Question 1.

a.
- The basic difference is that GDP per capita PPP (current international dollar) is
calculated at current PPP rate and GDP per capita PPP (2011 international dollar) is calculated
at constant PPP rate.
+ GDP per capita PPP (current international dollar) is the value of gross domestic
product of an economy that is converted to international dollars based on the current rates of
purchasing power parity. This PPP at international dollar has the same purchasing power of
US$ as described by World Bank.

+ GDP per capita PPP (2011 international dollar) is the value of GDP calculated at
international dollar value fixed at 2011 prices.

b.

C.

GDP 2018 of Mexico is larger than GDP 2018 of South Korea (2.5 > 2.07)
Because GDP is proportional with income => Income of Mexico > Income of South Korea

If we have $1000, we could buy more in India than in Russia (ratio GDP Russia is 4 compared to
GDP of India is 1)

D.

Brazil: 0.106
Russia: 0.18
India -0.117
China -0.171
Korea 0.133
Mexico 0.088
Turkey -0.27
E.
Each year Brazil grows with an annual increase of 0.106 in GDP

F.

Brazil: 0.0073
Russia: 0.014
India -0.31
China -0.08
Korea 0.0476
Mexico 0.039
Turkey -0.063
⇒ Compounded annual growth rate = approximately ⅓ annual growth rate.
Because compounded annual growth rate is like the sum of annual growth rate of every year of
the period we are taking into account.

G.
Brazil: 0.043
Russia: 0.076
India -0.066
China -0.045
Korea 0.048
Mexico 0.05
Turkey -0.065

Question 2.
a.
We can see that Gates’ net worth is $70B in 2013.
1937 CPI = 14.4
2013 CPI = 232.957
Adjustment factor = 14.4/232.957 = 0.0618.
⇒ Gates’ 2013 fortune in 1937 = $70B × 0.062 = $4.3B
 ==>Gates’s wealth does have more buying power than Rockefeller’s wealth.
b.
Rockefeller’s net worth in 1937 = $1.4B.
1937 GDP = $93B.
Percentage of GDP represented by Rockefeller’s net worth = 1.4/93 × 100 = 0.015 = 1.5%.
2013 GDP = $16,768 billion.
1.5% of $16,768 billion is $252 billion.
⇒ if Rockefeller was alive in 2013, and his net worth was 1.5% of 2013 GDP, he would be worth
$252 billion.

c.
The main advantage to this method of updating Rockefeller’s net worth is that it expresses its
relativity to the economy as a whole. Given that Rockefeller’s wealth was 1.5 percent of 1937
GDP, a net worth today that represented an equivalent percentage of GDP would be around
$250 billion.
The disadvantage could be this method may overstate Rockefeller’s standard of living in 1937
compared to the present. Even someone with his resources did not have such modern essentials
as air conditioning, computers, the Internet, or a host of life-saving drugs and medical
procedures. So while his net worth was extraordinary when translated to a comparable
contemporary figure, it is important to remember that people’s lives have been transformed by
the progress of technology unavailable even to the wealthiest individuals in Rockefeller’s time.
This is not accounted for in a simple numerical calculation of dollar values.

Question 3.
A.

September 210000
October 140,000
November ~ 205,000
Dec 155,000

B.
This is the Household Data on the employment status of the civilian population by sex and
age, both unseasonally and seasonally adjusted.
Seasonally adjusted is 6 columns on the right.

There was a general increase in the size of the labor force. Unemployment rate decreases and
employment rate increases.

C.
Total unemployment rate in Dec 2015 is 5.0
Total unemployment rate in Dec 2016 is 4.7
=> Unemployment rate decreases.
The number of employed workers increase from 150,030 (Dec2015) to 152,111 (Dec 2016)?

D.

E.

F.

Question 4.
a.

Increase in mortgage demand will increase the demand for credit, shifting demand curve
rightward, increasing interest rate and increasing quantity of credit.
b.

Decrease in government borrowing will decrease the demand for credit, shifting demand curve
leftward, decreasing interest rate and decreasing quantity of credit.

The credit demand curve shifts to the left, lowering the equilibrium interest rate and the
equilibrium quantity of credit.

In following graph, D0 shifts left to D1, intersecting S0 at point B with lower interest rate r1 and
lower quantity of credit Q1.

(c)

Households becomes pessimistic will cause a decline in borrowing by households => a leftward
shift in the credit demand curve. This will lower the equilibrium real interest rate and the
equilibrium quantity of credit.

However, households would also tend to increase their saving, thus shifting the credit supply
curve to the right. This will lower the real interest rate but will increase the quantity of credit.

Thus, both a decrease in credit demand and an increase in credit supply will ultimately lower the
equilibrium real interest rate. However, it has a confusing effect on the quantity of credit.

The graph below shows a small decrease in the equilibrium quantity of credit because the credit
demand curve shifted to the left by a greater horizontal distance than the credit supply curve
shifted to the right.
(d)

If the business community becomes more optimistic about the economy, it will increase their
borrowing to fund investment and expansion. This will shift the credit demand curve to the
right.

At the same time, distributing more of their earnings to shareholders as dividends will decrease
the supply of credit (assuming that the shareholders spend those dividends), shifting the credit
supply curve to the left.

The net result of these two effects is shown in the graph below. The equilibrium real interest rate
will definitely increase, but the effect on the equilibrium quantity of credit is ambiguous, and
depends on which curve shifts by the greater horizontal distance. (Note: The graph below shows
a situation where the leftward shift in the credit supply curve is exactly offset by the rightward
shift in credit demand, resulting in no change in the equilibrium quantity of credit.)

Question 5.
a)

The committee considered the following factors in making their decision:

+The economic activities are expanding at a moderate pace.

+ Household spending and business fixed investment have increased at substantial rates in
recent months.

+ Soft net exports.

+ Diminishing underutilisation of labour resources.

+ Inflation is lower than the committee’s long-run objective.

+ Energy prices and the prices of non-energy imports have decreased.

+ A decrease in measures of long-term inflation

All the above factors affect the employment and price stability of the economy. The committee
focused on fostering maximum employment and price stability. Thus, all the above factors are
related to the statutory mandate.

b)

The FOMC reached the following decisions in the meeting:

+ The committee also directs the Desk to engage the dollar roll and coupon swap
transactions as necessary to facilitate settlement of the Federal Reserve’s agency
mortgage-backed securities transactions.
+ The discount rate (the primary credit rate) was increased by 1/4 % points, making it to
1%, effective from December 17, 2015.
+ To raise the interest rate paid on required and excess reserve balances to 0.50 per
cent, effective from December 17, 2015.
+ The Federal Open Market Committee directs the Open Market Desk at the Federal
Reserve Bank to undertake open market operations to maintain the federal funds rate
in a range of 0.25 to 0.5%.
+ The Federal Open Market Committee directs the Open Market Desk at the Federal
Reserve Bank to continue reinvesting principal payments on all agency debts and
agency mortgage-backed securities.

c)

Following types of open market operations will move and control the federal funds rate in the
desired direction:
 1. Imposing a per-counterparty limit of $30 billion per day at an offering rate of 0.25
per cent will restrict the number of transactions happening per day and will lower
down the federal funds rate and will come between the range of 0.25 to 0.50 per
cent in the long term.
2. The restriction imposed on reverse repurchase operations by the committee to the
extent approved in the resolution on term RRP operations will control the reverse
repurchase operations. It will control the total amount of all the transactions will
be in the limits imposed by the committee; the federal funds rate will lower down
and will fall in the prescribed range.

d)

Considering the decisions taken by the FOMC, it can be analysed that:

1. The real interest rate will be in control in the long run and will fall under the desired rate as
specified by the committee.

2. The employment rate will rise as the committee has been consistently working on the health
of the economy. It will generate employment opportunities in the long run.

3. Money supply in the market will be in control of the committee due to the restrictions
imposed by the committee in the transaction limits in the market to control the federal funds
rate. Committee will maintain the pace to control money supply to control the inflation rate in
the long run within its objective.

Question 6.
a.

Capital stock = $3000

We can see that Y is $6000 with corresponding capital stock of $300

GDP = Y = $6000.

=> GDP = $6000.

b.
The savings curve is sxF (K, H, A) as shown in the figure. The savings at K = 300 is $4000.
=>> The savings of the economy is 4000.

c.
Without goverment and foreign trade, the equilibrium aggregate spending of the economy is
Y= C+I

So at the equilibrium I=S, we would have

Y=C+S
=> C=Y-S
With Y=6000 and S=4000, the comsumption is C= 6000-4000 = 2000

d.
As the human capital rises H to H’, the output rises from Y to Y’ at each level of K.
This will shift the production function up to Y’ as shown in the figure.
=> The output in the economy rises for K=300 will be above Y=6.

If human capital rises keeping other things the same, Y will increase at every capital stock level.
=> Y curve will shift upward. => GDP will increase.

Question 7.

a.
Hours of labor Number of hours Average productivity Marginal productivity
graded of labor of labor

1 40 40 40

2 75 37.5 35

3 105 35 30

4 130 32.5 25

5 142 28.4 12

6 149 24.83 7

7 154 22 5

b.

MP of fifth labor hour=(142-130)/(5-4)=12

c.
Value of the marginal productivity of labor of the fifth hour of labor = V​MPL ​= 12 x 0.75 = 9

d.
Labor should be hired until V​MPL​ = wage
MPL x price = wage
=> MPL = 10/ 0.75 = 13.33
Thus should hire 4 hours of labor.

e.
MPL = 10/ 1.5 = 6.67
Thus should hire 6 hours of labor.

f.

Professor will increase employment as long as Value of marginal productivity is higher or equal to
wage rate to maximize profit.

In case wage rate is $10 per hour, we see that value of marginal productivity is higher than
wage rate for L=4 but value of marginal productivity is lower than wage rate for L=5. So,
optimal employment is 4 labor hours.

In case wage rate is $20 per hour, we see that value of marginal productivity is higher than
wage rate for L=3 but value of marginal productivity is lower than wage rate for L=4. So,
optimal employment is 3 labor hours.

What is the change in the levels of involuntary and voluntary unemployment

Involuntary unemployment at a wage of $10=7-4=3

Involuntary unemployment at a wage of $20=5-3=2

Decrease in Involuntary unemployment=1 hour

Voluntary unemployment is equal to reduction in working hours from 7 hours to 5 hours i.e. 2
hours

● Profit maximization in current situation :

Labour Hours No. of papers graded Revenue Cost of Labour Profit / (Loss)

(A) (B) (C) = (B) * $0.75 (D) = (A) * $10 (C) - (D)

1 40 $30.00 $10.00 $20.00

2 75 $56.25 $20.00 $36.25

3 105 $78.75 $30.00 $48.75

4 130 $97.50 $40.00 $57.50

5 142 $106.50 $50.00 $56.50

6 149 $111.75 $60.00 $51.75

7 154 $115.50 $70.00 $45.50

● With Wage rate being $10 per hour, Professor should hire 4 Assistants to maximize
the profits.
● Level of unemployment = 7 hours - 4 hours = 3 hours (involuntary)
● If wage rate increases to $20 per hour :-

Labour Hours No. of papers graded Revenue Cost of Labour Profit / (Loss)

(A) (B) (C) = (B) * $0.75 (D) = (A) * $20 (C) - (D)

1 40 $30.00 $20.00 $10.00

2 75 $56.25 $40.00 $16.25

3 105 $78.75 $60.00 $18.75

4 130 $97.50 $80.00 $17.50

5 142 $106.50 $100.00 $6.50

● Professor should hire 3 TAs, as that would fetch the highest profits of $18.75 as
explained in the above table.
● The level of unemployment would be 5 hours - 3 hours = 2 hours.
● However, as compared to the existing situation, the change in the level of
unemployment would be
○ 4 hours - 3 hours = 1 hour (Involuntary unemployment)
Question 8.

A.

The minimum wage rate set at W​H​ is more than the equilibrium wage rate in the labor market
and thus it is binding. At this minimum wage, the amount of labor supplied is Q5 whereas the
quantity of labor demanded is equal to Q1. Thus, it creates a surplus of labor in the market due
to imposition of minimum wage. This creates unemployment in the economy as equilibrium
wage rate will now be W​H​ rather than W​M​.

At the new minimum wage, supply is higher than demand. => Excess supply

B.
The truck drivers will be willing to pay higher wages even if the negotiations are not successful
because they want to retain their drivers with them and not employ new drivers which will lead
to additional cost of hiring and training. Thus, truck drivers are willing to pay higher wage rate
to their employees.

Due to this strike, the employment is at 0, production is at 0.

By increasing wage, if it has fixed costs, they could ensure a certain level of production that
could prevent negative profits.

C.

At higher wage, the demand for labor would decrease while number of people willing to work
would increase.
 Unemployment will increase if negotiations are successful because a higher minimum wage
than equilibrium wage rate will increase the quantity of labor supplied more than the quantity of
labor demanded. This creates an excess supply of labor in the market and thus leads to
unemployment in the economy. The minimum wage creates unemployment in the economy.

D.

The reason could be drivers might be searching for new jobs where the wage rate is higher and
it will involve mainly frictional and structural type of unemployment in the economy.

Efficiency wage where some drivers are paid to ensure higher productivity. This can create
friction.

In addition, friction can exist due to labor market regulation such as rules of hiring or firing,
employment conditions, etc.

Question 9

A.

If June does not take the loan, June is neither a debtor or lender. However, if June takes a loan to
cover the difference between her savings and the value of the house, she will be a debtor.

Debtor:​ Is an individual or an organisation that owes money to or is indebted to another person or

organisation.

Lender:​ Is an individual or an organisation that lends money to another person or organisation.

B.

June decides to take loan from Boze bank, she becomes debtor and she took the loan of
$180,000 at the nominal interest rate of 5%.

$180,000 x 5% = 9000

When interest rate is 5.5%

$180,000 x 5.5% = 9900

If the bank calls June back after a day and tells her that she can only borrow at a nominal rate of
5.5%, this means that the bank has hiked their real interest rate for June from 3% to 3.5% as nominal
interest rates are equal to real interest rate plus inflation. Given the inflation isn't anticipated to
change for two years, this hike in the interest rate corresponds to an increase in the real interest rate
which could be bought about by the fact that the bank thinks that lending to June could be riskier
than their average customer, and to mitigate this risk they hike her interest rate by 0.5%. Even if
June realises that the bank finds loaning her the money risker, she doesn't have another option as
the bank is the only one in town.

Analysing Junes terms of payments before and after the rise in the nominal interest rate carried out
in terms of simple interest rate calculation:

Since we are not given the duration of her loan, let's consider the duration of the loan to be 5 years. If
she borrows at 5% then her total repayment value will be $225,000 with $45,000 in interest.
However, if she borrows at 5.5% then her total repayment value will be $229,500 with $49,500 in
interest. with $3,500 hike in total repayments. Since the hike is only 1.9% of the total borrowings,
June could still go ahead with the borrowing as long as she can cover the new amount.

C.

D.
E.

Question 10.
a.

Calculate the total assets of BalletMonk bank -

Total assets = Reserves + Cash equivalents + Long term investment

Total assets = $60 million + $68 million + $150 million

Total assets = $278 million

The total assets of Ballet Monk bank is $278 million.

b.

Calculate the total liabilities of Ballet Monk bank -

Total liabilities = Demand deposits + long term debt + short term borrowing

Total liabilities = $120 million + $45 million + $53 million

Total liabilities = $218 million

The total liabilities of Ballet Monk bank is $218 million.

c.

Calculate the stockholders' equity -

Stockholders' equity = Total assets - Total liabilities

Stockholders' equity = $278 million - $218 million = $60 million

The Stockholders' equity is $60 million

d.

When people take out deposits then reserves also decrease by similar amount.

So, if people take out deposits by $15 million then reserves also decrease by $15 million.

However, bank is increasing its reserves by $45 million.

So, there will be net increase of $30 million in reserves.

This increase would represent the stockholders' equity.

So,

The new level of stockholders' equity is ($60 million + $30 million) ​$90 million​.
e.​ It is given that both assets and liabilities of the bank increased by 10%. The old values of
assets and liabilities were

Total Assets = Long term Investments+Cash+Reserves =150+68+60 = 278m

Total Liabilities= Demand Deposits+Long term debt+Short term Borrowing = 120+45+53 =

218m

Since both of these increase by 10%, the new values are

New total assets=278*1.1=305.8

New total liabilities=218*1.1=239.8

Since stockholder's equity=Total assets-Liabilities

New stockholder's equity=305.8-239.8=66

f.

This process of using available funds to invest in long-term funds is called reinvestment of
funds. There are a few risks involved. These are

+ High inflation in the coming years might reduce the value of the investment
+ If the investment is in shares, the price of it may go down.
+ If the investment is abroad, the interest rate fluctuations may hurt.
+ As with any other investment, a shock or recession to economy may also hurt
the investment.

The risk can be reduced in the same way any investment risk in the market is reduced- by
diversifying the portfolio. If the investment is done in different types of instruments, the chances
of all of them losing money are slim.

g.

To compare the two banks in this regard, we need to first calculate the equity to asset ratio of
both of the banks.

For Ballet monk bank

Equity Ratio=66/278=.2374.

For Singing Sudakov bank:

The assets are given as 100000 and liabilities are 90000. So, equity=100000-90000=10000.

Equity ratio=10000/100000=.1

This ratio tells us that almost 24% of assets of Ballet Monk bank are held by the owners and not
by the creditors. The lower the assets held by the creditors, the higher the chances of bank run.
Since creditors hold lower assets in case of Ballet Monk bank (76% vs 90%), it has a higher
chance of bank runs.