Assessment Two By Tatenda Mangenje Economics Shiekl Contents TOC o “1-3” h z u Question 1

Assessment Two
By
Tatenda Mangenje
Economics
Shiekl
Contents
TOC o “1-3” h z u Question 1: GDP PAGEREF _Toc526346056 h 2Question 2: Consumer Price Index PAGEREF _Toc526346057 h 2Question 3: Producivity PAGEREF _Toc526346058 h 3Question 4: Savings & Investment PAGEREF _Toc526346059 h 3Question 5: Unemployment PAGEREF _Toc526346060 h 3Question 6: Capital adequacy regulation PAGEREF _Toc526346061 h 4Question 7: Supply of money PAGEREF _Toc526346062 h 5RBA: An Increase the supply of Australian dollars PAGEREF _Toc526346063 h 5Economic growth PAGEREF _Toc526346064 h 6Question 8: Financial modelling PAGEREF _Toc526346065 h 7Question 9: capital assest Price Model (CAPM) PAGEREF _Toc526346066 h 7Question 10: CAPM Calcuation PAGEREF _Toc526346067 h 7

Question 1: GDP
Year Production of X Price per Unit of X Nominal GDP Real GDP
2009 20 units $5 100 –
2010 20 units $10 200 100
2011 20 units $20 400 200
Question 2: Consumer Price IndexYear Price of Books ($) Quantity of Books Price of Pencils ($) Quantity of Pencils Price of Pens ($) Quantity of Pens Basket Cost CPI
2009 50 10 1 100 5 100 1100 100
2010 50 12 1 200 10 50 1600 145.5
2011 60 12 1.5 250 20 20 2750 250
c.If I had a clause in my wage contract that increased my wage by the rate of inflation as measured by the CPI calculated above, my standard of living would increase, because the CPI exaggerates increases in the cost of living.

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Assumption: Expenditure equals consumption basket for each year.

d.If I had a clause in y wage contract that increased my wage by the rate of inflation as measured by the CPI calculated above. If I personally only consume pens (no paper or pencils), my standard of living would decrease, because the price of pens has significantly increased a larger percentage than the consumer price index.

Question 3: ProducivityThe Australian government can pursue to increase the productivity of their citizens through increased government and private sector investment on infrastructure for instance an improvement in telecommunications (broadband) and transport networks to speed movement of people and goods and lower the cost of doing business. They can use tax and welfare reforms to improve work incentive and increase the incomes from people working more productively. If the government improves the quality and affordability of education and training this will benefit its effectiveness at raising productivity because workers are more skilled for employment. It can also facilitate inward migration of skilled labour to improve the quality of the labour force. Introducing tax breaks on the use of new technologies and low carbon, energy efficient products will contribute to an efficient workforce. There is plenty of evidence that paying workers a better hourly wage improves their morale and can lead to improvements in output per hour worked, therefore the government can encourage the uptake of the living wage or raise the national minimum wage. As well as improve access to and quality of health care to reduce sickness and absence which should increase output per worker

The Australian population, increasing by 7.1 million, or 41.1%, driven by both natural increase and surging immigration. When real GDP is measured in volume terms, the increase in population drastically improved productivity. More people means more demand, allowing GDP to flourish. CITATION PET06 l 3081 (COSTELLO, 2006)Question 4: Savings & InvestmentThe value of saving and investment in this country is:
($6,000 – $1,000 – $4,000) + ($1,000 – $1,200) = $800 billion
The value of private saving is
$6,000 – $1,000 – $4,000 = €$1,000 billion
The value of public saving is:
$1,000 – $1,200 = –$200 billion
The government’s budget policy is harming growth because public saving is negative which mean less is available for investment.

Question 5: UnemploymentSources of unemployment include but are not limited to job searching, minimum wage rates, influence from unions and efficiency wages.

The type of unemployment is initiated by the firm is Efficiency wages
A firm may pay wages in excess of the competitive equilibrium to improve worker health, lower worker turnover, increase worker effort, improve worker quality. This helps to motivate employees which helps to improve and maintain worker productivity. How would this apply to the current economic situation in Western Australia?
Frictional unemployment is when workers are unemployed and looking for work in a healthy economy. Frictional unemployment happens even when the wages are at a competitive equilibrium. It usually occurs during a period when workers are searching for new employment, like University graduates, or transitioning from an old job to new one. It is considered voluntary unemployment because workers choose to remain unemployed rather than take the first job they are offered.  CITATION Ant16 l 3081 (Georgeson, 2016)(You must cite the source of your research e.g. text books, internet, newspaper articles etc.)
Question 6: Capital adequacy regulationWith regard to Australian Banks research the following:
What is capital adequacy regulation and who regulates it?
How does the regulator measure risk associated with each bank?
What is the difference between Tier 1 and Tier 2 capital?
(You must cite the source of your research e.g. text books, internet, newspaper articles etc.)

Question 7: Supply of moneyRBA: An Increase the supply of Australian dollarsCITATION Res18 l 3081 (RBA, 2018)The Reserve Bank of Australia (RBA). The RBA responds to changes in demand and supply of money to maintain the targeted cash rate, which remains unchanged at 1.5 per cent. The quantities of money traded between the central bank and commercial banks, in the overnight markets are called Exchange Settlements (ES) balances. These ES balances are used to settle interbank transactions and can be used as a measure of the quantity of money in the economy. To increase the supply of Australian dollars (AUD) the RBA will conduct Open Market Operations (OMO) by three types of transactions:
Bond purchases or sales: By purchasing bonds from banks and individual the RBA increase the supply of money because they are holding bonds rather money which it has supplied into the economy in exchange for the bonds.

Repurchase Agreements (Repos): The RBA will lend money to banks and individuals through Repos such as loans or bonds. This helps to increase the supply of Australian dollar.

Foreign Exchange Markets: The RBA can also sell its Foreign currency reserves to increase the supply of the Australian dollar.
The RBA can also reduce interest rates which lowers the cost of borrowing, resulting in higher investment activity and the purchase of consumer durables.
Economic growth
CITATION Lar l 3081 (Bucket, n.d.)If the RBA increases the money supply by buying bonds, increasing the demand for bonds in Panel (a) from D1 to D2 and the price of bonds to Pb2. This corresponds with the increase in the money supply shown by M? in Panel (b). Subsequently, interest rate will fall to r2 to achieve equilibrium. The low interest rate mean lowers cost of borrowing, resulting in higher investment activity , net exports and the consumer spending which shifts the aggregate demand curve from AD1 to AD2 in Panel (c). Real GDP increases from Y1 to Y2 therefore increasing the price level from P1 to P2 thus increasing inflation. The increase price level, Real GDP and demands for bonds by the RBA represent positive Economic growth. This is an example of expansionary monetary policy. CITATION CBn l 3081 (CBN, n.d.)
Question 8: Financial modellingResearch and explain the following Financial modelling techniques:
Historical data and use of ratio analysis
Three statement model
DCF model
(You must cite the source of your research e.g. text books, internet, newspaper articles etc.)

Question 9: capital assest Price Model (CAPM)By providing examples, briefly describe the Capital Asset Pricing Model (CAPM).

The capital asset pricing model (CAPM) shows the relationship between assets that are risky and expected return for those assets. CAPM can be used to compare the risk of two stocks and thus determining the price of the stocks CITATION Inv18 l 3081 (Investiopedia, 2018)The CAPM formula is:
ra = rrf + Ba (rm-rrf)
where:
rrf = The rate of return for a risk-free stock
rm = The broad market’s expected rate of return 
Ba = Beta of the asset (how much it moves relative to the market)
CAPM is used by investors because they want to be compensated for the risk they are taking by investing in stocks. The CAPM says at any level of risk (beta), the expected rate of return should exceed the rate of return for a risk-free stock by a significant amount thus, the more the risk accepted by the investor the higher the expected rate of return.

Asset One Asset Two
Risk Free Rate 2.5% 2.5%
Beta 1.8 0.6
Expected Market Return  5% 5%
= 2.5 + 1.8 x (5-2.5) = 2.5 + 0.6 x (5-2.5)
Expected Asset Return 7% 4%
$1 Discount store example

Question 10: CAPM CalcuationNewco’s beta is 1.3. Assume the return on the market is expected to be 16% and the risk-free rate is 4% Calculate the expected return of Newco’s stock in one year and determine whether the stock is undervalued, overvalued or properly valued with a current value of $25.

E(R)Newco = 4% + 1.3(16% – 4%) = 20%The expected return of Newco’s stock using CAPM is 20% and the investor anticipates a 20% return, the security would be properly valued.

If the expected return using the CAPM is higher than the investor’s required return, the security is undervalued and the investor should buy it.

If the expected return using the CAPM is lower than the investor’s required return, the security is overvalued and should be sold.