Instructions:
- Read the questions carefully and attempt all questions.
- Do not exceed more than 150 words to answer or explain any part of each question.
- Wherever indicated, appropriately labelled diagrams or examples should support your answers.
- Make sure you answer each question in your own words with no evidence of copying or pasting from the internet or published sources. Such copying/pasting constitutes academic dishonesty and is taken very seriously at the university. A Turnitin report may be used as evidence if this is the case.
- A Turnitin submission is required for this Assignment.
- Late submissions will incur a penalty, see your Study Guide.
- All extension requests must be accompanied by appropriate evidence and applied at least 24 hours before the submission deadline.
Question 1: GDP and Inflation
- What are the three key measures of economic growth and how are they calculated?
(3 marks)
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- Consider the following production data for a small economy and answer the below questions. (Note, 2012 is the base year).
| Price of Gin (per litre) | Quantity of Gin | Price of Tonic (per litre) | Quantity of Tonic | |
| 2012 | $20 | 1000 | $5 | 2000 |
| 2013 | $30 | 1500 | $8 | 2000 |
| 2014 | $25 | 2000 | $6 | 2500 |
- Calculate real GDP for the years 2013 and 2014. (2 marks)
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- Calculate the rate of real annual economic growth for the years 2013 and 2014. (1 marks)
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- Calculate the GDP deflator for the years 2013 and 2014.
(2 marks)
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- Calculate the annual inflation rate for the years 2013 and 2014. (2 marks)
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Question 2
- Media reports that NZ Q3 2021 GDP dropped due to lockdowns but impact was less severe than the lockdown of 2020. This is purely based on comparison of GDP over 2020-2021. Explain briefly why this may not reflect the actual impact on welfare and economic wellbeing experienced in the country as a result of the pandemic. You can draw on the knowledge of alternative measures of GDP as discussed in lectures.
(5 marks)
- New Zealand’s official unemployment rate has been falling in 2021. Does this mean there has been an improvement in the labour market? Explain your answer, drawing on the definition of unemployment rate.
(5 marks)
Question 3
Under a fractional reserve system, banks keep a percentage of deposits as reserves and lend the rest out.
Suppose that banks hold five percent of deposits as cash reserves and that the public holds no cash (all money is held as bank deposits). Show, using the T-accounts for the banking sector, the effect of a $100 deposit. Be sure to show the mechanics of the system, and the final balances for (i) deposits, (ii) cash reserves, and (iii) loans.
(5 marks)
Question 4
Read the media story ANZ predicts OCR to hit 3% by next year and answer the following questions:
a) Using appropriate references and data sources, analyze whether Reserve Bank of New Zealand should go for an Official Cash Rate (OCR) increase by next year, and what would be the short-term implications of this decision on output, inflation and unemployment. You should apply the knowledge of RBNZ monetary policy learnt in lectures and explain your answer through the use of graphs.
(8 marks)
b) What are some of the external factors highlighted in this story that might not help RBNZ in maintaining price stability in the short-term?
(2 marks)
Question 5
In the aftermath of the Global Financial Crisis, Russel Norman (RN) suggested that the Reserve Bank of New Zealand should print money (lower the interest rate) in order to increase output. Don Brash (DB), a former governor of the Reserve Bank of New Zealand, countered that they should only print money if the government simultaneously cut spending. Explain in turn the likely impact of each of their suggestions and comment on the implied differences in their views on the state of the economy (i.e. whether they assume NZ economy is at or below full employment).
(10 marks)
Please cite appropriate references for this question, your answer should not exceed 250 words and include two appropriately labelled diagrams, one each for RN and DB’s policy prescriptions.
Note: This is a long answer question, so word limit is maximum 250 words
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