IMF Warning over Slowing Growth

Three Problem-Solving Questions that require written answers

Assignment Questions

Question 1-

Part A

The table lists some macroeconomic data fora country in 2013.

(a) Calculate the country's 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.

(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:64.5per cent
Working-age population (in thousands people):18,450
Employment-to-population ratio:61.5

Calculate the

(e) Labour force.

(f) Employment.

(g) Unemployment rate.

TheLucky Country reported the following CPI data:

June 2011 103.7
June 2012 108.8
June 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.

BBC News, October 10, 2007

(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.

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.

(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.

(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?

Question 3-

Part A

Explain your answers to following questions.

(a) In January 2013, the exchange rate was $1.05 US dollar perAustralian dollar and traders expected the exchange rate to remain unchanged. Today, with new information, traders now expect the exchange rate in 2014 to fall to$US0.90 per Australian dollar. Explain how the revised expected future exchange rate influences the demand forAustralian dollars and the supply ofAustralian 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 1.75Australiandollars per UK pound. There is purchasing power parity at this exchange rate. The interest rate inAustraliais 2.5 per cent a year and the interest rate in the United Kingdom is 3 per cent a year.

(c) Calculate theAustralian 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.