Best Macro-Economics Assignment Solution & Marking Guide

Questions: Question 1 Part A The table lists some macroeconomic data for a country in 2013. Item Billions of dollars Wages paid to labour 710 Consumption expenditure 780 Profit, interest and rents 450 Investment 230 Net taxes Government expenditure 110 240 Exports Imports 450 430 (a) Calculate the countrys GDP in 2013, using expenditure approach. (b) Explain the difference between income and expenditure approach in calculating GDP. An economy produces only apples and oranges. The base year is 2012, and the table gives the quantities produced and the prices. Quantities 2012 2013 Apples 76 78 Oranges 85 88 Prices 2012 2013 Apples $1.05 $1.15 Oranges $0.95 $1.03 (c) Calculate real GDP in 2012 and 2013 expressed in base-year prices. (d) Calculate the real GDP growth rate between 2012 and 2013. Part B Australian Bureau of Statistics reported the following data for 2013:Labour force participation rate: 64.5 per cent Working-age population (in thousands people): 18,450Employment-to-population ratio: 61.5Calculate the(e) Labour force.(f) Employment.(g) Unemployment rate.The Lucky Country reported the following CPI data:June 2011 103.7June 2012 108.8June 2013 110.1(h) Calculate the inflation rates for the years ended June 2012 and June 2013. Explain how the inflation rate changed in 2013 and what it indicates on the price level? Question 2 Part A 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. (a) Explain how turmoil in global financial markets might affect the demand for and supply of loanable funds, interest rate, investment, and global economic growth in the future. Bernankes 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. (b) Graphically illustrate and explain the impact of the glut of savings on the real interest rate and the quantity of loanable funds. (c) How do the high saving rates in Asia impact the world loanable fund market and investment in other countries? Part B The table shows information about an economy. (millions of dollars) Banks reserves at Central Bank 20 Current deposits 90 Cash in vault 10 Saving deposits 110 Bank notes held by households 30 Bank notes held by firms 40 (d) Suppose now that the cash in vault was initially zero. Calculate the total quantity of money, the monetary base, the desired reserve ratio and the currency drain ratio. (e) Suppose that the cash in vault was initially zero and there were no excess reserves. If the Central Bank decreases banks reserves by $1.5 million, what will be the money multiplier? Will the quantity of money increase or decrease, and by how much? Will the quantity of deposits increase or decrease, and by how much? Part A Explain your answers to following questions. (a) In January 2013, the exchange rate was $1.05 US dollar per Australian dollar and traders expected the exchange rate to remain unchanged. Today, with new information, traders now expect the exchange rate in 2014 to fall to $US0.90 per Australian dollar. Explain how the revised expected future exchange rate influences the demand for Australian dollars and the supply of Australian dollars in the foreign exchange market. Why? (b) In October 2012, the exchange rate was 103 US cents per 100 Japanese yen. Over the year, the supply of Japanese yen increased as a result of Abenomics and by October 2013 the exchange rate fell to 84 US cents per 100 Japanese yen. What would happen to the quantity of Japanese yen? Would people plan to buy or sell Japanese yen in the foreign exchange market? Draw a diagram to explain. Part B The UK pound is trading at 1.75 Australian dollars per UK pound. There is purchasing power parity at this exchange rate. The interest rate in Australia is 2.5 per cent a year and the interest rate in the United Kingdom is 3 per cent a year. (c) Calculate the Australian interest rate differential. (d) What is the UK pound expected to be worth in terms of Australian dollars one year from now?(e) Which country is more likely to have higher inflation rate? How can you tell? Part C The table gives some information about the US international transactions in 2013. Item Billions of U.S. dollars Imports of goods and services 3,551 Foreign investment in the US 987 Exports of goods and services 2,874 U.S. investment abroad 305 Net interest income 131 Net transfers 82 Statistical discrepancy 23 (f) Explain and calculate the current account balance.(g) Explain and calculate the capital account balance.(h) Did U.S. official reserves increase or decrease? Explain (i) Was the United States a net borrower or a net lender in this year? Explain your answer. Answers 1 Part A: Item Billions of dollars Wages paid to labor 710 Consumption expenditure 780 Profit, interest and rents 450 Investment 230 Net taxes Government expenditure 110 240 Exports Imports 450 430 (a) Countries GDP in 2013 using the expenditure method:GDP = Consumption expenditure + Investment expenditure + Government expenditure + Net ExportGDP = 780 + 230 + 240 + (450-430)GDP = 1270 (b) The income approach and the expenditure approach:There is a difference between the income approach and the expenditure approach. The income approach basically measures the total income that is earned by the households of a country in a given year (Gordon, 2012). On the other hand the expenditure approach basically measures the expenditure on the goods and services in a given country at a specific year. Thus the income approach measures the income of a nation and the expenditure approach measures the expenditure of a nation in a given year. The main components of the expenditure approach are consumption expenditure, government expenditure, investment expenditure and net export (export - import). On the other hand the main components of the income approach are wages, Depreciation, interest income, rental income, indirect business income, and business profits (Bostick and Freese, 2012). So these are the main difference between the income and the expenditure approach for measuring the GDP.(c) An economy produces only apples and oranges. The base year is 2012 and in the following table the quantities produced and the prices is given. Quantities 2012 2013 Apples 76 78 Oranges 85 88 Prices 2012 2013 Apples $1.05 $1.15 Oranges $0.95 $1.03 The real GDP in 2012 = (76 * 1.05) + (85 * 0.95) = 79.8 + 80.75 = 160.55 The real GDP in 2013 = (78 * 1.05) + (88 * 0.95) = 81.9 + 83.6 = 165.5 (d) The real GDP growth rate between 2012 and 2013, by considering the base year prices can be calculated here.Real GDP growth rate = (GDP2013 GDP2012)/GDP2012Real GDP growth rate = (165.5 160.55)/160.55Real GDP growth rate = 0.0308So, the real GDP growth rate between 2012 and 2013 is 3.08%. Part B The following data has been reported by Australian Bureau of Statistics for 2013. Employment-to-population ratio: 61.5 The employment to population ratio is (labour force employed / total population) Working-age population (in thousands people): 18,450 The working age population is basically the estimation of total potential workers in an economy. Labour force participation rate: 64.5% Labour force participation rate is the percentage of working-age people in an economy. Labour force participation rate = (labour force/working age population) (Gordon, 2012) (e) Labour force: labour force participation rate * total populationLabour force = 64.5 * 18,450Labour force = 1,190,025(f) Employment rate:It is known that,Labour force employed / total population = 61.5Or, labour force employed = 61.5 * total populationOr, labour force employed = 61.5* 18,450Or, labour force employed = 1,134,675So, the employment rate = (1134675/1190025)The employment rate = 0.953The employment rate is 95.3%.(g) Unemployment rate: Unemployment rate = (1190025-1134675) /1190025Unemployment rate = 0.046511Unemployment rate in the economy is 4.65% (Bowen, Hollander and Viaene, 2012).The following CPI data is reported the lucky country.June 2011: 103.7June 2012: 108.8June 2013: 110.1(h) Inflation rate is basically the general increase in the price level of an economy. On the other hand, the CPI or the consumer price index basically measures the level of price changes of a market basket consisting of goods and services that the households buy. Here the inflation rate ca n be calculated for the year 2012 and 2013 with the help of CPI.Inflation rate in 2013 = ((CPI2012 CPI2011)/CPI 2011)*100 Inflation rate in 2012 = ((108.8 103.7)/103.7) * 100Inflation rate in 2012 = 4.9180%Inflation rate in 2013 = ((CPI2013 CPI2012)/CPI 2012)*100Inflation rate in 2013 = ((110.1 108.8)/108.8)* 100Inflation rate in 2013 = 1.195%Thus it is found that the inflation rate in 2012 is 4.918% and it is 1.195% in 2013. Thus the inflation rate has fallen in 2013. Thus it can be indicated that the price level change has significantly increased from 2011 to 2012 but the increase in price level change is not significantly high from 2012 to 2013 (Hubbard and O'Brien, 2013). Answer 2 Part A The global economy may face a market slowdown next year due to the financial market turmoil that is warned by the international monetary fund. According to IMF, there will be global credit squeeze that can test the ability of the economy for the continuous expansion at recent rates (Krugman and Wells, 2013). (a) Here it can be said that, due to the turmoil in the global financial market, there will be impact on various factors like the demand and supply of loanable funds, interest rates, investment and global economic growth.It is known that loanable fund is the total of all the money that is saved and lent out to borrowers in the economy by people and entities rather than using it for personal consumption. Thus in the presence of the financial turmoil the demand for loanable funds will fall where the supply of loanable funds will increase (Krugman and Wells, 2013).Here it can be said that the as a result of the credit crunch, the interest rates will rise significantly and thus it will increase the supply of loanable funds and will lead to a decrease in the demand for loanable funds (Mankiw, 2013).The investment will fall due to high interest rates in the market as a result of the credit crunch.There will be a slowdown in the economic growth due to a fall in investment and the prevalence of credit crunch.(b) In the following diagram the impact of the glut of savings on the real interest rate and the quantity of loanable funds can be shown. In the above diagram it is seen that in the loanable funds market, as a result of the glut of savings, the supply of loanable funds will increase and the thus there will be a rightward shift of the supply curve. As a result the equilibrium quantity of loanable funds will increase and the rate of interest will fall (Melvin and Norrbin, 2013). (c) High savings rate in the Asia will lower the interest rate in Asia and it will affect the world loanable funds market by lowering the world interest rate and it will lead to increased investment in other countries. Part B In the following table the information about the economy is shown. (millions of dollars) Banks reserves at Central Bank 20 Current deposits 90 Cash in vault 10 Saving deposits 110 Bank notes held by households 30 Bank notes held by firms 40 The cash vault is initially zero. Monetary base = Currency + Bank reserves = 0 [since initially cash in vault is zero] + 20 = 20 million dollars Desired reserve ratio = Bank reserves / bank deposits = 20 / 90 = 0.22 =22% Currency drain ratio = currency / deposits = 10 / 90 = 0.111 = 11.1% Total quantity of money = bank reserves / reserve ratio = 20 / 0.22 = 90 (e) Since, the cash in vault was initially zero and there were no excess reserves, the total quantity of money will become zero. If the Central Bank decreases banks reserves by $1.5 million, the money multiplier will become = 1/ bank reserves = 1/18.5 = 0.000554 Here, the quantity of money will reduced to 20 1.5 = 18.5 million The volume of bank deposits will remain same (Smith, Walter and DeLong, 2012). Answer 3 Part A (a) In January 2013, the exchange rate was $1.05 US dollars per Australian dollar. It was first expected by the traders that there will be no changes in the exchange rate but it is now expected that the exchange rate will fall to $US0.90 per Australian dollar. Thus with the given new information, the traders will expect the value of Australian dollars to fall in the future and thus the demand for the currency will fall in future. On the other hand the supply of Australian dollars will increase as its value will fall in the future thus the supply will increase (Melvin and Norrbin, 2013). (b) In 2012, the exchange rate was 103 US cents per 100 Japanese yen. As a result of Abenomics, the supply of Japanese yen increased and as a result there was a decrease in the exchange rate. The exchange rate in 2013 was 84 US cents per 100 Japanese yen. In the diagram above it is shown that when the supply of Japanese yen increased, the currency depreciated in the market and the Japanese yen fell from P* to P1. It is seen that, as a result the equilibrium quantity has increased from Q*to Q1 in the market. People will plan to sell Japanese yen in the market as the value of the currency is depreciating. Thus people will not buy Japanese yen, instead they will sell it in the market and as a result the supply will further increase and the price value will further depreciate. Part B The UK pound is trading at 1.75 Australian dollars per UK pound. There is purchasing power parity at the exchange rate. The interest rate in Australia is 2.5% a year and the interest rate in the UK is 3% a year. (c) Interest rate differential: the interest rate differential is the gap in the rate of interest between similar interests bearing asset (Bostick and Freese, 2012). Interest rate differential = 3 2.5 = 0.5 percent(d) One year from now,Value of UK pound one year from now = (1.75 * 0.025)/0.03 = 1.45833(e) Low interest rate means consumers have more money to spend, causing the economy to grow and inflation to increase. So, Australia is more likely to have higher inflation rate. Part C The information regarding the US international transaction is given for the year 2013. Item Billions of U.S. dollars Imports of goods and services 3,551 Foreign investment in the US 987 Exports of goods and services 2,874 U.S. investment abroad 305 Net interest income 131 Net transfers 82 Statistical discrepancy 23 (f) Current account balance: the current account balance is one of the significant indicators regarding the health of the economy (Bowen, Hollander and Viaene, 2012). The current account is the sum of balance of trade. Current account surplus means that the country is a net creditor to the world. On the other hand, current account deficit indicates that the economy is debtor to the world. The current account balance = export of goods and services Import of goods and services + net transfer + net interest incomeCurrent account balance = 2874 3551- 82 + 131 = - 628(g) Capital account balance: the capital account balance represents the capital transfer of a country. A surplus in the capital accounts indicate that money is flowing inside the country and a deficit in capital account represents that money is flowing out of the nation. The capital account balance = foreign investment in the US US investment abroad + statistical discrepancyCapital account balance = 987 305 + 23Capital ac count balance = 705(h) Here it is seen that there is a surplus of 705 in the capital account balance and there is a deficit of 628 in current account balance. It is known that the balance of payment is calculated from the current account and capital account balances and these two are the main components of the balance of payment. Thus it can be seen that the surplus in the capital accounts is more than the deficit in the current accounts. Thus U.S. official reserve will increase (Bowen, Hollander and Viaene, 2012).(i) The U.S. is a net lender this year. Here it can be said that the country is has net BOP surplus as the current account deficit is lower than the capital account surplus. Thus it can be said that the country is a net lender this year. References Bostick, N. and Freese, S. (2012).Managing money. [Costa Mesa, Calif.]: Saddleback Educational Pub. Bowen, H., Hollander, A. and Viaene, J. (2012).Applied international trade. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan. Gordon, R. (2012).Macroeconomics. Boston: Addison-Wesley. Hubbard, R. and O'Brien, A. (2013).Macroeconomics. Boston: Pearson. Krugman, P. and Wells, R. (2013).Macroeconomics. New York, NY: Worth Publishers. Mankiw, N. (2013).Macroeconomics. New York, NY: Worth. Melvin, M. and Norrbin, S. (2013).International money and finance. Boston: Elsevier Press. Smith, R., Walter, I. and DeLong, G. (2012).Global banking. Oxford: Oxford University Press.