1.Consider a macro economy initially in equilibrium but not at full employment.

Using an aggregate demand and aggregate supply diagram model of economy , graphically illustrate and discuss the short-run and long-un effects of the following events upon the economy:
(a) An increase in international oil prices. Relationship between price and demand: When a price of good rises the quality demand will fall. This relationship is known as the law of demand. For example If we find out that the price of coffee have suddenly double in shops, what we would do? We will cut back on the amount of coffee we drink say from four cups per day to two cups .Perhaps we will give up drinking coffee altogether. An increase in international oil prices: - This situation associated with cost push inflation in aggregate demand. Cost push inflation is associates with deft ward shifts in the aggregate supply curve. Such shifts occurred when costs of production rise independently of aggregate demand. In this case the price of oil has increased internationally. It reflects that the cost of product has increased .Because when the firms face a rise in costs, they respond partly by raising prices and passing the cost onto the consumer.

For example: If the government raises the exercise duty on oil, there will be a single raise in oil prices and hence in industries fuel costs. This will cause temporary inflation while the price rise is passed on through the economy. On the diagram Y excise is the price level and the excise GDP. In the diagram P1 is the price level for the international oil price and AS1 is

the aggregate supply. As the cost of products has increased the industries out down n production, as a result supply of the oil decrease. That is why supply curve moves to the position of AS1 aggregate. AD is the aggregate demand curve and GDP2 is the new equilibrium for the new price level. b) An Appreciation in the foreign exchange rate value of economys currency. Ans : AD=C+I+G+(X-M) AD= Aggregate Demand C= Consumption I = Investment G= Government Investment X = Export I = Import It is assume that, an appreciation in the foreign exchange rate related with the (X-M) of an economy.

Export is the injection for an economy and import is a withdrawal for an economy. If the exchange rate goes up it affects the aggregate demand. For example: It the Australia dollar exchange rate is higher and higher it benefits the other country. Because people will spend more money outside the country, people will also go for holidays in other countries and spend money there. As a result the imports will be higher. On the other hand if the AUD rate is too high it is in stable position, than people will come to Australia for holidays and our exports will increase as well. So it is assume that if the export is higher aggregate demand higher.

C)The American economy falls back to recession.

Ands: It American economy falls back to recession. It is bad for our economy .Because our export will be less. It will affect the total aggregate demand. It can be assume that if people do not have jobs, they would not have money to spend. So people will buy fewer products from Australia. Consequently there will be less export or less injection for our country. As a result the aggregate demand curve will shift to the left because they amount of the total aggregate will be less.

In the diagram AD demand curve will shift to the left and the new AD will shift to the left and the new AD will be AD1 which is loss than before. (d) The countrys main exports fall in price while the goods the country imports from abroad rise in prise. Ans: If the price of the exports product is less than before than the demand of that product will increase. As a result the demand will be and the export will be high as well. So the Ad demand curve will shift to the right. On the other hand the value of the import product will be high so there will be less import.

2. Why do economists monitor retails sales? If more consumers are buying items on-line what difficulties will it present in terms of monitoring economic activities?
Ans: Economists monitor retail sales because economists are the one and studies micro and macro economics problem. Economics has a lot to do with money. They studies with how much money people are paid , how much money they spend, what is costs to buy various items, how much money firms earn; how much money there is in total in the economy. Economists studies- The production of goods and services, and consumption of good and services. The production of goods: Economists concern about how much the economy produces in total. In the total economy firms produce goods and services, by how much each firm produces and also what techniques of production they use. In addition to that they calculate how many people are employed. The consumption of goods and services: Economists studies how much the whole population spends ; what pattern of consumption the economy follows; how much people buy of particular items ; how peoples consumption is affected by prices and so on. Economics study all these because they what to know about money flow. People earn money ether to serve of spend. If people spend in the country by buying domestic product the money flows inside the economy. If they spend money out the country buying international products, the money flow out side the economy. When people spending money domestically it is easy to track, how much money people are spending, what product people are buying? By studying the many flow it becomes easy to study the economic growth. It more consumers are buying items on-line it will be difficult to monitor the economic activity because, while consumers are buying domestic product it is hard to track that. For example- Out of $1000, if people spending $700 domestically and $300 internationally it is good for the economy. But if people do the opposite way that it is not good for the economic growth of the country. To sum up economists monitor peoples spending the correct the price level of the market.

3. Collect an article from an Australian news paper showing coverage of some macroeconomics concept is displaying. Ans: Business investment still lacking in economic revival: Wayne Swan
WAYNE Swan has warned that updated Treasury forecasts to be released today will not be all good news and will show the economy had taken a "big hit" from the financial crisis. While growth and unemployment figures will be more positive than those predicted in May, the Treasurer said business investment was yet to pick up and challenges remained in the nation's

terms of trade. The release of the mid-year Economic and Fiscal Outlook comes ahead of a Reserve Bank meeting tomorrow, at which another rate rise is seen almost as a certainty. Analysts are predicting a rate rise of 25 to 50 basis points, which is likely to trigger fresh calls from the opposition for the government to wind back its stimulus program. Welcoming the government's decision to slash $250 million from the insulation component of its stimulus package, Malcolm Turnbull said yesterday: "The Reserve Bank is sending the strongest possible signals that the government has to wind back its spending. Start of sidebar. Skip to end of sidebar. End of sidebar. Return to start of sidebar. "They spent too much and they spent it in a very poorly targeted way. That is putting upward pressure on inflation and they know it," he told Channel Ten's Meet the Press. Mr Swan said yesterday that the growth and unemployment forecasts to be released today would be more positive than those six months ago because of the stimulus program, interest rate cuts and "the efforts of Australians". The revised unemployment figure is expected to be closer to IMF predictions of around 7 per cent. "Unfortunately, the budget has still taken a big hit from the global recession," he said. "Challenges remain in areas like business investment." In the article a macro economics issue is displaying. Investment is one of the core factors of the aggregate expenditure of an economy. As per we know AE=C+I+G+(x-m) although investment gets affected by the Business confidence. If people have less business confidence they will invest less. When the investment is less, the aggregate expenditure is less as well. Lack of business confidence is one of the macro economics issues which have been shown in the article.

4. Currently Australian consumers are paying off there debts not spending. Using the simple Keynesian Model assesses the implication for equilibrium GDP and level off savings of an increase in the savings function. Conversely what would happen to equilibrium income if there is a sustained rise in private investment spending?
Ans: currently Australian consumer are paying of there debts it is mean they are saving money to pay the debts. Saving is withdrawal but in the same time they paying off there debs so national income is going up.so it is good for long term but it might not very good for the short term. Keynesian analysis, if the equilibrium level of GDP (GDPe) is below the full- employment level (GDPf), There will be excess capacity in the economy and hence demand deficient unemployment. There will be what is known as a deflationary gap. This situation is illustrated in Figure-

The full-employment level of GDP (GDPf) is represented by the vertical line. The equilibrium level of GDP is (GDPe), where W=J. The gap is a-b; namely amount that the E line is below the 45 degree line at the full employment level of GDP (GDPf). It is also c-d: the amount that injections fall short of withdrawals at the full-employment level of GDP. If GDP is to be raised from GDPe to GDP f, injections will have to be raised and withdrawals lowered so as to close the deflationary gap. Note that the size of the deflationary gap is less than the amount by which GDPe falls short of GDPf. This is another illustration of the multiplier. If the injections are raised by a-b (i.e.-d), GDP will rise by GDP f-GDPe. The multiplier is thus given by: (GDPF-GDPe)/ (a-b) The Inflation Gap: If the full- employment level of GDP, national expenditure exceeds GDP, there will be a problem of excess demand. GDPe will be above GDPf. The problem is that GDPf represents areal ceiling to output. In he short run, GDP cannot expand beyond this point. GDPe cannot be reached. The result will therefore be demand pull inflation.

The situation involves an inflationary gap. This is amount by which expenditure exceeds

income or injections exceeds withdrawals at the full employment level of GDP. This is illustrated by the gaps e-f and g-h. To eliminate this inflation, the inflationary gap must be closed, either by raising withdrawals or by lowering injections. an increase in saving will cause a disequilibrium in the market for loanable funds. the rate of interest will fall from r1 to r2, but an increase will fall from in consumption. As a result, firm well sell less and will thus be discouraged from investing. The investment demand curve will shift to the left. The rate of interest will have to fall below r2, to clear the market. The demand for investment, according to Keynes, depends very much on business confidence in the future, A slide into recession could shatter such confidence. The resulting fall in investment would deepen the recession. The problem of disequillibrium in the market for loanable funds is made worse, according to Keynes, because neither saving nor investment is very responsive to changes in interest rates, and thus very large changes in interest rates would be necessary if equilibrium was ever restored after any shift in the saving or investment curves.

5. State the difference between:

# Money multiplier and income expenditure multiplier # Interest rate and the exchange rate # Supply side shocks and demand side shocks # Trade deficit and budget deficit

2Money multiplier: Multiplier is change in GDP due to the change of injection or withdrawal. When injection rise or withdrawals fall, this will cause GDP to rise. But by how much? The answer is that there will be a multiplied rise in income: that is, GDP will rise more than the rise in injections. The size of the multiplier is given by the letter k, Where: K = GDP/ J

It can be seen that the size of the multiplier depends on the slope of the W cure, the flatter the curve, the bigger will be the multiplier: that is the bigger will be the rise in GDP from any given rise injections. The slope of the W curve is given by W/ GDP. This is the proportion of a rise in GDP that is withdrawn, and is known as the marginal propensity to withdraw. The point here is that the less is withdrawn each time income circulates, the more will be recirculated and hence the bigger will be the rise in GDP . The size of the multiplier thus varies inversely with the size of mpw. The bigger the mpw, the smaller the multiplier; the smaller the mpw, the bigger than multiplier. In fact, the multiplier formula is simply the inverse of the mpw: K = 1/mpw Income expenditure multiplier:

Figure that injections rise by $20 billion. The expenditure line thus shifts upward by $20 billion to E2. The same effect would be achieved by withdrawals falling by $20 billion, and hence consumption of domestically produced good rising by $20 billion. Equilibrium GDP rises by $60 billion, from $100 billion to $ 160 billion. Where the E2 line crosses the 45 degree line. Size of GDP: GDP/ J

3Exchange Rate: Exchange rate is rate at which one currency trades for another on the foreign exchange market. If we want to go abroad, we will need to exchange our Australian dollars into rupiah, ringgit etc. The bank will quote for us that days exchange rates: for example 5000 rupiah to the dollar or 3.00 ringgit to the dollar it is similar for firms. If an importer wan s to buy , say , Some machinery from Japan, it will require yen to pay the Japanese supplier. It will thus ask the foreign exchange section of a bank to quota it is rate of exchange of the dollar into yen. Similarly, if we want to buy some foreign stocks and shares, or if companies based in Australia want to invest abroad dollars will have to be exchanged into the appropriate foreign currency.

Interest rate: The Reserve bank is worried about rising inflation. It thus decides to raise interest rates. One effect of these higher interest rates is that foreign capital is attracted into the country and the exchange rate is thus driven up, Tis makes impost cheaper and exports less competitive, which will result in a current account deficit that matches the financial and capital account surplus. Now we can assume that the government becomes worried about the damaging effect on exports and wants to reduce the exchange rate. If it uses interest rates as the means of achieving this, it will be the lower interest rate. This lower interest rate will make money flow out of Australia and this will make the rate of exchange depreciate. Not only government wants to set up high interest rate to contain inflation in the country but also low interest rates to help exporters. That is why government has different policies to have low inflation and low interest rate.

4Supply side shock: Assume that there is some exogenous increase in cast due to a sharp increase in oil prices, or an increase in wages won by a trad union, or firms rising prices to cover the cast of the interest rate. The short run AS curve shifts to AS1 prices rise to P1 and there is a fall in national output. If these increases in cast continue for some time, the AS curve will keep on shifting upwards. Price rice will continue and the cast push inflation will set up. Continuous upwards shift in the AS curve are particularly likely if different groups. The unions and the employers keep straggling for a large share of the national income.

5Demand side shock: Demand of goods rises when aggregate demand rises. These rises in aggregate demand happens du to the rise in consumer demand. If the government expenditure, investment by the firms or the export goes up the demand curve shift to the right. Due the single change in demand, if it rises the price and the output increase as well. 6Trade deficit: Trade deficit is meaning the imports of an economy are more than the exports in an economy. If a country facing inflation, the price of the goods in the country goes up. Alternatively people try and find cheaper product outside of the country. They send money overseas. As a result the import of the country goes up and the export goes down. 7Budget deficit: budget deficit happens when government expenditure is more than the government revenue. When government has budget deficit is government going to spend more money. For example: government investment money to build councils and also invests money to the new firms.

6. Assuming that the money market is initially in equilibrium, trace though the effects of a rise in the money supply on the market on the interest rate and also on output employment and the price level.
Ans: Equilibrium in the Money Market: Equilibrium in the money market occurs when the demand for money (L) is equal to th supply of money (Ms). This equilibrium is achieved through changes in the rate of interest.

Figure equilibrium is achieved with a rate of interest r (e) and a quantity of money M (e). If the rate of interest exceeds r (e), people would have money balances surplus to their need. They would use these to buy securities and other assets. This would use these to buy securities and other assets. This would drive up the price of securities and drive down the rate of interest. As the rate of interest fell, there would be a contraction of a money supply (a moment down along the M(s) curves) and an increase in the demand for money balances. The interest rate would than be achieved. Similarly, if the rate of interest were below r (e), people would have insufficient money balances. They would sell securities, thus lowering their prices and raising the rate of interest until it reached r (e). A shift in either M(s) or L will lead to a new equilibrium of money and rate of interest at the new intersection of the curves. Equilibrium in the money markets, therefore, will be first where the total demands for and supply of money is equal. This is achieved by adjustments in the average rate of interest. Second, it will occur when demand and supply of each type of financial asset separately balance. If, for example, there was excess demand for shot-term loans (like money at call) and excess supply of money to invest in long-term assets (like bonds), short-term rates of interest would rise relative to long-term rates.

Equilibrium in both the money market and GDP: Changes in money supply (or demand) affect GDP via changes in the rate of interest. It is threestage process, illustrated in Figure-

6In diagram (a) arise in money supply (Ms) will lead to a fall in the rate of interest(r): this is necessary to restore equilibrium in the money market. 7In diagram (b) the fall in r will lead to a rise in investment and other forms of borrowing (I). Since borrowing money will be cheaper, investment will cost less. 8In diagram (c) the rise in investment causes aggregate expenditure (AE) to rise, leading to a multiplied rise in GDP. The ultimate rise in GDP will be less than that shown in diagram (c). However. This is because the rise in the GDP from GDP2 will lead in the transactions demand for money. L will shift to the right in diagram (a) partially reversing the fall in the interest rate shown. This in turn will cause the level of investment to be less than I2 and consequently GSP will be less than GDP2.

7. Why do some economists say that budget deficits today mean tax rises in the future?
Ans: Economists say that budget deficits today mean tax raises in the future because, Government inject money to save the country to go into the reaction. For example: In 2009 during the global financial crisis a lot of people loose their jobs, they did not have money to spend. According to the economists, if people do not have jobs, they cannot earn money, if they do not have money, they can not spend. Consequently there will be less circulation of money in the economy. Moreover, the aggregate supply will be less because people will demand less product and industry will produce less. So, during the global financial crisis Australia Government invested money by giving every citizen $ 900. So, people can spend that money. Because of the Government investment Australia did not want into reaction.

So that was the budget deficit for government.

Unemployment = Tax = Govt. spending = Money raise = employment

Govt. tax

=Govt. spend(less collection) =

However, budget deficit today means more tax for future. Because, Government need to balance up the government revenue as well. Government invest money when there are recessions in the country. On the other hand Government collect money when there inflation in the country. This has the business cycle work. So, it is the if the government budget is deficits today than tax rise in the future.

8. Australia has had no recession in 20 years. Does this mean that for us the business cycle no longer applies?
Australia has had no recession in 20 years, it might not mean that for Australia the business cycle no longer apply because in 2009 during he financial crisis all over the world Australia was about to fall on recession. Government invest money to save Australia from recession. Business cycle applies for every economy including Australia. It does not mean that each and every country has to go into the recession. Although growth in potential output will vary to some extant over the years depending on the rate of advance of technology, the level of investment and the discovery of new raw materials it will nevertheless tend to be much steadier than the growth in actual output. Actual growth will tend to fluctuate. In some years there will be a high rate of economic growth: the country experiences a boom. In the years, economic growth will be low or even negative: the country experiences a recession. The cycle of booms and recession is known as the business cycle or trade cycle. When the price is too much high in a country the export goes down similarly when the price is too much low, the export goes up .Considering the business cycle when the price starts to go up, it keeps going up and up. Although at the same time the price starts to fall from its pick. On the other hand when the price starts to go down it keeps going down and down. At a certain stage it stars to go up again. The upward multiplier and the

downward multiplier correct the business cycle automatically. The depth of the magnitude and the length of the business cycle are different for each and every country. The countries will go into the recession or not it depends on the pro-activeness and the surplus budget of the government. There are four Phases of the business cycle-

1.The upturn: In this phase, a stagnant begins to recover, and growth in actual output resumes 2.The expansion: During the phrase there is rapid economic growth; the economy is booming. A fuller use is made or resources, and the gap between actual and potential output narrows. 3.The peaking out: Growths slows down or even ceases. 4.The slowdown recession or slump: During this phrase there is little or no growth or even a decline in output. Increasing slack develops in the economy.

9. The current Australian Economy is enjoying a resources boom is that good for other parts of the economy affected by the resources boom and by what economic channels are they affected. Ans: when there is resources boom in a country the production goes up. More production leads to more employment. More employment leads to more income. More income leads to more expenditure. It is hard to show change in GDP, output and employment by making change is injections and withdrawals. The multiplier process takes time. If there is a resources boom in the economy consumers, firms and government may not respond rapidly to the new situation. There respond will spread out over a period of time. Is there is a resources boom in one of the sector the firms will try to increase there production. The aggregate supply will go up. The price will go down because of the excusive supply than demand. In this case the aggregate demand will de less than the aggregate supply, as a result the price will go down under the equilibrium of the if the equilibrium level of GDP (GDPe) is below the full- employment level (GDPf), There will be excess capacity in the economy and hence demand deficient unemployment. There will be what

is known as a deflationary gap. This situation is illustrated in Figure-

The full-employment level of GDP (GDPf) is represented by the vertical line. The equilibrium level of GDP is (GDPe), where W=J. The gap is a-b; namely amount that the E line is below the 45 degree line at the full employment level of GDP (GDPf). It is also c-d: the amount that injections fall short of withdrawals at the full-employment level of GDP. If GDP is to be raised from GDPe to GDP f, injections will have to be raised and withdrawals lowered so as to close the deflationary gap. Note that the size of the deflationary gap is less than the amount by which GDPe falls short of GDPf. This is another illustration of the multiplier. If the injections are raised by a-b (i.e.-d), GDP will rise by GDP f-GDPe. The multiplier is thus given by: (GDPF-GDPe)/ (a-b) Other part of the economy affected by the resources boom: If there is a resources boom in one of the sector of an economy the other part of the economy will be affected as well

10. Why under flexible exchange rates does a nation not have too worry too much about a balance of payments deficit? What other specific advantages do

flexible exchange rates give to the operation of economic policy with specific regard to the effectiveness of fiscal policy and monetary policy?
Ans: Flexible exchange rate is when the demand of a currency goes up the supply of that currency goes down it leads to increase in exchange rate. Similarly when the demand of a currency goes down the supply of that currency goes up and it leads to decrease in exchange rate. The demand and the supply related with export and import. When import is less, the export is high. The demand will go up as well, than it will lead to increase in exchange rate. Than again higher exchange rate will lead to higher import and lesser export. It keeps going on in a same trend so the balance of payment gets corrected itself. It can be assumed that, under flexible exchange rates a nation does not have to worry about a balance or payment deficit because it gets corrected itself in a mater of time.

*echttp://www.theaustralian.com.au/business/breaking-news/business-investment-still-lackingin-economic-revival-wayne-swan/story-e6frg90f-1225793354917onomy.Exports is high means

the money.date-14/09/2011 *Lecture slides *principles of macroeconomics, John Solomon and Kith Norris *macro economics, salman and Norris *the resources drive