Posted: January 4th, 2017

Using the aggregate demand – aggregate supply (AD-AS) diagram, show how the four separate and independent economic events would affect economic activity and the price level.

Question 14: (2.5 marks each part)   Using the aggregate demand – aggregate supply (AD-AS) diagram, show how the four separate and independent economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event)   (a)         A significant destruction in an economy’s capital stock because of an earthquake; (b)        An increase in personal income tax; (c)         An increase in exports; (d)        An improvement in the marketing and selling skills of firm managers;     Question 15:   (a)       Consider this statement: ‘Banks do not create money because this is the Central Bank’s (Reserve Bank of Australia) responsibility’.  Do you agree or disagree?  Explain.  (4 marks)   (b)       Suppose that you deposit your pay cheque drawn on another bank into your own bank account.  Explain the impact on the overall money supply that this will have in the economy.  (2 marks)   (c)       Suppoes that you remove $1000 from under your mattress and deposit it in the Westpack bank.  If the required reserve ratio is 10 per cent, what is the maximum amount the bank can lend from this deposit?  (4 marks)     Question 16:   If the Central Bank (Reserve Bank of Australia) bought $100 million of government securities from private sector money markets, other things being equal, what would be the effect on the following? (2.5  marks each)     (a)        The economy’s monetary base; (b)        Short-term money market interest rates; (c)        Longer maturity interest rates; (d)        Aggregate demand, economic activity and inflation.                                                                                          Question 17:   Which of the following would cause a growth in the money supply? Answer yes, no, or possibly.  If your answer is ‘possibly’ then explain the circumstances under which the answer would be ‘yes’.  (a.5 marks each)   (a)     The selling of government securities to banks;A fall in interest rates;   (b)     An increase in government expenditure, financed by borrowing from the banking sector;   (c)     The purchase of government securities by the Central Bank from the banking sector;   (d)     It is agreed by the Treasurer and the Governor of the Central Bank to          reduce the target rate of inflation.     Question 18: The following are the various elements within a nation’s balance of payments account:              (i)   Imports of goods (-)              (ii)   Exports of goods (+)             (iii)   Imports of services (-)             (iv)   Exports of services (+)             (v)   Other income outflows (-)             (vi)   Other income inflows (+)            (vii)   Capital transfers sent overseas from the nation (–)           (viii)   Capital transfers to the nation from overseas (+)             (ix)   The nation’s investments overseas (-)             (x)   Investment in the nation from overseas (+)             (xi)   Short-term financial outflows (-)            (xii)   Short-term financial inflows (+)           (xiii)   Adding to reserves (-)           (xiv)   Drawing on reserves (+)           Into which of the above categories would you put the following?  (total 10 marks – 1 mark each)             (a)      DVD recorders imported into the nation from Japan;         (b)         Insurance cover purchased in the nation by overseas residents;         (c)         The nation gives overseas aid to a developing country;         (d)         US car company sets up a factory in the nation;         (e)         Some of the nation’s residents take a holiday in Bali;         (f)         Interest earned by the nation’s residents on overseas assets;         (g)         Running down the stock of foreign exchange in the Central Bank of the nation;         (h)         Migrants to the nation transferring property to the nation;         (i)          New deposits made in banks in the nation by overseas residents;           (j)          The nation’s palm oil is sold in the United Kingdom.