Question

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A. Shows the quantities of two musical instruments, harps and xylophones that can be produced by two countries, Amia and Gone.

	Amia	Gon
Harps Xylophones	90 120	40 88

1. Which country has the absolute advantage in producing xylophones? Why?

Country:

Explanation:

2. Which country has the comparative advantage in producing xylophones and why? Show your workings and explain your answer.

Country:

Explanation:

Calculation:

c) Assume that the exchange rate between the Amia pound and the Gon dollar is 2 A, Pound / 1 G,$, If Gon wants to import 300 units of harps from Amia, how much should Gon pay to Amia in term of Gon currency? One unit of harp is 200 A2A, Pound. Show your workings.    

Calculation:

Answer:

B. Aqua is a small economy. Increasing oil prices from 2007 through the second quarter of 2009 have caused the country's inflation rate to increase significantly. This information is collected from the report by the Aqua central bank.

a)         Prescribe the appropriate monetary policy to be implemented.            (0.5 mark)

b)         Required reserves ratio is one of the quantitative tools to be utilized in monetary policy. Based on your answer given in (d), briefly explain the effect of this quantitative tool to the economic situation stated above. (1 mark)

Answer 1

1.

A.

Country: Amia

Because, Amia is more efficient in production in comparison to that of Gon regarding the Xylophones. So, Amia is producing relatively more number of xylophones, building absolute advantage.

B.

Country: Gon

For Amia, opportunity cost of producing xylophones = 90/120 = .75 Harps

For Gon, opportunity cost of producing xylophones = 40/88 = .45 Harps

Since Gon has the relatively lower opportunity cost of producing a xylophone, than that of Amia, so Gon has the comparative advantage in production of xylophone.

C.

Price of 1 unit of Harp = 200 A pound

Price of 300 units of harp = 300*200 = 60000 A pound

So, price in terms of G dollars = 60000/2 = 30000 A Pound

2.

A.

Contractionary monetary policy will be implemented and as a part of it, money supply will be reduced. It will discourage the ugly consumption and demand will decrease. As a result, inflation rate will be controlled.

B.

Increase in required reserve ratio, will make less money available for the disbursements of loans. It will reduce the money supply and inflation rate will be controlled.