Macroeconomics for business and government - Essay Example

?Introduction This assignment is designed to test your knowledge about the basic terminology used in macroeconomics and your understanding of key macroeconomic concepts. It will also reinforce what is studied in modules 1, 2 and part of module 3. The assignment is made up two parts: part A and part B. The questions in Part A will be marked out of a maximum of 20 marks, and the questions in Part B will be marked out of a maximum of 30 marks in total. Part A This part comprises ten multiple choice questions each worth 2 marks. These questions are designed to test your knowledge of the course content. The questions in this section are typical of the kind of question that will be in part A of the examination paper. Q. 1 Policy makers can become concerned if the unemployment rate is too low because: Answer : B A. stock prices will fall. B. inflation might increase.- C. output will decrease. D. an exchange rate crisis might occur.. Q. 2 If nominal GDP rises from $10 trillion to $12 trillion, while the GDP deflator rises from 2.0 to 2.2, the percentage change in real GDP is: Answer: B A. -10% B. 10% C. 1.1% D. 9.1% E. 20% Q. 3 Which of the following events would cause a reduction in the size of the multiplier? Answer: D A. an increase in the marginal propensity to consume B. an increase in the marginal propensity to save C. a reduction in taxes D. a reduction in government spending E. none of the above Q. 4 Suppose the supply of money equals the demand for money. Given this information, we know that: Answer D A. the price of bonds will tend increase. B. the price of bonds will tend to fall. C. production equals demand. D. the goods market is also in equilibrium. - E. the supply of bonds also equals the demand for bonds. Q. 5 Suppose there is a simultaneous tax cut and open market sale of bonds. Which of the following must occur as a result of this? Answer : D A. Output increases. B. Output decreases. C. The interest rate increases. D. The interest rate decreases. E. Both output and the interest rate increase. Q. 6 The reservation wage is: Answer: C A. the wage that an employer must pay workers to reduce turnover to a reasonable level. B. the wage that ensures a laid-off individual will wait for re-hire, rather than find another job. C. the wage that would make an individual indifferent between working or not working.- D. the wage offer that will end a labour-strike. E. the bribe that must be paid to a maitre d' when you want a table but did not call in advance. Q. 7 Which of the following describe the rising distortionary effects of taxes in the economy: Answer : D A. the price-setting curve shifts downwards. B. the wage-setting curve shifts rightwards. C. an increase in the proportional tax wedge. D. an increase in the natural rate of unemployment. E. all of the above Q. 8 The aggregate demand curve will shift to the right when which of the following occurs? Answer : D A. a decrease in the money supply B. a reduction in consumer confidence C. a rise in the price level D. a decrease in taxes E. a decrease in the price level Q. 9 Which of the following represents the medium-run effect of an increase in the price target? Answer : D A. a decline in output B. an increase in the interest rate C. a decrease in the price level D. all of the above E. none of the above Q. 10 - When inflation has not been very persistent, we can expect that: Answer D A. expected price level for a given year will equal the previous year's actual price level. B. the current inflation rate will not depend heavily on past inflation. C. lower unemployment rates will be associated with higher inflation rates. D. all of the above - E. none of the above Part B Please answer each of the following questions using your own words. Use diagrams, tables or equations in your answer where appropriate. As a guide, you should be able to answer questions 11, 12 and 13 within 150 words (each question), and questions 14 and 15 within 250 words (each question), plus diagrams if appropriate (except where a question requires only a list or calculation). Note: Each question in this part will be marked out of a maximum mark as indicated in parentheses. Q. 11. a. From the following list select those variables that are normally regarded as macroeconomic variables: Rate of inflation, rate of economic growth, balance of current account on the balance of payments, the rate of Goods and Services Tax and quantity of total output in an economy. rate of inflation unemployment in the mining industry wage rate in the construction industry rate of economic growth balance of the current account on the balance of payments the rate of the Goods and Services Tax price of motor vehicles quantity of total output in an economy turnover in the gambling industry. b. Explain why you classified the items in your list as macroeconomic variables. The rate of inflation, rate of economic growth, balance of current account on the balance of payments, the rate of Goods and Services Tax and quantity of total output in an economy are classified as macroeconomic variables because they indicate how the economy performed as a whole and not on particular segment or industry of an economy. Say for example the rate of inflation which indicates how the prices have gone up in a given economy. The rate of economic growth which can be construed as the GDP which is the total value added in a given economy. The rest were not considered as macroeconomic variable because they appertains only to a certain segment or industry like unemployment in mining industry, wage rate in the construction industry. Q. 12. Define the following terms: a. Real Variable – measures the physical number or units of a certain economic variable. Like the rate of economic growth, the level of employment. b. Productivity – the output as a result of an input. In economics, it is the typical result or produce in quantity as a result of the usage of the factors of production of labor, equipment and capital typically used in a given industry. c. Long-run – long term outlook of an output as determined by certain factors such as education, research, saving, and the quality of government in the long run, say a half century or more. Q. 13. Using an example, explain how nominal GDP is converted into real GDP. Nominal GDP is converted into real GDP by deflating GDP. This is done by comparing the value of GDP of a given year against a reference year. To illustrate: Say for example GDP deflator for 2010 = $15,000 Billion/10,000 Billion = 1.50 or 1.5 x 100 = 150 % The nominal GDP for 2010 was $15 Billion. To convert it into real GDP, divide it by 1.50 to arrive at $10,000 Billion. Q. 14. Explain what is meant by ‘discouraged workers’. How does the existence of discouraged workers cause the unemployment rate to be an imperfect measure of the extent to which labour resources are being used? Discourage workers are individuals who would like to work but have given up looking for a job. The existence of discouraged workers causes the unemployment rate to be an imperfect measure of the extent to which labour resources are being used because they do not reflect the actual unemployment rate, which is the ratio of the unemployed individuals in a given economy compared to the actual labour force. Discourage workers existence makes the measurement of unemployment rate inaccurate or imperfect because it makes it difficult to measure or determine the number of actual jobs lacking in a given economy due to a portion of its labour force who is not looking for a job. They bloat the rate of unemployment even if there are jobs available to be had. For the government, the presence of discourage workers will make it difficult for them to apply remedial measures as to the number of actual jobs that they need to generate to achieve maximum or full employment. Because even if they have generated more jobs but when a portion of its labour force has already given up looking for them, the rate of unemployment may not seem to improve. Q. 15. “Continuous unrest / war in the Middle East might affect the general level of prices and real output in an economy”. Do you agree? Explain. I agree that continuous unrest/war in the Middle East might affect the general level of prices and real output in an economy. To better explain, we have to first determine that the most, if not all countries in the Middle East produces oil, petroleum, and gas. We use oil, petroleum and gas from running our car to producing goods to transporting the said products. Our industries or factories regard as basic “input” in production as it is a necessity for a certain factory to be able to manufacture and deliver certain products. Unrest, especially war will affect the general level of prices and real output in an economy because the price of basic input that is used to drive our economy, which is oil, will increase and as a result, the said increase of price of basic input will be passed or reflected on the output or finished product or services. Unrest/war increases the prices of oil as it disrupts production, distribution and transport of such input. When production, distribution and transport of such input are disrupted, the availability of it will become scarce. And following the law of supply and demand, if the supply of certain input will become scarce and unable to supply the existing demand, its price will naturally go up. And when industries buy their input (oil) at a higher price, they will reflect it on the prices of their goods and output. Read More