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ECONOMICS Name: Institution: Date: 1. Setting the benefits of unemployment by the unemployment insurance to be equal to the level of the wage of the policy holder’s last job will make the premiums that are supposed to be paid to be a bit expensive. This will be dependent on whether the premiums will be paid on term assurance or whole life assurance. Although unemployment insurance has a low penetration rate therefore it means that the public is not conversant with the policy. 2. a. If there are lower unemployment benefits then the motivation to search for job opportunities is diminished. This will increase the search time. b. On the circumstance that the spouse works if it is the husband. Then it will take the wife a longer search period to search for a job opportunity. c. On the circumstance that the spouse who was working but has lost his or her job, then the search period will be shorter because of the desperateness that will be attached to the spouse. d. A large mortgage will reduce the searching time of an individual. This is because of the urgency to pay up the outstanding mortgage. e. Lots of layoffs and opportunities in another country will mean that there will be several employment opportunities therefore, the waiting time to secure a job will be significantly reduced. f. When someone is single, then the need to secure a job opportunity is significantly lower than someone who has children. This, therefore, will reduce the time for one to secure a job opportunity if he or she has children as opposed to when he or she is single. 3. a. 230.85 Million people are in the labor force. b. The labor participation in the country is 85.5% c. The unemployment rate in the country is 4.5% d. If the unemployment rate is 4%, then we can conclude that the country was in recession during the period that this data was collected. This because of the high rate of unemployment. e. An increase in population by 30 million, The labor force participation will be 77%. f. Unemployment is not bad for the company at all this is because, during cyclical unemployment, the opportunities that have been created will fetch from the unemployed pool. This will increase the gross domestic product of a country. 4. The table Year CPI Inflation Rate Nominal Wage Real Wage 1 100 0% $ 10.00 $ 10.00 2 110 9% $ 12.00 $ 10.91 3 120 8% $ 13.00 $ 10.83 4 115 -4% $ 12.00 $ 10.43 5. a. The CPI Year Cost CPI- b. The nominal price c. The income increased; this is because of the inflation rate that was experienced during that year. d. Total inflation between 1998 to 2002 Year Cost CPI Inflation-%-%-%-%-% e. I benefited because they estimated that the inflation rate will be 4% but in the actual sense the inflation rate was 9%. Therefore, the additional 5% strip benefitted me because they valued the cash payments at 4% and thus the loan repayment will be paid following the 4%. 6. Part a and b Year CPI Inflation 1 115 0% 2 119 3% 3 126 6% 4 130.6 4% 5 133.2 2% 6 130.5 -2% c. between years 2 to 5 there is inflation d. Between year 5 and 6 there is deflation e. Between years 4 and 5 there is disinflation f. Explaining to someone who had not taken Econ 110 the difference between inflation and deflation is by explaining to him the value of money on a per annum basis. ………………………………………………………………………. QN 7 If the company printed 400 coupons instead of 200, the bid price will increase, this is because the purchasing power of the students has increased due to more distribution of coupons. The prices will increase as below. description Coupon price 200 coupons 400 coupons 100 coupons Giant candy bar 30 63 15 Bracelet 14 29 7 Class Pizza party- Circus ticket 35 73 18 Dinno toy- Workings: If coupons printed are 400. 30/192*400= 63 14/192*400=29 65/192*400=135 35/192*400=73 48/192*400=100 If the company printed 100 coupons instead of 200, the bid price will decrease, this is because the purchasing power of the students has decreased due to fewer distribution of coupons. The prices will decrease as below. 30/192*100=15 14/192*100=7 65/192*100=35 35/192*100=18 48/192*100=25 Given the answers given in a and b, it matters a lot how many coupons the economy has. This determines the purchasing power of individuals. When there is a lot of money in the economy, inflation increases, Inflation. The growth of money is due to increased inflation and hence as the money supply grows faster the rate of inflation increases much more. Doubling the coupon supply will double the bid prices of the items. Decreasing the coupon supply will decrease the bid prices of the items. QN 8 The monetary theory of inflation This theory was developed in- by Freidman who suggests that the growth of money supply is due to increased inflation and hence as money supply grows faster the rate of inflation increases much more. The price of commodities is proportional to the supply level of money while holding other factors constant and therefore, doubling the money supply will double the prices and vice versa. It is the central bank that sets the money supply level and thus it has the mandate to increase or reduce the supply of money. The monetary theory of inflation is long run and thus increased money supply in a particular year may not cause an increase in inflation concurrently. If inflation increase suddenly, it increases the purchasing power of individuals. This means that the supply of money has increased which increases the amount of money possessed in the pockets of individuals. Prices go up. The effect on the economy has been described by monetarists who have suggested that there will be inflation if the money supply rises faster than the national income growth. Consequently, there will be no inflation if the money supply rises at the same rate as the growth of national income. According to M. Freidman, monetary policy affects more than the fiscal policy on economic stabilization. inflation in developed countries is always due to an increase in money supply, this is not the case in developing countries, instead, factors related to fiscal imbalances, such as high money growth and exchange depreciation dominate the inflation process. If inflation increases the financial institution will have law demand for loans. Very few individuals will be interested in the loans since the money supply is high. High inflation rates increase the interest rates for loans and thus low demand for loans. QN 9 Conditions under which aggregate investment increase even when nominal interest rates were increasing. Normally low-interest rates encourage investment. A decrease in interest rate will lower the cost of borrowing which will increase the investment demand. There are times when the aggregate investment will increase even if nominal rates are increasing. For instance, high investment demand will cause investments to increase even if nominal interest rates are high. Also in a period where the future is promising rates to decrease, investors will invest irrespective of the current interest rates. QN 10 Reasons why appropriate monetary and fiscal policies would move the economy to full employment but have different long term effects. Monetary policy is the policy adopted by the central bank of a nation to control either the inflation rate or the money supply in the nation. Fiscal policy is the whole policy of taxation and spending policy of a nation. This is also controlled by the central bank of Kenya. If monetary and fiscal policies are well implemented will move the economy to full employment since interest rates, money supply, taxation, and government spending will be in proper control. The two have different long-term effects. Monetary policy influences the economy of a nation while fiscal policy is majorly concerned with government taxation and spending. QN 11 Difference between budget deficit and national debt The budget deficit is the difference between the nation's income and expenses. In a case where expenses surpass the gross income of the nation, the nation is considered to have a budget deficit. This means the money expected to be collected by the revenue collection authority is not enough to facilitate all the government projects. This situation mainly occurs when a lot of the population avoids and evades taxation over a given period or when a government decides to abruptly reduce tax rates. Also, poor collection of taxes may result in a budget deficit such that the expected income to be collected is not enough to facilitate all the expenditure. The national debt is the amount owed by the government. National debt may be internal or external. Internal debt is the money borrow from within the country, while external debt is the money borrow from other countries. The national debt helps the government to supplement the national deficit. Effect of national debt on aggregate D and aggregate S National debt influences an increase in inflation. An increase in inflation increases the price of commodities. This in turn decreases the demand for commodities. On the other hand increase in inflation reduces the purchasing power of the individual, in turn, the supply of commodities increases in the market, in conclusion, an increase in national debt increase inflation, which reduces aggregate demand and increases aggregate supply. Effect of the national deficit on aggregate D and aggregate S A national deficit means the government is spending more than it is cashing in. if government spending is high it reduces the amount of money supply. When the money supply is low, the purchasing power of individuals is decreased, and therefore supply is high and demand is low. When the money supply is low, inflation tends to rise especially in developed countries bringing financial imbalances to the country. Crowding out Crowding out is government involvement in the economy, an increase in government spending reduces the investment of the private sector. When the government spends more on the public sector, it reduces room for the private sector to invest. Government borrowing also reduces the amount available for the private sector to borrow. Lenders prefer to lend to the government than the private sector. Lending to the government is preferred by lenders because of the low risk of default and the government can pay any interest rate. Crowding out may occur when there is a national debt. This means the government has borrowed internally and therefore increased its involvement in the public sector. Lenders prefer to lend to the government as compared to the private sector. The private sector has a high default risk compared to the government. Besides the private sector is concerned a lot with the interest rates, high interest rates discourage the borrowing power of the private sector. We hold to be concerned about crowding out. Crowding out reduces the investment of the public sector, the public sector is a greater contributor to the economy of a country. If there is low involvement of the private sector, this will result in reduced collected taxes. Low revenue collection may cause a national deficit, which means there is a low money supply. Low money supply increases inflation that increases prices of commodities and in turn, reduces aggregate demand in the market. QN 12 Effect of use of credit card on the interest rate and aggregate demand A credit card is a substitute for money. Owners of a credit card can transact with credit cards instead of money. Credit cards increase the purchasing power of individuals. Meaning that the demand to purchase is high. When demand is high prices go up and hence increasing the inflation rate. Inflation has a positive relationship with interest rates. If inflation increase interest rate increase and vice versa. Price Level Aggregate Demand P2 P1 Real GDP Y1 Y2 Increase in money supply increases, price levels which has an impact of increased inflation. Increase in inflation leads to increased interest rates, The illustration above shows the inflationary pressure from a shift in aggregate demand. Price level P2 AS P1 AS Real GDP Y1 Y2 Increase in money supply increases, price levels which has an impact of increased inflation. Increase in inflation leads to increased interest rates, The illustration above shows the inflationary pressure from a shift in aggregate supply. QN 13 The effect of decrease on money supply on real GDP and the price level, what is the long effect, does it matter on where the economy begins, explain Money supply has a positive relationship with real GDP, if money supply is high, the purchasing power of individuals is increased, meaning they can attract many investment opportunities that build the GDP of the country. A higher GDP implies that there are higher attractive opportunities for the private sector. Money supply has also a positive relationship with the price level of commodities. If the supply of money is high, demand is high meaning the price levels of commodities are low. On the other hand, if there is a decrease in money supply, real GDP also decreases, meaning there are fewer investment opportunities for the private sector. If there is a reduced money supply, the demand for commodities reduces, rising the price levels of commodities. It does not matter where the economy begins, in developed and developing countries the relationship of money supply, real GDP, and the price level is the same. AD Real GDP Y1 Y2 Price level AS P2 P1 Real GDP Y1 Y2 We can determine the long run economic grouth using the above models of AS/AD shifts due to inflationary pressures. Preasure for inflationary to shift from one equllibrium poind of AD/AS causes the prices to fall or rise (see above illustration) QN 14 Government spending multiplier Y=450+0.85(Y-T) MPC= 0.85 MPC+MPS=1 Therefore, 0.85+ MPS=1 MPS= 0.15 Y=450+ 0.85Y-0.85T We assume that T does not depend on the level of income or RGDP, we can group with CO(450) Y=450+0.85Y Y-0.85Y=450 (1-0.85)Y=450, by dividing both sides by 1-0.85 Y=1/0.15*450 1/0.15=6.67 which is the government spending multiplier. If Y= 400 billion, calculates the government spending multiplier given CO=450 400=multiplier*450 Multiplier =400*450 =0.89 The tax multiplier for the economy RGDP=-MPC/(1-MPC) =-0.85/0.15 =-5.67 If taxes were cut by 600 billion, the aggregate demand would be, Y=450+0.85(y-t-600) Y=450+0.85Y-600 Y-0.85Y=450-600 (1-0.85)Y=-150 Y=-1000 QN 15 The economy is stable is monetary and fiscal policies are properly controlled. Monetary policy is the policy that involves money supply and inflation. Money supply has a positive relationship with inflation. A higher supply of money increases inflation, which in turn increases the price levels of commodities and hence demand goes down. Fiscal policy involves government taxation and spending. If government spending is high, it reduces the money supply, which reduces the ability to invest by the private sector. Unemployment goes down, and hence purchasing power decreases which increases the supply of commodities. 16. UNCERTAIN. The shifts from cars to bikes may not be necessarily influenced by the change in gasoline prices, comfort and luxury may inhibit the shift. 17. FALSE: When inflation occurs both borrowers and lenders are hurt as the cost of borrowing goes up for borrowers and the cost of Lending goes up for firms as workers may demand higher wages for the services they offer. 18. FALSE: When inflation occurs both consumers and firms are hurt as the cost of goods goes up for consumers and the cost of production goes up for firms as workers may demand higher wages for the services they offer. 19. FALSE: Increasing the money supply faster than the growth in real output will cause inflation. The reason is that there is more money chasing the same number of goods. Therefore, the increase in monetary demand causes firms to put up prices. 20.TRUE. Increasing the money supply faster than the growth in real output will cause inflation. The reason is that there is more money chasing the same number of goods. Therefore, the increase in monetary demand causes firms to put up prices. If the money supply increases at the same rate as real output, then prices will stay the same. 21. False. The Interest rate is given by I = (1+Real rate of interest) (1+inflation) – 1. Which in this (1.04) *(1.03) – 1 which is equivalently 7.12%. 22. TRUE. Unemployment is the percentage of people in the economy who are unemployed in the total workforce. If unemployment falls more people are employed, when unemployment rises this reflects that more people are employed. 23. Essay ECONOMIC POLICY UNCERTAINTY, MONETARY POLICY, AND HOUSING PRICE IN CHINA For the discussion, we refer to the journal published in 2020 named ‘Economic policy uncertainty, monetary policy, and housing price in China’ (Sen Wang, Yanni Zeng, Jiaying Yao & Hao Zhang (2020) Economic policy uncertainty, monetary policy, and housing price in China, Journal of Applied Economics. This paper analyses the impact of macroeconomic variability on house price fluctuations under different states of policy uncertainty, including the Economic Policy Uncertainty Index and several Chinese macroeconomic data sets in the period from 1999 to 2014. We use an autoregressive vector smooth transition model and the normal response function. The results show that major economic progress leads to rising house prices, i.e., Expanded policy uncertainty. Besides, the impact of macroeconomic shocks on house price fluctuations varies less than governments of policy uncertainty. We find that shock is not equal under the regimes of high and low policy uncertainty. Less than high. A policy uncertainty, an expanded monetary policy can help increase house prices, and an agreement is a deal Monetary policy creates a lasting “Household Money Problem” making it difficult to control house prices. Contractionary monetary policies have a downward influence on the house prices in the country whereas an expansionary monetary policy fills the people involved in the purchase of houses with optimism allowing them to pay higher prices for the same houses then driving the inflation also high will sustaining a stable gross domestic product. In the years 2008, there was an economic crisis which led to a close of the majority of the investment banks which significantly reduced prices of houses during that period. Under a high-level state, macroeconomic variables such as macroeconomic development, real estate market the environment, financing, and consumer confidence are causing housing prices to show greater volatility. Besides, artistic results show that under high policy uncertainty, increased funding accelerates the growth of housing prices and high-interest rates lead to a permanent Home Price Puzzle, making it more difficult to control house prices. REFERENCES Barkan, O., Caspi, I., Hammer, A., & Koenigstein, N. (2020). Predicting Disaggregated CPI Inflation Components via Hierarchical Recurrent Neural Networks. arXiv preprint arXiv:-. Boateng, A., Gil-Alana, L. A., Siweya, H., & Belete, A. (2016). Long memory and ARFIMA modeling: The case of CPI inflation rate in Ghana. The Journal of Developing Areas, 50(3), 287-304. Chinonso, U. E., & JUSTICE, O. I. (2016). MODELLING NIGERIA'S URBAN AND RURAL INFLATION USING BOX-JENKINS MODEL. science, 12(5), 4. Long, S., & Liang, J. (2018). Asymmetric and nonlinear pass-through of global crude oil price to China’s PPI and CPI inflation. Economic research-Ekonomska istraživanja, 31(1), 240-251. Iwasaki, Y., & Kaihatsu, S. (2016). Measuring Underlying Inflation Using Dynamic Model Averaging (No. 16-E-8). Bank of Japan.