Reference no: EM132602320
ECON1102 Macroeconomics Assignment - School of Economics - University of New South Wales - Australia
Instructions - There are SIX questions in total. Answer all SIX questions (and all parts of each question).
Question 1 - Use models and diagrams to aid your exposition where appropriate.
(i) Two key variables in macroeconomics are real GDP and the CPI. Select ONE of these variables.
Explain what the variable measures and discuss one problem associated with its measurement.
(ii) The country of Ur has a binding minimum aggregate real wage that results in unemployment. The government is considering two alternative proposals aimed at reducing the level of unemployment:
(a) Incentives for business to provide workers with extra capital equipment.
(b) Free childcare.
Evaluate the likely effectiveness of each policy in achieving a lower unemployment rate.
(iii) The following equations describe national saving and investment for the small open economy of Oz.
NS = 10 + 1.5r
I = 14 - 0.5r
The world interest rate is 4 percent. Other things equal, suppose the government of Oz increases the level of government spending by 2.
According to this model what are the effects on the budget balance, national saving and investment, real interest rates and the balance of trade?
(iv) The per-worker production function for an economy is given by:
y = Ak0.25.
With the aid of a diagram, discuss the potential for technology and private investment to act as sources of permanent economic growth.
(v) The central bank of Wakanda has the following policy reaction function for setting its real policy rate (where all variables are in percent):
r = 1 + 0.5π
Suppose Wakanda experiences a deflation rate of 2 percent? Discuss the implications for monetary policy if:
(a) The central bank is not subject to the zero lower bound.
(b) The central bank is subject to the zero lower bound.
Question 2 - The policy instrument used by the Reserve Bank of Australia (RBA) is a target value for the Cash Rate.
(i) What is the role of the Cash market?
(ii) Explain the mechanisms by which the RBA is able to achieve its target value for the cash rate. How does the RBA ensure the actual cash rate equals its target value?
(iii) Suppose the RBA undertakes a very large program of purchasing bonds from the banking system. What are the likely consequences for its ability to achieve its cash rate target?
(iv) Suppose the RBA wants to reduce long-term interest rates. Explain which of the following strategies is likely to have a larger effect on current long-term rates.
(a) The RBA reduces the current value of the Cash Rate.
(b) The RBA reduces the current value of the Cash Rate and indicates it intends further reductions in the future.
(v) In response to Covid-19 the RBA reduced its target for the Cash rate from 0.75 to 0.25 percent. Discuss two different mechanisms by which this policy might stimulate economic activity.
Question 3 - The balance sheet for Goliath Bank is given below.
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$ billion
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Assets
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Liabilities
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Loans
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1,000
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Deposits
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700
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Gov. Bonds
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250
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Borrowing
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600
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Reserves
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100
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Equity
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50
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(i) Explain the process by which the actions of Goliath Bank can affect the money supply for the economy.
(ii) Discuss the nature of any risks faced by Goliath Bank?
(iii) Explain the role of equity in influencing the riskiness of Goliath Bank.
(iv) Explain the role of deposit insurance in influencing the riskiness of Goliath Bank.
(v) What is meant by prudential regulation? Provide one example of a prudential regulation and explain its purpose.
Question 4 - Use the version of the AD-AS model developed in Econ1102.
(i) The AD curve indicates the existence of a negative relationship between real GDP and inflation. Explain why the AD curve has a negative slope.
(ii) With the aid of a diagram, explain the process in the AD-AS model by which the economy achieves long-run equilibrium following a permanent reduction in exogenous taxes.
(iii) The country of Padua is in long-run equilibrium and has an annual inflation rate of 2 percent. Suppose Padua is hit by a temporary AS shock that causes its inflation rate to double to 4 percent.
(a) Evaluate the options that are available to policymakers in Padua in responding to the inflation shock.
(b) Suppose prior to the shock, the central bank of Padua had adopted a formal inflation target equal to 2 percent. Discuss the implications of such a target for policy options in response to the shock.
Question 5 - The economy of Utopia is described by the following equations.
C = 10 + 0.8 (Y - T)
IP = 20
G = 40
X = 30
T = 10 + 0.2Y
M = 0.1Y
Y* = 207
(i) Show how to calculate the output gap for Utopia.
(iii) Suppose Utopia's level of exports falls by 20. In response the government considers two possible fiscal policy responses.
(a) To increase government spending by 20, or
(b) To reduce autonomous taxes by 20.
Evaluate the relative effectiveness of each policy as a response to the fall in exports.
(iii) Suppose the government is concerned about the size of the budget deficit. It decides to reduce autonomous taxes by 20 and at the same time reduce government spending by 20. Is this an effective fiscal policy response to the fall in exports? Explain your answer.
(iv) Use the government budget constraint to analyse each of the above (three) fiscal policies with regard to their effects on the level of public debt.
(v) After the government of Utopia implements its chosen fiscal policy, the level of public debt-to-GDP ratio increases.
Discuss the possible ways in which Utopia's debt-to-GDP ratio might be reduced over time.
Question 6 - Alpha and Beta are two countries. Alpha uses dollars ($) and Beta uses pounds (£). Treat Alpha as the home country and define the bilateral exchange rate as the number of pounds that exchange for one dollar:
e = £/$
The following table provides some annual exchange rate data.
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e
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2016
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0.6
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2017
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0.56
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2018
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0.50
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2019
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0.45
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(i) Discuss how the theory of Purchasing Power Parity would explain the behaviour of the exchange rate over the period 2016 to 2019?
(ii) Suppose we use the supply and demand model to interpret the above data. Examine the ability of differences in the growth rates of real GDP between Alpha and Beta to explain the behaviour of the exchange rate over the period 2016 to 2019?
(iii) Suppose the government of Alpha decided to fix the exchange rate in 2019 to its value in 2016.
(a) Use a diagram to illustrate the foreign exchange market for Alpha in 2019. Describe any actions being undertaken by the central bank.
(b) Suppose Alpha's currency was subject to a speculative attack in 2019. Explain what this would involve.
(c) Could the central bank of Alpha defend the currency against the speculative attack? Explain whether there any costs of doing so?