1.

)  How do the following events affect the value of the USD, all other things being

unchanged?

Appreciates Depreciates

Out of displeasure at the NAFTA has negotiated with

failed NAFTA negotiations D. Trump, Canada and

with D. Trump, Canada and Mexico boycott American

Mexico boycott American products, so in this way the

products export will reduce and the

value of USD will be

depreciating as the demand

will be decreases.

Because of Brexit, investors With the increase of new

withdraw their investments investors, the value of USD

from Great Britain and will be appreciating.

invest new in the USA

D. Trump introduces import If tariff will be introduced

duties for all important on import duty the dollar

trading partners price will be high and the

tariff is collected by the

government so the suppliers

will receive fewer dollars as

the price of exports was

higher for them.

Tourism in USA is booming If tourism will bloom and

and attracting more and promoted then the value of

more tourists from Europe USD will be appreciating by

and Asia the increase in demand of

 USD.

US Federal reserve raises If the reserve rate increases

interest rates the supply of currency will

be decrease and the demand

will be increases so, it will

increase the value of USD.

China, Japan and EU no If the countries will not

longer buy US government purchase the goods, in this

bonds as result of growing way the export will reduce

protectionism. and the value of USD will be

depreciating as the demand

will be decreases

2.a) Denmark operates a fixed-rate system and has its currency, the Danish krone

(DKK) fixed to the euro at a rate of 0.134 EUR = 1 DKK, with an exchange rate

fluctuation band of +/- 2.25%. Draw this fixed rate system with its characteristics and

with the supply and demand curve for Danish Krone (DKK) in exchange with EUR, in

the lower graph. Do not forget to mark the axes!

At a central rate of 746,038 KB/100 euros Denmark participates in ERM 2. Due to the

significant level of convergence, Denmark has reached an agreement with the ECB on a +/-

2.25% narrower ERM 2 band variation. The crown can move only between 762,824 crowns

for 100 euros to 729,252 crowns per 100 euros. In practice, Denmark's National Bank

established the crown far closer to the central rate since the late 1990's. The crown floats

against any currency other than the euro. It does not exist above or below the level of the

Swedish krona or US dollar that can fluctuate, example, from the exchange rate (price).
2.b) Due to the euro-crisis, investors lose their confidence in euro. The loss of confidence

is triggering reactions on the Danish financial market. On the financial market, people

sell their EURund buy DKK. Draw this intervention in the graph above.

The National Bank of Danmarks can act, i.e. buying and selling kroner against euro, if the

exchange rate of the crown is moving outside the central rate. The Danmarks NB will buy

crowns and sell euro if the exchange rate of the crown is travelling downward from the central

rate, selling the crowns and buying euro reversely when the crown rate is moving in an

appreciative manner away from the central rate.

Interest rate adjustment:

In order to stabilize the krone to a central rate, Danmarks National Bank may also change

interest rates. If the exchange rate of the crown moves away in depreciation from the central

rate – and vice versa, if the currency rate moves away from the central rate in an appreciated

manner, Danmarks Nationalbank will hike interest rate.

2.c) What kind of transaction must be Danish Central Bank carry out in such a case so

that the fixed exchange rate can be guaranteed?

In Denmark, the Government defines the foreign exchange policy to be pursued in

cooperation with the Danmarks National Bank. The monetary policy of Denmark, in other

words, aims solely at maintaining a steady crown against the euro. Danmarks The National

Bank is independent in its monetary policy and the formulation of monetary policy cannot be

determined by either Parliament or the Government. This clearly divides economic policy

responsibilities. The government guarantees a healthy economy through fiscal policy and all

economic programmers. In order to continue with the FDP, stability-oriented fiscal policy is

also crucial.

3.) After the reunification of Germany, payments to rebuild the former East Germany

led to a major expansion of aggregate demand in Germany. To combat the increasing

inflation, the German central bank had to raise interest rates. At that time, many

currencies of EU countries were fixed to the German currency (the Deutsche Mark).

Explain why in these countries the recession was reinforced by the policy of german

central bank.

Germany was confined to academic works and was too much influenced by the European

Central Bank (ECB). It has now become the Eurozone's key policy issue. Germany is more

powerful than it should be at the ECB. Furthermore, as head of the ECB, Mario Draghi's quest

for approval from the Turkish army was his primary error. He should do it. That might be too

late, as the seemingly irreversible drop in inflation and weak future growth in the Eurozone

reveal until the German public comes into play to implement the ECB policy lightly. The

Bundesbank should put a lot of weight on expansionary monetary and fiscal policy and assist

the ECB rather than torpedoing legitimate ECB decisions.

4) Assume that also natural resources are an important input for the production of GDP

but that their contribution is neglected in the production function, which has been used

here. What does this imply about the Value of total-factor productivity (TFP), which

you have calculated in question xyz?

Estimates of overall output factor growth, a gauge of efficiency improvements, were typically

based on a two-factor human and fixed capital model. Just like profit is gauged vacuum — in

the National Accounts System, rents on the exploitation are implied. The fixed capital impact

on the growth of inputs and gross domestic product, especially in resource-dependent

developing nations, has been misreported.

5) Calculate GDP and GNP using the following figures:

In billions of dollars

Consumption 3600

Investment 900

Transfer payments 800

Government expenditures 1000

Savings 1000

Exports 650

Imports 550

Net factor income to and from abroad GDP 

=Consumption+ Investment+ Government

expenditures+ (Exports- Imports)

=3600+900+1000+(650-550)

=5500+100

=5600

6) Which GDP components (component by the expenditure side) are affected by the

following transactions:

Canton AG build new hospital Investment

Income of teacher of primary school Consumption 

 Swiss army buys new jets Fixed Investment

Investment will be raised

Old age pension is being paid Government spending

Company is not able to sell at their Business Investment

production and piles up inventories Investment will be raised

7) Which goods and services are not included in GDP which can be regarded as welfare?

2 Examples?

Social Security, welfare programs, unemployment insurance, Medicare, and subsidies. These

are not included in GDP because they are not payments for goods or services, but rather

means of allocating money to achieve social ends. For example: Childcare, volunteer work,

household.

8) Is it possible that the growth rate of GDP is lower than growth rate of GDP per

employed person? Explain why (not).

If the total population increases, GDP can expand but GDP is not per capita. Likewise, GDP

per capita might expand if the population shifts towards increased workforce participation,

but GDP per capita is not. More broadly, these economic performance indicators may differ

fairly significantly in growth rates.

9) Assume that growth rate of total-factor productivity (TFP) becomes zero, and

therefore there is no more technological progress. Will growth of GDP still be possible in

the long run? If yes, under what conditions?

No, GDP will not be possible in the long run if growth rate of total-factor productivity (TFP)

becomes zero, and therefore there is no more technological progress. Some variables affect

the economy's long-term growth:

Productivity growth: is the ratio between economic results and inputs (capital, labor, energy,

materials, and services). The cost of products is reduced as productive activity increases. The

demand for a product or service increases at lower pricing. The growth of demand can lead to

increased incomes.

Population shifts: demographic variables impact economic growth by altering jobs to

population ratios. The number and quality of the natural resources accessible are included.

The population age structure also impacts jobs and long-term growth.

Participation of the work force: the number of people involved and the size of the economic

areas impact economic growth. The number of employees available is the participation of the

labor force. The engagement of workers is large due of low birth and mortality rates in highly

developed and industrialized nations.

10) Multiple Choices

Assume an economy where there is no population growth. In the neoclassical growth model,

an increase in the savings rate can, in the long run, cause an increase in…

a. GDP growth

b. GDP growth per worker

c. Neither GDP growth nor GDP growth per worker

d. Growth of the capital stock per worker

11) If the capital stock per worker in an economy has increased over a certain time and total

factor productivity has increased as well

a. GDP per worker (labor productivity) has grown at the same rate as productivity

b. GDP per worker (labor productivity) grew at a higher rate than total factor

productivity

c. GDP per worker (labor productivity) has grown at a lower rate than total factor

productivity
 d. GDP per worker (labor productivity) aims at a maximum value of total factor

productivity exceeded

12) The government is analyzing the impact of an investment project in infrastructure

on GDP. How does the investment multiplier change when the following conditions

change?

Multiplier gets bigger Multiplier gets smaller

Marginal propensity to Multiplier get increased

consume increases

Marginal propensity to Multiplier get decreased

consume decreases

14) a) An economy is stuck in a recession and the government decides to spend more in

infrastructure. Show the situation of a recession in the AS-AD framework and what

happens with the increase in government spending

Recessions can be caused whether by overall demand or overall supply by adverse shocks. (a)

Investor confidence, or you can lower the AD from AD0 to AD1 to AD1 to the Left. The

account style (E1) will have slower growth and a lower price than the old balance if AD

changes further (E0). The new balance (E1) is likewise much below potential GDP in this

example. A change in government expenditure or increased taxes causing a decrease in

spending might also move AD to the Left. (b) Critical input costs may grow from SRAS0 to

SRAS1 to shorten AS to the Left. The new equilibrium when SRAS moves to the right. When

the SRAS changes left, the new balance (E1) has a lower range and higher price levels than

the reliable and sustainable (E0). The new balance (E1) is similarly well below potential GDP

in this case.

14b) Describe 2 objections against such a fiscal policy

Side effects on public spending. Reduced government expenditure (G) may severely affect

public services such as public transit and education, creating market failure and societal

inefficiency. This might reduce inflationary pressure.

Poor information. If the government has insufficient information, fiscal policy would suffer.

If, for example, the government predicts that recession will occur, it will boost AD, but if this

prognosis were wrong, if the economy developed too rapidly, government intervention would

create inflation.

15) Donald Trump imposed import taxes on many goods hoping to reduce the current

account deficit in the USA. What kind of measures could the US take to reduce the

current account deficit, which lay within its boarders and affect the domestic

components and have an impact on NX? Explain the connections

There is a deficit in the current account when the imported (goods/ services/inv. revenue)

value is higher than the export value. Current account deficit reduction policies involve:

 Exchange rate devaluation (making exports less affordable And imports cheaper)
  Reduce internal consumption and import expenditure (e.g. strict taxation policy)

 Provision for local industry and export competitiveness strategies on the side.

16) Assume that the production of output in a country can be described by a neoclassical

production function, where the inputs are labor, capital and technological progress. The

share of labor income of aggregate income is 0.75 and the share of capital income is 0.25

respectively. The production function has the property of constant returns to scale and

there is diminishing marginal productivity with respect to each factor of production.

16a) Over a certain time period we observe that on average, the GDP grows at a rate of

3% while labor grows at a rate of 1.8 %. Furthermore, it is assumed that the capital

stock grows at a rate of 2%. What is the average growth rate of technological progress

or total factor productivity (TFP) in this case?

Y = A* K a * L β

Y = total output

A = total factor productivity

K = capital input

L = labor input

Putting the values on the above formula

3%= A *2%*1.8%

A = 3%*2%*1.8%

A = 0.0000108

two inputs' respective shares of output (a - are the share of contribution for K and L

respectively)
16b) What was the average growth rate of labor productivity (GDP per employee)? How

is this growth rate linked to the growth rate of total factor productivity which you have

found above? How can the difference in the growth rates be explained?

Employee Productivity = Total output / Total input.

= 0.03/24

= 0.00125

Labor growth rate productivity is part of the total factor productivity so if labor

productivity gets changed if will affect the total productivity in the same manner.

17) According to traditional neoclassical growth theory all investment must be financed

by saving and more investments require more savings first. Why is this assumption

problematic for a modern economy? Explain the consequences of an increase in savings

of househoulds and/or businesses in the economy. What role does money creation play in

the process of financing investment?

The neoclassical model believes that factor contributions are externally deter- mined, while

the new growth theory contends that factor contributions are endogenously determined.

Endogenous growth theories may be split into two categories. Economic development

theories evolve with the passage of time. Thus, the beginning of the Harrod-Domar model of

economic growth may be beneficial, for it was the first model to attempt to establish a

consistent model of economic growth, which puts current theory in its historical perspective.

In particular the significance of technology advancement and human capital for economic

growth was generally overlooked in the HarrodDomar and the other previous models.

The increase in household saving results in a lower consumption than otherwise. It

might be interesting to explore a counterfactual situation that hasn't affected behaviour to

demonstrate the macroeconomic effects of this shift in consumption. If the saving rate for
households had stood at 2004-2005 and had not influenced disposable revenue, it would have

been 11% more than its present level of consumption.

The method by which the money supplies of a country, or economic or monetary area,

are expanded is the production of money, or issuance of the money. The majority of the

money supply is in the form of bank deposits in most modern economies. The Fed generates

money through open market activities, i.e., market purchases of new money instruments, or

by the creation of bank reserves supplied to business banks. Bank reserves are then increased

by a fractional reserve banking system in which banks can lend a part of their assets.