ECO1002 Business Economics 2
Assignment 2
Question 1 (10 marks)
a. Classify the following persons as employed, unemployed or not in labour force. Put a tick (√, in the appropriate boxes. (5 marks)
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Person
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Status
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Employed
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Unemployed
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Not in
labour force
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A
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Museum guard. Was not at work last week due to illness
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B
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Part-time sales assistant at ZARA. Actively looking for full-time work
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C
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Unpaid stay-at-home dad. Has not looked for a job in several years
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D
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Retired professor.
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E
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Has never been employed. Looked for a job last week
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b. “The minimum value of unemployment rate is zero and it happens when the economy performs well”, is this statement TRUE or FALSE? Explain. (5 marks)
Question 2 (6 marks)
Suppose that banks do not hold any excess reserves and people hold zero cash. If the central bank buys $10 million of government bonds from the banking system, what will be the effect on the economy’s reserves and money supply given that the reserve requirement for deposits is 15 percent? What type of monetary policy is the central bank adopting in this context? Can you name TWO other monetary policies that would also lead to a similar impact on the economy’s money supply?
Question 3 (4 marks)
According to the Fisher effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate?
Question 4 (10 marks)
Suppose an economy is in its long-run equilibrium.
a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short- run aggregate supply, and long-run aggregate supply. Label the axes. (2 marks)
b. Now suppose that an investment tax credit is removed. Use your diagram in (a) to show what happens to output, price level and unemployment rate in the short run. (8 marks)