Appendix 2 Assignment Part B Macroeconomics: Answer any five (5) of the following questions. Each question is worth 10 marks.

. Make very sure you put within quotations if phrases are taken in its entirety from a reference, which should not occur too often anyway and where ideas are adapted from references you must acknowledge with in-text referencing. Answer each question directly with properly labelled diagrams where necessary. Generally an answer would be about to 1 page. Question 1: (a) (b) (c) What are the four macroeconomic goals for any country? Is there a conflict between achieving all of them at the same time? (2 marks) Which is worse, higher inflation or higher unemployment and explain why? (2 marks) Give examples of each of the 4 types of aggregate expenditure. Which of the 4 represent the largest share of GDP in Australia? Can an expenditure component be negative? Explain. (2 mark) Explain and illustrate with a suitable diagram the four phases of an economic trade cycle. Identify where you think the Australian economy might be on a trade cycle diagram. (2 marks) Using the simple Keynesian macro model, assess the implications for equilibrium GDP and the level of savings of an increase in the savings function. (Hint: Keynes called this phenomenon the paradox of thrift) (2 marks)

(d)

(e)

Question 2: In a closed economy (i.e. one that does not engage in foreign trade), spending on consumer goods is related to GDP by the following schedule. Also, firms are investing at a rate of $8bn per year and the government is spending is $12bn per year: 199 8 0 4 20 24 199 9 20 20 20 40 200 0 40 36 20 56 200 1 60 52 20 72 200 4 80 68 20 88 200 5 100 84 20 104 200 6 120 100 20 120 200 7 140 116 20 136 200 8 160 132 20 152 2009 180 148 20 168

GDP C (consumption) J (total injections) E (Aggregate expenditure)

(a) What is the equilibrium level of GDP? (1 mark)

(b) What is the mpc? (1 mark) (c) What is the value of the expenditure multiplier? (1 mark) (d) Suppose that full employment yields GDP of $140bn per annum, by how much must government expenditure be changed to reach full-employment GDP? (2 marks) (e) Does the initial equilibrium situation represent an inflationary or a deflationary gap, and what is the size of this gap? (2 marks) (f) Explain why an increase in injections (G, I or X) will lead to a multiplied rise in national income (2 marks) (e) What is the formula for the multiplier in a simple closed economy, with no taxes? (1 mark) Question 3: Using the aggregate demand aggregate supply (AD-AS) diagram, show how the four economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event) (a) (b) (c) (d) An increase in the productivity of workers; (2.5 marks) A decrease in government spending; (2.5 marks) An increase in the economys capital stock; (2.5 marks) A reduction in personal income tax. (2.5 marks) Question 4: (a) (b) Use the aggregate demand / aggregate supply framework to show an economy in recession; (2 marks) On a separate aggregate demand / aggregate supply framework to compare how fiscal and monetary policy can be used to move the economy from a recession to the full employment level of economic activity. (8 marks)

Question 5: Will the following lead to cost-push or demand-pull inflation, or both and explain why? (2 marks each part) (a) The Reserve Bank cuts interest rates and the economy booms. Cost-push / Demand-pull / Both

(b)

As a result of falling unemployment, trade unions become more militant and demand higher wages. Cost-push / Demand-pull / Both Cost-push / Demand-pull / Both

(c) The government raises the rate of GST.

(d) The government cuts income tax rates and raises government expenditure at a time of near full employment. Cost-push / Demand-pull / Both (e) Increasing industrial concentration leads to more oligopolistic collusion to raise prices. Cost-push / Demand-pull / Both Question 6: (10 marks total - 2.5 marks each part) (a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for the diagram and 2.5 marks for the explanation)

Provide (describe) two (2) causes of each type of inflation (2.5 marks for 2 demand-pull causes and 2.5 marks for 2 cost-push causes) Question 7: (a) (b) (c) Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero? Why or why not should this be the case? (5 marks) How did the classical economists interpret long-run unemployment? (2.5 marks) How does structural and cyclical unemployment differ and how concerned should policymakers be about these types of unemployment? (2.5 marks)

Question 8: Assume that there is a free-floating exchange rate. Will the following cause the exchange rate to appreciate or depreciate? In each case you should consider whether there is a shift in the demand or supply curves of Australian dollars (or both) and which way the curve(s) shift(s). (10 divided by 12 marks for each one of the three parts to each of part a, b, c and d) (a) Imports increase. Demand curve shift left / right / no shift Supply curve shift left / right / no shift Exchange rate appreciates / depreciates

(b)

Australian interest rates rise relative to those abroad

Demand curve shift left / right / no shift Supply curve shift left / right / no shift Exchange rate appreciates / depreciates
(c)

Australia experiences a lower rate of inflation than other countries. (Assume no change in interest rates) Demand curve shift left / right / no shift Supply curve shift left / right / no shift Exchange rate appreciates / depreciates (d) Speculators believe that the rate of exchange will fall. Demand curve shift left / right / no shift Supply curve shift left / right / no shift Exchange rate appreciates / depreciates Question 9: Will the following lead to cost-push or demand-pull inflation, or both and explain why? (2 marks each part) (a) The Reserve Bank cuts interest rates and the economy booms. Cost-push / Demand-pull / Both (b) As a result of falling unemployment, trade unions become more militant and demand higher wages. Cost-push / Demand-pull / Both (c) The government raises the rate of GST. Cost-push / Demand-pull / Both

(d) The government cuts income tax rates and raises government expenditure at a time of near full employment. Cost-push / Demand-pull / Both (e) Increasing industrial concentration leads to more oligopolistic collusion to raise prices. Cost-push / Demand-pull / Both

END OF ASSIGNMENT - THANK YOU