Part -1:

Question 1

a Discuss two reasons why the GDP deflator gives a different rate of inflation than the CPI does. In calculating the real GDP of an economy, explain whether you will use the GDP deflator or the CPL.

b The Gini coefficient in Hong Kong was 0.525 in 2001 and 0.533 in 2006. Explain whether income inequality in Hong Kong has decreased or increased between these years. If an economy has a Gild coefficient of 1.000, what is the distribution of income?

Question 2

a Suppose your salary for this year remains the same as last year. Does that mean your real income remains the same? Explain.

b Suppose the people of an economy consume only two goods, namely food and clothing. The production of goods and services in this economy consists of 50 units of food, 100 units of clothing and 40 units of machinery for production for both years.

i Find the nominal GDP for the current year and the base year. Show all your workings.

ii What is the percentage increase in the CPI?

iii What is the percentage increase in the GDP deflator?

Part -2:

Question 1

'The cost of inflation is zero if it is anticipated.' Explain whether the statement is true, false or uncertain. (12 marks)

Question 2

Suppose the velocity of money grows at 1% and nominal GDP grows at 5% per annum. Answer the following questions based on the quantity theory of money (QTM).

a What is the annual money growth rate?

b What is the annual inflation rate if real GDP increases by 2% per annum?

c Explain (with the aid of an AD-AS diagram) the relationship between the QTM and the aggregate demand and aggregate supply (AD-AS) model with reference to the results in part (b).

Question 3

Suppose the government issues bonds that are indexed to the general price level. Discuss whether unexpected inflation or deflation will help to alleviate the government's real financial burden.

Question 4

Suppose an economy that is initially at full employment faces a substantial increase in the factor cost of production.

a Discuss (with the aid of aggregate output market and money market diagrams) the short-run effect on output, unemployment, general price level and interest rate with a substantial increase In the factor cost of production.

b Discuss (with the aid of an aggregate output market diagram) what kind of monetary policy can be adopted to restore the economy back to full employment equilibrium.

c Suppose the problem you discussed in part (a) relies on the self-adjustment mechanism instead of the discretionary policy proposed in part (b). Examine the possible impact of minimum wage on the self-adjustment mechanism.