UNIVERSITY OF TECHNOLOGY, JAMAICA

COLLEGE/ FACULTY: BUSINESS AND MANAGEMENT

SCHOOL/ DEPARTMENT: BUSINESS ADMINISTRATION
FINAL ASSESSMENT: SEMESTER II, 2019/0
NAME OF STUDENT __________________________________ ID# __________________

NAME OF TUTOR _______________________________

Module Name: INTRODUCTION TO MACROECONOMICS

Module Code: ECO2001

Date: May 2020

Theory/ Practical: THEORY

Groups: BSc. ECONOMICS, BBA (UTECH, PAPINE CAMPUS), WESTERN

CAMPUS;
Date Dispatched: MAY 8, 2020
Date to be Returned: MAY 11, 2020
INSTRUCTIONS

1. THIS ASSESSMENT IS VALUED AT 40% OF YOUR FINAL MARKS.

2. THIS PAPER HAS THREE (3) QUESTIONS.

3. COMPLETE ALL QUESTIONS AND RETURN TO YOUR TUTOR WITHIN 72

HOURS.

4. ALL SUBMISSIONS MUST BE TYPEWRITTEN.

5.  IF YOU HAVE A CONCERN, DOCUMENT IT AT THE END OF THE PAPER.

6. DO NOT TRY TO CONTACT YOUR TUTOR DURING THE ASSESSMENT

PERIOD.

Box 1: Plagiarism

Please note the following statements on plagiarism, extracted from the Students Handbook
2019/20, University of Technology, Jamaica.

Under Major Offences, Regulation 5

Plagiarism:
 “Presenting any material, whether in written, oral, or electronic form, that is attributable to, or
the property of another person, as one’s own work, without acknowledging the source from
which the material is taken”. [Page 186, 3.2.2 (b)]

 “Submitting work for which credit has been previously obtained or is being sought in another
course”. [Page 187, 3.2.2 (e)]

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  “Copying another person’s paper, lab report or other assignment”. [Page 187, 3.2.2 (f)].

Also Note under Gross Offences:

“Presenting oneself for another candidate for the purpose of taking a test or examination; or by
allowing oneself to be represented by another for the same.”. [Page 185, 1.1 (a)].

You can consult the Students’ Handbook in your own time to see what the sanctions are.

Box 2: Declaration

DECLARATION OF AUTHORSHIP FOR FINAL ASSESSMENT

I have read the statements in Box 1 and understand the implications.

I declare that I am the sole author of this paper. I certify that I received no assistance in
completing the assessment. I also understand that a grade of zero will be assigned for this
assessment if I plagiarized, and the University Regulations will also apply.

Please fill in the information below:

Student’s Name:
ID#:
Date:

For Submission: Students are required to prepare and submit document as follows:
 Open Microsoft Word document and save file as: ECO2001 – YOUR NAME.
Eg. ECO2001 – JANE DOE
 Create a HEADER with Your Name, ID Number and Tutor’s name
Eg. JANE DOE 13034567 Marjorie Segree
 Create a FOOTER with Module name and code and page number
Eg. Introduction to Macroeconomics – ECO2001 – Page 1
 The Microsoft word document should be done using Times New Roman font style, 12”
font size and double-line spacing.
 Submit document ONLY ONCE using Subject heading INTRODUCTION TO
MACROECONOMICS FINAL ASSESSMENT. Remember to attach file as only the
first document received will be graded.
 Submit soft copy file of final assignment at least 15 minutes before stipulated deadline
(no later) to tutor’s email: allstudentmatters@gmail.com


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  Failure to meet the deadline or any form of plagiarism will
result in a zero.

Question 1 30 marks
Mrs. Josina Alexander is a University Lecturer who in 2019 earned income of J$550,000 per
month. She used J$250,000 to purchase groceries for her family, pay her rent, utility bills,
gardener, household helper and her monthly repairs/maintenance of her car
In addition, she used J$200,000 to make monthly hire-purchase payments on the washer, dryer
and 65” Smart TV she purchased from Singer Corp. in 2017.
Every month she lodged J$100,000 to her account at the Building Society, J$50,000 to her
savings account and the balance is used to ‘top-up’ her pension fund monthly contribution.
At the end of each month she carefully completed in writing a statement of her revenues and
expenses as well as a statement of her adjusted net worth.
a) Use each of the functions of money to illustrate how Josina spends her monthly income.
(4 marks)
Unit of account- josina used J$250,000 to purchase groceries, pay her rent and her
gardener. By doing so she has place value on goods and services.
Medium of exchange and Standard for deferred payments - J$200,000 was used to make
monthly hire-purchase payments
Store of value – josina saved by logging J$100,000 each month.

b) Based on the current economic situation, as a macroeconomic student, explain to Mrs.

Alexander the different motives for holding currency. (3 marks)
The Transaction Motive : the desire to hold cash balances to maintain sufficient funds in
a bank account in order for day to day operations.
The Precautionary Motive : a desire to hold in order to be able to deal effectively with
unexpected events that require cash outlay.
The Speculative Motive : a tactic used by investors to hold cash to make the best use of
any investments opportunity.

c) NCB has received an additional $150,000 in deposits at the end of June and Josina
borrows $135,000 to make a purchase. Calculate the money multiplier and the total
impact that these deposits will have on the overall money supply.
(6 marks).

LOAN RESERVES DEPOSIT

$135000 $15000 $150000

MONEY SUPPLY= NEW DEPOSIT x 1CASH RATIO

= $150000 x 1 .10
=$150000 X 10
=$1500000
Therefore the credit created is $1350000 and the cash reserve is still $150000

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 d) If the required reserve ratio increased to 20%,
calculate
i) the amount of loanable funds,
ii) the money multiplier; and
iii) the impact on the overall money supply. (3 marks)

LOAN RESERVES DEPOSIT

$120000 $30000 $150000

Money supply = 150000 x 1 .20

= 150000 x 5
= 750000
Therefore the credit created is $750000 and the cash reserve is still $150000.

e) Explain three tools of monetary policy that can be used to alleviate the challenges
currently facing Jamaica as a result of Covid-19. (6 marks)
Open market operations activity by a central bank to give liquidity in its currency to a
bank or a group of banks. As results of the Covid 19 A demand for liquidity has
grown, and global uncertainty has increased.
The discount rate is tool banks used to charge its members for borrowing. In light of
the pandemic banks have lowered the interest rate to encourage borrowing.
The reserve requirement refers to the money banks must keep on hand overnight.
They can either keep the reserve requirement allows banks to lend more of their
deposits, its expansionary because it creates credit.

f) Explain the classical economists’ belief that contractionary monetary policy would

affect the price level in the economy. (6 marks)

g) The discount rate has been reduced to 5% from 10%. Is this a contractionary or an
expansionary measure? Explain your answer. (2 marks)

This is contractionary occurs when you increase government spending to slow down the
economy. As a result there is a decrease in the money supply so customers tend to save than
spend. Banks then lower interest rates during this period to allow people to invest. So based on
the question above measure implemented would’ve been contractionary because an this is
attracting more people to invest an help stabilize the economy.

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QUESTION 2 30 marks

a) The following table contains information from Jamaica’s Balance of Payments for the
years 2013 & 2014.
($US millions)
2013 2014
Goods/Merchandise exports 1580.5 1482.2
Goods/Merchandise imports 5462.0 5199.9
Services Account Balance 623.5 655.8
Current Transfers Balance 2220.5 2293.9
Current Income Balance -276.9 -342.9
Reserves Balance 77.8 -953.3

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 i. Calculate the Current Account Balance for 2013 & 2014. (Show all workings) (8
marks)
Current account balance = (Merchandize exports – Merchandize imports ) +
(Service exports – Service imports) + unilateral transfers

2013: (1580-5462)+623+2220= -1037.5

2014: (1482.2-5199.9)+655.8+2293.9= -768

ii. Comment on the changes in the Current Account Balance of 2014 over 2013. ( 2
marks)

The changes in the current balance resulted in a deficit between the years of 2013
and 2014, thus occurs when value of imports exceed exports.

b) Explain the major difference(s) between recessionary and inflationary gaps.

(2 marks)

Inflationary gaps are the opposite of recessionary gaps, which occur when a country’s
level of real GDP is lower than the potential GDP at full-employment equilibrium or
when a country’s actual output is lower than the potential output at full employment
level. This occurs during recession period when the money supply is low, and
government spending decreases. To manage recessionary gaps, governments and
central banks enact expansionary policies, which increase the money supply and
therefore increase aggregate demand.

c) Which do you think is more popular among Jamaican citizens: tax evasion or tax
avoidance? Given reasons for your answer.
(4 marks)
Tax evasion can be defines as illegal means of avoiding taxes- deliberate omissions of
returns on income. While tax avoidance refers to legal means for avoiding to pay taxes.
Without a doubt, tax evasion is more popular in Jamaica due how corrupt the nation is. We
found that there are a lot of fraudulent documents that are floating around and this makes it
easier for organized criminals to do their things and get away.

d) If the Jamaican economy were experiencing an expansion boom with accompanying

inflationary pressures, how would countercyclical fiscal policy differ from pro-cyclical
fiscal policy in stabilizing the economy?
(4 marks)
The concept is often encountered in the context of a government's approach to spending
and taxation. Procyclical means something with a positive effect, while countercyclical
means a negative effect.  procyclical fiscal policy can be described as governments’ way
of increasing government spending by reducing taxation during an economic expansion,
but reduce spending and increase taxes during a recession. A 'countercyclical' fiscal
policy takes the opposite approach: reducing spending and raising taxes during a boom
period, and increasing spending and cutting taxes during a recession

e) Use a properly labelled graph to illustrate an inflationary gap. (5 marks)

P

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50

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 50 100 Q

INFLATIONARY GAP

f) Use a carefully labelled graph to illustrate a recessionary gap. (5 marks)

RECESSIONARY GAP
REAL GDP

Question 3 30 marks
Classical and Keynesian economists seem in many instances to be polar opposites in terms of
Schools of Thought especially during the period immediately after the Great Depression.
However, as data became more readily available they seem to agree to some extent on some
aspects of how an economy works.

a) Summarize the major points that classical economists and Keynesian economists cannot
agree on. (2 marks)

The primary disagreement between new classical and new Keynesian economists is over
how quickly wages and prices adjust. Keynesian theory of total spending in the economy
and its effects on output and inflation, they suggest governments need to use fiscal policy,

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 especially in a recession. The theory of classical economics is that free markets will
regulate themselves if they are left alone. Markets will find their own level of equilibrium
without interference by people or the government.

b) There is investment that is independent of the level of income in the economy and
investment that is dependent on the level of investment in the economy. Graphically
illustrate both.
(4 marks)
AUTONOMOUS INVESTMENT :

INVESTMENT

1 X

NATIONAL INCOME

INDUCED INVESTMENT

INVESTMENT

0
NATIONAL INCOME X

c) Suppose the consumption function is, C = 100 + 0.70Y, and autonomous investment is
$200.

Estimate:

i. The equilibrium level of Income; (4

marks)

Y+C+I
Y=100+0.70Y+200
Y=300+0.7Y
Y-0.7Y=300

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 0.3Y=300
0.3Y = 300
0.3 0.3
Y=1000

ii. Consumption and Savings at the equilibrium level of Income. (6

marks)
C= 100+ 0.7 (1000)
C= 100+700
C=800

Y=C+S
1000=800-S
(Transpose for S)
S= 1000-800
S=200

d) Consider the following numerical version of the Keynesian model with a government.

C = 200 + 0.8Yd, I = 150, G = 180, T = 300

Solve for the value of equilibrium output. (Yd = Y – T) (6 marks)

Y = 200 + 0.8Yd + 180 + 150
Y= 200 + 0.8 (Y-T) +180 + 150
Y= 200 + 0.8 (Y- 300) +180+150
Y= 200 + 0.8 Y – 240 + 180+ 150
Y= 530-240+ 0.8 Y
Y= 290 + 0.8 Y
Y-0.8Y = 290
0.2Y= 290
0.2Y= 290
0.2 0.2
Y= 1450

e) Calculate the value of the budget deficit or surplus (2 marks)

TAX-GOVERNMENT SPENDING
$300 - $180= $120 SURPLUS

f) Compute the value of the multiplier? (2 marks)

MULTIPLIER=11-MPC

M=11-0.8
M= 5

g) Explain how will a 100% increase in government spending affect equilibrium output.

(4 marks)
If government spending increases by 100% then taxes a reduced which results in an increase
income/output in the economy. As a result people will then demand more money because
they can afford to buy more. Since more money is now floating in the economy this will lead
the banks to increase interest rate which will reduce the ability for everyone to invest.

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END OF PAPER

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