exchange rate next month to fall to$US1 per Australian dollar. Explain how the revised expected future exchange rate influences the demand forAustralian dollars, or the supply ofAustralian dollars, or both in the foreign exchange market. (1 mark)

(b)In 1 January 2010, the exchange rate was 91 yen per U.S. dollar. Over the year, the supply of U.S. dollars increased and by January 2011 the exchange rate fell to 84 yen per U.S. dollar. What happened to the quantity of U.S. dollars that people planned to buy in the foreign exchange market? (1 mark)

(c)On 1 August 2010, the exchange rate was 84 yen per U.S. dollar. Over the year the demand for U.S. dollars increased and by 1 August 2011 the exchange rate was 100 yen per U.S. dollar. What happened to the quantity of U.S. dollars that people planned to sell in the foreign exchange market? (1 mark)

The U.K. pound is trading at 1.54Australiandollars per U.K. pound. There is purchasing power parity at this exchange rate. The interest rate inAustraliais 2 per cent a year and the interest rate in the United Kingdom is 4 per cent a year.

(d)Calculate theAustralian interest rate differential. (1 mark)

(e)What is the U.K. pound expected to be worth in terms of Australian dollars one year from now? (1 mark)

(f)Which country is more likely to have the lower inflation rate? How can you tell? (1 mark).

The table gives some information about the U.S. international transactions in 2008.

(g)Explain and calculate the current account balance.(1 mark)

(h)Explain and calculate the capital account balance.(1 mark)

(i)Did U.S. official reserves increase or decrease? Explain(1 mark)

(j)Was the United States a net borrower or a net lender inthis year? Explain your answer.(1 mark)

END