ECO121 – FA2024

Individual Assignment 2
Submit hard copy in class during Week 7 (Friday 1st of March)
Instructions: 1. Make sure to write down your student detail and your hand writing clear in case you write.
In all questions, you first need to compute the value of H which is your student code divided by 16.3. For
example, if your student ID is HS180360, then the value of H is 180360/16.3 = 11,065.03. Rounded your
results by two decimal points.
2. Show basic calculations to get full marks. Use abbreviations such as S for saving.
3. You may work with other students to discuss the questions; however, you MUST do the assignment
individually and ensure your true comprehension. There may have penalty for wrong comprehension.
Question 1. Suppose economists collect the following data for a closed economy:
Y = H; C = 7,300; T = 1,750; G = 1,860.
The economists also estimate that the investment function is: I = 2,800 – 80r (first period),
where r is the country’s real interest rate, expressed as a percentage.
a. Calculate private saving, public saving, national saving, investment, and equilibrium real interest rate
(point A).
b. In the second period, the new investment function is: I = 2,450 – 80r while the national saving reduces by
175 compared to the first period. Suppose consumption and government spending remain unchanged,
(i) compute investment and equilibrium real interest rate in this period (point B);
(ii) compute the current GDP (period 2) and GDP growth rate.
(iii) derive the saving function (or the supply curve in the loanable funds market). Hint: You need to connect
two equilibrium points A(x1; y1) and B(x2; y2). The function of AB: (S-x2)/(S-x1) = (r-y2)/(r-y1)
(some may approach the saving function S = a + b*r, using the coordinates of A and B to compute a and b)
Question 2. a. Suppose economy A starts with H (USD) in currency. All of the currency is deposited into
bank B which can make loans totaling $8,600. There is no extra reserve in this bank, then compute the
reserve requirement ratio.
If all banks in the economy have full capacity in making loans to customers, compute the maximum money
supply in the economy.
b. Using the reserve ratio from (a): Bank B has $200 in reserve (no extra reserve rather than the
requirement). Compute the amounts of loan and deposit in bank B.
Question 3. On the graph, MS represents the money supply and MD represents money demand.
Refer to the Figure below. Assume the money velocity is fixed.
a. Suppose the initial money-demand curve is the one labeled MD1 while the money-supply curve is MS1
(period 1); also suppose the economy’s real output is 30,000 for the year. If the money market is in
equilibrium, then calculate money velocity.
b. In the second period, the central bank raises money stock by 50% shifting the MS curve to MS2 (MD
unchanged). Calculate the inflation rate and output growth rate between two periods.
1
 Value of money

MS1 MS2

D
0.7

A
0.6
E
0.55
MD2

0.45 Quantity of
B MD1 money

H X

Question 4. Assume that Norway and Italy can switch between producing fridges and rice cookers at a
constant rate as below:
Minutes needed to make one unit of

Fridge Rice cooker

Norway H 100
Italy 10,500 90

a. What is Norway’s opportunity cost of producing a rice cooker? What about Italy?
b. Which nation is the exporter of fridge (has comparative advantage in producing fridges)? Two nations are
willing to trade a fridge for how many rice cookers?