BUSI 101 – Capital Markets and R

Project 1
Jatinderpal Gill
1

Question 1:

(a) Looking at the table from Question 1, the value of nominal GDP in 20X0 is $40,468.75
and in 20X1 is $49,837.50.
(b) The value of real GDP in 20X0 is $40,468.75 and in 20X1 is $48,531.25.
(c) The GDP deflator for 20X0 is 100 and for 20X1 is 102.69.
(d) The inflation rate from 20X0 to 20X1 is 2.69%
(e) The increase in nominal GDP from 20X0 to 20X1 is due to an increase in real output and
an increase in prices for each specific product. As seen below, the price and quantity
increased for both the Popcorn and Smartphones from 20X0 to 20X1:
Popcorn Smartphones
2010 – nGDP = ($1.25 x 375) + ($400 x 100) = $40,468.75
2011 – nGDP = ($1.50 x 425) + ($410 x 120) = $49,837.50

Question 2:

(a) If both Marc and Josh both divided the calculations and writing equally to complete the
project, it would take them a total of 30.5 hours. This is derived from Josh and Marc
both cutting their respective times in half on both calculations and writing to equally
complete the project in 30.5 hours. Marc would calculate for 4 hours and write for 4
hours, while Josh would calculate for 7.5 hours and write for 15 hours.

(b) It is impossible for a person to have a comparative advantage in all goods produced.
Looking at what Marc and Josh are capable of doing, we see that if Marc spends 8 hours
doing calculations, then he would miss out 8 hours of writing and vice versa, the same
goes for Josh whom would be writing for 30 hours and miss out on 15 hours of doing
calculations. Marc is equal in calculating and writing, but Josh has an advantage in
calculating over writing, so each could specialize in what they are good at. Marc could
spend 8 hours writing and Josh could spend 15 hours doing calculations if each were to
2

specialize, giving a total of 23 hours to complete the project, saving 7.5 hours equally
contributing.

(c) The better solution would be for Marc and Josh to find a more even distribution of hours
between the tasks equally since the opportunity cost is exactly the same. If they could
come to an understanding that a trade-off between the hours they both spend could
equal to the same amount of opportunity cost in the end, then they could each work
some time in each of the tasks rather than splitting the two tasks separately.

Question 3:

(a) The expected real interest rate is 2.6% (4.5 – 1.9).

(b) The actual real interest rate is 2.2% (4.5 – 2.3).

(c) Mike and Jane lost from the unexpected inflation, because they have less purchasing
power over the term of the loan to use on items that they want to purchase. The bank
will benefit from the unexpected inflation since larger loans will be needed to cover the
higher costs from inflation.

Question 4:

(a) Property Rights are important for the growth of a nation’s standard of living because
they help people protect what they own. The nations that enforce more property rights
have a higher standard of living because people are willing to live in that nation knowing
there is ownership rights and also justice available if these rights are infringed on.
Nations with a lower standard of living usually do not have very good property rights
which is what factors into that nation’s standard of living.
3

(b) Two examples of where property rights would be important:

 A farmer would only grow crops if they are protected from their crops being stolen.
 A business such as Apple benefits from property rights so that no other company can
copy their software.

Question 5:

(a) The value of saving is $425 billion (S = 1,400 – 700 – 275) and the value of investment is
$425 billion (I = 1,400 – 700 – 275).

(b) The value of Private Saving is $400 billion (1,400 – 300 – 700).

(c) The value of Public Saving is $25 billion (300 – 275).

(d) Currently the government budget policy is harming the country because the
government is spending much more than it is receiving in tax revenue. This is definitely
in part because of covid which has caused a high inflation rate.

Question 6:

(a) As seen on the graph plotted below, the equilibrium real interest rate would be 4% and
the equilibrium level of saving and investment would be roughly $170 billion.
4

Loanable Funds Market

0
130 150 170 190 200

Supply Demand

(b) Market forces such as demand for loanable funds will outweigh the supply and cause
the real interest rate to eventually increase because of lenders allowing for more funds.

(c) If the government were to increase its budget deficit by $40 billion, the supply curve
would shift left, as seen below, and change the equilibrium real interest rate to 5% and
the level of saving and investment to roughly $140 billion.
5

Loanable Funds Market

12

10

0
130 150 170 190 200

Supply Demand

Question 7:

(a) If the public decided to increase the amount of currency it holds, the money supply
would decrease because more money is being held and saved rather than deposited
into a bank which would loan portions of that money to increase the money supply.

(b) If Banks decided to hold more excess reserves, the money supply would decrease
because they are keeping more money in reserve rather than loaning the money. Banks
tend to reserve a low amount of the money that is deposited into accounts and loan out
a large portion, when a higher reserve is held, less money is in the economy since less
money is loaned out.

Question 8:

(a) The value of velocity is 20. This is derived from multiplying the price per unit of output
($4) by the real output (2,000) and dividing this number by the money supply ($400).
6

(b) If the money supply doubles then this will cause an increase in the rate of inflation.
Originally, we had M(400) x V(20) = P(4) x Y(2,000) = 8,000, now with double the money
supply we have M(800) x V(20) = P(4) x Y(2,000) => 16,000 = 8,000.

Question 9:

(a) If the Bank of Canada decreases the money supply, the money supply would obviously
decrease, the money demand would increase, the value of money would increase and
the price level would decrease.

(b) If the People decided to demand more money at each price level, money supply would
increase, money demand would increase, the value of money would decrease and the
price level would increase.

(c) If the Banks decided to hold fewer excess reserves, the money supply would increase,
money demand would be affected by what the economy currently needs, the value of
money would decrease and price level would increase.
7

Bibliography
Mankiw, Kneebone, McKenzie. (2020). Principles of Macro Economics. 8 th Canadian Edition.
Toronto. Nelson.