Macroeconomics Case Assignment

GDP:Questions:

1. Assume that consumer spending is $1,000, government expenditures are $300, investments by industry are $150, and the excess of exports over imports is $200. Compute the GDP. (Please show your work) The basic formula for calculating the GDP is: Y = C + I + E + G C=1000; I=150; E=200 and G=300

Y=1000+150+200+300=1650, Y=1650

2. If we are able to increase our domestic energy production, and that allows us to import less oil from foreign countries, briefly explain what will happen to the GDP. If Exports exceeds imports then it will add to the GDP but if imports are more than the exports it subtracts from the GDP.

With this being said if we import less oil from foreign countries then it would positively impact the nation’s GDP.

Inflation

Questions:

1. If the CPI went from 100 to 104 during the past year, the rate of inflation, in percent, was? (Please show your work)Rate of inflation = (104 – 100)/100 x 100= 4/100 x 100 = 4%2. If the CPI went from 231 to 234 over the past year, the rate of inflation was? (Please show your work) Rate of inflation = (234 – 231)/231 x 100, = 3/231 x 100, = 1.

The analysis should only cover the period from the beginning of 2008 to the present, and make sure the most recent 2011 changes are addressed. The 2008 economic contraction affected the world economy. 2008 seen the housing market crash both here and in Japan. By 2009, Canada, Japan, the United Kingdom, and the United States all saw negative economic growth. Japan’s economy was hit the hardest with -10% growth in 2009 as demand for their products weakened. Canada was the last to fall into negative growth and experienced the least negative growth of the four countries. All experienced a partial recovery in 2010 as GDP came out of negative growth and each seen minimal growth.

The global economic crisis, however, hit the country’s mainstay exports hard and brought on Japan’s worst recession since World War II, in late 2008. Since mid-2009, Japan has limped back into recovery, helped by exports and stronger capital investment. 2011 was looking up for the Japanese economy, relatively speaking, but the earthquake and tsunami in early March 2011 has put the economy in a tailspin with a large portion of the country affected not only by the devastation but the effects of the nuclear power plan leakage. Canada, the UK, and the U.S. appear to be going into the double dip recession as the economies in 2010 were making slow recovery, 2011 has seen more contraction. The monetary policies of all four countries have slowed the pace of the recession, but are going to be unable to fix the problems, because the national debt are so high, deficit are rising, and projections are not good. Monetary policy, keeping interest rates low and printing more money can only do so much; fiscal policies implementing stimulus packages have foreseeable failed and only added to national debts.

2. Compare the four countries with respect to Inflation and Prices (CPI). The analysis should only cover the period from the beginning of 2008 to the present, and make sure the most recent 2011 changes are addressed. As the economies of Japan, Canada, the UK, and the U.S. were entering the recession in 2008, prices and inflation had hit a high, but began to fall as the GDP fell. GDP and CPI are nearly identical images when looking at the graphs of each. Prices fell as the economy tanked because consumers clearly did not have the purchase power. As the economies of each country experienced positive growth rates, CPI began to rise. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. When comparing the four countries, Canada, UK and U.S. have experienced very similar changes in CPI, where Japan has remained relatively unchanged for 2011, but mimicked the others in 2008 and 2009.

Inflation for 2011 in Canada, the UK and the U.S. is increasing. Some reports say peanut butter will see a 40% price increase in the next week, which may be due to a poor peanut growing season. According to the United States Department of Agriculture’s Consumer Price Index, all food increased 0.8 percent between 2009 and 2010 and is forecast to increase 3.5 to 4.5 percent in 2011. The increases in food prices affect the overall purchasing power of consumers, combined with inflation, consumers are not going to be able to purchase our way out of recession. 3. Compare the four countries regarding the Labor Market (Unemployment Rate).

The analysis should only cover the period from the beginning of 2008 to the present, and make sure the most recent 2011 changes are addressed. Regarding the labor market, United States posted the most consistent rates of unemployment ranging from 1.9% to just about 3%. In stark contrast, Japan posted the most unpredictable figures in terms of unemployment percentages; 0.8% in 2008 to -9.8% in 2009.In 2011, Japan recorded a percentage change of about 2.0%. As is the case with the USA, UK’s rates never went below 1% during this period. The future of the labor market is therefore quite promising in the USA as compared to the other countries in this particular category.

Questions:

1. Assume interest rates on Treasury bonds, with the indicated time to maturities as follows:15 years = 7.72%20 years = 8.72%25 years = 9.64%30 years = 10.18%The differences in rates among these bonds is caused by: (please briefly explain your choice)a. Tax effectsb. Default risk premiums. (Default risk premium will cause the interest rates among the T bond with different time period with different rates) c. Maturity risk premiumsd. A down sloping yield curvee. Liquidity risk premiums2. Which statement is False? (Please briefly explain your choice) a. The default risk premium is applied to all bonds including U.S. Government ones. b. The liquidity premium requires that an asset can be sold both quickly and for fair market value. c. The inflation premium is added on to the required return to protect the purchasing power of an investors earnings. d. The market risk premium is added to all bonds, even U.S. Government ones. (Market risk premium will be the same for all investors since the value is based on what actually happened).

3. Over the next 3 years inflation is expected to be: Year one 2.5%, year two 3.5%, year three 4%. What should investors require for an inflation premium on a Treasury bond with a three-year maturity? (Please show your work) Inflation premium on year 3 = (2.5+3.5+4)/3

Inflation premium on year 3 = (10)/3Inflation premium on year 3 = 3.33%4 If the rate of inflation is expected to be 0% for the next 4 years will the yield curve have an upward slope? (Please briefly explain your answer) Yield to maturity = = Rf + DRP + LP + MRP + Inflation Premium Everything consistent

Inflation premium = (2.5+3.5+4+0)/4 = 2.5 it reduces the 3.33 to 2.50 No it wont be upward it will be downward sloping if the rate is 0 in year four

Reference:http://www.investopedia.com/terms/m/marketriskpremium.asp#axzz1uEeDH1nd http://www.cliffsnotes.com/study_guide/Unemployment-Rate.topicArticleId-9789,articleId-9735.html http://inflationdata.com/inflation/inflation_articles/calculateinflation.asp http://www.investopedia.com/terms/i/inflation.asp#axzz1lAEXt7uC http://research.stlouisfed