Central Bank fixes the exchange rate at $3 per zeppo
1. The country of Freedonia uses the zeppo as its currency. The equations representing the demand for and supply of zeppos in the foreign exchange market are:
Demand D = 30,000 – 5000e
Supply S = 15,000 + 2500e
where e is the nominal exchange rate, expressed as dollars per zeppo.
a. [1 point] What is the market equilibrium value of the zeppo?
b. [2 points] The Central Bank fixes the exchange rate at $3 per zeppo. Is the zeppo overvalued or undervalued? To maintain the fixed exchange rate, will the Central Bank need to buy or sell zeppos on the foreign exchange market? Explain.
c. [3 points] At the fixed exchange rate, what is the quantity of zeppos demanded? What is the quantity of zeppos supplied? Will the country experience a balance-of-payments deficit or a balance-of-payments surplus? Calculate the balance-of-payments deficit or balance-of-payments surplus in both zeppos and dollars.
2. You have been hired by the Earl of Grantham to undertake an economic analysis of his earldom. The Earl is concerned that Grantham’s economy is not growing as quickly as that of its neighbour, Haxby. You have been provided with information for both regions, as shown in the table below:
Region Year GDP Labour
force Popu-
lation Average labour product-ivity Share employed GDP per capita
Grantham 2012 $10,000 2500 62.5%
2013 $11,000 2683 63.4%
Haxby 2012 $12,000 3000 60.0%
2013 $14,000 3200 61.5%
a. [3 points] Complete the missing columns in the table above, showing all of your work. Round off population to the nearest whole number; round off average labour productivity and GDP per capita to two decimal places.
b. [3 points] To determine whether the Earl’s fears are supported by the evidence, calculate the growth rate, from 2012 to 2013, of GDP, GDP per capita, and average labour productivity in Grantham and in Haxby.
c. [2 points] Assuming that these growth rates continue, in approximately how many years will each region’s GDP per capita double?
3. Michael has a stand producing frozen bananas, sold at the Halifax Waterfront Market; he can produce 100 frozen bananas per day. He employs two workers: G.M., who can produce 80 frozen bananas per day, and Maeby, who can produce 60 frozen bananas per day.
a. [2 points] What is the average labour productivity per day of these three workers?
b. [2 points] Suppose that Michael buys a machine that can produce 120 bananas per day. Who will Michael assign to use this machine, and why?
c. [2 points] With the machine in use, what will be the new average labour productivity per day of these three workers?
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