ECON1000 Open Campus Worksheet #2 (Covers Units 6 to 10) – worth 10%

Question 1 (19 marks)

a) Developers of a new housing scheme spend money putting in roads, lighting and clearing land surrounding the scheme.

(i) What kind of market failure is this? Explain. (2 marks)

(ii) Why does market failure occur in this scenario? Explain. (3 marks)

(iii)Using the diagram of the market for housing, label the supply curve, the private benefit curve, the social benefit curve, the market equilibrium level of output and the efficient level of output. (5 marks) (iv) Suggest a government policy that would yield the efficient outcome. (2 marks)

b) Identify the type of market failure, explain why it occurs and provide a solution

(i) An auto repair shop convinces you that you need a $20,000 valve job when all you need is an oil change. (4 marks)

(ii) Everyone in the neighbourhood would benefit if an empty lot were turned into a park but no entrepreneur will come forward to finance the transformation. (3 marks)

Question 2 (16 marks) a) Classify each of the following as a movement along or a shift of the production function and provide a justification for your choice. (2 marks each)

(i) Grace Kennedy invests $125 million in a new manufacturing plant.

(ii) A new highway linking two major towns is constructed.

(iii)A new fertilizer formula improves crop yields.

(iv) An earthquake.

(v) Illegal drug traffickers start to bribe judges and corrupt the justice system.

b) Discuss THREE factors needed for economic growth. May 2016 (6 marks)

1 Question 3 (25 marks)

a) Identify which category of unemployment each of the following persons would belong to. (1 mark each)

(i) Rahul’s wife is transferred to the Santa Cruz branch of her bank, so he leaves his job as a teacher at Campion to try to get a job at St Elizabeth Technical

(ii) A global economic slump reduces Caribbean tourist traffic.

(iii) Digicel buys out Claro Jamaica and lays off Claro’s administrative staff.

(iv) The contraction of the sugar industry idles cane cutters while the demand for IT workers remains unsatisfied.

(v) As production processes become more sophisticated, people who leave school without CXC subjects are unable to find employment.

b) Show on the diagram for the labour market how each of the following events will affect the equilibrium wage and level of employment. (5 marks each)

(i) Boatloads of Haitian migrants arrive.

(ii) Worldwide demand for our exports surge.

(iii) The income tax rate is increased from 25 percent to 35 percent.

(iv) Improvements in education and training raise the general level of productivity.

Question 4 (20 marks) Draw diagrams illustrating the impact on the money demand, money supply, equilibrium interest rate and the quantity of money due to each of the following: (5 marks each)

a) The changes in bank regulations expand the availability of credit cards so people need to hold less cash.

b) During a period of rapid inflation the central bank increases the reserve requirement.

c) The economy recently experienced an increase in the number of tourist arrivals, increasing income throughout the island.

d) Oil prices on the world market increase, causing domestic prices to increase. May 2016 2 Question 5 (20 marks)

a) Determine which account of the Balance-of-Payments is affected by each of the following transactions. (E.g. Current Account – Transfers) (2 marks each)

(i) A local firm ships US$80 million of merchandise to China.

(ii) National Commercial Bank, a local company, pays US$1 million in dividends to foreign shareholders.

(iii)A German company builds a manufacturing facility in your country.

(iv) A local resident purchases a retirement condo in Florida for US$10 million.

(v) You travel to the United States for holiday and spend US$500

(vi) You invest in the South Korean stock market by buying US$500 in stock.

b) Consider three countries Hungary, Mexico and the United States, which sell identical t-shirts. If the price of the t-shirt is 500 forint, 20 pesos and US$2. Calculate The purchasing power parity exchange rate between c)

(i) Mexico and the U.S. (2 marks)

(ii) Hungary and the U.S. (2 marks) Suppose the current exchange rate between the Mexican peso and the U.S. dollar is 12 peso = US$1 and the exchange rate between the Hungarian forint and the U.S. dollar is 215 forint = US$1. Based on the PPP calculations is part a, what do you expect to happen to the exchange rate between:

(i) Mexico and the U.S. (2 marks)

(ii) Hungary and the U.S. (2 marks) TOTAL MARKS = 100 May 2016 3