DEAKIN UNIVERSITY FACULTY OF BUSINESS AND LAW
Department of Economics
FINAL EXAMINATION TRIMESTER 1, 2021
Unit Code: MAE 203
Unit Name: The Global Economy Estimated Reading Time: 15 minutes Estimated Working Time: 2 hours
Estimated time for preparing and submitting your final responses to CloudDeakin Dropbox: 45 minutes
This is an Open Book Take Home Examination. You must upload your final responses as a Microsoft Word Doc and a pdf file to CloudDeakin Dropbox within 24 hours from the start time scheduled in the exam timetable.
This exam consists of three (3) questions. Answer all the questions. This exam paper carries a total of 60 marks. (This is converted to 60% of your total assessment in this unit).
Preparing and submitting your answers:
- Download the exam answer sheet word document and save it on your computer using the file name: your-student-ID_unit-code; A hypothetical example: 123456789_MAE203.
- Input your answers in that document by typing your response below each question number.
Keep saving your work regularly as you make progress towards completing your exam.
- Please also insert appropriate diagrams and calculations if necessary in the answer document. Legibly draw/hand-write relevant graphs or calculations on a piece of white paper, scan it and insert it in the document along with your typed response to each question. You are allowed to use a calculator to aid your work.
- For instructions on scanning and inserting images in the word document, please refer to Exam Preliminary Information Document that was released on the unit site prior to the exam period.
- Upload the completed exam answer sheet word document along with a pdf copy of the same in the CloudDeakin Dropbox prior to cut-off time. Check that you uploaded the correct file.
- Late submissions will not be marked.
- If you encounter any technical issues with CloudDeakin, please contact the IT Service Desk online or via phone (1800 463 888; +61 5227 8888 if calling from outside Australia) and record your ticket number as evidence of technical issues during the examination period.
- In the unlikely event that you cannot upload your completed exam paper, email it as an attachment to your unit chair [xtang@deakin.edu.au] within the submission time.
NOTE: It is important that you work individually on this exam. Your submission will be reviewed for the purposes of detecting collusion and/or plagiarism.
Answer all the questions below.
Question 1 (this question has three parts, (a), (b) & (c))
- The following Table gives the quantities of phones and computers countries A and B can produce. [Assume the phone’s price is equal to the computer’s price].
| Country A | Country B | ||
| phones | computers | phones | computers |
| 1000 | 0 | 600 | 0 |
| 500 | 200 | 400 | 300 |
| 0 | 400 | 0 | 800 |
(i) Can you tell which country has a comparative advantage in producing phones and which country has a comparative advantage in producing computers? Explain your reasoning.
- Assume that country A is currently producing 500 phones and 200 computers while country B is currently producing 400 phones and 300 computers. Show that both can be better off if they specialise in producing one good and then engage in trade. How much gain will they receive from trading, respectively?
- If country B invented a new technology and can produce 1000 phones and 0 computer, or 500 phones and 300 computers [all other numbers do not change], then do you think country B should trade with country A? Why, or why not?
[3+2+2 marks]
- The following table contains information about prices and quantities in a hypothetical economy for three years. Using this information, calculate the economic growth rate between 2020 and 2019.
| 2013 (base year) | 2019 | 2020 | ||||
| Products | Price | Quantity | Price | Quantity | Price | Quantity |
| Bread | $4 | 12 | $6 | 14 | $7 | 15 |
| Energy drinks | $2 | 20 | $4 | 30 | $5 | 40 |
| Pizza | $10 | 25 | $12 | 30 | $14 | 25 |
| Second hard Books | $30 | 10 | $35 | 20 | $40 | 22 |
[6 marks]
- The following table contains information about a hypothetical economy for the year 2020. i) Calculate the unemployment rate and labour force participation rate; ii) What will happen to unemployment rate if 20% of full- time university students graduated and started to look for jobs in 2020? iii) What would happen to the unemployment rate if coronavirus suddenly disappeared, and explain why the unemployment rate would change? iv) Suppose that among these 0.8 million unemployed workers, 40% of unemployment is due to cyclical factors. Then, how much is the natural rate of unemployment?
| Discouraged workers | 0.3 million |
| Unemployed | 0.8 million |
| Full time retirees or unable to work | 3 million |
| Full time university students | 0.5 million |
| Defence force personnel | 75,000 |
| Employed | 12 million |
[2+2+1+2 marks]
Question 2 (this question has three parts, (a), (b), and (c))
- JobKeeper Payment was a subsidy scheme designated to help businesses affected by the COVID-19 pandemic. Use the supply and demand of loanable funds to discuss how the JobKeeper scheme could affect the equilibrium interest rate. Assuming that Australia is a closed economy, how could the JobKeeper scheme affect private, public and national savings while assuming national income and household consumption remain constant?
[2+4 marks]
- The government budget will be in deficit due to the JobKeeper Payment scheme. This may reduce government spending on infrastructure and cause government to increase personal income tax and business tax in the near future. Suppose that Australia is a closed economy, use the dynamic AD, SRAS and LRAS framework to analyse and demonstrate the impact of the JobKeeper Payment scheme on the level of output (or real GDP), unemployment, and inflation.
[4+4 marks]
- Suppose that Australia is an open economy. The US Federal Reserve injected more than $1.5 trillion into the markets in 2020. How do you think this could affect your results in (b)?
[3+3 marks]
Question 3 (this question has two parts, (a) & (b))
- Suppose the following table describes the expenditure components of real GDP, potential GDP, and the price level for the Australian economy in 2019 and 2020:
| Year | Potential GDP | Price Level | C | I | G | NX |
| 2019 | $500 billion | 100 | 266 billion | 113 billion | 102 billion | 19 billion |
| 2020 | $500 billion | 100 | 246 billion | 103 billion | 102 billion | 9 billion |
The government wants to use fiscal policy to combat the fall in real GDP in 2020 in the short run. If the SRAS curve did not shift in 2020, what should the value of government expenditures be (show your calculations) to bring the economy back to potential GDP? Illustrate the effect of this policy in the static AD, SRAS, and LRAS framework.
[7+3 marks]
- In response to the COVID-19 pandemic, on the 18th of December 2020 the European Union passed the NextGenerationEU stimulus package of 1.8trillion euros. To finance the NextGenerationEU, the European Commission will borrow on behalf of the European Union. Using a graph of demand and supply of dollars for euros, explain how will this affect the exchange rate between the Australian dollar and the Euro. How would the result change if private savings in Australia decrease?
[5+5 marks]
END OF EXAMINATION
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