08 Jun Question 2) (4 marks in total)Below you can find the per
Question
2) (4 marks in total)Below you can find the per capita real GDP of the 13 countries who have joined the European Union (EU) in2004 (except for Turkey), and the EU average in 1999 (both in Column A). It also gives the GDP per capitalgrowth rates in 2000 (Column B). Let us assume that countries will keep growing at the given rates until thesecountries reach the level of the EU average. Answer the following questions and explain your answers andshow all of your working (in order to obtain partial marks).
Country Real GDPper capita in 1999(before joining EU)Growth rateof GDP percapita in 2000(%)Ratio of percapita GDP toEU average in 1999Years todouble thisratio(A) (B) (C) (D)EU average $25,660 2.7 1 -Hungary (joined 2004) $5,218 4.8 (Q2 b) (Q2 b)The Czech Rep. (joined 2004) $5,170 1.5 0.2015 -Poland (joined 2004) $4,257 5.7 0.1659 -Slovenia (joined 2004) $9,994 3.6 0.3895 77.8Estonia (joined 2004) $4,259 5.5 0.1660 25.0Cyprus (joined 2004) $13,389 2.3 0.5218 -Malta (joined 2004) $13,025 4.1 0.5076 50.0Romania (joined 2007) $2,323 7.3 0.0905 15.2Bulgaria (joined 2007) $1,691 4.0 0.0659 53.9Lithuania (joined 2004) $3,420 4.3 0.1333 43.8Latvia (joined 2004) $3,092 3.6 0.1205 77.8Slovakia (joined 2004) $3,818 5.0 0.1488 30.4Turkey (pending) $6,230 2.9 0.2428 350
a) (1 mark) Just observing the above table (doing no calculations), are there any countries that will not beable to catch up to the level of per capita income in the EU based upon the assumption we have made?
b) (2 marks) Fill in the information for Column C and D in the above table for Hungary (where it is markedas Q2b). And then, using the Rule of 70 from the textbook, how many years will the ratio of Hungary’sGDP to EU average GDP take to double (hint: the growth rate of a fraction is approximately equal to thegrowth rate of the numerator minus the growth rate of the denominator)? How many years do you think itwill eventually take real GDP per capita of Hungary to reach that of EU average?
c) (1 mark) The above calculation in part b) is based on the assumption that a country’s real GDP grows at aconstant rate. But in reality it does not. Why is that?Macro1 (ECON1010), 2sem 2015Page 4 of 4
3) In this question you analyse the effects of the following economic policies in the loanable fundsmarket diagram where we have the real interest rate on the vertical axis and the quantity of loanablefunds on the horizontal axis.
a) (2 marks) Demonstrate and explain the effect of a government tax increases in the loanable fundmarket. Which of the curves is effected by this—supply or demand—and what direction does itmove. Your explanation must also include what happens to the real interest rate, the level ofnational savings, and the level of investment as well.
b) (2 marks) Now you realise that the tax increases that you analysed above also affect the (aftertax)profitability of new investment. How would this change your explanation in Part a)? Again,use the loanable funds model to demonstrate this effect.
4) (3 marks) The level of government debt is a growing concern for the current Australian TreasurerJoe Hockey who has the responsibility of managing the government budget. Summarise the keyarguments on the debate around Australian government debt and deficit for the Abbott government.Your summary must address the following; what is the major concern of running government deficits,what is the economic reasoning to have a balanced budget and when might a budget deficit/surplusbe ok? Conclude by briefly discussing what policies you would suggest Joe Hockey implement tobalance the budget and why. The summary should be at least half a page in length.
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