GARDEN CITY UNIVERSITY COLLEGE, KENYASI – KUMASI

FACULTY OF BUSINESS STUDIES

END OF SEMESTER ASSIGNMENT III

(SECOND SEMESTER JUNE 2020)
DATE OF SUBMISSION: 25TH JUNE 2020
TIME: BETWEEN 8AM TO 5PM GMT
ECN 102: INTRODUCTION TO MACROECONOMICS

INDEX NUMBER: ………………………………………………

Instructions:
 Answer all questions and submit via the same GCUC’s official online platform
where the assignment is given within the stipulated time above
 Answers should be converted into pdf format before submission
 Write legibly and neatly present solutions.
 Make sure your INDEX NUMBER is written correctly above and on all sheets
used.
 Students who are found duplicating (copying) the work of others and
presenting it as their own (plagiarism) will have their assignments cancelled
and awarded grade ‘F’ as stipulated in the Students’ Handbook
 Questions
30 marks

Question 1

i) The following table shows the consumer prices index (CPI) for the UK, where 1996 =
100.0. Calculate the rate of inflation for the eight years 1991–4 and 2001–4. The formula
is:
Inflation = ((Pt  Pt1) / Pt1)  100
where t is the year in question and t1 is the previous year. Give your answer to one decimal
place. (The figures for 1990 and 2000 are given and are based on indices of 75.8 for 1989 and
104.8 for 1999)

Year 1990 1991 1992 1993 1994 2000 2001 2002 2003 2004

Price index (P) 81.1 87.2 90.9 93.2 95.1 105.6 106.9 108.3 109.8 111.2

Rate of inflation 7.0 0.8

ii) Will the following lead to cost-push or demand-pull inflation, or both?

(a) The Bank of Ghana cuts interest rates and the economy booms.
Cost-push / Demand-pull / Both

(b) As a result of falling unemployment, trade unions become more militant and demand higher
wages.
Cost-push / Demand-pull / Both

(c) The government raises the rate of VAT. Cost-push / Demand-pull / Both

(d) The government cuts income tax rates and raises government expenditure at a time of near
full employment.
Cost-push / Demand-pull / Both

(e) Increasing industrial concentration leads to more oligopolistic collusion to raise prices.

Cost-push / Demand-pull / Both

iii) Which of the following are wholesale and which are retail?

(a) Large-scale deposits made by firms at negotiated rates of interest. .................... retail / wholesale

(b) Loans made by high street banks at published rates of interest. .......................... retail / wholesale

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 (c) Deposits in savings accounts in high street banks. .............................................. retail / wholesale

(d) Deposits in savings accounts in building societies .............................................. retail / wholesale

(e) Large-scale loans to industry syndicated through several banks. ........................ retail / wholesale

iv) Rank the following assets of a commercial bank in order of decreasing liquidity.
(a) Market loans
(b) Reserves with the Bank of Ghana
(c) Cash
(d) Personal loans
(e) Sale and repurchase agreements (repos)
(f) Mortgages
(g) Government bonds (of from one to five years to maturity)

High liquidity

.........................................................

.........................................................

.........................................................

.........................................................

.........................................................

.........................................................

.........................................................

Low liquidity

Question 2

i) The following diagram shows the relationship between national income and the government’s
budget balance (BB).

BB
Surplus

0
Y1 Y2 National income (Y)
Deficit

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 (a) Define the term ‘budget balance’....................................................................................................

(b) Describe the budgetary position at Y1 .............................................................................................

(c) Assume that full employment is achieved at Y2, what is the size of the structural budget balance?

...............................................................................................................................................

(d) If national income remains at Y2, and the BB line does not shift, what will happen to the level of
national debt?
...............................................................................................................................................

(e) Why is the BB line upward sloping? ...............................................................................................

(f) What determines the slope of the BB line? .....................................................................................

(g) What would cause the BB curve to shift downwards? ...................................................................

ii) Assume that the banking sector’s assets consist of the following items: Cash plus reserves in the
central bank €10bn; Loans and advances to customers €60bn; Bonds €15bn; Money market loans
and bills €15bn. Assume that there are no other items.
(a) What is the banking sector’s current cash ratio? ...................................................................
(b) What is its current liquidity ratio? .........................................................................................
Assume in each of the following that banks want to maintain the cash ratio in (a) above. What
will be the effect of each of the following on money supply?
(c) An open market purchase by the central bank of €1bn of bonds. ...........................................
(d) An open market sale by the central bank of €5bn of bonds. ...................................................
Assume in each of the following that banks want to maintain the liquidity ratio in (b) above.
What will be the effect of each of the following on money supply?
(e) An open market purchase by the central bank of €1bn of bonds. ...........................................
(f) An open market sale by the central bank of €5bn of bonds. ...................................................

iii) The following are the various elements of the UK balance of payments account:
(a) Imports of goods ()
(b) Exports of goods (+)
(c) Imports of services ()
(d) Exports of services (+)
(e) Other income and current outflows ()
(f) Other income and current inflows (+)
(g) Transfers of capital from the UK (–)
(h) Transfers of capital to the UK (+)
(i) Direct and portfolio UK investment overseas ()

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 (j) Direct and portfolio investment in UK (+)
(k) Other (mainly short-term) financial outflows ()
(l) Other (mainly short-term) financial inflows (+)
(m) Adding to reserves ()
(n) Drawing on reserves (+)

Into which of the above categories would you put the following?
(i) Video recorders imported from Japan. .............................................................................

(ii) Insurance cover purchased at Lloyds in London by overseas residents. .............................

(iii) UK gives aid to finance capital project in a developing country ........................................

(iv) Japanese car company purchases factory in UK. ...............................................................

(v) UK residents taking holidays in Florida. ...........................................................................

(vi) Interest earned by UK residents on assets abroad. ............................................................

(vii) Running down the stock of foreign exchange in the Bank of England ...............................

(viii) New deposits made in banks in the UK by overseas residents. ..........................................

(ix) Scotch whisky sold in France ...........................................................................................

(x) UK insurance company sets up branch in Canada.

iv) Assume that there is a free-floating exchange rate. Will the following cause the exchange rate to
appreciate or depreciate? In each case you should consider whether there is a shift in the demand
or supply curves of sterling (or both) and which way the curve(s) shift(s).

(a) Imports increase. Demand curve shift left / right / no shift

Supply curve shift left / right / no shift
Exchange rate appreciates / depreciates
(b) UK interest rates rise relative to those abroad. Demand curve shift left / right / no shift
Supply curve shift left / right / no shift
Exchange rate appreciates / depreciates
(c) The UK experiences a lower rate of inflation than other
countries (assuming no change in interest rates). Demand curve shift left / right / no shift
Supply curve shift left / right / no shift
Exchange rate appreciates / depreciates
(d) Speculators believe that the rate of exchange will fall.
Demand curve shift left / right / no shift
Supply curve shift left / right / no shift
Exchange rate appreciates / depreciates

Examiner: Dr. K. Acheampong