IMF Warning over Slowing Growth

Three (3) Problem-Solving Questions that require written answers

1. General information

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· There are 3 questions and each question will be marked out of 10 marks, consisting total of 30 marks. Then the marks will be converted to a total of 20 mark scale for 20 per cent of your total course assessment.

· The marks that will be uploaded in Moodle later will be out of 20 marks (that is, 20 per cent of total assessment).

· Assignment submitted after 5.00pm Friday 13 January 2015 will not be accepted and marked zero.

1.2 This is not a group assignment but individual assignment. Each student must attempt to do the assignment and submit.

1.3 Each student must clearly print student name and ID on the Assignment Cover Sheet.

1.4 You need to follow an appropriate format explained below. Not following appropriate format will cause loss of some marks.

· All written answers must be clearly typed and printed. Hand-written answers are NOT allowed.

· All assignment questions and sub-questions should be typed in order at the heading.

· Separate each main question by different page. For example, if Question 1 (a) (b) (c) and (d) are answered on pages 1-2, then start Question 2 on page 3, etc.

1.5 The answers to the assignment questions should be written clearly and concisely with the main points only, and avoid irrelevant points. In your answers,

· You should analyse, explain and show how and why you draw your answers. Providing just answers without explanation will not receive full marks.

· You should also include appropriate and relevant diagrams, charts and tables together in your explanation. Draw them using Microsoft Word/Excel/Power Point tools, NOT hand drawn.

1.6 Copying the assignment contents from others is a serious violation of copy right. It will be penalized and attract a heavy loss of marks. Write the answers in your own English words.

1.7 Each must submit one HARD COPY of the assignment to Librarian in KOI.

2. Assignment Questions

Question 1– 10 marks

Part A

The table lists some macroeconomic data fora country in 2013.

(a) Calculate the country’s GDP in 2013, using expenditure approach. (1 mark)

(b) Explain the difference between income and expenditure approach in calculating GDP. (1 mark)

An economy produces only apples and oranges. The base year is 2012, and the table gives the quantities produced and the prices.

(c) Calculate real GDP in 2012 and 2013 expressed in base-year prices. (2 mark)

(d) Calculate the real GDP growth rate between 2012 and 2013. (1 mark)

Part B

Australian Bureau of Statistics reported the following data for 2013:

Labour force participation rate:64.5per cent

Working-age population (in thousands people):18,450

Employment-to-population ratio:61.5

Calculate the

(e) Labour force.(1 mark)

(f) Employment. (1mark)

(g) Unemployment rate.(1 mark)

TheLucky Country reported the following CPI data:

June 2011 103.7

June 2012 108.8

June 2013 110.1

(h) Calculate the inflation rates for the years ended June 2012 and June 2013. Explain how the inflation rate changed in 2013 and what it indicates on the price level?(2 marks)

Question 2– 10 marks

Part A

IMF Warning over Slowing Growth

The global economy may face a marked slowdown next year as a result of the turmoil in financial markets, the International Monetary Fund has warned. The IMF said the global credit squeeze would test the ability of the economy to continue expanding at recent rates. While future economic stability could not be taken for granted, there was plenty of evidence that the global economy remained durable, it added.

BBC News, October 10, 2007

(a) Explain how turmoil in global financial markets might affect the demand for and supply of loanable funds, interest rate, investment, and global economic growth in the future. (2 marks)

Bernanke’s Asian Savings Glut Theory Blasted

U.S. Federal Reserve chairman Ben Bernanke says that high saving rates in Asia (that he called a “glut of savings”) were to blame for the extraordinarily low bond rates during the first half of the “noughties”, as well as U.S. soaring house prices and current account deficit. Claudio Borio, research director at the Bank for International Settlements, says Bernanke is wrong and excessive lending by financial institutions caused low interest rates.

Source: The Australian, 6 June 2011

(b) Graphically illustrate and explain the impact of the “glut of savings” on the real interest rate and the quantity of loanable funds. (2 marks)

(c) How do the high saving rates in Asia impact the world loanable fund market and investment in other countries? (2 marks)

Part B

The table shows information about an economy.

(d) Suppose now that the cash in vault was initially zero. Calculate the total quantity of money, the monetary base, the desired reserve ratio and the currency drain ratio.(2 marks)

(e) Suppose that the cash in vault was initially zero and there were no excess reserves. If the Central Bank decreases banks’ reserves by $1.5 million, what will be the money multiplier? Will the quantity of money increase or decrease, and by how much? Will the quantity of deposits increase or decrease, and by how much? (2 marks)

Question 3– 10 marks

Part A

Explain your answers to following questions.

(a) In January 2013, the exchange rate was $1.05 US dollar perAustralian dollar and traders expected the exchange rate to remain unchanged. Today, with new information, traders now expect the exchange rate in 2014 to fall to$US0.90 per Australian dollar. Explain how the revised expected future exchange rate influences the demand forAustralian dollars and the supply ofAustralian dollars in the foreign exchange market. Why? (1 mark)

(b) In October 2012, the exchange rate was 103 US cents per 100 Japanese yen. Over the year, the supply of Japanese yen increased as a result of Abenomics and by October 2013 the exchange rate fell to 84 US cents per 100 Japanese yen. What would happen to the quantity of Japanese yen? Would people plan to buy or sell Japanese yen in the foreign exchange market? Draw a diagram to explain. (2 marks)

Part B

The UK pound is trading at 1.75Australiandollars per UK pound. There is purchasing power parity at this exchange rate. The interest rate inAustraliais 2.5 per cent a year and the interest rate in the United Kingdom is 3 per cent a year.

(c) Calculate theAustralian interest rate differential. (1 mark)

(d) What is the UK pound expected to be worth in terms of Australian dollars one year from now? (1 mark)

(e) Which country is more likely to have higher inflation rate? How can you tell? (1 mark).

Part C

The table gives some information about the US international transactions in 2013.