Question 1 on Topic 3 (10 marks)
(a) It is the year 2014, and the following economic activities had taken place in the country of Claratina:
*Consumption was $5 billion, and 20% of these consisted of goods initially produced in 2013. Of this $5 billion, foreigners living in Claratina bought $0.3 billion worth of locally made goods and services.
*$0.4 billion worth of housing stock was sold. 10% of this was used housing stock.
*Owners of factories rented out by businesses were paid $0.2 billion.
*New capital (i.e. machinery) stock purchased by firms totalled $0.1 billion.
*The government bought $0.2 billion worth of used guns for the military, and spent a further $0.01 billion engaging agents to undertake and complete the process.
*Claratina is a closed economy.
*Use the expenditure method only when answering the questions below.
(i) What was the value of consumption in Claratina is 2014? 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 Claratina in 2014? 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 Claratina in 2014? Explain how you obtained this value (i.e. what did you count, and what did you exclude). (1.5 marks)
(iv) Calculate Claratina’s GDP in 2014. (1.5 marks)
(b) The standard of living in India is higher than the standard of living in Indonesia as the size of India’s nominal GDP (using current USD) in 2019 was estimated at $2.869 trillion as opposed to Indonesia’s $1.119 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 4 (10 marks)
(a) A handmade watch is valued at $5,000 in 2010, which is 2.5 times its value in 1970. The respective CPIs were 92 in 1970 and 170 in 2010.
(i) Calculate the rate of inflation between 1970 and 2010. (2 marks)
(ii) Between 1970 and 2010, has this watch risen in price faster than at the rate of inflation? Show all workings and justify your answer. (4 marks)
(b) Due to COVID-19 negatively impacting your firm’s business, your boss has had to reduce your pay this year, yet your standard of living actually increased. How can this be so? Explain your thought process with respect to the concept of wages. (4 marks)
Question 3 on Topics 6 & 7 (15 marks)
(a) The economy is doing extremely well, and is growing faster than economists think it should. The finance ministry has advised the government to engage in a fiscal contraction to slowdown the economy. It suggests that this can be done by cutting spending on healthcare and education. The prime minister has asked you, as her chief economic advisor, for your views. In particular, she wishes to know the following:
(i) Would cutting government spending on healthcare and education slowdown the economy immediately and will it also continue to slowdown the economy into the future? 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) She has also heard that cutting spending reduces the level of debt and improves the budgetary situation, so this initial cut in government expenditure will eventually lead to a better economic outlook. She wants to know your opinion on this. Your advise 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 friend says that money transferred to recipients of the National Disability Insurance Scheme (NDIS) shows up as government expenditure in the national income accounts identity, because the government is spending money by giving this financial benefit to the recipients. Explain why you agree or disagree with this statement, and if you disagree, explain which part of the identity would be changing instead? (5 marks)
Question 4 on Topics 6 & 8 (15 marks)
(a) Inflation is above the target range set by the Central Bank of Gravisa, and is of concern to its board, who feel compelled to act.
(i) What does this tell you regarding the likely output gap? Illustrate it using an AS-AD diagram, and briefly explain your diagram. (5 marks)
(ii) Explain the process of what happens to the economy in the long-run if the central bank does not intervene (assume also that the government does not intervene). Amend the AS-AD diagram drawn in part (i) to illustrate your answer. (5 marks)
(b) Your mother states that if the goal of monetary policy is to quickly induce firms to change their investment decisions then monetary policy is ineffective because firms react slowly to changes in interest rates. Do you agree or disagree with her statement? Justify your answer. (5 marks)