macro economics

Macro Economics
1.1	You need to follow an appropriate format explained below. Not following appropriate format will cause loss of some marks. 
•	All written answers must be clearly typed and printed. Hand-written answers are NOT allowed.
•	All assignment questions and sub-questions should be typed in order at the heading.
•	Separate each main question by different page. For example, if Question 1 (a) (b) (c) and (d) are answered on pages 1-2, then start Question 2 on page 3, etc.
•	You should include appropriate and relevant diagrams, charts and tables together with your descriptive analytical answers.
1.2	The answers to the assignment questions should be written clearly and concisely with the main points only, and avoid irrelevant points.
•	Do spelling and grammar check in MS Word, once completed.    

Question 1 – 10 marks
The table lists some macroeconomic data for Xanadu in 2012.
Item	Billions of dollars
Wages paid to labour	  800
Consumption expenditure	1,000
Profit, interest and rents	  340
Investment	  150
Government expenditure	  290
Net exports	  ?34
(a)	Calculate Xanadu’s GDP in 2012. (1 mark)
(b)	Explain the approach (expenditure or income) that you used to calculate GDP.  (1 mark)

An economy produces only apples and oranges. The base year is 2011, and the table gives the quantities produced and the prices.
Quantities	2011	2012
Apples	60	160
Oranges	80	220
Prices	2011	2012
Apples	$0.50	$1.00
Oranges	$0.25	$2.00
(c)	Calculate nominal GDP in 2011 and 2012. (1 mark)
(d)	Calculate real GDP in 2011 and 2012 expressed in base-year prices. (2 mark)

The tables describe an economy’s labour market and its production function in 2010.
Real wage rate
(dollars per hour)	Labour hours supplied	Labour hours demanded		Labour
(hours)	Real GDP
(2005 dollars)
80	45	  5		  5	   425
70	40	10		10	   800
60	35	15		15	1,125
50	30	20		20	1,400
40	25	25		25	1,625
30	20	30		30	1,800
20	15	35		35	1,925
				40	2,000
(e)	What are the equilibrium real wage rate, the quantity of labour employed in 2010, labour productivity and potential GDP in 2010? (1 mark)
(f)	 In 2011, the population increases and labour hours supplied increase by 10 at each real wage rate. What are the equilibrium real wage rate, labour productivity and potential GDP in 2011? (2 mark)
(g)	In 2011, the population increases and labour hours supplied increase by 10 at each real wage rate. Does the standard of living in this economy increase in 2011? Explain why or why not.    (2 mark)
Question 2 – 10 marks
ABS reported the following data for October 2011:
Labour force participation rate: 65.6 per cent 
Working-age population: 18,429,726
Employment-to-population ratio: 62.2
Calculate the
(a)	Labour force. (1 mark)
(b)	Employment. (2 mark)
(c)	Unemployment rate. (2 mark)
The Lucky Country reported the following CPI data:
June 2010  201.9
June 2011  207.2
June 2012  217.4
(d)	Calculate the inflation rates for the years ended June 2011 and June 2012. Explain how the inflation rate changed in 2012? (1 mark)
(e)	Explain why might these CPI numbers be biased?  (2 mark)
(f)	What would be alternative price indexes and how would the alternative price indexes help to avoid the bias in the CPI numbers? (2 mark)

Question 3 – 10 marks
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 loanable funds, investment, and global economic growth in the future.  (4 mark)
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. (3 mark)
(c)	How do the high saving rates in Asia impact investment in other countries? (3 mark)

Question 4 – 10 marks
The table shows a bank’s balance sheet. The desired reserve ratio on all deposits is 5 per cent. 
Assets 	Liabilities 
(millions of dollars) 
Reserves at RBA 	25 	Current deposits 	90 
Cash in vault 	15 	Saving deposits 	110 
Securities 	60 	
Loans 	100 	
(a)	What, if any, are the bank’s excess reserves? How much will the bank loan? If there is no currency drain, what are the bank’s excess reserves, if any, after it has made the first loan? (2 mark)
(b)	If there is no currency drain, what is the quantity of loans and total deposits when the bank has no excess reserves? (2 mark)
(c)	Suppose that the currency drain ratio is 10 per cent of deposits and the desired reserve ratio is 1 per cent. If the Reserve Bank sells $100,000 of securities on the open market, calculate excess reserves after the first round. Calculate the money multiplier. (3 mark)
Using graphs, explain the change in the nominal interest rate in the short run if
(d)	Real GDP increases. (1 mark)
(e)	The money supply increases. (1 mark)
(f)	The price level rises. (1 mark)

Question 5 – 10 marks
Using appropriate graph, explain your answers to following questions.
(a)	Yesterday, the current exchange rate was $1.05 U.S. dollar per per Australian dollar and traders expected the exchange rate to remain unchanged for the next month. Today, with new information, traders now expect the exchange rate next month to fall to $US1 per Australian dollar. Explain how the revised expected future exchange rate influences the demand for Australian dollars, or the supply of Australian dollars, or both in the foreign exchange market. (1 mark)
(b)	In 1 January 2010, the exchange rate was 91 yen per U.S. dollar. Over the year, the supply of U.S. dollars increased and by January 2011 the exchange rate fell to 84 yen per U.S. dollar. What happened to the quantity of U.S. dollars that people planned to buy in the foreign exchange market? (1 mark)
(c)	On 1 August 2010, the exchange rate was 84 yen per U.S. dollar. Over the year the demand for U.S. dollars increased and by 1 August 2011 the exchange rate was 100 yen per U.S. dollar. What happened to the quantity of U.S. dollars that people planned to sell in the foreign exchange market? (1 mark)
The U.K. pound is trading at 1.54 Australian dollars per U.K. pound. There is purchasing power parity at this exchange rate. The interest rate in Australia is 2 per cent a year and the interest rate in the United Kingdom is 4 per cent a year. 
(d)	Calculate the Australian interest rate differential. (1 mark)
(e)	What is the U.K. pound expected to be worth in terms of Australian dollars one year from now? (1 mark)
(f)	Which country is more likely to have the lower inflation rate? How can you tell? (1 mark).

The table gives some information about the U.S. international transactions in 2008.

Item	Billions of U.S. dollars
Imports of goods and services 	2,561
Foreign investment in the United States	955
Exports of goods and services 	1,853
U.S. investment abroad	300
Net interest income	121
Net transfers	?123
Statistical discrepancy	66

(g)Explain and calculate the current account balance. (1 mark)
(h)Explain and calculate the capital account balance. (1 mark)
(i)Did U.S. official reserves increase or decrease? Explain (1 mark)
(j)Was the United States a net borrower or a net lender in this year? Explain your answer. (1 mark)