since u ppl wanted a change of songs
but never say what u all want...
there you go!
ahaha
Good luck guys
Just 4 days it'll be over fast.
Die a painless death.
Cheers.
Good luck to everyone taking it.
The song can be found here : http://www.youtube.com/watch?v=NG2zyeVRcbs (Miley Cyrus - The Climb)
Could not post the video here as there are lots of restrictions on this blog. Also, regarding the econs scheme that I asked yi hui and edmund to email you all, if you dont mind, please stay back on mon after gp while I photocopy for you all the answer scheme.
~Zhongye.
Tutorial case study questions, answers and structure to CE3 : Term1Week10Tut2 Questions
Term 1 Week 10 Tutorial 2
- Data response
- Exchange rates
- AD-AS, economic growth, inflation
1.Refer to figure 1. Describe the change in investment cost amongst Asian countries in terms of US dollars. (2 marks)
2.Using examples, suggest 2 reasons for the observation in question 1. (4 marks)
3.Which country is most likely to have pegged its currency to that of the US dollars? (2 marks)
4.Which country’s currency depreciated the most against the US dollars? (3 marks)
5.Suggest and explain a reason for the depreciation amongst Asian currencies against the US dollar (3 marks)
6.Evaluate the sustainability of the rapid economic growth rate in Asian economies in year after the 1997 – 98 crisis. (8 marks)
Total of 22 marks
Tutorial case study questions, answers and structure to CE3 : Term1Week10Tut2_answers
Term1Week10Tut2_answers
1.Refer to figure 1. Describe the change in investment cost amongst Asian countries in terms of US dollars. (2 marks)
Across Asia, the cost of investment fell [1 mark]
The degrees of reductions vary, for example, cost of investment in Vietnam increased [1 mark]
2.Using examples, suggest 2 reasons for the observation in question 1. (4 marks)
Technology improved with the ICT revolution that took place in the middle of 1990s. This reduced the cost of production, thereby reducing the price of machineries, especially the ICT equipments [2 marks; may use demand supply diagram to illustrate fall in price of ICT equipment, but not necessary]
There may be a fall in demand for investment goods during the 97 – 98 crisis. [1 mark]
Stocks/ inventories of investment goods may have piled up leading to a reduction in price and fall in output. [1 mark]
3.Which country is most likely to have pegged its currency to that of the US dollars? (2 marks)
China. [1 mark]
The fall in cost of investment in terms of the local currency in China is equal to the fall in terms of US dollars. [1 mark]
4.Which country’s currency depreciated the most against the US dollars? (3 marks)
Indonesia [1 mark]
While the cost of investment in Indonesia counted in terms of US dollars had fallen, the same cost increased in terms of Rupiah (Indonesia’s currency). [1 mark]
This suggests that the Rupiah had weakened in its value against the US currency. [1 mark]
5.Suggest and explain a reason for the depreciation amongst Asian currencies against the US dollar (3 marks)
Upon the onset of the Asian financial crisis, there was a massive capital outflow. This can be inferred from the statement that there was a “return” of overseas private capital to the region. There must have been a “departure” of such capital before there is a “return”. [2 or 1 marks]
Such a flight of capital from Asian economies would have reduced the demand for the economies’ currencies. The value of these currencies would hence fall. [1 or 2 marks]
{Candidate may choose to illustrate change in exchange rates via a diagram. }
6.Evaluate the sustainability of the rapid economic growth rate in Asian economies in year after the 1997 – 98 crisis. (8 marks)
Economic growth rates may be defined by actual and potential growth. The former is the rate of change in the volume of output produced within the country in a year. The later shows the increase in the economy’s capacity to produce. Sustainability of economic growth refers to the ability of the growth to be maintained and in the absence of high inflation rates.
Asian economies experienced high rates of actual economic growth after the financial crisis. First, exports increased, led by the electrical and electronic exports to the US. This increment in exports may be due to the depreciation of local currencies against the US and also a strong economic growth rate in the US itself. There is also increase in trade amongst the Asian economies as suggested by the identification of “active intra-regional trade” in the excerpt.
Asian economies also received inflows of international private capital. Short term capital inflow increases the firms’ abilities to increase their investment expenditures and to employ more workers. Long term capital inflow, probably in the form of foreign direct investments increased investments and employment directly, increasing the aggregate demand (AD) in the economy.
Increase in investments also implied that in the long run, aggregate supply (AS) may have increased (fig. 1), increasing potential growth. Output may be increased (Y0 to Y1
) with the lowering of the GPL (P0 to P1 ). Hence, the growth in Asia may be sustained.
The concern however is that AS may not have increased after all. The financial crisis may have caused governments to cut back on their investment spendings to reduce budget defict. This was exemplified by Taiwan (excerpt 2). As argued above, there might have been a capital flight from the economies, reducing investments in the earlier period. Fall in both public and private capitals would shift AS leftwards. With an increase in AD as identified above (increment in exports and consumption) in Asian economies, there may be a problem of inflation (fig. 2)
Depreciation of Asian currencies against the US dollars may also have increased the price of imports in Asian economies. Increment in these prices may have increased the cost of production if the imports are factors of production, and increased the consumer price index if the imports are finished consumer goods. Hence, depreciation of Asian currencies is a double edge sword. On one hand it increases the net exports of the Asian economies, on the other, it may bring about higher rates of inflation.
Reliance on the US economy may also be another problem. AD is sustained by exports to foreign regions such as the US. This makes Asian economies susceptible to adverse economic performances in these foreign regions.
In conclusion, there is much uncertainty revolving the rapid economic growth rates after the financial crisis in Asian economies, making such growth rates unsustainable.
Tutorial case study questions, answers and structure to CE3 : Term1Week10Tut1_questions
Workbook pg 1 Qn. 4
1.How did the Colombian economy in the second half of 1990s compare with that in the first part? (2 marks)
2.A “sharp decline in economic growth has caused a rise in the government’s budget deficit.” Explain why this may be so. (2 marks)
3.What may be the impacts of the change in government investment on the Colombian economy? (4 marks)
4.Explain how a devaluation of the peso may cause a change in the macroeconomic performance of the Colombian economy. (4 marks).
5.Analyze whether the Colombian government can pursue an expansionary monetary policy using interest rates if it wishes to maintain control on the peso. (6 marks).
Econs Tutorial case study questions, answers and structure to CE3 : Term 1 Week 10 Tut 1
Term 1 Week 10 Tut 1
1.How did the Colombian economy in the second half of 1990s compare with that in the first part? (2 marks)
The performance worsened [1 mark]
Economic growth rates fell from 4.7 percent on the average a year in the earlier half of 1990s to that of 1.8 percent in the later half. Unemploymnt was 19.5 percent in the later half compared to the earlier. [1 mark for elaboration with example from date]
2.A “sharp decline in economic growth has caused a rise in the government’s budget deficit.” Explain why this may be so. (2 marks)
A fall in economic growth rates imply that national income falls [1 mark]. The government’s tax revenue from direct taxes would have fallen. Assuming government expenditure remains unchanged, budget deficit worsens. [1 mark]
3.What may be the impacts of the change in government investment on the Colombian economy? (4 marks)
Government investment is a form of injection into the circular flow of income. It is also a component of the aggregated demand (AD). In the short run, a fall in government investments would mean a fall in injections and AD. This kicks off a multiplier process that brings about a fall in the real output of the economy (fig. 1), resulting in a fall in national income. [2 marks]
In the long run, the aggregate supply (AS) curve would shift left due to a fall in capital formation as government reduces its expenditure on capital goods. The production capacity of the economy would fall, ceteris paribus. The result of the leftward shift in AS is a fall in real output. Negative change in real output in the long and short runs reinforce each other to result in a large fall in real output. [2 marks]
4.Explain how a devaluation of the peso may cause a change in the macroeconomic performance of the Colombian economy. (4 marks).
The devaluation of a currency is a reduction of the currency’s value by the discretion of the government or central bank. The devaluation of the peso suggests that Colombia adopts a fixed exchange rate regime. [1 mark]
As the peso devalues, price of Colombia’s exports in terms of foreign currency falls. The quantity demanded of Colombian exports increases in the international markets. Conversely, the price of foreign goods in Colombian markets is lower. Quantity demanded of imported goods by Colombians fall. [1 mark]
As Colombia is a relatively small market on the international scale, demands for exports and imports tend to be price elastic. This leads to the fulfillment of the Marshall-Lerner condition such that with devaluation of the currency, net exports increase. [1 mark]
This improves the AD of the Colombian economy. As seen from fig. 2, the real output increases. [1 mark]
5.Analyze whether the Colombian government can pursue an expansionary monetary policy using interest rates if it wishes to maintain control on the peso. (6 marks).
An expansionary monetary policy aims to promote increment in real output via an increase in money supply or a reduction of interest rates. It is a demand-side policy that causes AD to shift rightwards.
The decrease in interest rates would cause an outflow of short term capital (hot money) from Colombia. In figure 3, we see that such a capital outflow increases the supply of the peso in the currency market, exerting a downward pressure on the exchange rate of peso. To maintain the exchange rate of peso at ef, the central bank of Colombia has to sell foreign exchange and buy peso, such that the demand for peso increases from D0 to D1.
Selling foreign exchange continually to protect the value of the currency is unsustainable as the central bank may soon find itself drained of foreign reserves in its effort to sustain the fixed exchange rate. It would therefore raise the interest rate back to the original level in order to restore the market equilibrium exchange rate of the peso. Raising the interest rates back can be seen as a contractionary monetary policy. This move neutralizes the initial expansionary policy.
[It is also argued that interest rates may rise back automatically. As hot money flows out of the economy, the availability of loanable funds for firms and households is being reduced. Interest rates will hence rise, offsetting the initial fall dictated by the central bank. Hence the initial expansionary policy is neutralized]
It can thus be seen that to maintain a fixed exchange rate, a government actually forsakes the control over interest rate as a tool for monetary policies.
However, the above analysis is based on the assumption that Colombia has an open capital and financial account. However, this may not necessarily be the case. If Colombia has a closed capital account (imposition of capital control
[1]), the reduction of interest rate
[1] Capital control refers to the restriction of the amount of a country’s currency that can be sold at any one time. For example in the aftermath of the 1997 financial crisis, Malaysia imposed capital control to restrict the outflow of short term capital from Malaysia. Despite heavy criticisms from organizations such as International Monetary Fund, it has been argued (by renowned Western academics inclusive) that Malaysia became one of the faster countries to recover from the crisis due to the imposition of capital control.
There are 3 tutorials for next week.
Homework: 1)Rewrite/write the essay on whether the govt should keep inflation at 0%.
2)Find out how the exchange rate policy works.
3)Study econs for MBT.
1st tutorial :
Going through the essay and the exchange rate policy
2nd and 3rd tutorials:
Going to do case study for both.
Bring all your lecture notes for lesson. 
