Macroeconomic Variables and Their Implications

This document discusses the implications of macroeconomic variables such as money multiplier, open market operations, aggregate demand, and aggregate supply. It also includes tables and figures to support the explanations.

Running head: MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
Name of the Student
Name of the University
Author Note

1MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
Table of Contents
Answer to question 2:.................................................................................................................2
Part a:.....................................................................................................................................2
Part b:.....................................................................................................................................3
Answer to question 3:.................................................................................................................5
Part a:.....................................................................................................................................5
Part b:.....................................................................................................................................6
Part c:.....................................................................................................................................7
References................................................................................................................................10

2MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
Answer to question 2:
Part a:
Table 1: Result for simple money multiplier
Particulars Details
Reserve Ratio A 5%
Simple Money Multiplier B=1/A 20
Source: Created by Author
The simple money multiplier is measured by 1/RR (Coghlan 2014). RR denotes
reserve ratio. Here, RR is given as 5%, therefore, the result is 20.
Table 2: Results representing an increase in money supply in the banking system
Particulars Details
Deposits of Customer A $ 9,500.00
Money Multiplier B 20
Money Supply C=A*B $ 190,000.00
Increase in Money Supply D=A+C $ 199,500.00
Source: Created by Author
It is given that customer deposit is $9500 with the previously calculated money
multiplier 20. The money supply is calculated by multiplying the multiplier with the deposit
available in the bank. Therefore, the money supply is $190000 and thus the increase in the
money supply is $199500 in the banking system.

3MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
Table 3: Calculation depicting the effects of an increase in reserve ration on the money
supply in the banking system
Particulars Details
Reserve Ratio A 12.50%
Deposits of Customer B $ 9,500.00
Money Multiplier C=1/A 8
Money Supply D=B*C $ 76,000.00
Increase in Money Supply E=B+D $ 85,500.00
Source: Created by Author
Here, the reserve ratio (RR) increases to 12.50%, as a result, the money multiplier
falls to eight. This reduces the money supply from the previous calculation (the deposit
remaining the same) the increase in money supply is $85500 that is less compared to the
earlier $199500.
The money multiplier signifies the quantity of money that the banks create with the
deposits available that are identified by the reserve ratio. Reserve is the number of customer
deposits that the reserve bank directs the banks to hold (Bhati Zoysa and Jitaree 2015).
However, the multiplier indicates the growth rate of money lending from a bank. When the
reserve ratio is low, the bank consists of more money to lend which indicates a higher money
multiplier. Contrary to this, when the reserve ratio increases the deposits available for issuing
loan is less implying a smaller multiplier (Jayaraman and Ward 2019). This implies that there
is a reduction in money supply when the reserve ratio increases, which the money multiplier
depicts.
Part b:

4MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
Open market operation (OMO) is a policy instrument that refers to the buying and
selling of government securities by the Central Bank of a country (Homburg 2015). This
policy is used in the open market to expand or contract the quantity of money in the banking
system. To reduce inflation in the economy, the Central Bank of Vietnam should sell
securities through OMO to grab the excess money circulating in the economy. The purchase
and sale of securities are conducted only between the banks and the Reserve Bank via the
web platform through the process of auction trading. The bids can be fixed-rate or variable
rate and the security is handed over to the one with the highest bid.
Figure-1 depicts the scenario of a contractionary monetary policy where a decrease in
money supply increases the rate of interest. When the Reserve Bank sells securities to
stabilize growth and reduce inflation, the money supply MS falls to MS’. This increases the
rate of interest from r to r’ and sucks the excess liquidity back from the market. This is a
contractionary monetary policy of the Central Bank. This reduces inflation by reducing the
quantity of money from QM to QM'. Thus, there is a rise in the cash rate and the GDP of the
economy falls. This is because with an increase in interest rate investment falls and this
processed into a reduction in aggregate demand, which induces the Real GDP to decline. The
opposite happens when the government securities are purchased to inject money into the
economy.

5MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
Figure 1: Change in the money supply by applying OMO
Source: Created by Author
Answer to question 3:
Part a:
The figure mentioned below explains the aggregate demand (AD) and aggregate
supply (AS) at various price levels in the Coco Republic. The macroeconomic equilibrium of
the country is at 500 billion of quantity corresponding to the price level $180.
Assuming that the potential or full-employment GDP is at 540 billion that is beyond
the real GDP of the country. This is a recessionary gap because the economy is operating
below its full-employment equilibrating position (Ugwuanyi and Ugwunta 2017). This
indicates the economy is approaching a period of recession. There is a fall in employment
along with lower utilization of resources. Thus, in the figure, a gap of 40 billion determines
the recessionary phase of the economy.

6MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
Figure 2: Aggregate demand and aggregate supply model with potential GDP
Source: Created by Author
Part b:
The Australian market for property dealings is subject to wide variations in prices, as
a result, the demand for residential buildings has reduced (Warren-Myers 2016). Assuming
that the Australian economy is at full employment when the demand for new houses
decreases in some capital cities there is a fall in aggregate demand due to a fall in the
consumption for a property. The chart mentioned below illustrates this shift in aggregate
demand in Australia. The vertical axis determines the price level and the horizontal one
measures the output produced. At the full-employment level, the long-run aggregate supply
(LRAS) intersects the short-run aggregate supply (SRAS) and the aggregate demand (AD)
curve. The LRAS is a vertical curve because in the long run the prices are adjustable to the
amount supplied and the output is not related to the price level (Rao 2016). The equilibrating

7MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
price level is P corresponding output produced is Q. when the aggregate demand shifts
towards its left due to a fall in consumption by households, in the short run there is a fall in
output to Q’ and the price level lowers to P’. In the short-run, the market cannot adjust to
fluctuations and there is a fall in productivity due to a fall in prices and revenue. However, in
the long run, the economy adjusts and improves the market situations, hence as a result the
economy gradually moves back to its full-employment level. This increases the level of
output to Q, however, the price falls further to P”.
Part b:
Figure 3: Long-run and short-run changes in output due to a fall in aggregate demand
Source: Created by Author
Part c:

8MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
The video informs about the trade agreement signed between China and Indonesia.
The Chinese president Li Keqiang meets the president of Indonesia Joko Widowo for
boosting the trade ties and the infrastructural development in the country. They both signed
two documents on developmental strategies. Moreover, the Indonesian president is looking
forward to increasing exports to China for boosting the GDP. This will help the Indonesian
economy to grow. The increased infrastructural development will increase the expenditure of
the government that will increase the aggregate demand of the country. Moreover, their
future strategy to increase exports to China will increase the net exports of the Indonesian
economy. This will further increase the aggregate demand due to an increase in output and
income.
Figure 4: Long-run and short-run changes in Real GDP due to a rise in aggregate
demand
Source: Created by Author

9MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
The above figure explains the macroeconomic scenario of the Indonesian economy
after the event of the signing of the trade agreement. Assuming that the country is operating
at a full-employment level, where the available resources are fully utilized with efficiency.
When the country sign document mentioning infrastructural development with China, this
helps in boosting the aggregate demand of the economy. As a result, the aggregate demand
shifts rightward from the full-employment level. In the short run, there is an increase in the
price level from P to P’. The real GDP increases from the full-employment level Q to Q’.
This helps in increasing the growth rate of GDP of the Indonesian economy. However, in the
long run, the economy there is an increase in the price level, which reduces the total output in
the economy. Thus, this can be said that in the short-run the economy generates a positive
rate of growth compared to the long-run case.

10MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
References
Bhati, S., Zoysa, A.D. and Jitaree, W., 2015. Determinants of liquidity in nationalized banks
of India. In World Finance & Banking Symposium (pp. 1-11).
Coghlan, R., 2014. Money, Credit and the Economy (Routledge Revivals). Routledge.
Homburg, S., 2015. Superneutrality of Money under Open Market Operations. Review of
Economics, 66(3), pp.289-302.
Jayaraman, T.K. and Ward, B.D., 2019. Is the money multiplier relevant in a small, open
economy? Empirical evidence from Fiji.
Rao, B.B. ed., 2016. Aggregate demand and supply: a critique of orthodox macroeconomic
modeling. Springer.
Ugwuanyi, U.B. and Ugwunta, O.D., 2017. fiscal policy and economic growth: An
Examination of selected countries in Sub-Saharan Africa. International Journal of Academic
Research in Accounting, Finance and Management Sciences, 7(1), pp.117-130.
Warren-Myers, G., 2016. Sustainability evolution in the Australian property market:
Examining valuers’ comprehension, knowledge and value. Journal of Property Investment &
Finance, 34(6), pp.578-601.