Economics for Decision Making

Question 1 on Topic 3 (10 marks)
(a) In the country of Classica, we have information on the following economic activities in the year 2019:
*Consumption stood at $1 billion worth of new goods and services, 20% of which were bought by foreigners residing there.
*Housing stock worth $100 million was sold, 30% of which was made up of existing housing stock.
*Wages totalled $120 million.
*Businesses bought $150 million worth of bonds
Businesses spent $25 million expanding the size of their factories.
*The government procured $150 million worth of protective equipment for hospitals, and paid out $10 million in fees to agents who organised the purchase.
*The government also transferred $20 million to various charities as a gesture of goodwill.
*Classica is a closed economy.
(i) What was the value of consumption in Classica is 2019? Explain how you obtained this value (i.e. what did you count, and what did you exclude). (1.5 marks)
(ii) What was the value of investment in Classica is 2019? Explain how you obtained this value (i.e. what did you count, and what did you exclude). (1.5 marks)
(iii) What was the value of government expenditure in Classica in 2019? Explain how you obtained this value (i.e. what did you count, and what did you exclude). (1.5 marks)
(iv) Calculate Classica’s GDP in 2019 using the expenditure method. (1.5 marks)

(b) The standard of living in Nigeria is higher than the standard of living in New Zealand as the size of Nigeria’s nominal GDP (using current USD) in 2019 was estimated at $0.448 trillion as opposed to New Zealand’s $0.206 trillion in the same period (figures from the World Development Index Database). Do you agree or disagree with this statement? Explain your answer and provide real world evidence to justify your answer. (4 marks)

Question 2 on Topic 5 (10 marks)
(a) Most people in the country of Hypothetica tend to keep 5% of their cash holdings in their wallets. The central bank has instructed the commercial banks to also hold 3.5% of all bank deposits as reserves.
(i) Calculate the simple money multiplier (2 marks)
(ii) Suppose that in 2018 customers deposit $2,500 into their bank accounts. Based on the simple money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. (2 marks)

(b) What do you expect will happen to the total amount of Australian dollar securities (i.e. government securities) held by the Reserve Bank of Australia in the next few years? Justify your answer. (6 marks)

Question 3 on Topics 6 & 7 (15 marks)
(a) The impact of COVID-19 has sent the economy of Hypothetica into recession. The finance ministry has advised the government to ensure a weaker currency in order to boost exports and thus kickstart the slowing economy. As well, the finance ministry wants the government to also cut income taxes and introduce a special income supplement of $100 a month to every citizen as this will also boost the economy. The President of Hypothetica has asked you, as her chief economic advisor, for your views. In particular, she wishes to know the following:
(i) Would a weaker currency really increase net exports? Your advise on this is ____________________ (provide your answer and justification on both the immediate and future impact. Feel free to use external resources to assist you in your answer if you prefer). (5 marks)
(ii) What would be the potential downside of cutting income taxes and providing citizens with an income supplement, with respect to government finances, and is that going to negatively impact on future economic growth? Your advise on this is ____________________ (provide your answer and justification. Feel free to use external resources to assist you in your answer if you prefer). (5 marks)

(b) Your father has just stated that the government’s cut in income taxes and income supplement will be highly effective in order to boost economic growth as consumers will spend all their increased after-tax income by shopping at local stores. Explain why you agree or disagree with this statement and provide two reasons to support your argument. (5 marks)

Question 4 on Topics 6 & 8 (15 marks)
(a) Inflation in Symposia is currently below the target range of its central bank. What does this tell you regarding Symposia’s likely output gap? Illustrate it using an AS-AD diagram, and briefly explain your diagram (5 marks)

(b) Your mother states that the RBA printing money will lead to inflation. Do you agree or disagree with her statement both in the current economic situation and in times when the economy is at potential GDP? Justify your answer. (5 marks)

(c) Is nominal GDP targeting a better tool for central banks to use in the highly recessionary COVID-19 period where inflation has essentially disappeared as a policy issue? Briefly explain your reasoning. (5 marks)

References

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