Econ1016-Impact Of Coronavirus Pandemic Assessment Answer

Section A

This section contains five questions. For each question, explain whether the given statement is true, false or uncertain. Start your answer by selecting one of the options – “True”, “False” or “Uncertain” and then provide arguments to justify your selection (be brief and concise and present your arguments in 100 or less words). You need to ensure your assumptions are clear, reasonable and explicit if making any. 

Question 1

The world price of oil has fallen recently. For India (which is a net importer of oil), this development will imply that GDP deflator will fall by more than the CPI.

Question 2

On an average, real GDP per capita has grown at a much slower rate in USA than in Japan after the second world war. This is because of much lower levels of GDP per capita in USA than in Japan around the second world war time.

Question 3

Janet, a mother of two, decides to reduce her working hours to spend more time with her children. By itself, assuming everything else being the same, this development has necessarily resulted in a lower quality of life for Janet due to a fall in income (and resultant fall in economic activity as measured by GDP).

Question 4

Workers and employers in economy expected 3% inflation rate for 2015 but actual inflation turns out to be 5%. Kylie, a casual worker with no labour contract, has remained unaffected while Susie, a fixed term employee, has become worse-off.

Question 5

The saving rate (gross domestic saving as a % of GDP) in Singapore, a small open economy, was 48% in 2017 while the investment rate (domestic investment as a % of GDP) was 25%. As a result, there was net outflow of capital from Singapore in 2017.  

Section B

This section contains three scenario-based questions.  All the questions have 3 subparts. All the questions are compulsory.

Question 1

Coronavirus pandemic and resultant shutdown measures to contain it have plunged the economies around the world including Singapore into severe contraction. Assuming Singaporean economy was in long run equilibrium in the aggregate demand and supply (AD-AS) model before the pandemic (and consequent shutdown) started, answer the questions below:

a)Assuming the contraction in the Singaporean economy is mainly driven by demand side factors, Show the short-run effects of this using the AD-AS model. Carefully explain.

b)Now assume that the contraction in the Singaporean economy is mainly driven by supply side factors, Show the short-run effects of this using the AD-AS model. Carefully explain in words

c)Which of the above mentioned two recessions scenarios, is more challenging for the policy makers to deal with (the government and the central bank)? and why? 

Question 2

Suppose, the government of Australia incurs a budget deficit of $50 billion due to increased government spending in 2020 as result of Covid 19. Because of this, the government borrowing in 2021 increases by the same amount. 

a)Show this development using a graph representing the market for loanable funds for Australia[ Make sure to label the variables represented on the X-axis and Y-axis of the graph clearly. Also mark the curves in the graphs clearly indicating what they represent (i.e. demand or supply of loanable funds)]. Explain in writing the effect of this on interest rates.

b)Compare the size of equilibrium changes in 1) investment, 2) public saving, 3) private saving and 4) national saving (public saving + private saving) with $50 billion increase in borrowing. Compare the changes (increase/decrease) in these variables indicating same, less or more than the $50 billion. 

c)Will the equilibrium quantity of national savings change by more or less than the initial change in public saving? Explain your answer.

Question 3

Suppose Never Bank (not the central bank), operating in (fictitious country) Neverland holds $100 million in deposits. Also assume that banks in Neverland are supposed to maintain the (required) reserve ratio of 10%.

a)Assume initially that Never Bank is the only bank in Neverland. State the effects on money supply if Never Bank decides not to make any loans. Compare this to the effect on money supply if, alternatively, Never Bank decides to loan out all its available deposits for loans. 

b)What will be the effect on money supply if many banks start to open and operate in Neverland and they loan out all their available deposits.

c)Go back to the scenario presented in Part a, where Never Bank is the only bank in Neverland.  Suppose, people of Neverland decide to withdraw their deposits with the Never Bank and keep their money with them as currency. What is the quantity of money in Neverland in this situation? State the assumption you made here. Compare the quantity of money in this situation with the one in ‘Part a’ where the Never Bank does not make any loans out of its deposits.