BUSINESS ADMINISTRATION DEPARTMENT

HOA LAC
INDIVIDUAL ASSIGNMENT
Spring2023
SUBJECT: ECO121
Duration: 160 minutes

Student Information
Name: LÊ THÙY DƯƠNG Roll number: HS170719
Room No: DE- 105 Class: MKT1723

FOR TEACHER ONLY

MARK MARKED BY Signature of Proctor

(Name and Signature)

Question1 (2.5 marks):

Assume that in the Economy only two goods are produced: Pencils and Erasers.
Macroeconomics information for this economy is given in the below;
a. What is the value of Nominal GDP in 2011 and 2012? What is the percentage increase?

- Nominal GDP in 2011= 300

- Nominal GDP in 2012= 407
- % increase= 35.6%

b. What is the value of Real GDP in 2011 and 2012, by considering 2011 as the base year? What
is the percentage increase?

- Real GDP in 2011= 300

- Real GDP in 2012= 330
- % increase= 10%

c. What is the value of the GDP deflator in the two years? By what percentage does the price
level change from the base year to 2012?

- GDP deflator in 2011= 100

- GDP deflator in 2012= 123.33

d. Was the increase in Nominal GDP due more to an increase in prices or in the volume of
output?
- Increasing in Nominal GDP due more to an increase in prices because Nominal GDP
values output using current prices

e. What was the growth rate of average labour productivity for the whole economy between 2011
and 2012?

- Productivity in 2011= 300/1000= 0.3

- Productivity in 2012= 330/1100= 0.3
- The growth rate of average labor productivity for the whole economy between 2011
and 2012 is 0%

2011 2012

Output (Pencils) 100 110

Output (Erasers) 200 220
Employment (Pencils) 500 600
Employment (Erasers) 500 500
Price per Pencil $1.00 $1.50
Price per Eraser $1.00 $1.10

Question 2 (2.5 marks)

For the following questions, assume there is a 10% required reserve ratio:

a. A bank has $300 of reserves, $300 of loans and $600 of deposits, how much excess reserves
are they holding? How much could the bank make in additional loans right now? How much will
the money supply increase after the money creation process is finished?

Required reserve ratio = 10%

D= 600
R (needed reserves)= re x D = 600 x 10% = 60
 Excess reserves = 300 – 60 = 240
The bank could loan out this additional money making $240 in additional loans
mm = 1/R =10
The money supply increase= 240 x 10 =2400 after the money creation process is finished

b. A bank has total reserves of $450 and excess reserves of $150. What is the banks current
deposit balance? What is the banks current loan balance? What is the maximum amount of
deposits this bank can have?

Total Reserves = $450

Excess Reserves = $150
Current Deposit Balance = Required Reserves x (1/Required Reserve Ratio) = (450 - 150) x
10 = $3,000
Bank's Current Loan Balance = Deposits - Total Reserves = 3,000 - 450 = $2,550
Maximum Amount of Deposits that this bank can have = 450 x 10 = $4,500

c) Citizens of the country of Heehaw produce hay and provide entertainment services (banjo
playing). In one year they produced $15 million worth of hay, with $11 million consumed
domestically and the other $4 million sold to neighboring countries. They provided $7 million
worth of banjo-playing services, $5 million in Heehaw, and $2 million in neighboring countries.
They purchased $6 million worth of soda pop from neighboring countries.

Calculate the magnitudes of GNP, GDP, net factor payments from abroad, net exports, and
the current account balance.

GNP= output by citizens=15+7=22 million$

GDP= output produced by country =15(Hay)+5(donestic banjo) =20million$

Net factor payment = GNP - GDp= 2million$

Net exports= 4(Hay sold abroad) - 6(soda imports) = - 2million$

Current account balance = net exports +Net factor payment = - 2+2= 0.

d)What is the main conceptual difference between GDP and GNP? How different are GDP and
GNP for the United States? For countries with many citizens who work abroad?

GDP measures the amount of goods and services produced within national borders, by citizens
and non-citizens alike. The GNP measures the amount of goods and services produced by
citizens both domestically and abroad. GDP is the most commonly used by global economies.

Question 4 (5 marks)

Suppose the Government wants to increase its expenditure by $200 but does not have much
money so it sells 5 years government bonds to the Central Bank on the open market. Then it
deposits $200 in a commercial bank for future use. Assume that all commercial banks have the
same reserve ratio (Reserve Requirement) of 5% and that they lend out all extra reserves as
loans. Further assume that all borrowers do not keep the loans in the form of currencies but
deposit them in some banks for later use.

a. what is the money multiplier for this economy?

mm = 1/R=1/5%=$20

b. How much does the total money supply increase because of this open market operation?

Reserve requirement = 5% x $200 = $10

Loans= 200-10=190
Money supply = 190+200=390

c. Suppose the demand for money does not change, will this open market operation increase or
decrease the equilibrium interest rate?

TH1: When the money supply increases, the money supply curve shifts to the right
=> Decrease the equilibrium interest rate (because it reduces the value of money and increases
the price level)
TH2: When the money supply decreases, the money supply curve shifts to the left
=> Increase the equilibrium interest rate (because it increases the value of money and decreases
the price level)

So this open market operation will increase or decrease the equilibrium interest rate according to
the increase or decrease in the money supply (if the demand for money does not change)

d. Using graphs for the money market, labor market, and goods market to show the effect of this
monetary policy in the long run (assume the economy is originally at long-run equilibrium

r
S

5%

410 F
ANSWER