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ECONOMICS Study Guide 13-F6c Macroeconomics Revision Questions 2011


Study Guide 13 – F6c

Macroeconomics Revision

CONTENTS:

Chapter Topic C1 Gross Domestic Product

Pages 3 – 14

C2 and C6 C3

15 – 20

C5

AD / AS equilibrium and analysis Money, Interest rates and the Banking system Trade and the Foreign Exchange Market The Government

C7

Macroeconomics Analysis

38 - 58

C4

21 – 27 28 – 33 34 – 37

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Study Guide 13 – F6c

Chapter C1:

Macroeconomics Revision

GROSS DOMESTIC PRODUCT

1. Real GDP is defined as the A. monetary value of goods and services produced. B. total output of a country expressed in terms of imports. C. value of goods and services produced in a country in a year with the effects of inflation removed. D. increase in economic growth. 2. If your grandparents buy a new retirement home, this transaction would affect A. consumption. B. investment. C. government purchases. D. all of the above. 3. The ‘basket’ on which the CPI is based is composed of A. raw materials purchased by firms. B. total current production. C. products purchased by a typical customer. D. consumer production. 4. Investment is A. the purchase of goods and services. B. the purchase of capital equipment. C. when we place our saving in the bank. D. the return from business ownership. 5. If the nominal GDP grows 5%, and real GDP grows only 2%, prices should rise by A. 5%. B. more than 5%. C. 0%. D. 3%. 6. In 2005 (the base year), the level of nominal GDP was $140 billion. In 2006, nominal GDP had increased to $154 billion but real GDP was unchanged. The price index in 2006 must have been: A. 1000. B. 1100. C. 1200. D. 1500.

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Study Guide 13 – F6c

Macroeconomics Revision

7. Which of the following would be included as part of GDP? A. Housework B. Illegal drug sales C. Intermediate goods D. Educational services 8. An example of transfer payments is A. wages. B. profit. C. rent. D. unemployment benefits. 9. Investment is A. the purchase of inventory. B. the purchase of capital equipment. C. the placement of money in savings accounts. D. the purchase of goods and services. 10. When talking about Gross Domestic Product, which of the following statements is correct? A. Measuring by the income and expenditure methods result in the same amount. B. Measuring by the production method means adding up the value of all goods produced. C. Inflation has an effect on real GDP, but not GDP. D. It measures the quality of life. 11. Which of the following statements about the Circular Flow Model is correct? A. Exports reduce the flow of income. B. Imports reduce the flow of income. C. Saving and investment is the same thing, and both can be carried out by households and firms. D. In terms of circular flow, households are more important than firms. 12. Which of the following money flows is an injection into the circular flow? A. Savings. B. Taxation. C. Imports. D. Exports. 13. Which of the following would not be considered in GDP calculations? A. Purchase of a used car. B. Spending by the Government on education. C. Imports. D. Do-it-yourself repairs of a house.

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Study Guide 13 – F6c

Macroeconomics Revision

14. Use appropriate figures from Table 1 to calculate Gross Domestic Product. Table 1: Gross Domestic Product Data ($billion) Final consumption expenditure -government Compensation of employees Increase in physical stocks Gross fixed capital formation Exports of goods and services Imports of goods and services Gross Operating Surplus Indirect Taxation Subsidies

30 45 5 17 20 25 20 40 13

A$110 billion. B$47 billion. C$92 billion. D$99 billion. 15. Use diagram 1to answer the questions that follow

Diagram 1: The Circular Flow Diagram (i)

OVERSEAS SECTOR

I S

M C G

HOUSEHOLDS

FIRMS

X

(ii)

T

(iii)

Y

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Study Guide 13 – F6c

a.

Macroeconomics Revision

Provide appropriate labels for the sectors or flows i, ii, and iii from the diagram. : (i)

_____________________________________________________

(ii)

_____________________________________________________

(iii)

_____________________________________________________

b. Explain why imports (M) are shown as a flow LEAVING the economy yet imports are goods and services ENTERING the economy.

c. Name three injections from the diagram 1.

d. Outline the economic situation if withdrawals (or leakages) were greater than injections.

e. GDP is not a perfect measure of “standard of living”. Give a specific example of an economic activity that GDP does not measure.

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Study Guide 13 – F6c

Macroeconomics Revision

Table 2

(Adapted from http://www.stats.govt.nz/) Use the information in the table 2 to answer the following questions. 16a. Define “Gross Domestic Product”.

b. State which approach was used in calculating GDP.

c. State what is included in the following categories. i. Compensation of employees

ii. Operating Surplus

d. Calculate Real GDP in base year prices for the years shown using the information available Year

2001

CPI March Quarter (1993 = 1000) 1044

2002

1071

Real GDP

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Study Guide 13 – F6c

Macroeconomics Revision

17. In the space provided below draw a fully labeled 2 Sector Circular Flow Model. Label only the money flows. Diagram 1: 2 Sector Circular Flow Model

(b) If producers increase the level of payment for human resources, it may NOT affect the level of consumption expenditure. Explain why this may be true.

(c) Outline the importance and the role of the government sector in the circular flow model.

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Study Guide 13 – F6c

Macroeconomics Revision

(d) The Government makes transfer payments by taking money from some parts of the economy and giving it to others. Explain how an increase in unemployment beneďŹ ts may affect any sector other than households or government.

(e) The Kiwisaver Program is intended to provide for retirement for the people of this country. Outline a possible immediate impact of this scheme on the circular flow model.

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Study Guide 13 – F6c

Macroeconomics Revision

Table 3 New Zealand Gross Domestic Product $ (million) 2004 Change in Inventories Local Government Consumption Central Government Consumption Gross Fixed Capital Formation Imports of Goods and Services Exports of Goods and Services Compensation of Employees Gross Operating Surplus Private Consumption

1,127 2,870 21,456 30,207 39,811 39,998 58,947 61,399 81,659

Adapted from: Statistics New Zealand

18. From the statistics in Table 3 calculate New Zealand's GDP for the 2004 year.

$____________________ (million)

b. In 2000 the nominal GDP was $108,570 million. The base year for the CPI index was 2000 and in 2004 the CPI index was 1097. Calculate the real GDP for New Zealand for 2004.

$____________________ (million)

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Study Guide 13 – F6c

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c. Explain why real GDP is used to calculate economic growth between years rather than nominal GDP.

Graph 1

The Business Cycle

Output

Potential GDP C

Actual GDP

D

B

A

Time

19. a. From Graph 1 identify the points labelled A to D. A

C

B

D

Three of the four kinds of spending that make up internal demand shrank during the June quarter 2006. The Reserve Bank is counting on the growth in consumer spending slowing to a standstill over the next year or two. Adapted from: NZ Herald 30 September 2006

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Study Guide 13 – F6c

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b. Refer to the stimulus material in the text box above and choose the point from Graph 1 that best represents where the New Zealand economy was producing in the June quarter for 2006. Provide one reason why you have chosen this point.

Figure 3 The Circular Flow of Economic Activity Financial Intermediaries

Government sector

Households

Overseas Sector

Firms

20. Label the following flows on figure 3 above graph. 1. Transfers of $10 billion 2. Consumer spending of $50 billion 3. Government spending of $22 billion 4. Investment $20 billion 5. Import payments $25 billion 6. Export earnings $26 billion 7. Taxation $35 billion

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Study Guide 13 – F6c

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b. Calculate the GDP, where ∆R = $5 billion, using the expenditure approach and the figures above. Show all your working.

c. Other than the expenditure approach list the two methods used to calculate GDP. 1._______________________________________________________ 2._______________________________________________________ d. Explain the term transfer payments and give a suitable example.

f. Explain why the output from a home vegetable garden would not be included in the calculation GDP.

e.

Why is real GDP a more useful measure than nominal GDP?

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Study Guide 13 – F6c

Macroeconomics Revision

Table 4: Components of GDP Teacher

Component Gross operating surplus Compensation of employees Net exports Net indirect taxes Final consumption expenditure – government Final consumption expenditure – private Gross fixed capital formation Value of physical increase in stocks

$m 200 000 220 000 125 000 50 000 100 000 150 000 30 000 500

use only

4. a. Use Table 4 above to calculate Gross Domestic Product (GDP) using the income approach. Show your working.

b. Use the components of GDP from Table 4 to classify the following examples into the appropriate component of GDP. The first has been done for you.

I. II. III. IV.

Example Milk powder sent to China Salaries paid to employees Telecom’s profit Goods and services tax Purchase of equipment by Fonterra

Table 5: Economy GDP – expenditure Quarter Nominal $m Mar. 2007 42,105 Jun. 2007 42,838 Sep. 2007 42,087 Dec. 2007 43,617

Component Net exports

Real $m 33,881 33,754 32,835 34,390

c. Use Table 5 to describe the general trend in real economic growth in 2007.

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Study Guide 13 – F6c

Chapter C2/C6:

Macroeconomics Revision

AD/AS EQUILIBRIUM AND ANALYSIS

1. Which of the following would NOT cause a shift in the long run aggregate supply curve? A. An increase in available labour. B. An increase in available capital. C. An increase in available technology. D. An increase in price expectations. 2. A fall in income tax rates will: A. decrease GDP because it cuts government expenditure. B. increase GDP because it reduces imports. C. increase GDP because it increases consumer spending. D. decrease GDP because it increases imports. 3. The aggregate demand curve will shift to the right if: A. productivity increases. B. business confidence declines. C. imports increase. D. interest rates fall. 4. The aggregate supply curve gets steeper as output increases because: A. costs increase. B. demand increases. C. prices increase. D. the New Zealand dollar depreciates. 5. An increase in aggregate supply will: A. decrease employment and increase prices. B. increase employment and increase prices. C. increase employment and decrease prices. D. decrease employment and decrease prices. 6. Using AD/AS analysis, a recessionary gap occurs when: A. aggregate demand is greater than long run aggregate supply. B. aggregate demand is less than long run aggregate supply. C. the price level falls. D. the economy is in the flat part of the aggregate supply curve. 7. An increase in Aggregate Demand: A. closes a recessionary gap. B. closes an inflationary gap. C. is more difficult for governments to achieve than an increase in supply. D. can be achieved by increasing interest rates.

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Study Guide 13 – F6c

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8. The reason that the AS curve becomes steeper as real GDP increases is related to: A increasing prices. B diminishing marginal utility. C diminishing returns. D economies of scale. 9. What is the inflation rate if the CPI increases from 1000 to 1300 over the course of a year? A. 20% B. 30% C. 200% D. 300% 10. Which of the following events shift the short-run aggregate-supply to the right? A. An increase in government spending on military equipment. B. An increase in price expectations. C. A drop in oil prices. D. A decrease in the money supply 11. In the AD/AS model, the initial impact of an increase in consumer optimism is to A. shift AS to the left. B. shift AS to the right. C. shift AD to the left. D. shift AD to the right. 12. In the market for real output, the initial effect of a decrease in the money supply is to A. shift AS to the left. B. shift AS to the right. C. shift AD to the left. D. shift AD to the right. 13. The Aggregate Supply curve will move to the right if A. the exchange rate depreciates against other currencies. B. workers receive higher wages. C. the price of imported oil goes up. D. workers become more productive. 14. The Aggregate Demand curve will move to the right if A. workers become more productive. B. businesses become less confident about the future. C. imports increase. D. interest rates fall.

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Study Guide 13 – F6c

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The New Zealand economy has been undergoing some tough times of late. It has been identified that tight monetary policies, decreased government spending and some tax increases have all contributed to this. Graph 1: The NZ Economy P/L AS

AD

Real GDP 15 a. Complete the diagram above and identify either the inflationary or deflationary gap. b. Explain how tight monetary policies and reduced government spending may lead to slowdown in economic growth.

c. Outline one reason why the aggregate supply curve can shift to the right.

d. Outline why the aggregate supply curve gets steeper as real GDP increases.

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Study Guide 13 – F6c

Macroeconomics Revision

e. On the diagram below illustrate the effect of higher disposable income on the Aggregate demand curve. Graph 2: The NZ economy P/L AS

AD

Real GDP 16. On Graph 3 below draw a fully labelled graph showing an economy with a recessionary gap. (2 marks) Graph 3

a. On Graph 3 above, draw a new aggregate demand curve to showing the effect a fall in interest rates.

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Study Guide 13 – F6c

Macroeconomics Revision

b. State which components of aggregate demand will be affected by the fall in interest rates. c. Explain the shape of the aggregate demand curve.

d. Explain the difference between individual demand and aggregate demand.

17a). Define the term “Aggregate Demand”

b). Draw a fully labelled diagram showing the AD and AS curves so that a deflationary gap is formed. Label the gap as XX.

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Study Guide 13 – F6c

Macroeconomics Revision

c). If the Reserve bank employs a tight monetary policy (interest rates increases), what impact that will have on the Aggregate Demand. Explain your answer

d). Business often invests in new technology. Explain how this investment will affect the Aggregate Supply?

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Study Guide 13 – F6c

Macroeconomics Revision

Chapter C3: MONEY, INTEREST RATES AND THE BANKING SYSTEM 1. If the public transfer money from cheque accounts to term deposits: A. M1 decreases and M3 increases. B. M1 decreases and M3 stays the same. C. M1 decreases and M3 decreases. D. M1 and M3 stay the same. 2. If interest rates fall, and the public transfer their funds from term deposits at registered banks to their cheque accounts, which of the following would happen? A. M1 and M3 both increase. B. M1 increase but M3 stays the same. C. M1 decreases but M3 remains the same. D. M3 decreases but M1 remains the same. 3. Which of the following government actions is most likely to increase the transactions demand for money? A. Having a balanced budget B. Increasing subsidies on essential goods. C. Raising the rate of income tax. D. Raising the rate of sales tax. 4. Which of the following is not a function of money? A. B. C. D.

Unit of account Store of value Medium of exchange Portable

5. If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is A. 3 percent. B. 6 percent. C. 9 percent D. 18 percent. 6. If the public transfers funds from term deposits held at banks to notes and coins, the money supply (M1) will A. increase but M3 will fall. B. fall and M3 will increase. C. increase but M3 will remain unchanged. D. remain unchanged and M3 will increase.

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Study Guide 13 – F6c

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7. The Asset demand for money is A. the desire to hold part of wealth as actual money. B. reduced if real interest rates are predicted to rise. C. increased if firms and consumers wish to buy additional goods and services immediately. D. the motive of holding money which arises from the use of money as a medium of exchange. 8. Suppose your income rises from $19,000 to $31,000 while the CPI rises from 122 to 169. Your standard of living has most likely A. fallen. B. risen. C. stayed the same. D. fallen then risen 9. If new deposits to the banking system total $1 million and the banks keep 25 per cent as reserves, the final change in the money supply will be: A. $0.25 million. B. $1 million. C. $4 million. D. $25 million. 10. An increase in the Official Cash Rate will: A. increase aggregate demand. B. reduce the rate of taxation. C. reduce inflationary pressures. D. increase the money supply. 11. The level of public deposits in the banking system increases by an initial $50m. If the reserve ratio of the banking system is 10%, the secondary (credit) increase in the money supply is: A. $500m. B. $450m. C. $300m. D. $ 50m. 12. Transactions demand for money will decrease if: A. real incomes increase. B. price level decreases. C. price level increases. D. interest rates decrease 13. Which of the following functions is not carried out by the Reserve Bank of New Zealand? A. to make loans to the public. B. to issue notes and coins. C. to supervise the banking sector. D. to implement monetary policy.

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Study Guide 13 – F6c

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14. The Reserve Bank lowers the OCR to avoid a _____________ with very low inflation and increase the OCR to avoid a _____________ with very high inflation A. recession, boom. B. budget surplus, budget deficit. C. depreciation, appreciation. D. negative externality, positive externality. Table 1 Monetary Aggregates Transaction EFTPOS (excl.cheque) Transaction balances (cheque) Currency in circulation Notes and coins held by the public Currency held by M3 institutions

$ million July 2006 17,712 20,012 3,365 2,789 576

15. Calculate M1 and show your working.

M1 = $ 16. Assume a prudential ratio of 16% and that the government repays $400 million of public debt. Calculate the maximum possible total (primary plus secondary) change in the money supply that could result.

Total change in the money supply =

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Study Guide 13 – F6c

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17. Explain what is meant by the transaction demand for money.

Assume the New Zealand government has announced additional spending of $NZ50 billion on roads over the next few years. Also assume that banks in NZ have an average reserve ratio of 20%. 18 a. Why are banks anxious to not lend out all they receive as deposits?

b. Why are banks anxious to keep reserves at a maximum level?

c. If banks keep 20% of the $NZ50 billion, fill in the amounts below to show how their combined balance sheet will look after the initial injection. Simplified Balance Sheet of Combined NZ Banks Liabilities Transaction Deposits TOTAL LIABILITIES

Assets Reserves Advances TOTAL ASSETS

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d. Calculate the maximum amount of credit created (secondary change in money supply) as a result of the injection. Show your working.

Credit created: $NZ ___________ e. In terms of their primary monetary policy objective of price stability, why might the government borrow from the public to finance the spending on roads?

19. On the axes below, draw a fully labelled diagram showing Money Supply and Money Demand producing an equilibrium interest rate of 5.5 per cent. Graph 1

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20. How is the CPI used to measure the performance of the Governor of the Reserve Bank?

21a. Define the term “money”.

b.

What is meant by the term “Double coincidence of Wants” with reference to barter trade?

c. List any two functions of the Reserve Bank

d. Banks have a reserve ratio of 15%. What is the current Credit Multiplier?

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Study Guide 13 – F6c

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22a. Explain the term “Tight Monetary policy”.

b. Define the term liquidity.

c. The banking system holds a reserve ratio of 20%. Total deposits stand at $1200m. The bank receives a new deposit of $35m from to the private sector. Calculate the final change in Money supply.

d. What is the amount of credit created (secondary expansion) due to this deposit?

e. Explain how might continued reductions in Liquidity eventually result in a fall in inflation?

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Study Guide 13 – F6c Chapter C4:

Macroeconomics Revision TRADE AND THE FOREIGN EXCHANGE MARKET

1. In a floating exchange rate system, a country's currency is determined by A. the international price of gold. B. the Federal Treasury and the Reserve Bank. C. the free market forces of supply and demand. D. the quarterly average trade weighted index. 2. A depreciation of the New Zealand dollar would: A. decrease the price of imports to New Zealand buyers. B. Decrease the price of New Zealand’s exports. C. increase the price of New Zealand’s exports. D. all of the above. 3. What will be the immediate effect if a country’s terms of trade worsen? A. a given volume of exports will buy less imports. B. unemployment will increase. C. exports will decrease. D. the currency will depreciate. 4. Calculate the terms of trade for a country if the import price index was 800 and the export price index was 1200? The base year index was 1000. A. 200. B. 9900. C. 1500. D. 1222. 5. If the world price of lamb is above the New Zealand price, with free trade New Zealand will: A. export lamb and local production will fall. B. export lamb and local price will rise. C. export lamb and local consumption will rise. D. import lamb and local production will fall. 6. In the Balance of Payments accounts, an increase in the number of tourists visiting New Zealand is most likely, in the short term, to affect: A. the balance on transfers. B. the balance on services and the current account balance. C. the financial account balance. D. the balance on income and the capital account balance. 7. The exchange rate changes from 3 Brazilian reals per dollar to 4 reals per dollar, (Ceteris Paribus) A. the dollar has depreciated. B. the dollar has appreciated. C. the dollar could have appreciated or depreciated depending on what happened to relative prices in Brazil and New Zealand.. D. none of the above is true.

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8. An economy that interacts with other economies is known as A. B. C. D.

a balanced trade economy. an export economy. an import economy. an open economy.

9. If $NZ1 buys $AU0.90, then $AU1 buys A. B. C. D.

$NZ0.90 $NZ1.00 $NZ1.11 $NZ1.90

10. If a country’s terms of trade have fallen, then a possible explanation is that export prices have A. B. C. D.

risen and import prices have fallen. fallen proportionally more than import prices. fallen proportionally less than import prices. risen but import prices have not changed.

11. An appreciation of the New Zealand dollar will benefit A. New Zealand Exporters. B. New Zealand tourists travelling overseas. C. overseas importers. D. foreign investors buying New Zealand companies. 12.

a. Define the Terms of Trade.

(b) Year

Export price index

Import price index

Terms of

trade 1999=1000 2000

1041

1069

______

2001

979

1020

______

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(c) Explain how there can be a deterioration in the Terms of Trade but an improvement in the Balance of Trade.

Terms of Trade (Base: June 95/96 = 1000) April Years Terms of Trade 2001 1127 2002 1102 2003 1083 2004 1103 2005 1057 13 a. From the table above, between which years does a favourable movement in terms of trade occur? 200__ to 200__ b. Suggest a reason for a favourable movement in the terms of trade.

c. Explain why an improvement in the terms of trade is generally considered good for the economy as a whole.

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Study Guide 13 – F6c

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14 a. Use the data in Table 1 to calculate the surplus or deficit (show your workings) on the: (i) Balance on Capital Account

(ii) Current Account Balance

Table 1 Major Components

$NZ million

Quarter ended December 2009 Balance on services Capital account inflow Capital account outflow Exports Imports Foreign investment in NZ Balance on Income New Zealand investment overseas Inflow of current transfers Outflow of current transfers

365 523 176 7 449 8,046 -884 -1869 -177 416 207

b. Describe the effect of a depreciating dollar on the following components of the NZ Balance of Payments. (i) Exports

(ii) Foreign investment in NZ.

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c. Identify two different reasons for a decrease in demand for the New Zealand Dollar.

New Zealand has won the rights to host the Rugby World Cup in 2011. 15. a. On Graph 1 below, illustrate the effect of an influx of tourists to NZ on the foreign exchange market. Label any changes appropriately. Graph 1: The Foreign Exchange Market Er S$NZ

P*

D$NZ Q$NZ*

Qnzd

b. Explain any changes you made to Graph 1 above.

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c. Explain the likely effect of the exchange rate change in Q15b above on the balance on goods. Teacher use only

d. On the graph below, illustrate the effect of your answer to c) above on the NZ economy. Show the new PL and Output Graph 2: The New Zealand Economy Price Level

AS

PL*

AD

Y*

Real GDP

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Study Guide 13 – F6c

Macroeconomics Revision

Chapter C5: THE GOVERNMENT 1.

The government will provide some merit goods free of charge because: A. some people on low incomes may be unable to afford them. B. the consumption of merit goods results in negative externalities. C. merit goods are both non-excludable and non-rival. D. the government requires compulsory consumption of merit goods.

2. An appropriate policy for the government to implement should there be a major downturn in economic activity would be to: A. encourage individuals to increase their level of savings. B. budget for a surplus. C. tighten up their monetary policy. D. none of the above. 3. If government spending exceeds tax collections, A. there is a budget surplus. B. there is a budget deficit. C. private savings is positive. D. public savings is positive. 4. The initial impact of an increase in government spending is to shift A. aggregate supply to the right. B. aggregate supply to the left. C. aggregate demand to the right. D. aggregate demand to the left. 5. If the government fiscal policy results in a budget surplus this means: A. it has printed more money. B. government spending is greater than taxation. C. government spending is less than taxation. D. there has been an increase in the OCR. 6. If the economy is “heading – up” (i.e. operating at a level that is likely to lead to inflation), which of the following would be an appropriate course of action for the government? A. Encourage people to use their credit cards more often. B. Introduce a budget surplus. C. Introduce a budget deficit. D. Intervene in the foreign exchange market so the local currency depreciates. 7a. Define the term expansionary fiscal policy.

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b. Describe ONE objective the government might aim to achieve through the use of expansionary fiscal policy.

c. Explain how the policy could achieve this objective.

d. Explain the impact of the expansionary fiscal policy on the price level.

e. Identify ONE of the major examples of government spending

8a. Explain the difference between a government deficit and a current account deficit.

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b. Define fiscal policy.

c. Taxation is a major source of government revenue. Describe how government could use income tax to achieve growth.

d. In recent years the government of Country XYZ has been operating at a surplus, largely due to the strength of the domestic economy. Suggest TWO ways that a “strong domestic economy” might help the government achieve a surplus.

Graph 1 The Business Cycle % Real GDP Positive

Years

Negative 9. a. Label the following items on Graph 1 above: 1. 2. 3. 4. 5.

an upturn a downturn a boom a recession a depression

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Stimulus Material: In the New Zealand 2003 Budget, the Government has revised GDP projections downwards. b. State what part of the business cycle New Zealand is likely to be on. c. Explain what is meant by the term Government budget.

d. Define fiscal policy and provide a suitable example.

e. State how fiscal policy might be used to counteract the effects of an economic slowdown?

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Study Guide 13 – F6c

Chapter C7:

Macroeconomics Revision

MACROECONOMIC ANALYSIS Graph 1: The New Zealand Economy

Price Level

AS

PL

AD Y

YFull

Real G.D.P

1. a. Study Graph 1 above and explain why the Aggregate Supply curve becomes steeper as the economy approaches capacity output.

b. On Graph 1 above: (i) Show the effect of an increase in nominal wages. Label any curve shifts. (ii) Label the new price level PL1 (iii) Label the new level of Real GDP as Y1 c. Use evidence from Graph 1 to describe the impact of the change on unemployment.

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d. Complete the table below to describe the effect of each event on the AS / AD model. Use ↑ to denote an increase and ↓ to denote a decrease leave blank if there is no change. Price Real Event AS AD Level G.D.P Increase in productivity Increase in consumer confidence Decrease in cost of imported raw materials

Employme nt

There is no doubting the size of the shock that is at work in the global economy. Some are saying we are witnessing the biggest destruction of wealth we have ever seen. Notes from Alan Bollard’s address to the Job Conference 27/02/2009 2a. On Graph 2 below show the effect of the “destruction of wealth” on the New Zealand Economy. Label any new curve(s), Price Level and Real GDP appropriately. Graph 2: The New Zealand Economy Price Level

AS

PL

AD YFull

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Study Guide 13 – F6c

b.

Macroeconomics Revision

Describe the expected response of the Reserve Bank of New Zealand to this situation.

c. Fully explain the effect of your answer in (b) on:

Consumption Investment

Price Level

Graph 3: The New Zealand Economy

Real G.D.P

3 a. On Graph 3 above show the New Zealand economy experiencing a recession (recessionary gap) b. Label the equilibrium price level PL1 c. Label the equilibrium level of Real G.D.P as Y1

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Study Guide 13 – F6c

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As part of the government’s Jobs and Growth plan, Prime Minister John Key and Transport Minister Steven Joyce have today announced almost a billion dollars of additional investment in the state highway network over the next three years. Mr Joyce says the benefits of this will be felt across the board and around the country through new jobs, increased growth and, over time, an improved state highway network. www.beehive.govt.nz 16/03/2009

d. On Graph 3 : (i) Show the effect of the Government announcement. Label any curve shifts. (ii) Label the new price level PL2 (iii) Label the new level of Real G.D.P as Y2

Complete the table given below and then use it to answer the questions Years

2000 2006

Table 1: National Income Expenditure CPI Real GDP in on (Base year 2004 GDP 2004 = prices ($ million 1000) ($ million) 109696 870 155554 1005

% change in real GDP N/A 22.8

4a. Calculate real GDP (in 2004 prices) for 2000 and 2006. Write your answers in the TWO spaces provided in Table 1 above. Round your answers to the nearest whole number b. Using data from Table 1, describe the general trend in economic growth from 2000 to 2006.

(2 marks)

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Study Guide 13 – F6c

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c. For each event below, describe its likely impact on the AS–AD model by appropriately drawing new curves on the graph beside each event. Label any curve shifts. Also label the new equilibrium price level (PL1) and the new equilibrium level of real GDP (Q1) c. (i) A fall in consumer confidence Price Level Graph 4: AD/AS Model AS

AD Real GDP (ii) An increase in net exports Price Level

Graph 5: AD/AS Model AS

AD Real GDP

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(iii) A decrease in productivity Graph 6: AD/AS Model Price Level AS

AD Real GDP (iv) A decrease in cost of imported raw materials Price Level

Graph 7: AD/AS Model

AS

AD Real GDP

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Study Guide 13 – F6c

Macroeconomics Revision

The Reserve Bank announced a rise in the OCR (Official Cash Rate) noting that domestic demand was increasing. This increase was being driven by the decrease in income tax, which increased consumer confidence and spending. d. On Graph 8 below: (i) Show the effect of a decrease in income tax. (ii) Label the new equilibrium price PL1 and the new equilibrium level of real GDP Y1. Graph 8: The Economy of Country XYZ Price Level AS

PL AD

Y

Yf

Real GDP

e. Use appropriate evidence from Graph 8 to describe what will happen to inflation and employment as a result of the changes that you made in (d) above. (i) Inflation

(ii) Employment

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Study Guide 13 – F6c

Macroeconomics Revision

Table 2: Simplified Government Budget (Country ABC) for 2009–2010 Budget Items

$ millions

Corporate tax Education Benefits Other expenditure GST Income tax Health Other income

9.5 8.9 17.8 14.6 10.7 24.1 11 11.8

f. (i) Using the information in Table 2 above, calculate the Operating Balance for the government in 2009 – 2010.

$ (million) _______________ surplus / deficit (ii) Name the type of policy that the operating balance you’ve calculated above best represents. (Circle the correct answer.) Expansionary / Contractionary Monetary Policy / Fiscal Policy g. Explain how a decision by government to run an operating surplus would affect aggregate demand.

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Study Guide 13 – F6c

Macroeconomics Revision

5. Explain what factors influence Demand for and Supply of New Zealand dollars under a floating exchange rate.

6. On Graph 9 show the effect of an increase in the OCR that attracts investment by United States investors into New Zealand. Write an explanation of the changes you have made, below the diagram. Graph 9:

The Market for NZD (in terms of USD)

SNZD

DNZD

Explanation:

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Study Guide 13 – F6c

Macroeconomics Revision

7. On Graph 10 show the change that occurs to the exchange rate when the New Zealand government purchases new aeroplanes for the New Zealand Airforce from the United States. Write an explanation of the changes you have made, below the diagram. Graph 10:

The Market for NZD (in terms of USD) SNZD

DNZD

Explanation:

Last month’s export-import figures point to a current account deficit of 10 per cent of GDP. For the full year the deficit was $6.55 billion. NZ HERALD 27 September 2006

8. Briefly describe the balance of payments account.

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Study Guide 13 – F6c

Macroeconomics Revision

Table 3 Balance of Payments Major Components NZ $(million) 2005 Exports (FOB) Imports (FOB) Balance on capital account Exports of services Imports of services Balance on income Balance on current transfers New Zealand investment abroad Foreign investment in New Zealand

31,167 35,096 -288 12,077 11,687 -10,805 655 -4,251 7,954

Adapted from: Statistics New Zealand

9. From the statistics in TABLE 3 calculate the balance of the New Zealand's current account for the 2005 year.

$____________________(million)

10. Explain the likely impact on the New Zealand Dollar as a result of the current account balance you have calculated in 9 above.

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Study Guide 13 – F6c

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Graph 11 - The New Zealand Economy

AS

PL

11. On Graph 11 draw a line showing the full employment level of national income that shows an inflationary gap. a. label the line Yf. P Leq gap. b. label the inflationary 12. Explain the reason for the inflationary gap that you have shown in GRAPH 11. AD

Yeq

Real GDP

13. An inflationary gap cannot be sustained in the long run. Explain why.

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Study Guide 13 – F6c

Macroeconomics Revision

The Reserve Bank of New Zealand uses monetary policy to assist with the elimination of an inflationary gap. 14. Fully explain how monetary policy is used to control inflation.

In 2000 the New Zealand current account deficit was approximately 6.5% of GDP and consequently the value of the NZD fell to 0.39 USD. In 2006 the current account deficit is now 10% of GDP, yet the NZD has only fallen to approximately 0.65 USD. 16. Refer to the information in Table 4 and fully explain why the value of the NZD has not depreciated further. Table 4

New Zealand Inflation Rate New Zealand Official Cash Rate Average OECD Official Cash Rate

2000 2006 1.8% 3.3% 6.5% 7.25% 8.8% 5.1%

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17. Explain ONE factor that influences the demand for and one factor that influences the supply of NZ dollars under a flexible exchange rate. a. Factor that influences demand.

b. Factor that influences supply.

18. Explain the effect of the following on the value of the NZ Dollar. (i) An increase in world sugar prices.

(ii) The upgrading of US hospitals with NZ made x-ray facilities.

19. The NZ government announced plans to grant $120 million to the western part of the country for business development. a. Complete the table below to show the first two steps of the effect of the $120 million injection. Assume that the banks have a prudential reserve ratio of 20%. (Use whole numbers.)

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Study Guide 13 – F6c

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Credit Creation Initial Injections

Deposit $120M Reserve

Step 1 Advance

Reserve

Step 2 Advance b. Fill in the blanks in the table below to show the effect on the Balance Sheet of all banks as a result of the $120 million injection. Assets $m Advances Reserves Total Assets

Changes in the Combined Banks Balance Sheet Liabilities $m Deposits Total Liabilities

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Study Guide 13 – F6c

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20. On Graph 12 below illustrate the effect of this injection on the money market. Label the graph appropriately. Graph 12: The Money Market I/R

Qty of Money 21. Explain the initial effect on the interest rates as a result of the monetary expansion.

Use the graph below to answer the questions that follow. Graph 13: AD / AS equilibrium P/L

AD Real Output

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Macroeconomics Revision

22. a. Name ALL the components of Aggregate Demand (AD)

b. Update the graph above to show the economy in equilibrium operating at less than the full employment level. c. On the same graph show the effect of a loss of export markets. 23.

Explain how each of the following may lead to an increase in Aggregate Demand: a. Increased business confidence.

b. Decreased unemployment.

Graph 14: The NZ Economy

AS

24. Graph 14 shows the NZ economy operating at capacity. Complete the graph by labelling the axes, the vertical line, and showing Aggregate Demand.

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b. Why does the aggregate supply curve in Graph 14 become steeper as the economy approaches full employment?

c. Contrast the effects of an increase in aggregate demand on an economy operating below capacity, with an increase in aggregate demand on an economy operating at full employment.

d. Outline the relationship between the government, monetary policy and the Reserve Bank of a country.

e. Explain why tourists coming to a country are counted as an export.

f. Suggest TWO reasons for the increase in demand for NZ’s exports.

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Study Guide 13 – F6c

Macroeconomics Revision

Graph 15 below shows the market for the $NZ which has been set by the floating exchange rate. Graph 15: The market for the $NZ

25. Label Graph 12 correctly, and show the effect on the exchange rate of an increased demand for NZ exports. b. Explain how an appreciation of the $NZ might “dampen down or slow down” the strong NZ economy.

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Section C