Macroeconomics Study Questions And Answers

Federal Budget Surplus

Economic Variable Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Year 1	Year 2
Nominal GDP (billion $)	550 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	600
GDP deflator	91	100
Total population (million)	35	35.5

1. a) The Inflation Rate for Year 2 = (GDP DEFLATOR_Year2– GDP DEFLATOR_year1) / GDP DEFLATOR_year1= (100-91)/91=0.098
2. b) i) The growth rate of the nominal GDP of Year 2 is given by the formula

[Nominal GDP (Year2) – Nominal GDP (Year1)]/ Nominal GDP (Year1)

= (600=550)/550=0.09

1. ii) The growth rate of real GDP of Year 2 is given by the formula

[Real GDP (Year 2) – Real GDP (Year 1)]/ Real GDP (Year 1)

However, in this case the Real GDP for both the years will needed to be calculated. The formula for calculating Real GDP is given by,

Real GDP= (Nominal GDP/ GDP Deflator)*100

Real GDP (Year 1) = [Nominal GDP (Year 1)/ GDP Deflator (Year 1)]*100

= (550/91)*100

= 604

Real GDP (Year 2) = [Nominal GDP (Year 2)/ GDP Deflator (Year 2)]*100

= (600/100)*100

=600

The Growth Rate of real GDP = (600-604)/604

= – 0.0066

iii) The real GDP per capita can be obtained by the formula

Real GDP per Capita (Year 1) = Real GDP (Year 1) / Population (Year 1)

= 604/35= 17.25

Real GDP per Capita (Year 2) = Real GDP (Year 2) / Population (Year 2)

=600/35.5= 16.9

Growth rate of Real GDP per Capita =

[Real GDP per Capita (Year 2) – Real GDP per Capita (Year 1)]/ Real GDP per Capita (Year 1)

= (16.9-17.25)/17.25

= – 0.02

Economic Variable	Value (million)
Full-time workers	15.0
Part-time workers	5.0
Involuntary part-time workers	1.0
Unemployed	2.5
Discouraged workers	1.0
Working-age population	30.5
Total population	35.5

1. Unemployment Rate = (Unemployed/ Labor Force)

In the given scenario, Labor Force =Full-time workers + Part-time workers + Involuntary part-time workers + Unemployed

=15.0 + 5.0 + 1.0 + 2.5

= 19.5

Hence Unemployment Rate = (2.5/19.5)= 0.12

Labor force participation rate = (Labor Force/ Total Working-age Population)*100

= (19.5/30.5)*100= 63.9

Involuntary part-time rate= (Number of involuntary part-time workers/ Labor force)*100

= (1.0/19.5)*100=5.12

Employment-to-population ratio= (Employed / Civilian Population)*100 = (21/35.5)*100= 59.1%

An economy is said to be in full employment level when there is no involuntary unemployment. In the given scenario the economy has involuntary part time worker which means there are people who are willing to work full time at the existing wage rate but are working part time. This means that the economy is not at full employment level.

1. If the discouraged workers are considered the New Unemployment Rate = (2.5/20.5)= 0.12

The labor force participation rate= (20.5/30.5)*100= 67%

Real interest rate (% per year)	Loanable funds demanded (billions)	Loanable funds supplied (billions)
2	8.0	4.0
3	7.0	5.0
4	6.0	6.0
5	5.0	7.0
6	4.0	8.0
7	3.0	9.0
8	2.0	10.0

Figure 1: Demand Supply framework of Loanable Funds

(Source: Created by Author)

At equilibrium point that is at the point of intersection between the demand and supply curve for loanable funds the real interest rate will be determined. In the given scenario the rate of interest will be 6. At equilibrium if it is assumed that the entire loanable funds are used for investment then the level of investment is 6.

On an added notion, demand for loanable fund=I

On the other hand, private savings=r

AS-AD Graph

It is known that demand for loanable funds=private savings

Private savings is also 6.

1. b) When there is a government surplus it will increase the supply of loanable funds and thereby reduce the level of savings and increases the level of investment. This also reduces the rate of interest.
2. c) A deficit on the part of the government will reduce the level of national savings as a result of which the supply of loanable funds shifts to the left and thereby increases the rate of interest and decreases the level of investment.

a)

Assets	Amount (in $)	Liabilities	Amount (in $)
Reserves	2,000	Deposits	2,000

In this case, the bank reserves would increase by $2,000. As an amount of $2,000 is deposited in the bank, the liabilities of the bank would rise by $2,000 as well.

b)

There is absence of additional reserves in BMO Bank and the reserve ratio is provided as 20%. This implies that with the rise in checking amount by $2,000, the bank needs to keep 20% of the amount as reserves and the rest could be lent.

Particulars	Units
Deposited amount	$          2,000
Reserve ratio	20%
Maximum amount to be lent	$          1,600

Assets	Amount (in $)	Liabilities	Amount (in $)
Reserves	2,000	Deposits	2,000
Loans	1,600	Deposits	1,600

c)

BMO
Assets	Amount (in $)	Liabilities	Amount (in $)
Reserves	2,000	Deposits	2,000
Loans	1,600

CIBC Bank
Assets	Amount (in $)	Liabilities	Amount (in $)
Reserves	1,600	Deposits	1,600

d)

Particulars	Units
Bank reserves	$          2,000
Reserve ratio	20%
Checking deposits	$        10,000
Increase in money supply	$          8,000

1. a)

Figure 2: Exchange Rate determination

(Source: Created by Author)

1. a) The higher rate of interest in Columbia will in turn make the country attractive to the investors, as a result of which the demand for Peso will increase in the foreign exchange market. As a result of this Peso will appreciate.
2. b) In order to fix Peso to Canadian Dollar at the previous exchange rate the central bank of the country may implement fixed exchange rate regime. A fixed exchange rate which in other words is termed as the pegged exchange rate holds the value of currency of a country against the value of the other country against a basket of other currency or in terms of other assets such as gold.

Figure 3: Exchange rate appreciation

(Source: Created by Author)

1. a) The aggregate demand may shift to the right because of several different reasons. As the spending on the part of the consumers increase that increases the demand for goods and services and as a result the aggregate demand curve shifts to the right.

On the other hand, if the Marginal Propensity to Save (MPS) is low that is people spend more and save less, then also the aggregate demand curve shifts to the right.

In the short-run when the AD curve shifts the equilibrium also shifts along the SAS₀. In the given scenario the equilibrium will be at the point C where the Price level and Real GDP will increase. Afterwards the SAS curve shifts to the left in order to reflect that prices have risen and there is a decrease in the amount of real GDP. Hence the new equilibrium is achieved at the point D. The economy can be regarded at a full employment equilibrium.

1. b) The SAS curve also may shift to the left because of different reasons. Which may include,

A rise in the level of nominal wage rate shifts the SAS curve to the left as the cost of production rises and the level of profit lowers.

Rise in the process of the other input factors may shift the SAS curve to the left as this increases the cost of production.

In the given context when the SAS curve shifts to the left in the short run the new equilibrium will be achieved at point A, where real GDP will decrease and price level will increase. In this context it can be stated that the country possesses an inflationary gap.

1. c) The new equilibrium will be achieved at the point D where the SAS and AD curve will intersect.

Figure 4: Aggregate Demand and Aggregate Supply Model

(Source: Created by Author)

The equilibrium Price is 95 and the equilibrium level of real GDP is 500.

1. b) The country is facing an recessionary gap which is 600-500=100
2. c) MPS=1-MPC=1-.75=.25

Multiplier=1/.25=4

Hence the G should be increased by 25 Billions of Yen to mitigate the gap.

The multiplier is 4 and hence the tax multiplier is 3. Therefore, the second round consumer spending should be 33.33 Billions of Yen.

The third round of consumer spending would be .25*33.33= 8.33 Billion

The fourth round would be savings equal to the tax cut.

Total= 66.66

1. a) The government may use remedial fiscal policy to mitigate the output gap or bring the economy back to its potential GDP.

Figure 5: AD-AS Model

(Source: Created by Author)

1. c) The Real GDP will increase, Potential GDP will remain same, inflation rate will increase and the unemployment rate will decrease.

1. a) It is quite evident that the economy grew faster. This is because the budget surplus is more than expected that is the income received is significantly higher than that of the expenditures. On the other hand, the federal expenditures were also lower than that of the expected. It reflects that the economy has grown significantly.
2. b) In order to balance the budget the surplus can be reinvested in the companies or the companies can distribute the surplus revenue as dividends. On the other hand, the government can reduce the tax rate so as to balance the budget.
3. c) A sudden and unexpected budget surplus will not pose any difficulty for balancing the budget in future.  However, the surplus should be managed effectively and the surplus amount also needed to be allocated effectively.

Figure 6: AD-AS Model

(Source: Created by Author)

The bank can increase the money supply within the economy through selling the treasury bills or can cut the tax rate to increase the consumer demand which will in turn shift the aggregate demand curve to the right which will ensure that the economy achieves the equilibrium at the potential level.

1. b) The overnight interest is defined as the rate of interest at which the major banks borrow or lend funds of one day among themselves. Usually the banks predetermines a target level for that particular rate. In order to achieve the desired target of overnight interest rate the bank may perform open market operation in order to adjust the monetary base.
2. c) The overnight interest rate in increases it will discourage the banks to borrow in order to maintain their reserve requirement. This will also ensure that banks will also increase the rate of interest and the cost of borrowing will increase which will discourage the companies to undertake expansionary decisions.