Introduction to Macroeconomics Assignment Questions

Question 1- Measuring GDP and Economic Growth

(a) A small economy produced the following final goods and services during the given month: 3 million kilograms of food, 50 000 shirts, 20 houses, 50 000 hours of medical services, one motor car plant and two tanks. Calculate the value of this output at the following market prices:

1) $1 per kilogram of food.

2) $20 per shirt.

3) $50 000 per house.

4) $20 per hour of medical services.

5) $1 million per motor car plant.

6) $50 000 per tank.

(b) Mark works part time at Pizza Hut and earn an annual wage of $15000.  He sold 4000 pizzas at $5 per pizza during the year.  He was unemployed part of the year, so he received unemployment benefits of $30 000.  During the year, Mark bought a used car for $1000, using the expenditure approach, how much has Mark contributed to GDP?

(c) Suppose the economy has been in a recession and everyone is asking when it will recover.  To find an answer to the state of the economy's heath, a television reporter interviews Terence   Asaud, a local car dealer. Asaud says, "I do not see any recovery. This year our second quarter sales were down on the first quarter. In the third and fourth quarters we then sold a lot more cars than the second quarter, but sales in both these two quarters are still down on what they were in same quarter last year." Is Mr. Asaud correct?  Are his observations with the peak, recession, trough or expansion phase of the business cycle?

Jobs and Inflation -

Australian Bureau of Statistics reported the following data for 2015:

Labour force participation rate: 69.6per cent

Working-age population (in thousands people): 18,429,726

Employment-to-population ratio: 65.2

(a) Calculate the labour force.

(b) Calculate the employment.

In New South Wales in October 2015, the labour force was 3,803,200 and 200,500 people were unemployed. In November 2015, the labour force decreased by 300 and the number employed increased by 2,900.

(c) Calculate the unemployment rate in November 2015.

CPI and Inflation -

Suppose your market basket for the university education considered of only four items (fictitious costs) listed in the following table, with quantities of each fixed in both periods indicated in the notes below the table.

¹tuition for 2 semesters

²Payment for nine months

³Twenty books of 800 pages with full colour

⁴One hundred 350 ml coca-colas

Using 2003 as your base year, what is the percentage change in the university education price index?

What are the three criticisms of the CPI?

Question 2 - Quantity Expansion (QE) of Money in the European Union (EU)

On March 9 2015, the European Union (EU) commenced quantity expansion of money, Euro (€). The European Central Bank (ECB) has increased the quantity of money by 60 billion euro every month in the open market in an attempt to support the economy of EU countries. The large increase in the quantity of money is expected to have significant impacts on a range of economic sectors in the EU and global financial markets.

(a) Analyse how the quantity expansion of euro money is likely to affect money supply, interest rate, investment and consumption, and economic growth in the EU.  Draw relevant graph(s) for your analysis.

(b) Discuss how the quantity expansion of euro money would change the value of euro, exchange rate (depreciation or appreciation) against other currencies, and exports and imports in the EU.  How would this contribute to EU's current account balance and would this improve the competitiveness of the EU economy in the global market?

The United States is likely to Raise Interest Rate soon

The U.S. Federal Reserve chairman, Dr Janet Yellen, has signalled that the United States is likely to raise its interest rate as US economic indicators has improved. On the other side of the world, however, the interest rates in many other countries including the EU and Australia are on hold at their lowest level ever.

(c) Explain, in the short run, how and why an increase in US interest rate is likely to change the flow of funds between the United States and Australia.

(d) Using a graph, explain how an increase in US interest rate is likely to affect loanable funds supply and interest rate in Australia. Also, analyse how the change in loanable funds supply and home loan interest rate are likely to influence housing demand, house prices, and household debt burden in Australia.

 (e) Discuss how and why an increase in US interest rate is likely to affect the value of Australian dollar and exchange rate (depreciation or appreciation) against the US dollar. Also, discuss how the change in exchange rate is expected to influence Australia's exports, imports and the current account balance (improve or worsen).

Question 3 - Exchange Rate and Balance of Payments

(a) For each of the following situations, indicate the direction of the shift of the supply or the demand curve of the domestic currency, the factor causing the change and the resulting movement of the equilibrium exchange rate for the domestic currency.

1) The domestic country's exports become more popular overseas.

2) The domestic country experiences a recession, while other nations enjoy economic growth.

3) Inflation rates accelerates in the domestic country, while inflation rates remain constant in other nations.

4) Real interest rates in the domestic country rise, while real interest rates abroad remain the same.

5) Tourism from the domestic country increases sharply because of fare war among countries.

In July 2015, Australian dollar is trading at US$0.75per Australian dollar and the interest rate in Australia is currently 2 per cent a year. It is forecast that the US will increase its interest rate sometime later this year.

(b) If the interest rate in the US increases to 3 per cent a year, how is it likely to affect the flow of funds between Australia and the United States and the exchange rate of US dollar against Australian dollar (depreciation or appreciation)? What is likely to happen to the current account balance of the United States?

Balance of Payments -

The table gives some information about the US international transactions in a year.

(c) Explain and calculate the current account balance.

(d) Explain and calculate the capital account balance.

(e) Did the US official reserves increase or decrease? Explain.

(f) Was the US a net borrower or a net lender in this year? Explain your answer.