Open economy Assignment | Online Assignment

For this assignment it is a group assignment so I only need question 2 to be done

ASSIGNMENT # 2 ECON 1500

Macroeconomics – Summer 2020

The Faculty of Business – Humber ITAL

INSTRUCTIONS

You must perform this assignment in groups (Individual assignment will get a grade of zero). Type your answers using MS Word (diagrams may be drawn in pencil, any other hand written answer will receive a grade of zero. Ensure that you complete all the parts to all questions and follow instructions given in each question. Poor organization and presentation will lead towards deduction of marks. Submit the assignment on the Blackboard only through the provided link on the Group’s page. Any other way of submission will not be graded.

EVALUATION

Assignment # 2 will be graded out of 100 marks and is worth 10% of your course grade.

QUESTION 1 – [30 marks]

Access the Bank of Canada web site to answer the four parts below.

1. [5 marks] Visit the “Statistics” tab to locate data (under Indicators) on the recent history of the following groups of monetary variables: (i) inflation control target; (ii) policy instrument; and (iii) monetary aggregates. Present monthly data of each set of variables in tabular form from January 2019 to January 2020 inclusive. (Please do not print the table directly from the website, Make a neat and precise one page table for only the months required, An MS Excel table is ideal to do this neatly and compactly.)

1. [9 marks] Explain in detail what each variable represents, use Bank of Canada’s website to find the answer to this question.

1. [9 marks] Explain the economic reasons for the evolution in the variables from January 2019 to January 2020 inclusive.

19. [7 marks] Find the Bank’s latest press release (June 2020) about overnight rates and explain why the Bank decided to change (or not to change) its target for the overnight rate. Be sure to explain the details about COVID-19. Attach the press release to your answer.

QUESTION 2 – [30 Marks]             Chapter 12

[5 marks] A case study in Chapter 12 analyzed purchasing power parity for several countries using the price of Big Macs. Go on the Website of “The Economist” newspaper at http://www.economist.com/content/big-mac-index and find the data on the Big Mac Index for January 2020 and save it to your computer. Print the January 2020 article on the Big Mac Index and attach it to your assignment. For actual exchange rates, you may use internet.

1. [12 marks] Using the data table from “The Economist”, fill in the data on local price of the Big Mac and actual exchange rate. Then compute the predicted exchange rate of the local currency per U.S. dollar. [Check the price of Big Mac in US$ because you have to compare the prices with that]Make sure to show your calculations in the predicted exchange rate column. [Please don’t print the entire data table from the website.]

1. [7 marks] Summarize the article in one paragraph, highlighting the main points.

1. [6 marks] Looking at the exchange rates predicted by the Purchasing Power Parity, how well do you think does the theory of purchasing power parity explain exchange rates?

QUESTION 3 –  [15 marks]-             Chapter 13

Figure 13.4 shows the effect of an increase in the world interest rate on a small open economy with perfect capital mobility. We assumed there that the Net Capital Outflow (NCO) was positive. For most of the past 40 years, however, Canada’s NCO has been negative.

13. [10 marks] Redraw the two panels of figure 13.4, but this time assume that NCO is negative at the world interest rate. Now suppose that the world interest rate increases. What happens to national saving (S)? What happens to domestic Investment (I)? What happens to NCO and the real exchange rate? Carefully label both diagrams and explain step by step what happens starting from the initial equilibrium in both markets. Make sure to include all the relevant details step by step or you will lose marks.

13. [5 marks] Does the conclusion we reached in figure 13.4 (that an increase in world interest rates causes the Canadian dollar to depreciate and net exports to increase) still hold? Explain why or why not.

QUESTION 5 –  [25 marks]    –         Chapter 14

Suppose economy is in long run equilibrium. [Only one diagram is required for this question, draw and label clearly to show all relevant points and moves]

1. [4 marks] Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both-short run and long-run aggregate supply.

1. [4 marks] The central bank raises the money supply by 10%. Use the diagram you drew in part a) to show what happens to output and price level as the economy moves from initial equilibrium A to the new short-run equilibrium (call it point B).

1. [4 marks] Show how economy moves from the short run equilibrium (point B) to the new long-run equilibrium (call it C) and explain why it moves to C.

1. [4 marks] According to sticky wage theory of aggregate supply, how do nominal wages at point A, compare to nominal wages at point B? How do nominal wages at point A compare to nominal wages at point C?

1. [4 marks] According to sticky wage theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages compare to real wages at point C?

1. [5 marks] Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?