Question ECON1000 Open Campus Worksheet #5 (Covers Units 9 and 10) – worth 3%

03 Jun Question ECON1000 Open Campus Worksheet #5 (Covers Units 9 and 10) – worth 3%

Question

ECON1000 Open Campus

Worksheet #5 (Covers Units 9 and 10) – worth 3%

Question 1 (15 marks)

A household survey concludes that the typical person consumes: 100 units of good X, 150 units of good Y and 25 units of good Z. The information for prices of good X, Y and Z are given below:

Good

Quantity

Prices 2000

Prices 2001

Prices 2002

Consumed

X

100

$1.00

$1.50

$1.75

Y

150

1.50

2.00

2.00

Z

25

3.00

3.25

3.00

If the year 2000, is the predetermined base year:

a)

Calculate the CPI for 2001 and 2002.

(4 marks)

b)

Calculate the inflation rate in 2002.

(2 marks)

c)

Identify TWO problems using the CPI as a measure of the cost of living.

(2 marks)

d)

Provide an example for each of the TWO problems in part c.

(3 marks)

e)

Differentiate between the CPI and the GDP deflator as a measure of the standard

of living.

(4 marks)

Question 2 (15 marks)

Draw diagrams illustrating the impact on the money demand, money supply, equilibrium interest rate and the quantity of money due to each of the following:

a)

The changes in bank regulations expand the availability of credit cards so people

need to hold less cash.

(5 marks)

b)

During a period of rapid inflation the central bank increases the reserve

requirement.

(5 marks)

c)

The economy recently experienced an increase in the number of tourist arrivals,

increasing income throughout the island.

(5 marks)

Question 3 (12 marks)

Determine which account of the Balance-of-Payments is affected by each of the following transactions. (E.g. Current Account – Transfers)

a) A local firm ships US$80 million of merchandise to China

b) National Commercial Bank, a local company, pays US$1 million in dividends to foreign shareholders.

c) A German company builds a manufacturing facility in your country.

d) A local resident purchases a retirement condo in Florida for US$10 million

e) You travel to the United States for holiday and spend US$500

f) You invest in the South Korean stock market by buying US$500 in stock

Question 4 (8 marks)

a) Consider three countries Hungary, Mexico and the U.S. which sell identical t-shirts. If the price of the t-shirt is 500 forint, 20 pesos and US$2. Calculate The purchasing power parity exchange rate between

i)

Mexico and the U.S.

(2 marks)

ii)

Hungary and the U.S.

(2 marks)

b) Suppose the current exchange rate between the Mexican peso and the U.S. dollar is 12 peso = US$1 and the exchange rate between the Hungarian forint and the U.S. dollar is 215 forint = US$1. Based on the PPP calculations is part a, what do

you expect to happen to the exchange rate between:

i)

Mexico and the U.S.

(2 marks)

ii)

Hungary and the U.S.

(2 marks)

TOTAL MARKS = 50