Reference no: EM132681434

Question 1

Coronavirus pandemic and resultant shutdown measures to contain it have plunged the economies around the world including Singapore into severe contraction. Assuming Singaporean economy was in long run equilibrium in the aggregate demand and supply (AD-AS) model before the pandemic (and consequent shutdown) started, answer the questions below:
a) Assuming the contraction in the Singaporean economy is mainly driven by demand side factors, Show the short-run effects of this using the AD-AS model. Carefully explain in words (100 or less).

b) Now assume that the contraction in the Singaporean economy is mainly driven by supply side factors, Show the short-run effects of this using the AD-AS model. Carefully explain in words (100 or less).

c) Which of the above mentioned two recessions scenarios, is more challenging forthe policy makers to deal with (the government and the central bank)? and why? (explain in 50 words or less) (hint: think about the trade-offs in policy responses).

Question 2
Suppose, the government of Australia incurs a budget deficit of $50 billion due to increased government spending in 2020 as result of Covid 19. Because of this, the government borrowing in 2021 increases by the same amount.

a) Show this development using a graph representing the market for loanable funds for Australia . Explain in writing the effect of this on interest rates.

Effect on interest rate
Interest rate increases.
The decrease in supply of loanable funds by a magnitude of 50 billion from S1 to S2 exerted an upward pleasure on interest rate, which increase for 3% to 5% on the diagram.

b) Compare the size of equilibrium changes in 1) investment, 2) public saving,3) private saving and 4) national saving (public saving + private saving) with $50 billion increase in borrowing.

Compare the changes (increase/decrease) in these variables indicating same, less or more than the $50 billion.

c) Will the equilibrium quantity of national savings change by more or less than the initial change in public saving? Explain your answer (in 50 words or less)

Question 3
Suppose Never Bank (not the central bank), operating in (fictitiouscountry) Neverland holds $100 million in deposits. Also assume that banks in Neverland are supposed to maintain the (required) reserve ratio of 10%.

a) Assume initially that Never Bank is the only bank in Neverland. State the effects on money supply if Never Bank decides not to make any loans. Compare this to the effect on money supply if, alternatively, Never Bank decides to loan out all its available deposits for loans. (compare boththe scenarios in 150 words or less).

b) What will be the effect on money supply if many banks start to open and operate in Neverland and they loan out all their available deposits. (explain in 100 words or less)

c) Go back to the scenario presented in Part a, where Never Bank is the only bank in Neverland. Suppose, people of Neverland decide to withdraw their deposits with the Never Bank and keep their money with them as currency. What is the quantity of money in Neverland in this situation? State the assumption you made here. Compare the quantity of money in this situation with the one in ‘Part a' where the Never Bank does not make any loans out of its deposits.(answer each in 50 words or less)