Introduction to Macroeconomics

Topic

Three Problem-Solving Questions that require written answers

Question 1-

Part A

The table lists some macroeconomic data for a country in 2014.

(a) Calculate the country's GDP in 2014. Then show that the expenditure side GDP and income side GDP are consistent, using the information in the table.

An economy produces only three commodities - apple, orange and bread. The base year is 2013, and the table gives the quantities produced and the prices.

(b) Calculate real GDP in 2013 and 2014 expressed in base-year prices. Then, calculate the real GDP growth rate between 2013 and 2014.

Part B

Australian Bureau of Statistics reported the following data for 2014:

Labour force participation rate: 64.0 per cent

Working-age population (in thousands people): 17,500

Employment-to-population ratio: 61.0 per cent

Calculate the

(c) Labour force.

(d) Employment.

(e) Unemployment rate.

The Lucky Country reported the following CPI data: June 2012 103.7 June 2013 105.8
June 2014 107.1

(f) Calculate the inflation rates for the years ended June 2013 and June 2014. Explain how the inflation rate changed in 2014. What does it indicate on the price level?

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) will increase 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 a relevant graph 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 expected to raise its interest rate and is contemplating for the right time point 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 historically lowest level.

(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) Then using a graph, explain how it is likely to affect loanable funds supply and the 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. Discuss how the change in exchange rate is expected to influence Australia's exports, imports and current account balance (improve or worsen).

Question 3-

Part A

Explain your answers to following questions.

(a) In 2014, the exchange rate was over 90 US cents per Australian dollar. With new information today, traders expect the exchange rate to fall to 75 US cents per Australian dollar in 2015. Explain how the revised expected future exchange rate will influence 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. As a result of Abenomics since late 2012, the exchange rate fell to 82 US cents per 100 Japanese yen by June 2015. Draw a graph and explain what would have happened to the quantity of yen and the Japanese exchange rate? Would people now plan to buy or sell Japanese yen in the foreign exchange market?

In July 2015, Australian dollar is trading at US$0.75 per 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 some time later this year.

(c) 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?

Part B

The table gives some information about the US international transactions in 2014.

(d) Explain and calculate the current account balance.

(e) Explain and calculate the capital account balance.

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

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