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# Macro-Economic Indicator

1. Assume the total civilian labor force is 30,000 people and the number of unemployed is 2,500 people. Compute the unemployment rate, in percent. (please show your work)

2. As with the above problem, assume the total civilian labor force is 30,000 people, but, 500 of the unemployed have now given up and have stopped looking for work. Compute the unemployment rate, in percent. (please show your work)

Macro-Economic Indicators: GDP, CPI, Unemployment, and Interest.

Introduction

Gross Domestic Product (GDP) represents the total worth or total value of all the goods and services over a specified period of time or the size of an economy. It’s calculated as a comparison to the past quarter or year. It can be calculated in two ways i.e. the income approach or the expenditure approach.

1(a).Assume that the consumer spending is \$1000, government expenditures are \$250, investments by industry are \$200, and the excess of exports over imports is \$300. Compute the GDP.

Y = C + I + E + G = 1000 + 250 + 200 + 300 = 1750, GDP = 1750.

Y = GDP, C = Consumer spending, I = Investment made industry, E = Excess of Exports over Imports, G = Government spending.

2(b).If we are able to increase our domestic energy production, and that allows us to import less oil from foreign countries, briefly explain what will happen to the GDP.

If we are importing less oil from foreign countries then the excess of exports and imports will increase positively which will result in a positive growth for the economy. For instance, in the above problem if the imports were reduced by \$100 dollars then the GDP will also increase by \$100 to \$1850.

1(c).If the CPI went from 106 to 111 during the past year, the rate of inflation, in percent, was?

Inflation is the average rate at which the prices of all goods and services are increasing and the negative impact on purchasing power. To calculate the inflation rate, we simply work out the differences between the two consumer price indexes i.e. the previous year’s CPI from the current year’s CPI and multiply the difference by 100 to get a percentage. The rate of inflation = 111 – 106 = 5/106*100 = 4.7%

2(c).If the CPI went from 217 to 234 over the past year, the rate of inflation was?

The inflation rate = 234 – 217 = 17/234 * 100 = 7.265 %

1(d).Assume the total civilian labor force is 30,000 people and the number of unemployment is 2,500 people. Compute the unemployment rate, in percentage.

Unemployment rate = number of people unemployed/number of people in the civilian labor force. Unemployment rate = 2500/30000 * 100 = 8.333 %

2(d).As with the above problem, assume the total civilian force is 30000 people, but, 500 of the unemployed have now given up and have stopped looking for work. Compute the unemployment rate, in percentage.

An unemployed person in the US is a person who belongs to the civilian labor force who is willing and available for any chances of employment in his line of profession or liking, has worked for wages of less than an hour per week and is actively involved in searching for employment.

Unemployment rate = number of people unemployed/number of people in the civilian labor force. Unemployment rate = 2500 – 500/30000 -500 * 100 = 2000/29500 * 100 = 6.78%.

1(d).The differences in rates among the above treasury bonds is caused by down sloping yield curve. They usually don’t follow the federal funds rate instead they follow the yields between the 10-30 year Treasury Notes, which are auctioned to the highest by the US. Treasury department. The yields normally respond to the markets needs or demand, if the demand is high, the yields are low and if the demand is low then the yields will be high to attract clients or investors.

Which statement is false?

2(d).The default risk premium is applied to all bonds including US government ones. It’s false because in the United States, the only borrower who does not pay the default premium is the US government. However during hard economic times the US government offer higher yields to attract investors. The default premium is paid by corporations or companies with low grade bonds or individuals with poor credit rating.

3).Over the next 3 years inflation is expected to be: Year one 2.5%, year two 4.5% and year three 5%. What should investors require for an inflation premium on a treasury bond with a three- year maturity? The inflation premium is the provision for expected effects of inflation expected by the investor given the prevailing economic conditions. The three year maturity bond should have a margin of at least 5% inflation provision to cater for the erosion of the expected returns on the investment due to the negative effects it has on the expected income.

If the rate of inflation is expected to be 0% for the next 4 years will the yield curve have an upward slope? No. A higher inflation increases bond yields while a low inflation decreases the bond yield. In this case it will definitely not increase, but it maybe constant or decrease.

References

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Integrated Approach to Credit Risk and Interest Rate Risk Management. John Wiley & Sons

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