ECO1000 Macroeconomics

ASSIGNMENT 1 (20%)

Trimester 3, 2012

Due date: Week 6 (Week commencing 17th December, 2012) to your tutor at the beginning of the tutorial class. No late submissions will be accepted except under extreme circumstances. Instructions: I. II. III. This assessment exercise will account for 20% of your final grade in the subject. Answer all five questions. Illustrate with diagrams where appropriate.

Family Name : Name : Student number : Campus : Marks :

Marks : Question 1 (4 marks) :

Question 2 (4 marks) :

Question 3 (4 marks) :

Question 4 (4 marks):

Question 5 (4 marks): 1

Question 1 : (4 marks) 1a. What is the expenditure approach to measuring GDP? (1 mark)

1b. What is the objective of monetary policy? (1 mark)

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1c. “At its meeting last month, the Central Bank decided to lower the cash rate by 25 basis points (0.25%) to 3.0 per cent, effective 8 November 2012. The country’s economy is contracting, capacity utilisation has fallen from its peak, and will decline further in the near future. Demand for credit is weak overall’ i) Explain the intended effect of the Central Bank cutting the cash rate by 25 basis points and illustrate your explanation with an appropriate graphical analysis (Hint : the Money Market and the AD/AS Model). (2 marks)

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Question 2 : (4 marks) Lamb chop Beef Pork Chicken 2000 Price ($) 25 35 15 10 Output 40 50 60 80 2001 Price ($) Output 28 30 20 8 45 55 65 85

Country A produces only lamb chop, beef, pork and chicken. The base year is 2000, and the table gives the quantities produced and the prices. a. Calculate Country A’s nominal GDP in 2000 and 2001. Nominal GDP in 2000 = $ Nominal GDP in 2001 = $ 0.5 mark 0.5 mark 0.5 mark

b. Real GDP in 2001 (base year is 2000) = $

c. The economics growth between 2001 and 2000 = % 1 mark d. The GDP deflator for 2011 is = Working : 0.5 mark

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e. Refer to the diagram below (1 mark)

Initially, the market for money is in equilibrium, as illustrated in the above diagram. Then, the Central Bank increases the quantity of money by $100 billion. i) Draw this increase in the quantity of money in the above diagram. ii) What was the initial equilibrium interest rate? What happens to the new equilibrium interest rate? 5

Question 3 (4 marks) The following events have occurred at times in the history of US: • A strong hurricane (wild storm) hits New York and nearby cities. • The price of oil drops sharply. • The US government decided to decrease the goods and services tax (value add tax) to stimulate the fragile economy. • A strong growth in the Chinese economy. Use the AD/AS model to show the following : a. Explain for each event whether it changes the short-run aggregate supply, long-run aggregate supply, aggregate demand, or a combination of them in the US economy. b. Explain the separate effects of each event on real GDP and the price level, starting from a position