ECON201 SEU Cash Reserve Ratio Discussion

Description

Topic: The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This rate is determined by the Country’s Central Bank. The Cash Reserve Ratio of select Middle Eastern Countries are given below: Bahrain (%) — 5.0 Oman (%) — 5.0 Saudi Arabia (%) — 7.0 United Arab Emirates (%) — 1.0 As can be seen, the cash reserve ratio of Saudi Arabia is highest among the listed nations. “Discuss on the implications of the 7% reserve rate on Saudi economy, highlighting the advantages and disadvantages”.

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Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 2
Macroeconomics (ECON 201)
Due Date:16th April 2022 @ 23:59
Course Name: Macroeconomics
Student’s Name:
Course Code: ECON201
Student’s ID Number:
Semester: II
CRN: 24486
Academic Year:2021-22-2nd
For Instructor’s Use only
Instructor’s Name: Dr. Mohammad Athar Ali
Students’ Grade: 00 / 10
Level of Marks: High/Middle/Low
General Instructions – PLEASE READ THEM CAREFULLY
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The Assignment must be submitted on Blackboard (WORD format only) via
allocated folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students
or other resources without proper referencing will result in ZERO marks. No
exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
plagiarism).
Submissions without this cover page will NOT be accepted.
Chapter 13, 14 & 15: Critical Thinking: Financial System: Saving and Investment &
Unemployment and Its Natural Rate: (10 Points)
In the second assignment for the Macroeconomics course, the students are required to choose a specific
area from the subject and answer the questions given, upon successful completion of the assignment; the
student should be able to achieve the following learning outcomes:
Learning Outcomes:
1. Describe how to evaluate macroeconomic conditions such as unemployment, inflation, and
growth. [CLO 1.2]
2. Recognize the fundamental determinant’s of a nation’s long-run economic growth. [CLO 1.3]
Reference Source:
Textbook: – Mankiw, N. Gregory. Principles of Macroeconomics, 6th ed. Mason, OH: South-Western
Cengage Learning, 2011. ISBN: 9780538453066 (hard copy); ISBN: 9781115468523 (eBook)
Q.1. Critical Thinking: Financial System: Saving and Investment: Chapter 13: (4 Points)
Suppose the government borrows $20 billion more next year than this year.
a. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall?
b. What happens to investment, private saving, public saving, and national saving? Compare the
size of the changes to the $20 billion of extra government borrowing.
c. How does the elasticity of supply of loanable funds affect the size of these changes?
d. How does the elasticity of demand for loanable funds affect the size of these changes?
e. Suppose households believe that greater government borrowing today implies higher taxes to
pay off the government debt in the future. What does this belief do to private saving and the
supply of loanable funds today? Does it increase or decrease the affects you discussed in parts (a)
and (b)?
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Q.2. Critical Thinking: Financial System: The Basic Tools of Finance: Chapter 14: (3 Points)
When company executives buy and sell stock based on private information they obtain as part of
their jobs, they are engaged in insider trading.
a. Give an example of inside information that might be useful for buying or selling stock.
b. Those who trade stocks based on inside information usually earn very high rates of return.
Does this fact violate the efficient markets hypothesis?
c. Insider trading is illegal. Why do you suppose that is?
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Q.3. Problems and Applications: Unemployment: Chapter 15: (3 Points)
The Bureau of Labor Statistics announced that in April 2010, of all adult Americans,
139,455,000 were employed, 15,260,000 were unemployed, and 82,614,000 were not in the labor
force. Use this information to calculate:
a. The Adult Population
b. The Labor Force
c. The Labor-Force Participation Rate
d. The Unemployment Rate
Important Note: – Support your submission with course material concepts, principles, and
theories from the textbook and at least two scholarly, peer-reviewed journal articles.
Answer:
Question 1:
A: Demand curve D and supply curve S for loanable funds determine the
equilibrium interest rate I. When government borrows $20 billion, supply of
loanable funds is reduced by the same amount and thus shifts towards the left from
S to S1. With demand remaining unchanged, the original demand curve intersects
the new supply curve at e1: as a result the interest rate increases from i to i1 So
increase in government borrowing increases the interest rate.
B: To recall National saving = public saving + private saving
National saving = Investment
It is dear from the above diagram that the initial national saving is L which falls to
Li due to increase in government borrowing. So, national savings fall by less than
$20 billion. Since national savings is equal to investment, investment also declines
by less than $20 billion. Now the increased government borrowing refers to public
borrowing; so public saving declines by exactly $20 billion. Since private saving is
the difference between national savings and public savings, private saving
increases by less than $20 billion.
Investment decreases by less than $20 billion
National savings decreases by less than $20 billion
Public savings decreases by exactly $20 billion
Private savings increases by less than $20 billion
C: Elasticity of supply of loanable funds affects the size of above parameters. If
supply of loanable funds is more elastic, the supply curve for the loanable funds
will be more flat curve. When government borrowing increases, a flat supply curve
will increase interest rate by fewer amounts and the national savings would fall by
less. If the supply curve is less elastic, the interest rate will increase by a greater
amount.
D: Elasticity of demand for loanable funds will also affect the size of above
parameters. If demand for loanable funds is more elastic, the demand curve for the
loanable funds will be more flat curve. When government borrowing increases, a
flat demand curve will increase interest rate by fewer amounts; but reduces the
national savings by more amounts. If the demand curve is less elastic, the interest
rate will increase by a greater amount.
E: The belief that today’s government borrowing implies higher tax payments to
pay off the government debt in the future leads to increased private savings. People
are motivated to save more for excess tax payments in future. As a result, the
supply of loanable funds will increase. Increase in private savings will offset the
reduction in public savings; also reduces the amount by which national savings
decline; also reduces the amount by which interest rate increases.
Question 2:
A: A good example of insider information would be to know how clinical trials
went at a biotech company. If the insider knew that the trials were successful
before the public, he or she could speculate on a stock price increase based on this
information.
B: According to effective markets theory, market prices reflect all public
information regardless of insider information. Since the trading was based on
information that was not yet available to the public, there is no violation of the
hypothesis.
C: It gives an unfair advantage to an insider who can continue to profit from
insider trading for as long as the insider desires. Hence, insider trading is illegal
since it involves taking advantage of unknowing shareholders.
Question 3:
A: The Adult Population = (# Employed + # Unemployed + # Not in the labor
force)
= (139,455,000 + 15,260,000 + 82,614,000) = 237,329,000
B: The Labor Force = (# Employed + # Unemployed)
= (139,455,000 + 15,260,000) = 154,715,000
C: The Labor-Force Participation Rate = 100 X ( Labor force / Adult population)
= 100 X (154,715,000 / 237,329,000) = 65.19%
D: Unemployment rate (“u-rate”) = 100 X ( # of unemployed / labor force)
= 100 X (15,260,000 / 154,715,000) = 9.8%

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Cash Reserve Ratio

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