Tutorial 10

Question 1

1. Suppose the exchange rate between the Australian $ and the UK £ is £0.40 per $1. If a woollen jumper costs £38 in the UK, what is its price in Australian dollars?

(a) $15.20
(b) $38.00
(c) $95.00
(d) $152.00

Answer 1

c) $95.00

Question 2

2. [B] If the exchange rate between the Japanese yen and the A$ changes from 100 yen per dollar to 150 yen per dollar, then the dollar has _____ against the yen.

(a) depreciated
(b) appreciated
(c) weakened
(d) been devalued

Answer 2

(b) appreciated

Question 3

3. [B] Other things being equal, a depreciation of the Australian dollar means

(a) Australian goods have become more expensive relative to foreign goods
(b) Australian goods have become cheaper relative to foreign goods
(c) A given unit of foreign currency will now buy fewer Australian dollars
(d) the Australian dollar will now buy more of a foreign currency

Answer 3

(b) Australian goods have become cheaper relative to foreign goods

Question 4

4. If the Central Bank wishes to support (or strengthen) the value of the home currency on foreign exchange markets, it can _______ commercial banks, but this will tend to ______ commercial banks’ cash reserves and the money supply.

(a) buy foreign currency from; increase
(b) sell foreign currency to; increase
(c) buy foreign currency from; decrease
(d) sell foreign currency to; decrease

Answer 4

(d) sell foreign currency to; decrease

Question 5

5. [B] Labour productivity is a measure of

(a) the amount of goods and services produced from each hour of a worker’s time
(b) the amount of goods and services produced per person in the country
(c) the amount of goods and services produced by a country relative to another country
(d) none of the above

Answer 5

(a) the amount of goods and services produced from each hour of a worker’s time

Question 6

6. Of the following activities, which contributes the least to promoting economic growth in the long run?

(a) saving and investment
(b) discovery of new techniques of production
(c) consumption
(d) investment in human capital

Answer 6

(c) consumption

Question 7

7. If a country’s population growth exceeds its growth in real GDP

(a) real GDP per person will fall
(b) real GDP per person will rise
(c) real GDP will fall
(d) the rate of economic growth will be greater than zero

Answer 7

(a) real GDP per person will fall

Question 8

8. In discussions of economic growth, the term “technological knowledge” usually refers to

(a) the knowledge and skills that workers acquire through education, training, and experience
(b) machinery and equipment items, especially those related to computing and information
(c) the understanding of the best ways to produce goods and services
(d) all of the above are examples of technological knowledge

Answer 8

(c) the understanding of the best ways to produce goods and services

Question 9

9. [E] If average income as measured by real GDP per person grows by about 2 per cent per year, this implies that average income doubles every ________ years.

(a) 20
(b) 25
(c) 30
(d) 35

Answer 9

(d) 35

Question 10

1. [B] If a book sells for 75 Chinese yuan (CNY) and if the exchange rate is 1 AUD = 6 CNY, how much would the book cost in Australian dollars?

Answer 10

1. If a book sells for 75 Chinese yuan (CNY) and if the exchange rate is 1 AUD = 6 CNY, the book’s cost in Australian dollars is:

   75 /  6  =  12.50

Question 11

2. If real GDP is growing by 7% per year, while population grows by 2% and labour employment by 1%:-

a) what is (approximately) the growth rate of average income?
b) what is (approximately) the growth rate of labour productivity?

Answer 11

2. If real GDP is growing by 7% per year, while population grows by 2% and labour employment by 1%:-
   a) the growth rate of average income is (approximately):

    7% - 2%  =  5% 

b) the growth rate of labour productivity is (approximately):

	7% - 1%  =  6%

Question 12

If the local currency is depreciating rapidly, and the Central Bank wishes to prevent it from depreciating further, what action can it take on the FX market? What effects will such action have on the domestic money supply and interest rates if no other official action is taken?

Answer 12

If the home currency is depreciating, that probably reflects a fall in the demand for it, or an increase in its supply on the FX market, or both. For simplicity, assume the demand curve shifts leftward as shown in the diagram.

If the CB doesn’t intervene, the price of the home currency will fall – i.e., the home currency will depreciate (weaken).

If the CB wishes to prevent this, in effect it is trying to establish a price floor at the old equilibrium price (i.e., the old exchange rate). There will be an excess supply of the home currency, as shown. The CB will need to absorb (buy) this excess supply. It does this by selling foreign currency on the FX market.

As long as it is able to sell sufficient quantities of FX, the CB will be able to maintain the fixed exchange rate. Eventually, however, it may run out of FX to sell.

Further, in selling FX, the CB is also accepting in return quantities of home currency or reducing accounts held by commercial banks at the CB. Other things being equal, this will mean that the “cash” reserves of the commercial banking system are reduced. The cash interest rate will tend to rise, followed by other interest rates. Investment and consumption demand will tend to fall. As a result, real GDP will tend to fall and unemployment to rise. Thus, the CB’s intervention in the FX market will have a contractionary impact on the economy unless other policy measures are taken.

Question 13

From your understanding of the theory of economic growth, what are the major factors that would help an economy to achieve faster growth in labour productivity and income per person over a period of several decades?

Answer 13

(Recall that an economy produces goods and services by combining its stocks of natural resources, human resources, physical capital and human capital, and by using its current level of technological knowledge, which includes organisational and managerial knowledge. In general, natural resources are fixed endowments that may decrease rather than increase. Further, growth in labour by itself does not raise output per worker or income per person.)

To achieve faster rates of growth in labour productivity and income per person in the longer run, the economy must have faster growth in physical and/or human capital, and/or faster improvement in technological knowledge.

To promote growth in physical and human capital, more investment is needed. This requires greater efforts at saving, which involves a sacrifice of current consumption in favour of future income. (Note that in some cases domestic saving can also be supplemented by foreign saving in the form of foreign investment, loans or aid.) Increases in physical capital may be subject to diminishing returns, but returns to investment in human capital are likely to remain high for very long periods because of spill-over effects (the returns to investments by different persons or organisations tend to re-inforce one another).

To promote technological progress, the country could:

• encourage research and development efforts
• import and copy technology and ideas (e.g. “best practices”) from overseas where appropriate
• promote greater efficiency in production and resource allocation, e.g., through judicious reliance on incentives and the market mechanism
• protect and strengthen property rights

(Note that expansionary fiscal policy would probably be not very effective in promoting longer-term economic growth.)

(Note also that economic growth may involve some adverse side-effects, such as increased income inequality, environmental degradation, or a worsening in the quality of life.)

Question 14

1. If the exchange rate is 100 yen per dollar

a) it is also 100 dollars per yen
b) it is also 1/100 dollar per yen
c) it is also 100 yen per pound
d) all of the above

Answer 14

b) it is also 1/100 dollar per yen

Question 15

2. Depreciation of the home currency will tend to result in

a) an increase in net exports
b) a reduction in net exports
c) no change in net exports
d) all of the above are equally likely

Answer 15

a) an increase in net exports

Question 16

3. Which of the following is not usually considered a determinant of labour productivity?

a) human capital
b) physical capital
c) natural resources
d) technological knowledge
e) tastes and preferences

Answer 16

e) tastes and preferences

Question 17

4. Which of the following would not be considered physical capital?

a) construction of a new factory
b) on-the-job-training
c) a new computer used in a restaurant
d) a desk used in an accountant’s office
e) all of the above are considered physical capital

Answer 17

b) on-the-job-training

Question 18

5. Which of the following is considered human capital?

a) a personal computer
b) a voice-mail system
c) a high-school education
d) a classroom
e) all of the above are human capital

Answer 18

c) a high-school education

Question 19

6. According to studies of international data on economic growth, increasing the saving rate

a) can lead to substantially higher GDP growth for a period of several decades
b) typically reduces the growth rate of GDP for several decades
c) has no effect on the growth of GDP
d) reduces the need for capital

Answer 19

a) can lead to substantially higher GDP growth for a period of several decades

Question 20

7. The “catch-up” effect is the idea that

a) it is easier for a country to grow fast if it starts out relatively poor
b) other countries assist relatively poor countries so they can catch up to richer countries
c) savings will always catch-up with investment spending
d) if investment spending is low, increased savings will help investment to catch up

Answer 20

a) it is easier for a country to grow fast if it starts out relatively poor

Question 21

8. Investment from abroad

a) can help a country to grow faster
b) is a way for poorer countries to import the state-of-the-art technologies developed and used in richer countries
c) often requires removing restrictions that governments have imposed on foreign ownership of domestic capital
d) all of the above are correct
e) none of the above is correct

Answer 21

d) all of the above are correct

Question 22

9. According to the textbook, the primary reason that living standards are higher today than they were a century ago is that

a) human capital has increased
b) physical capital has increased
c) technological knowledge has increased
d) more productive natural resources have been discovered

Answer 22

c) technological knowledge has increased

Question 23

10. According to the catch-up hypothesis, Africa should have grown faster than other economic regions because of its relatively low level of income per head. In reality, Africa has tended to grow more slowly. This might be explained in terms of:

a) higher trade barriers in Africa
b) lower tax rates
c) excessive saving rates
d) all of the above are correct
e) both (a) and (c)

Answer 23

a) higher trade barriers in Africa

Question 24

Suppose the bilateral exchange rate between the AUD and USD changed from 1 AUD = 0.80 USD to 1 AUD = 0.85 USD. From this we would say that the Australian dollar appreciated/depreciated by _____________ %.

Answer 24

2. Using the rate of change (growth) formula, we obtain:
   (0. 85 - 0.80) / 0.80 = 0.0625

that is, the AUD appreciated by 6.25%.

Question 25

Suppose the population grows at an annual rate of 2%, while both
(i) the number of hours worked, and
(ii) real output
grow at 1% per year, what is happening to real GDP per capita?

Answer 25

Note that we are given some redundant information here. Growth in real GDP per capita is approximately 1% - 2% = -1%. In words, real GDP per capita fell by 1%.

Question 26

1. Imagine that the Australian dollar is strengthening. Who would benefit from this, and who would be hurt by this?

Answer 26

1. Domestic consumers of imported products, including domestic residents who are traveling overseas, will benefit because these products are now cheaper in terms of domestic currency. Domestic producers who use imported inputs heavily also benefit. Foreign producers will benefit from increased sales.

Similarly, foreign purchasers of the home country’s exports will be hurt because these products are now more expensive in terms of foreign currency. These purchasers include foreign visitors travelling in the home country, as well as foreign producers who use domestic exports intensively as their inputs. Domestic exporters and domestic producers of import substitutes will be hurt because of smaller sale volumes.

Question 27

2. If a country wishes to increase its rate of economic growth in the longer term (25-30 year horizon), would it help if the government were to pursue expansionary fiscal and monetary policies?

Answer 27

2. Expansionary fiscal and monetary policies tend to increase aggregate demand in the short run only; they generally have little effect on aggregate supply and potential output in the long run, unless the policy action involves increases in physical or human capital, or technological progress.

Question 28

3. How do inward-oriented policies affect an economy’s growth rate?

Answer 28

3. Inward-oriented policies are motivated by a desire to rely mainly on domestic resources and factors, and to avoid having to rely on the rest of the world for one’s prosperity. Whether such self-reliance is (or is not) desirable from a national-interest point of view is not clear, but it is clear that self-reliance would come with considerable economic costs. Some of these are:
    - the gains from international trade which must be foregone (we’ll see this more clearly in Module 10)
    - the lost opportunities to improve technological knowledge rapidly via the borrowing of ideas and practices from overseas
    - the lost opportunities to finance part of the country’s investment requirements by using foreign savings

Question 29

4. Does economic growth have any undesirable consequences or prerequisites? How serious are they in your view?

Answer 29

4. Refer to Lecture Slide #48, material covered for Module 02, and the textbook. The purpose of this question is not to elicit an answer in favour of, or opposed to, continued economic growth. Rather, it is designed to encourage you to think carefully about the advantages and disadvantages of economic growth and to sharpen your skills in articulating your position on complex issues such as the present one.