ECONOMICS ASSIGNMENT

29.04.2020

QUESTION 4- It is possible to analyze and demonstrate some implications by using the table
that is given for economic indicators for Azerbaijan. Firstly, between the period of 2014 and 2015
we can obviously see that the GDP value has diminished while inflation and unemployment
variables have increased. As everyone knows, definition of GDP is the market value of all final
goods and services produced within a country in a given period of time. When the market value of
these goods decrease over some period of time as between 2014 and 2015, the income and
expenditure (GDP) of people will also decline since GDP measures these two values at the same
time. This decrease (2014-2016), in turn, will create an inevitable problem for companies in the
economy because they are not able to earn higher profits as before. The overall price rise called
inflation has increased because of the fact that the rising costs of companies, occurred as a result of
not being able to earn high profit, leads them to increase the overall price level of products.

Actually, due to the Philips curve there is a short run trade-off between inflation and
unemployment rate in the economy. It has been reported to have inverse relationship between them,
meaning that when inflation is higher within one geographical area, unemployment should be low
in a short period of time or vice versa. That is because when unemployment rate goes down in the
economy, the number of employees demanded will have exceeded the number of workers supplied,
which in turn forces companies to increase salaries and wages in order to compete one another. This
salary and wage increase will reflect themselves on the price of products and services that are
provided by companies since they are included into the fundamental costs of producers. As a
consequence, inflation occurs.

Despite of the fact that the unemployment rate has slightly increased from 4.9 to 5 at the same
time with inflation between 2014 and 2015, it is stable for the period of four years (2015-2018). The
slight increase has happened because companies might have fired their workers for the reason of
increasing costs that were originated from inflation.

Eventually, when we come to the overall analyze of the table, decreasing value of GDP and low
stable unemployment rate were one of the main indicators for inflation. GDP declines, companies
increase their prices of products as a result of eroding values of income and expenditures of
population since they cannot obtain the profit that they desire (2014-2017). Unemployment was
stable and low and this causes demand for workers to exceed the supply of workers, which in turn
leads companies to increase salaries and wages. This rise also reflects itself in inflation component
(2014-2017).

Between 2017 and 2018, the inflation went down as we see from the table. Because GDP is the
reflection of society’s income and expenditure companies were able to increase their profits as a
result of GDP increase. The unemployment has slightly decreased since the companies were in
capable of receiving more workers as a result of reduction in the costs (2017-2018).

QUESTION 5- For the GDP per capita I want to give an example of two countries. First one is
Qatar which is known to be one of the richest countries in the world and GDP per capita is
relatively high. The second country with relatively low GDP is Libya. The reason why Qatar is
considered to be richer country is that its economy depends on natural gas reserves and higher oil
prices. According to Beth Grienfield, this country has fundamentally invested in natural gas
infrastructure and exported it to the rest of world economy. The production of gas and oil creates an
opportunity for Qatar to reach a point in which GDP per capita is so high. The investment and net
exports component have mainly contributed to GDP of this country. The reason why Libya was not
able to achieve higher GDP per capita is that the civil wars happened during 2011-2012 eroded the
components of GDP which are saving, consumption, investment, government spending and net
exports. In today’s world, the GDP per capita in Qatar is approximately 70,000 while in Libya it is
reported to be nearly 8,000 while its economy also depends on oil production. The Libya economy
is regarded as the country whose GDP per capita is growing so fast even though its GDP is low. We
can explain this implication with catch-up effect. The countries which start off poor is more likely
to expand than countries start off rich. The major reason that stands behind this faster growth rate in
Libya is that it has enjoyed higher oil prices since 2007 and the fact that oil and gas constituted the
99 percent of its exports explains why GDP has enormously increased for the last decade.

QUESTION 7- a. if banks choose to keep all of deposited money as reserve, they will not be
able to create additional money because there is no money left to make a loan for people. Therefore,
the bank will not have any contribution to the money supply. The money supply will be 1000.

b. When the banks are required to make 10 percent reserves of their deposits and they choose to
keep excess 10 percent reserve, the overall reserve that bank has made is 20 percent (1/5) of 1000
euro deposit. Now the amount of money that is reserved is 200 euro (20 percent of 1000). Money
multiplier is the reverse of reserve (1/5) and it is 5. The 800 euro which is borrowed will create an
additional 4000 euro (800*5). The money supply is equal currency plus + demand deposits so it is
5000 (4000+1000).

Question 8
 When Fed sells government bonds to the public, the money available in the hands of public will
move to the hands of government and it, in turn, reduces the supply of money. As we see from the
graph, when supply of money decreases, price level decreases and the value of money increases.

QUESTION 6

a) 8000+1600+1000+400=11000
b) 8000+1600+1000+400+1400+200=12600
c) (1600/12600)*100=12.6984127(nearly 12.7)
d) (12600/20000)*100=63

QUESTION 9

180000-100000= 80000 (NOMINAL GAIN)

80000*(25/100) = 20000 (This is the tax that government impose on people)
(120-80)/(80)*100= 50 percent inflation
100000+100000*(100000*0.5) = 150000
180000-150000= 30000 (REAL GAIN)
30000-20000= 10000

QUESTION 3
a) The table demonstrates nominal exchange rates. Because this is the rate in which
people can exchange their currency of money with the currency of another country.
b) The exchange rate between euro and pound: 1 pound= 1.14298 euro
The exchange rate between dollar and pound: 1 pound= 1.23964 dollar
The exchange rate between euro and dollar:
1 euro= (1/1.14298) = 0.87490 pound
1 dollar= (1/1.23964) = 0.80668 pound
dollar / euro= 0.80668/0.87490= 0.92202 1 dollar= 0.92202 euro

c) If UK inflation exceeds European inflation over the next year, I would expect UK
pound will depreciate because of the fact that the price level is much higher and the
nominal exchange rate depends on price level. Also, the value of the money will fall
in UK because of the price rise. UK pound loses its value from the perspective of
the amount of the European currency that it buys.

QUESTION 2

b) (58,510,999,630.2) / (9,649,341.0)= 6,063.7

56,718,105,558.8 / 9,757,812.0= 5,812.58

56,558,154,150.5 / 9,854,033.0= 5,739.594

57,357,249,337.8 / 9,939,800.0= 5,770.463

c) (5,812.58-6,063.7) / (6,063)*100= -4.14

(5,739.594-5,812.58) / (5,812.58) *100= -1.25

(5,770.463-5,739.594) / (5,739.594) *100= 0.5378