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ECON 1000 Open Campus Worksheet #5




Question;Question 1 (15 marks)A household survey concludes that the typical person consumes: 100 units of good X,150 units of good Y and 25 units of good Z. The information for prices of good X, Y andZ are given below:GoodQuantityConsumedPrices 2000Prices 2001Prices 2002X100$1.00$1.50$1.75Y1501.502.002.00Z253.003.253.00If the year 2000, is the predetermined base year:a) Calculate the CPI for 2001 and 2002.(4 marks)b) Calculate the inflation rate in 2002.(2 marks)c) Identify TWO problems using the CPI as a measure of the cost of living.(2 marks)d) Provide an example for each of the TWO problems in part c.(3 marks)e) Differentiate between the CPI and the GDP deflator as a measure of the standardof living.(4 marks)Question 2 (15 marks)Draw diagrams illustrating the impact on the money demand, money supply, equilibriuminterest rate and the quantity of money due to each of the following:a) The changes in bank regulations expand the availability of credit cards so peopleneed to hold less cash.(5 marks)b) During a period of rapid inflation the central bank increases the reserverequirement.(5 marks)c) The economy recently experienced an increase in the number of tourist arrivals,increasing income throughout the island.(5 marks)Question 3 (12 marks)Determine which account of the Balance-of-Payments is affected by each of thefollowing transactions. (E.g. Current Account Transfers)a) A local firm ships US$80 million of merchandise to Chinab) National Commercial Bank, a local company, pays US$1 million in dividends toforeign shareholders.c) A German company builds a manufacturing facility in your country.d) A local resident purchases a retirement condo in Florida for US$10 millione) You travel to the United States for holiday and spend US$500f) You invest in the South Korean stock market by buying US$500 in stockQuestion 4 (8 marks)a) Consider three countries Hungary, Mexico and the U.S. which sell identical tshirts. If the price of the t-shirt is 500 forint, 20 pesos and US$2. Calculate Thepurchasing power parity exchange rate betweeni)Mexico and the U.S.(2 marks)ii)Hungary and the U.S.(2 marks)b) Suppose the current exchange rate between the Mexican peso and the U.S. dollaris 12 peso = US$1 and the exchange rate between the Hungarian forint and theU.S. dollar is 215 forint = US$1. Based on the PPP calculations is part a, what doyou expect to happen to the exchange rate between:i)Mexico and the U.S.(2 marks)ii)Hungary and the U.S.(2 marks)TOTAL MARKS = 50


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