1. Essay type question:
In 2012, the government revised minimum wages and through the Ministry of Labour and Social Security urged the media to expose any employers not complying with the revised wages adding that the Ministry would commence countrywide inspections to ensure that employers complied. Some scholars have argued that minimum wages end up hurting those it is intended to help while others propose that they are vital to addressing poverty and unemployment. Critically analyze these assertions using empirical literature to support your arguments. (This question must be typed and should not be more than three pages but a separate page for references must be attached i.e. three pages of the write up and a page or two for references. Use Times New Roman 12, 1.15 spacing and the Harvard style of referencing. All sentences must be centered and justified).
2. Assume a country where there are 100 million working age individuals in the economy. Of these 100 million, 50 million are currently working, 10 million are looking for work, 10 million stopped looking for work 2 months ago, and the remaining 30 million never wanted to work.
a) Calculate the number of unemployed individuals, the size of the labour force, the unemployment rate, and the labour force participation rate.
b) Now suppose that of the 10 million individuals looking for work, 5 million become discouraged and stop looking for work. Given this change, calculate and briefly explain what will happen to the size of the labour force, the unemployment rate, and the labour force participation rate.
c) Now use again the original numbers. Suppose firms experience an increase in the demand for their products and they respond by increasing employment. Specifically, 2 million of the previously unemployed individuals now find jobs. Given this change, calculate and explain what will happen to the size of the labour force, the unemployment rate, and the labour force participation rate.
d) If discouraged workers were officially counted as unemployed, calculate and briefly explain what would happen to the size of the labour force, the number of employed individuals, the number of unemployed individuals, the unemployment rate, and the labour force participation rate.
3. Here is a multiple contraction of the money supply resulting from open market sales of securities by the Bank of Zambia. Assume the following: (i) the reserve requirement of commercial banks is 10%, and (ii) all commercial banks hold no excess reserves.
a) Suppose the Bank of Zambia sells two K14, 000 bonds, one each to Tembo and Banda. Tembo pays for her bond with money she withdraws from her account at Nations Bank. Banda pays for his bond with money he stored in his closet.
i) The following is Nations Bank's balance sheet before Tembo withdraws K14, 000 in cash. Complete the balance sheet.
iii) By how much do Nations Bank's reserves fall short of the legal requirement?
b) Suppose Nations Bank replenishes its reserves by selling some of its securities to Phiri (i.e. the bank sells Phiri securities equal to the amount its reserves fall short). Phiri has a checking account at the Nyau Bank.
i) Complete the Nyau Bank's balance sheet before Phiri purchases the securities.
ii) Show what happens on Nations Bank's and the Nyau Bank's balance sheets when Phiri pays for those securities by giving Nations Bank a personal cheque on her deposit at the Nyau Bank, which Nations Bank turns over to the Nyau Bank in exchange for cash.
c) What is the decrease in money supply so far, due only to the original sale of two bonds to Tembo and to Banda as well as the subsequent sale of Nations Bank's securities to Phiri?
d) Suppose the Nyau Bank replenishes its shortage of reserves (caused by transactions described in (b) by selling some of its securities:
i) How much must it sell?
ii) What will be the ultimate decrease in the money supply resulting from this initial sale of two bonds by the Bank of Zambia?
iii) How is your answer to, d (ii), changed if Nations Bank begins with K14, 000 of excess reserves?
4. The economy of UNILUS has a monetary base of K500 million. The Central Bank of UNILUS requires commercial banks to hold as reserves.
Assume that commercial banks do keep the reserves, and do not keep excess reserves. In UNILUS, people find it useful to keep some cash in their pockets. On average, in this economy you can observe a currency-to- deposit ratio of .
a) What is the total value of deposits in the banks of UNILUS?
b) How much is kept as reserves in UNILUS?
c) What is the money supply in this economy?
d) Calculate the money multiplier for this economy.
e) Calculate the bank deposit multiplier.
f) Now assume that in UNILUS there is a money demand as follows:
Md = 3500-=250i
where represents the interest rate.
i) What is the interest rate present if the money market is in equilibrium?
j) Draw a diagram that shows the money market demand and supply, as well as the equilibrium interest rate for the economy.
5. Suppose country can produce 80 units of by using all its resources to produce or 60 units of by devoting all its resources to . Comparable figures for country are 60 units of and 60 units of . Assuming constant costs, in which product should each country specialize. Please show all relevant working and briefly explain your answers.
6. Suppose that a Zambian Jeweller imports gold from South Africa and exports his finished products to the US. Furthermore, suppose the US dollar depreciates and the South African rand appreciates, relative to the kwacha. Speculate as to how each would hurt the Zambian Jeweller. Briefly explain.
7. Indicate whether each of the following would cause the Zambian kwacha to appreciate or depreciate and briefly explain.
a) The Zambian government lures Chinese firms to invest in Zambia's mining sector.
b) The Central Bank engages in a high interest rate monetary policy.
c) The Zambian economy moves into a recession.
d) Zambia encounters severe inflation.
Practice Questions
1. Briefly explain whether it would be desirable to have zero unemployment.
2. Why is unemployment regarded as a problem? What policy measures might be used to tackle this problem? Briefly explain.
3. According to the IS-LM model, what happens to the interest rate, income, consumption, and investment under the following circumstances?
a) The central bank increases the money supply.
b) The government increases government purchases.
c) The government increases taxes.
d) The government increases government purchases and taxes by equal amounts.
4. Suppose that the government wants to raise investment but keep output constant. In the IS-LM model, what mix of monetary and fiscal policy will achieve this goal?
5. Suppose that in 2015 there is a sudden, unanticipated burst of inflation. Consider the situations faced by the following individuals. Who gains and who loses?
a) A homeowner whose wages will keep pace with inflation in 2015 but whose monthly mortgage payments to a savings bank will remain fixed
b) An apartment landlord who has guaranteed to his tenants that their monthly rent payments during 2015 will be the same as they were during 2014
a) A banker who made an auto loan that the auto buyer will repay at a fixed rate of interest during 2015
b) A retired individual who earns a pension with fixed monthly payments from her past employer during 2015
6. Suppose that UNILUS declares itself an independent state and the following is UNILUS' balance of payments for 2014.
| Item |
Millions of kwacha |
| Goods exports |
400 |
| Goods imports |
300 |
| Service exports |
150 |
| Service imports |
100 |
| Net investment income |
-50 |
| Net transfers |
100 |
| Foreign purchases of assets in UNILUS |
100 |
| UNILUS purchases of assets abroad |
100 |
| Official reserves |
100 |
Calculate the following:
c) the balance on trade in goods
d) the balance of trade
e) the balance of payments on current account
f) the capital account balance
7. Explain the economic basis for supporting free trade.
8. Evaluate the arguments in favour of protectionisms. What measures might be used to provide effective protection?
9. How might a fall in the exchange rate (depreciation) improve the balance of payments?
10. Suggest policy options a government of a developing country might adopt to help it raise the standard of living of its people.