Macro Economics Question Answer 2022

Running Head: ECONOMICS 1
Macro Economics
Institutional Affiliation
Name
Date

ECONOMICS 2
Question 1: Macroeconomic concepts and models
(a) Figure 1: Circular model showing real flows and money flow
(b)
Vehicles: The vehicle safety standards that are so strict tend to increase the prices for cars since
these restrictions require some documents that are attained after making some payments
(Whitehead, 2010).
Petrol: In my opinion, I think the Consumers Price Index would be underestimated I case the
increase in production efficiencies make the supply of petrol cheaper.

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Motorbikes: In case the government makes it hard for people to acquire new motorbike licenses,
then the Consumers Price index becomes underestimated since the prices for the motorbikes will
be high.
(c) (i) weetbix
During a complete business cycle, the prices of weexBix may not fluctuate easily though its
demand in New Zealand is inelastic due to presence of substitutes like weetabix. The private
good is perishable.
(ii) The production of speed boats is likely to fluctuate since there are many competitors in the
market of manufacturing boats (Leslie, 2015). The demand for these boats is seasonal and thus
its perfectly elastic in nature though it’s a durable private good.
(d)
current equilibrium
Y = C + I + G + (X – M)
Since taxes = 0 and transfer payments are also = 0’
c = 3540
I = 680
G = 270
M = 180
X = 260
Equilibrium income Y = 3540 + 680 + 270 + 260 - 180
Y = 4570

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The equilibrium level of national income for the economy is therefore 4570
Since the economy is open, injections = consumption + investments + government expenditures
+ exports
= 3540 + 680 + 270 + 260
Injection s = 4750
Total of savings = total investments
= 680
Net income taxes = Exports – imports
= 260 – 180
= 80
(e)
(i) Real GDP = (Nominal GDP/ CPI)*100
= 265/1051*100 = 25.21 (march 2017)
= 298/1072*100= 27.80 (March 2017)
For Real GDP per capital,
Real GDP = (Real GDP/population)
New Zealand population and output data
CPI
Populatio
n
Million
Nominal
GDP
$ Billion
Real GDP
$ Billion
Real GDP per
capita $
March
2017 1051 4.682 265 25.21 5.38
March
2019 1072 4.976 298 27.80 5.59

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= 25.21/4.682 = 5.38(March 2017)
=27.80/4.976 = 5.59 (March 2019)
(ii) The figures of March 2019 show better standandards of living compared to that of
2017 since it portrays more Rea GDP per capita.
(f)
(i) Both statements are normative in nature. The reason is that they only base on their
expectations but lack analytical facts about the rise in cash rate.
(ii) Growth rate is a better determinant of people’s wellbeing because they positively
show the GDP of the country (Whitehead, 2010). For example the increase in schools in the
country shows increase in the number of educated citizens. Also increase in transport networks
reduces the amount of traffic and time wastage.
(g)
Figure 2: A Drop in Tourist Numbers

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Figure 2 shows the aggregate demand and supply curve, when the number of tourists reduce
in the country, the level of revenue is likely to reduce from Y to Y1 as the price of services
(tourism) also reduces as aggregate demand falls from AD to AD1 in wards. Therefore, the
Real GDP or Output of the country is reduced.
Figure 3: Change in Technology
Figure 3 shows a change in technology for the local firms in the country increases the
aggregate supply. It is evident that, when technology is advanced, firms increase on their
production levels thus shifting the aggregate supply from AS to AS1 leading to the increase of
Real Output from
QUESTION 2
(a). Through reducing government expenditure, the level of economic activities in New
Zealand is likely to decline due to inadequate capital to invest in businesses (Leslie, 2015). In
addition, the country is likely to experience under employment as the stiff competition may
create employment of technology machines instead of human labour.
(b). By this statement, Ban Ki-moon was trying to explain ways how sustainable
development can be achieved all over the globe. All the 17 sustainable development goals are

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enclosed within these three policies and this statement was thus provided to encourage the
achievement of these goals.
Positive effects of economic growth
Economic growth encourages the standards of living in a country. This is achieved
through creation of employment opportunities for the citizens so that they are able to acquire all
their needs (Curaan, 2019). In addition, economic growth solves there macroeconomic problems
faced by different countries which are inflation, unemployment, balance f payment deficits
among others.
Negatives of economic growth
At times, economic growth bring about a large difference in the incomes of people. This in turn
creates income inequalities among people and thus a slow development is observed (Curaan,
2019). Also, economic growth leads to monopoly and unnecessary competition within the
country.
(c).
(i) CPI = (CPI for current year – CPI for the base year) / total number of years
= (1319 – 1289) / 2
= 15
CPI decrease from September last year to September this year is 15.0
(ii). The reserve bank of New Zealand suggested a price stability with a numerical target
band between 0 and 2 and thus the change in CPI does not fall in to the range.
(d). The policy of bank rate policy can be adapted by RBNZ to control the inflation rate
in the country. The bank rate policy will regulate on the amount of goods consumed in the
country in such a way that if the consumption is too high, the RBNZ will have to restrict

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commercial banks to reduce the money lent to the public and later command a decline of interest
rate if there is low consumption. In addition, the government through RBNZ will command
commercial banks to increase the rate of lending to the public if the level of investment is low.
(e)
 Increasing the ORS is likely to affect the level of aggregate demand by reducing it.
 The prices for the goods and services in the country is likely to rise.
 The shift implies the increase in the level of interest rates is very high.
 The shift also means that aggregate supply of goods in the country is rises faster well as
the aggregate demand remains constant.
(f)
(i) Recession in economics is a situation where the economic activities in an economy is seen to
decline.
(ii) the statistical measurements used to determine when New Zealand is moving towards a
recession include the per capita income and the price index.
(ii) To move the country out of a recession, the government can use the expansionary
monetary policy through increasing money supply in the country or even use the
expansionary fiscal policy by increasing its expenditures and lowering the taxes.
(iii) The above measures in (iii) above stimulate investment and business growth and also
lead to increased consumption in the country. Inflation is likely to increase and the
GDP of the country may decline due to excessive spending by the government.
(iv) During the recession phase, the aggregate demand increases and this forces prices of
goods to rise

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(g) In open economies like New Zealand, both the expansionary monetary policy and the fiscal
policy stimulate the growth of economic activities in the country. The fiscal policy is easier to
implement, its very flexible and effective. On the other hand, the expansionary monetary policy
may cause demand pull inflation in the long run.
Question 3
(a)
(i)
In this context, there are only two products (apple and pears) and two regions (Napier and
Hasting) in trade thus fulfilling the model (Comparative advantage). It is evident that using fewer
resources or lowest opportunity cost makes a region or a country to have comparative advantage
in the specified product.
(ii)
Opportunity cost for apples (Napier) = Quantity of Pears for Napier
Quantity of apples for Napier
O.C = 1200/4500 = 0.27
Opportunity cost for apples (Hasting) = 2500/2300 = 1.09
O.C. for Pears (Napier) = 4500/1200 = 3.75
O.C. for pears (Hasting) = 2300/2500 = 0.92

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Therefore, Napier has got the lowest opportunity cost in producing apples than pears and
Hasting has got the lowest cost in producing pears.
(iii)
There is a basis of trade between Napier and Hasting since every region has got
advantage in producing the identified products. In case Napier needs pears from Hasting it is
possible since it does not possess resources in producing apples. Therefore, such situation
strengthens the trade between two regions.
(b).
(i). The introduction of trade restriction leads to the increase in employment
opportunities. This is because the local industries are protected from competition thus focusing
on the local labor. Also, the government is likely to benefit from increased revenue as imports
are entered in the country. This is because the prices of imports are inflated artificially.
(ii) The positive effects of FTA with Britain are as follows;
There is existence of lower government spending due to the subsidies that are regulated by
the free trade agreement (Whitehead, 2010).
Also, there the FTA with Britain increases the foreign direct investment since more capital is
ejected to the domestic industries
The negative effects of FTA with Britain are as follows;

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In case when the relationship is with Britain is left, there exists a lot of job losses among the
individuals. Furthermore, leaving of FTA cause a lot of vulnerability in the country since
several industries are dismissed (Leslie, 2015).
(c)
(i) Current Account Balance = (X-M) + Net Income + Net current transfers
CAB = ((14500 +6800 – (5200+ 15400) + 6700 + 2800 + 765 + 6800
Current Account Balances = 17,765
(iii)
Current account in actual sense reveals the trading in services and goods in the prevailing
period whereas capital account involves the flow of capital from and in the country. It is also
evident that current account indicates the net income unlike the capital account (Curaan, 2019).
(d)
(i) The dollar of New Zealand in this case has depreciated. This is because it requires a lot of
British pound to equate 1 dollar of New Zealand.
(ii)
If NZD 1.00 = GBP 0.51
NZB1250 = (0.51* 1250) GBP
= GBP637.50 therefore, it is cheaper to buy apples in British pound in relation to New
Zealand dollar.

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(iii) If GBP 0.51 = NZD1.00,
GBP5750 = (1*5750)/0.51 = NZD11274.51
This therefore shows that it was expensive to buy a motorbike in New Zealand dollar.
(iv)
Since the demand for pears is taken to be inelastic, it means an increase in prices
will not reduce on the consumption of pears in New Zealand. Also, since motorbikes have
got elastic demand, it means that a unit change in prices for motorbike will lead to
reduction in imports (Curaan, 2019). On the other hand, when the prices of pears are hiked,
a lot of products are to be exported as the country aims at attaining higher current account
balance. Furthermore, the increase in price of motorbike leads to the deterioration of
imports since motorbikes are elastic in nature. Therefore, the current account balance of
New Zealand is reduced.
(e)
If the official bank rate is increased, this attracts the demand for investment from
abroad. The scenario of the increase of OCR makes the local currency to gain value due
to increased demand of foreign investment

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References
Curaan, L., (2019) . Trade negotiations with Australia and New Zealand. Retrieved from:
http://www.europarl.europa.eu/RegData/etudes/STUD/2019/603479/EXPO_STU(2019)603479_
EN.pdf
Guan, Z. (2010). The interrelationship between New Zealand stock market and exchange rates.
Retrieved from:
https://pdfs.semanticscholar.org/b22b/83ab01a3a2f0bfc05d8821c47101acdc06b7.pdf
Leslie, J. (2015). New Zealand trade strategy and evolving Asian-Pacific regional economic architecture.
Retrieved from: https://www.asianz.org.nz/assets/reports/8504e619a4/ANZF1034-Trade-
Strategy-Report-_-FA.pdf
Steenkamp, D., (2014). Measuring New Zealand’s effective exchange rate. Reserve Bank of New Zealand
Te Pūtea Matua Bulletin Volume 77, No. 6. Retrieved from:
https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletins/2014/2014dec77-
6.pdf?la=en
Sullivan, R. (2013). New Zealand History of Monetary and Exchange Rate Regimes. Reserve Bank of New
Zealand. Retrieved from:
https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Seminars%20and
%20workshops/Mar2013/5200816.pdf
Whitehead, J. (2010). Macroeconomic Policy: Making it Work for New Zealand. Retrieved from:
https://treasury.govt.nz/publications/speech/macroeconomic-policy-making-it-work-new-
zealand