group assignment course introduction to macro economics

Two others macroeconomic data are: Current Account Balance and Central Government Debt Figure 1 GDP current US$: Figure 2: GDP current US$Sweden had a GDP current US$ of 541.01 billion i

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VIETNAM NATIONAL UNIVERSITY - HO CHI MINH CITY

INTERNATIONAL UNIVERSITY SCHOOL OF INDUSTRIAL ENGINEERING & MANAGEMENT

GROUP ASSIGNMENT

Advisor: Dr Hoang Thi Anh Ngoc

Group: 09 VERSION C- SWEDEN

Group members:

Ho Chi Minh City, Viet Nam

May 2023

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Table of Contents

Part 1: Overview of some basic macroeconomic variables: 3

Part 2: GDP and its components : 8

Part 3: The money creation process: 9

Part 4: Theory of Open Economy 10

Part 5: Aggregate Demand – Aggregate Supply (20 pts) 12

Table of Figures Figure 1 3

Figure 2: GDP( current US$) 3

Figure 3: Inflation, consumer prices( annual %) 4

Figure 4: Unemployment, total (% of total labor force) (modeled ILO estimate) 5

Figure 5: Current account balance (BoP, current US$) 6

Figure 6: Central government debt, total (% of GDP) 7

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Part 1: Overview of some basic macroeconomic variables:

For the most recent 5 years present the GDP, inflation, and unemployment and two other macroeconomic data that you see fit to present the state of the assigned country Provide the overview of the country based on those

macroeconomic variables

Two others macroeconomic data are: Current Account Balance and

Central Government Debt

Figure 1

GDP( current US$):

Figure 2: GDP( current US$)

Sweden had a GDP (current US$) of 541.01 billion in 2017, which

increased to 555.45 billion in 2018 However, due to the COVID-19 pandemic,

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the country's GDP was reported at 533 billion in 2019, then rapidly rose up to 87 547.05 billion and 635.66 billion in 2020 and 2021

It's important to note that the pandemic has had a significant impact on

Sweden's economy, as it has for many countries around the world The

government implemented various measures to mitigate the negative effects of

the pandemic, including loan guarantees, fiscal stimulus packages, and support

for businesses and workers Therefore, the GDP rapidly went up in 2020 and

2021

Inflation, consumer prices( annual %):

Figure 3: Inflation, consumer prices( annual %)

Sweden's annual inflation rate for consumer prices was 1.95% in 2018,

which decreased to 1.78% in 2019 In 2020, due to the impact of the COVID-19 pandemic, the inflation rate decreased significantly to 0.5% However, it

strikingly rose up to 2.16% in 2021 Last year was the highest peak in inflation

rate for consumer prices in approximately 30 years 8.37%.at

Overall, Sweden has traditionally had a low and stable inflation rate,

which has helped to maintain its economic stability and prosperity The country's central bank, the Riksbank, has a mandate to ensure price stability, and it uses a range of tools to manage inflation, including setting interest rates and

conducting monetary policy operations

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Unemployment, total (% of total labor force) (modeled ILO estimate):

Figure 4: Unemployment, total (% of total labor force) (modeled ILO estimate)

Sweden's unemployment rate (modeled ILO estimate) was 6 % in 2018, 36 which creased slightly to 6 % in 2019 In 2020, due to the impact of the in 83 COVID-19 pandemic, the unemployment rate increased significantly to 8.29%, then continuing went up to 8.72% However, there was a fall in 2022 7.36%.to Overall, Sweden has traditionally had a relatively low unemployment rate compared to many other countries, thanks in part to its strong economy and

supportive welfare system However, the pandemic has created significant

challenges for the country's labor market, with job losses and reduced work

hours affecting many workers across various sectors

The Swedish government has implemented a range of measures to support workers during the pandemic, including wage subsidies, temporary layoff

schemes, and support for retraining and reskilling programs These efforts are designed to help mitigate the effects of the pandemic on the labor market and support a robust economic recovery over the coming years

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Current account balance (BoP, current US$):

Figure 5: Current account balance (BoP, current US$)

Sweden had a current account surplus (BoP, current US$) of 15 billion 38

in 2017, which decreased to 1 billion in 2018 and further significantly 14

increased to 9 billion in 2019 In 2020, due to the impact of the COVID-19 28 pandemic, Sweden's current account balance rose to 32.7 billion and continuing grew up to 39.99 in 2021

Overall, Sweden has traditionally had a strong current account surplus, thanks in part to its export-oriented economy and high levels of international trade The pandemic has created significant challenges for the country's trade relationships, as global demand has decreased and supply chains have been

disrupted Furthermore, the depreciation of the Swedish krona against other

major currencies has made imports more expensive, contributing to the current account deficit from 2019-2021

The Swedish government and central bank are implementing various

measures to support the economy and promote recovery, including monetary and fiscal stimulus, as well as trade policy initiatives aimed at maintaining and

expanding international trade relationships These efforts are designed to help mitigate the negative effects of the pandemic on the country's balance of

payments and support a return to a current account surplus over time

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Central government debt, total (% of GDP):

Figure 6: Central government debt, total (% of GDP)

Sweden's central government debt as a percentage of GDP was 43.95% in

2017, which decreased slightly to 42 % in 2018 and further strongly 26

decreased to 38.67% in 2019 In 2020, due to the impact of the COVID-19 pandemic, the debt- -GDP ratio increased significantly to an estimated to 43 %99 , then fell down to 40.74% in 2021

Overall, Sweden has traditionally had a relatively low level of public debt, thanks in part to its strong economy and fiscal discipline The pandemic has created significant challenges for the country's finances, as the government has implemented various measures to support the economy and mitigate the negative effects of the pandemic on businesses and workers

The Swedish government has announced various fiscal stimulus packages aimed at supporting businesses and households during the pandemic, including wage subsidies, tax deferrals, and loans for small and medium-sized enterprises Additionally, the government has increased spending on healthcare and other social services to respond to the public health crisis

The country's relatively strong economic fundamentals and favorable borrowing conditions have helped to mitigate the impact of the pandemic on government debt levels Nevertheless, policymakers are aware of the need to maintain fiscal discipline over the long term to ensure sustainable public

finances and avoid the risk of future debt crises

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Part 2: GDP and its components :

Explain how each of the following transactions affects which component of the GDP of the assigned country (increase, decrease, or unaffected):

• Local government hires workers to repave Highway 101:

Its transaction would result in a rise in the GDP component connected to government spending Because the government is paying for a service that will

be used by the general public, this would specifically raise the GDP component connected to government consumption expenditures Due to the fact that this is a domestic transaction involving a government body and a service provider, it would be taken into account for calculating GDP As a result, since this

transaction shows that there is an increase in economic activity taking place within the nation related to government expenditures, it will have a favorable effect on the GDP of the allocated country Since the infrastructure (the

highway) is being rebuilt and counts as government investment in the economy, this would also add to the investment component of GDP

• You purchase a box of foreign-brand chocolate:

A box of chocolate from a foreign brand would have an impact on the GDP's import component The GDP of a nation is considered to be negatively affected when goods and services are purchased from abroad because they were not created there As a result, the transaction would raise the GDP's import

component for the designated nation

• Uncle Henry buys a new refrigerator from a domestic manufacturer: The transaction of Uncle Henry buying a new refrigerator from a domestic manufacturer would raise the GDP component relating to consumer

expenditures Specifically, since Uncle Henry is the final consumer and not a business or the government purchasing the commodity, it would raise the GDP component tied to personal consumption expenditures This would be a type of durable goods spending, and as it involved a domestic manufacturer and took place within the nation's boundaries, it would directly affect GDP calculations The designated country's GDP would benefit from this transaction as a result

• A domestic laptop manufacturer sells a desktop computer from its inventory to the Johnson family:

The sale of a desktop computer from the Johnson family's inventory by a domestic laptop maker will increase the GDP subcomponent known as

consumer expenditure The amount of money spent by households on products

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and services, including durable things like computers, is measured as

consumption expenditure As a result, this transaction will increase the

designated nation's GDP

• You pay a hairdresser for a haircut:

Paying a hairdresser for a haircut would increase the GDP component relating to consumption expenditures Since you, the final consumer, are buying

a service for personal use, it would specifically enhance the GDP component connected to personal consumption expenditures Because it is a domestic transaction involving a service provider and a client, it would be taken into account when calculating GDP As a result, this transaction would increase the allocated country's GDP because it shows that there is economic activity taking place there

Part 3: The money creation process:

Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves The required reserve ratio is presently set at 5% Larry, a Southeast Mutual Bank customer, deposits $200,000 into his checking account at the local branch

a Use T-account to show the increases in the balance sheet of Southeast Mutual Bank

Southeast Mutual Bank T-Accounts:

b What is the effect of a new deposit on excess and required reserves when the required reserve ratio is 5% ?

Since the required reserve ratio is 5%:

New Required reserve = Deposits x Reserve ratio

= $200,000 x 5% = $10,000

New Excess reserve = $200,000 x 95% = $190,000

c Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Janet, who immediately uses the funds to write a check to Felix Felix deposits the funds immediately into his checking account at Walls Fergo Bank Then Walls Fergo Bank lends out all of its new excess reserves

to Raphael, who writes a check to Megan, who deposits the money into her

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account at PJMorton Bank PJMorton lends out all of its new excess reserves to Susan in turn What is the effect of this ongoing chain of events

on required reserve and loans at each bank? Enter each answer to the nearest dollar

Deposits

Increase in Required reserves

Increase in Loans

d Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves Under these assumptions, the $200,000 injection into the money supply results in an overall increase of how much in demand deposits?

Increase in Checking Deposits = Deposits / Reserved ratio

= $200,000/0.05

= $4,000,000

Part 4: Theory of Open Economy

Suppose now that a sudden bout of political turmoil in a foreign country causes world financial markets to become uneasy Because investors now see the foreign country as unstable, they decide to pull a portion of their assets out of the foreign country and put them into the assigned country This unexpected shock to the demand for assets in the foreign country is known as capital flight Using a three-panel diagram, show what happens to national saving, domestic investment, net capital outfloow, the interest rate, the exchange rate, and the trade balance of the assigned country Also explain in words how this policy affects the amount of imports, exports, and net exports of the assigned country

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The impact of capital flight on Sweden's macroeconomy can be analyzed using a three-panel diagram, which shows the changes in different economic variables The panels are:

1 Loanable funds market: This panel shows the supply and demand for loanable funds in the Swedish economy

2 Foreign exchange market: This panel shows the supply and demand for foreign currency (of the foreign country experiencing political turmoil) in the Swedish economy

3 Macroeconomic equilibrium: This panel shows the intersection of the loanable funds and foreign exchange markets, which determines the equilibrium values of interest rates and exchange rates

Effects of Capital Flight on National Saving, Investment, Net Capital Outflow, Interest Rate, Exchange Rate, and Trade Balance:

• In the loanable funds market, the demand for loanable funds in Sweden increases as investors withdraw their assets from the foreign country As a result, the interest rate in Sweden decreases, increasing the quantity of loanable funds demanded and reducing the quantity supplied

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• In the foreign exchange market, the increase in demand for the Swedish krona increases its value relative to the foreign currency, leading to an appreciation of the Swedish exchange rate

• In the macroeconomic equilibrium panel, the lower interest rate and stronger exchange rate lead to an increase in net exports by making locally produced goods cheaper abroad and imports more expensive at home

In summary, capital flight leads to a decrease in national saving, an increase in domestic investment, and a decrease in net capital outflow The decreased demand for loanable funds lowers the interest rate and appreciates the exchange rate Lower interest rates and exchange rates increase net exports, leading to an expansion in the trade balance Therefore, the amount of exports would increase due to the stronger exchange rate, while the amount of imports would decrease due to the reduced demand for foreign goods Consequently, Sweden is likely to experience an increase in net exports

Part 5: Aggregate Demand – Aggregate Supply (20 pts)

For each of the following events, explain in words and with diagrams the short-run and long-short-run effects on output and the price level, assuming policymakers take no action

a) A technological improvement raises productivity

b) The federal government increases spending on national defence

a)

Productivity increases reduce firm costs This will increase total supply In the short run, the SRAS curve will shift to the right, lowering the price level and increasing real GDP Wages and prices adjust in the long run, reducing aggregate demand AD shifts to the left until a new long-run equilibrium is established at the intersection of the new AD curve at a lower price level, restoring real GDP to potential GDP

In the graph below, in short run SRAS0 will shift rightward to SRAS1,

intersecting AD0 at point B with lower price level P1 and higher real output Y1

In the long run, AD0 shifts left to AD1, intersecting SRAS1 at point C with further lower price level P2 and restoring real GDP to potential GDP level Y0