Assignment B (Macroeconomics)

Semester 1, 2014

Business Economics BUECO5903

Prepared by Paul McPhee
(Course Coordinator)

Checked by David Spiers
(Caretaker / Moderator)

Instructions for Candidates:

1. Choose any five (5) of the following nine (9) questions;

2. Each question is worth ten (10) marks;

3. This assignment comprises 10 per cent of total assessment;

4. Please type your assignment;

5. All diagrams and direct quotations must be referenced as per the course description specified method;

6. Please use the numbering system provided.

Question 10. (2 marks each)

The following data is part of a fictitious nation’s national accounts:

Item Value $ Billion
2013
Household consumption 80
Capital expenditure 7
Government consumption 4
Government investment 5
Exports of goods 3
Exports of services 5
Imports of goods 8
Imports of services 4
Taxation 7


(a) What is the 2013 equilibrium level of GDP? (1/2 mark)

(b) Calculate Gross National Expenditure (GNE) for 2014; (1/2 mark)

(c) Calculate Gross National Product (GNP) for 2014; (1/2 mark)

(d) Calculate Gross national Income (GNI) for 2014; (1/2 mark)

(e) What is the 2013 level of equilibrium injections? (1 mark)

(f) What is the 2013 level of equilibrium withdrawals? (1 mark)

(g) What is the 2013 level of equilibrium savings? (1 mark)

(h) If in 2014 GDP changes to $80 Billion and consumption changes to $58 Billion, then what is the Marginal Propensity to Consume (mpc)? (2 marks)

(i) What is the multiplier value? (1 mark)

(j) Calculate the change in GDP as well as the new GDP value when:

Imports of goods decreases by $5 Billion;
Imports of services increases by $1 billion;
Exports of goods increases by $6 Billion;
Exports of services increases by 2 Billion;
Private sector capital works increase by $2 Billion;
Inventories plus capital stock increase by $1 Billion;
Depreciation of capital equipment and inventories is $2 Billion;
Government capital works increase by $6 Billion;
Government consumption decreases by $8 Billion

(2 marks)


Question 11:

(a) Describe the relevant criteria that the Australian Bureau of Statistics use to determine whether a person is ‘unemployed’ and what problems do you see using this measure? (4 marks)

(b) Do you agree or disagree with the following statement:

”With proper management of an economy, frictional unemployment need not occur”. Explain your reasoning (2 marks)

(c) Is structural unemployment something macroeconomic policymakers should be concerned about? How does it differ from cyclical unemployment? (4 marks)


Question 12:
(10 marks total - 2.5 marks each part)

(a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for the diagram, and 2.5 marks for the explanation)

(b) Provide (describe) two (2) causes of each type of inflation
(2.5 marks for 2 demand-pull causes, and 2.5 marks for 2 cost-push causes)


Question 13:
(5 marks each)

(a) Explain why the aggregate demand curve is downward sloping. (3 marks)

(b) Explain the difference between the Keynesian and monetarist views on how an increase in the money supply causes inflation. (4 marks)

(c) Why is the shape of the aggregate supply curve important to the Keynesian-monetarist controversy? (3 marks)


Question 14:
(2.5 marks each part)

Using the aggregate demand – aggregate supply (AD-AS) diagram, show how the four unrelated economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event)
(a) A significant destruction in an economy’s capital stock because of an earthquake;

(b) An increase in personal income tax;

(c) An increase in exports;

(d) A production cost reduction due to the implementation of new manufacturing technologies;


Question 15:

(a) Consider this statement: ‘Banks do not create money because this is the Central Bank’s (Reserve Bank of Australia) responsibility’. Do you agree or disagree? Illustrate and explain using a quantified example. (4 marks)

(b) Suppose that you deposit your pay cheque drawn on another bank into your own bank account. Explain the impact on the overall money supply that this will have in the economy. (2 marks)

(c) Suppoes that you remove $2000 from under your mattress and deposit it in the Westpack bank. If the required reserve ratio is 10 per cent, what is the maximum amount the bank can lend from this deposit? (4 marks)


Question 16:

If the Central Bank (Reserve Bank of Australia) bought $200 million of government securities from private sector money markets, other things being equal, what would be the effect on the following? Explain your reasoning

(1.25 marks for each correct answer plus 1.25 marks each correct explanation)

(a) The economy’s monetary base;

(b) Short-term money market interest rates;

(c) Longer maturity interest rates;

(d) Aggregate demand, economic activity and inflation.



Question 17:

Which of the following would cause a fall in the money supply? Answer yes, no, or possibly and explain your economic reasoning in your answer.

(1 mark per correct anaswer plus 1 mark per correct reasoning)

(a) The selling of government securities to banks;
(b) A fall in interest rates;

(a) An increase in government expenditure, financed by borrowing from the banking sector;

(b) The purchase of government securities by the Central Bank from the banking sector;

(e) It is agreed by the Treasurer and the Governor of the Central Bank to
reduce the target rate of inflation.


Question 18:
The following are the various elements within a nation’s balance of payments account:
(i) Imports of goods (?)
(ii) Exports of goods (+)
(iii) Imports of services (?)
(iv) Exports of services (+)
(v) Other income outflows (?)
(vi) Other income inflows (+)
(vii) Capital transfers sent overseas from the nation (–)
(viii) Capital transfers to the nation from overseas (+)
(ix) The nation’s investments overseas (?)
(x) Investment in the nation from overseas (+)
(xi) Short-term financial outflows (?)
(xii) Short-term financial inflows (+)
(xiii) Adding to reserves (?)
(xiv) Drawing on reserves (+)

Into which of the above categories would you put the following? (total 10 marks – 1 mark each)
(a) The nation’s palm oil is sold in the United Kingdom;
(b) DVD recorders imported into the nation from Japan;
(c) Interest earned by the nation’s residents on overseas assets;
(d) Some of the nation’s residents take a holiday in Bali;
(e) Insurance cover purchased in the nation by overseas residents;
(f) The nation gives overseas aid to a developing country;
(g) US car company sets up a factory in the nation;
(h) Running down the stock of foreign exchange in the Central Bank of the nation;
(i) Migrants to the nation transferring property to the nation;
(j) New deposits made in banks in the nation by overseas residents;