Problems and Solutions of Macroeconomics - Essay Example

8 September 2007 Macroeconomics PROBLEMS 4. a. The GDP of Australia increased during 1993, 1994, 1995, 1996; fastest growth is from 1995-1996 b. The GDP of Japan decreased during 1990, 1991, and from 1994, 1995; fastest decline in from 1990-1991 c. The economies of Japan and Australia both suffered contractions in GDP from 1989-1991. Recovery in Japan started a year earlier than Australia. However, Australia's economy has experienced sustained growth from 1992 to 1996. Japan, on the other hand, suffered another contraction from 1994 to 1995 but managed to posts increases in GDP during the following year. 6. a. The US economy is currently on expansion evidenced by the increasing trend in quarterly GDP albeit at a decreasing rate. b. The US economy has been on expansion after the recession on 2001. c. Compared to the second quarter GDP growth rate last year, this year's second quarter GDP has grown relatively faster. CRITICAL THINKING 1. a. The most recent recession ended in the fourth quarter of 2001, during which expansion began. b. The expansion during 2002 and 2003 is called jobless recovery because it "leaves the Okun gap constant and creates enough new jobs to match the growing population but not enough to lower the unemployment rate." PROBLEMS 4. Initial Capital Stock = 19 looms Depreciation = 1 loom/year Gross Investment = 5 looms Net Investment = 4 looms Final Capital Stock = 24 looms 6. a. GDP Consumption Expenditures $350,000 Investment $150,000 Government Purchases $130,000 Exports $120,000 Less: Taxes ($125,000) Imports ($140,000) GPD $485,000 b.The net domestic product at factor costs can be computed if intermediate consumption, consumption of fixed capital, and net indirect taxes. c.Investment is financed by savings and profits. Problems 3. a. Unemployment rate = 212, 927, 000 -142, 314, 000/212, 927, 000 = 33.16% b. labor force participation rate = 142, 314, 000 - 134, 055,000/ 142,314, 000 = 5.80% c. employment to participation ratio = 1- 0.3316/0.058 = 11.52 4. a. basket used in CPI nuts = $60/ $3/bag = 20 bags mangoes = $10 mangoes/ $1/mango = 10 mangoes b. CPI Nuts = $4 * 20 bags = $80 Mangoes = $1.5 * 10 = $15 Current CPI = $95 c. Inflation Rate (Current CPI - Last Year's CPI) / Last Year's CPI = ($95-$70)/$70 * 100% = 35.71% CRITICAL THINKING 1. c. I believe that the jobless recovery is most probably brought about by the weak confidence of the business sector on the economic recovery. They are hesitant of hiring new workers that they cannot sustain in the long run. In order to remedy this situation, they engaged in maximizing the production efficiency of individual workers to match the expected level of production. PROBLEM SOLVING 6. In the short run, prices and quantity supplied are stable. So, if demand changes, these factors will be unresponsive. It will just create an entirely different equilibrium. 10. a. Point B b. Improvements in technology and improvements in labor productivity c. Higher demand d. After the increase in aggregate supply, real GDP is greater than potential GDP. e. Increase in aggregate demand which is due to higher consumer expenditure, government expenditure, and investments will equate potential GDP with real GDP. PROBLEM SOLVING 10. a. Potential GDP will increase because of the higher labor force. b. Employment will be increase especially if all these immigrants secure new job opportunities. c. Real wage will go down because of the larger labor pool competing for jobs. CRITICAL THINKING 2. Memo Writing TO: MR PRESIDENT FROM: Student DATE: 7 SEPTEMBER 2007 TOPIC: INCREASING POTENTIAL GDP This is in response to your regarding the economic efforts which can increase the country's potential GDP. The following programs are recommended: 1. Training and development programs which can enhance the efficiency of human resource; 2. Higher wages that can motivate employees to work better; 3. Spending on research and development to improve technology; 4. Nationwide programs which discusses ways on how to improve technological efficiency; and 5. Corporate subsidy that companies can use to improve their operations. PROBLEMS 4. CRITICAL THINKING 1. a. The Asian Development Bank forecasts that Asian economies will grow by 6-1% and 6.6 % in 2003 and 2004, respectively. b. China's GDP is growing because of capital increases in labor as well as other factors such as strong inflow of foreign investments. The effects of these factors can be separated by finding their individual dollar contribution. c. It should be noted that China has a higher population than the United States. However, it is forecasted that with the rapid increase in real GDP, the per capita real GDP will equal in the two countries in the mid-2040s. PROBLEMS 4. M2 decreases by $10,000 and M1 decreases also by the same amount. 6. Assets Loans $3750 Reserves $250 Other Assets $200 Total Assets $4200 Liabilities and Equity Deposits $4,000 Other Liabilities $200 Total Liabilities and Equity $4200 CRITICAL THINKING 2. I think baseball trading cards will be able to take the function of money in the economy. First, it is readily available to everyone, meaning everybody has an access to it as compared to tractor parts and impressionist paintings. As for store of value, it does not become stale like a loaf of bread. PROBLEMS 8. Open market purchases operate in the economy by contracting demand causing a leftward shift in aggregate demand. This in turn, will lower the price level and GDP. This move decreases inflation in the long run while GDP is stabilized. 10. a. Bank failure will cause a contraction in the money supply. b. Due to the bank failure, aggregate demand will also decrease. c. In the short run, this will cause price level to go down and GDP will also be lower because demand from each economic sector is decreased. d. In the long run, GDP and price level will be at equilibrium. CRITICAL THINKING 2. PROBLEMS 4. a. An expected deflation will make the SAS curve to shift to the left. The LRAS, on the other hand, remains unchanged. b.Thus, the anticipated deflation lowers price level and quantity supplied in the economy. c.If the anticipated deflation does not materialize, the SAS curve will shift to its previous position increasing the price and quantity until they reach the previous equilibrium point. CRITICAL THINKING 1. PROBLEM 4. a. In order to come up with autonomous expenditure, we first compute autonomous consumption. C = a + bY 110 = a + b (100) 170 = a + b (200) 110 = a + b (100) 110 = a + 100b a = 110-100b 170 = 110-100b +200b 60 = 100b b = .6 a = 110 - 100 (.6) a = 110 - 60 a = 50 billion cloves (autonomous consumption) Autonomous spending equals autonomous C + I + G +X = 50 + 50 + 60 + 60 = 220 billion cloves b. C = a + bY where b equals MPC from the computation above, mpc = .6 c. 310 billion cloves d. inventories are increased to meet the demand e. inventories are depleted f. multiplier = 1/ (1-b) = 1/ (1-.6) = 2.5 CRITICAL THINKING 1. PROBLEMS 8. 10. PROBLEMS 6. a. Decreases in government expenditure will also trigger a decrease in savings and a subsequent increase in real interest rates. b. However, the effects listed above are strongly dependent on the Ricardo Barro effect. It could possibly happen that the decrease in government spending will be matched by an equal amount by private savings in the anticipation that this will paid for by higher taxes in the future. 12. a. The country is running a structural budget deficit. It should be noted that this type of deficit occurs when the economy is at full employment which is most possible as it is in boom. The presence of inflationary gap confirms this as this usually occurs when the economy is at full employment. b. By definition, automatic stabilizers are "automatic" which does not require any policy from important economic actors. In this structural budget deficit, automatic stabilizers should decrease as the government try to lessen its expenditures to match with the level of taxes it collects. c. If there is decrease in the discretionary expenditure of the government, the structural deficit is likely to decrease. It should be noted that structural deficits are caused by excessive federal spending which cannot be adequately covered by the current level of taxes. CRITICAL THINKING 1. PROBLEMS 2. a. The initial equilibrium occurs at the intersection of LAS, SAS, and AD which is at 7 trillion GDP and a price level of 110. b. The increase in short run aggregate supply can be caused by higher demand. c. If the Fed follows a fixed rule monetary policy, price level will be increase. However, real GDP will remain constant. d. If the Fed follows a feedback rule monetary policy, price level will be constant while only the GDP increase. It should be noted that the constant level in money supply stabilizes price level. 6. a. The Fed is employing a fixed rule monetary policy this time directly controlling the interest rate and not the money supply. b. If we assume investors are rational, a decrease in interest rates promptsinvestors to move money away from the bond market to the equity market. At the same time, businesses enjoy the abilityto finance expansion at a cheaper rate,therebyincreasing their future earnings potential, which,in turn, leads to higher stock prices. Investors and economists alike therefore view lower interest rates as catalysts for expansion. Thus, the decrease in interest rate will further enhance the stock market. c. The Fed shouldn't have interfered in the market. 8. a. b. CRITICAL THINKING 1. PROBLEMS 6. a. It should be noted that it one case, Virtual Reality exports TV sets while import them on the other case. This is relatively due to the previous situation of the economies before the trade. The comparative advantage of the two is compared and the one which has the comparative advantage in the production of TV sets produce this for the two economies. b.Both the TV and computer manufacturers gain in each case because resources are channeled to where they can be efficiently used. Wastage in production are eliminated and specialization further enhances productivity. c. Consumers gain because they can now able both products at optimal prices. 10. a.World price of soybean will be $6 per bushel. b. Revenue is $6 * 300 million bushels = $1800 million c. Both countries will be worse off with the VER. CRITICAL THINKING 1. a.The textile industry has been experiencing transformation brought about globalization. Production is being relocated in the countries which have lower cost of labor and overall production. b.China is expected to be the largest producer of textile because its "enjoys economies of scale, low-cost labor, and an integrated domestic industry that spans cotton farming to clothing design." c.I don't think the Americans should not be concerned about who manufacturers their clothes as long as the quality of the product is maintained. d.Americans will not run out of activities where it enjoys comparative advantage. It should be noted that the country is the hub of technological advancements and it should focus on this sector. PROBLEMS 4. a. $24 b. $40 c. Dreamland's investment is finance through financial markets, households, government, and other players in the goods market. 8. a. The exchange rate is determined by market forces and not dictated by the central bank. b. The current account balance is positive meaning it doesn't owe anything to the rest of the world. c. The expected exchange rate will decrease because of the low interest rate. d. The interest rate differential is positive because the country has lower interest rates than the other countries. e. In terms of interest rate parity, the currency of this country is undervalued. f. In terms of purchasing power parity, the country will adjust in the long run to have the same purchasing power as the rest of the world. CRITICAL THINKING 1. a. In a sense, the falling dollar is a problem for the United States considering its current problem in payments deficit and large scale of foreign borrowing. A failing dollar will aggravate these problems by enlarging the country's debt. On the other hand, the falling dollar also encourages exports as US goods now appears cheaper to other countries. b. The same way, the rising Euro attracts investment in this currency as profit potentials through capital gains are expected. However, exports may suffer because they appear more expensive to foreigners. c. The Fed can save the sinking dollar by intervening in the market. The Fed can increase interest rates or lessen the supply of dollar. However, these policies should not be pursued if they cannot be maintained in the long run. d. The EU can suppress the rising Euro by lowering interest rates and increasing the circulation of Euro. However, these policies should not be pursued if they cannot be maintained in the long run. Read More