Econometrics Study Material

This document provides a comprehensive study material on Econometrics, covering topics such as GDP, consumption, investment, government expenditure, and more. It includes equations, calculations, and explanations to help students understand the subject better. The document also discusses the impact of fiscal and monetary policies, as well as the potential effects of the US-China trade war on the Australian economy.

Running head: ECONOMETRICS
Macroeconomics
Name of the Student:
Name of the University:
Author Note:

1ECONOMETRICS
Table of Contents
Part a...........................................................................................................................................2
Part b..........................................................................................................................................3
Part c...........................................................................................................................................3
Part d..........................................................................................................................................4
Part e...........................................................................................................................................4
Part f...........................................................................................................................................4
Part g..........................................................................................................................................5
Part h..........................................................................................................................................5
Part i...........................................................................................................................................6
Part j...........................................................................................................................................7
Reference:..................................................................................................................................8

2ECONOMETRICS
Part a
Y =C + I+ G+( X−M )
Where, Y= Gross domestic product,
C= Consumption,
a= autonomous consumption,
b= marginal propensity to consume,
I= Investment,
G= Government expenditure,
X= export and
M= import.
The data is collected from the Australian Bureau of Statistics.
C = $260752 million
I = $109478 million & $1983 million
G =$ 84696 million
X = $100820 million
M= $99614 million
Y =260752+109478+1983+ 84696+(100820−99614)
Y =458115
The actual GDP is $458115 million.

3ECONOMETRICS
Part b
C=a+ b Y d
Where, C= Consumption,
a= autonomous consumption and
b= marginal propensity to consume.
Yd= Disposable income
Marginal propensity to consume = 1- (MPS+ marginal tax rate + nx(m))
b=1− ( 0.3+0.05+0.04 )
b=0.61
Y d = ( 1−marginlatax rate )∗Y −T
Y d = ( 1−0.05 )∗458115−70140.1
Y d =365069.2
The autonomous expenditure,
a=C−b Y d
a=260752−(0.61∗365069.2)
a=3 8059. 8
The autonomous consumption expenditure $38059.8 million.
Part c
Import= Autonomous import + (Marginal import rate * Y)
Autonomousimport=99614− ( 0.04∗458115 )

4ECONOMETRICS
Autonomousimport=81289. 4
Part d
Net export= Autonomous net export + (marginal rate of net export* Y)
Autonomous net export=1206− ( 0.04∗458115 )
Autonomous net export=−17118. 6
The autonomous net export is -$17118.6 million dollar.
Part e
Expenditure multiplier= 1
1−MPC
Expenditure multiplier= 1
1−0.61
Expenditure multiplier=2.56
Tax multipliers,
Lumpsum multiplier= −MPC
1−MPC = −0.61
1−0.61 =−1.56
Again,
Proportional multiplier= −1
1−MPC∗(1−t) = −1
1− ( 0.61∗( 1−0.05 ) ) =−2.38
Part f
Equilibrium GDP = C + Ig+ G + NX
Equilibrium GDP=260752+109478+ 84696+(100820−99614)
Equilibrium GDP=456132

5ECONOMETRICS
Part g
The change in government spending is dG.
The government expenditure multiplier,
dY
dG = 1
1−MPC
dg=dY ∗(1−MPC)
dg=(458115−456132)∗(1−0.61)
dg=773.37
Part h
The bank takes action to reduce the GDP gap through the monetary policies. The gap
is defined by the difference between actual GDP and equilibrium GDP. In order to do so, the
government reduces the money supply that raises the interest rate. This reduces the aggregate
demand and thus the AD falls from AD1 to AD2. Thus, equilibrium shifts from point A to B.
This reduces the price level from the P to P1 and the real GDP falls from Y to Y1. This is
presented in the below diagram.

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Price Level
Real GDP
AS
Y1 Y
P1
P
AD
2
AD
1
A
B
Interest Rate
GDP
LM
1
Y1 Y
I1
I
LM
2
IS
B
A
The effect in the IS-LM model is seen by the leftward shift of LM curve. The LM
curve shifts from LM1 to LM2. This incident raises the interest rate from I to I1. The below
diagram shows the shift in LM curve and the change in interest rate.

7ECONOMETRICS
Part i
Fiscal policy and monetary policy are two techniques that are used to control the
economy by changing the economic factors. The fiscal policy is operated by changing the
government expenditure and tax. The monetary policy is operated by changing the money
supply and interest rate. The advantage of monetary policy over fiscal policy is that the
central bank makes the monetary policies. Thus, the motive of the monetary policy is very
much different from the government and there is no political influence on the economy. The
monetary policy does not create any debt in the budget. On the other side, fiscal policy is a
debt creator by the addition of excess spending in the policies. Moreover, the disadvantage of
the fiscal policy is that it crowd out the investment which makes a significant difference from
the monetary policy in economic aspects (Desai 2019.). Thus the monetary policy is a fairly
effective for the successful economic objectives to achieve the steady growth, high
employment and stable price level. Thus, the monetary policy has more potential benefits
than fiscal policy towards attaining the economic growth and stability.
Part j
The US and China are the two large countries having a trade war. If the trade war
escalates and spreads to the other global economies then they can potentially influence the
economic conditions of small and medium size economies. Australia is a mid-sized economy
which is very much dependent on the trade with China. Over the last few years, Australia has
proportionately increased the trade with China compared to the other countries. The trade war
will force to contract the Chinese economy through reducing the export of China. This will
reduce the import demand in China for which Australia will be the most influenced country
due to the rise in the export of Australia to the China. As the trade relation is not very strong
with the other countries Australia will not be able to manage the excess supply and the result
will be in the form of unemployment and weaker currency (Herrero, Xu and Gary 2018). On

8ECONOMETRICS
the contrary, the Australian economy will be benefited in few sectors like in the agribusiness
and the demand of wine and grains may rise.

9ECONOMETRICS
Reference:
Desai, C., 2019. Economics, Monetary Theory and Fiscal Policy. In Management for
Scientists (pp. 1-15). Emerald Publishing Limited.
Herrero, A.G., Xu, J. and Gary, N.G., 2018. IS THE MARKET OVERREACTING TO THE
US-CHINA TRADE WAR? YES IF ONLY FOCUSING ON TRADE MEASURES.