Sample Assignment on Economics

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Course ID

1ECONOMIC ASSIGNMENT
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer a......................................................................................................................................4
Answer c......................................................................................................................................5
Answer d......................................................................................................................................6
Answer e......................................................................................................................................9
References list................................................................................................................................10

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Answer 1
Inflation and unemployment are the two major macroeconomic variables in an economy.
The former is related to the price level while later is related to labor market. The phenomenon of
gradual increase in the price level is known as inflation. Unemployment is the condition of labor
market where members in the labor market though willing to get a job but fail to find jobs. An
interrelation often observed between different macroeconomic indicators (Goodwin et al., 2015).
Inflation and unemployment might be influenced by a number of different factors but a common
linkage between the two variables. The figure below empirically tested the relation between
inflation and unemployment using data for Australian economy from 2001 to 2016.
4 4.5 5 5.5 6 6.5 7
1
1.5
2
2.5
3
3.5
4
4.5
5
f(x) = − 0.15400701871836 x + 3.51940971372956
R² = 0.0138640768243962
Inflation and Unemployment
Unemployment
Inflation
Figure 1: Relation between Inflation and Unemployment
(Source: abs.gov.au, 2018)
The scatter plot above explains the relationship between inflation and unemployment.
The fitted trend line shows a moderate downward trend. This implies as unemployment increases
inflation goes down and vice versa. The co-efficient on unemployment in the fitted trend

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equation is -0.154. This indicates with 1 percent increase in unemployment inflation goes down
by 0.15 percent. The economic rationale behind the inverse relationship between inflation and
unemployment is simple. As unemployment increases, the purchasing power of people reduces.
This causes a decline in aggregate demand creating a downward pressure on price (Bernanke,
Antonovics & Frank, 2015).
There is a theoretical background behind the relationship between inflation and
unemployment as explained by famous economist A.W.Phillips. Followed by his name the
relationship is popularly known as Phillips relation. The trade-off between price level and
inflation is explained by Phillips curve. Phillips studied the movement of inflation and
unemployment in United Kingdom over the period 1861-1957 (Heijdra, 2017). After the study it
was found that inflation is likely to be influenced by the unemployment level and change in the
rate of unemployment. From the findings, Phillips proposed the hypothesis that during high labor
demand, there remain few unemployed people in the economy. The employers then expect
wages to bid up rapidly and hence a higher price level. Opposite is the case in times of low labor
demand. The low labor demand is associated with a high rate of inflation. The low wage growth
then results in a slow increase in the price level. The second factor influencing the inverse
relation between inflation and unemployment is the rate of change in the unemployment (Uribe
& Schmitt-Grohé, 2017). During economic expansion, businesses expand rapidly resulting in a
high growth of labor demand. The fast growth in labor demand implies a decreasing trend in
unemployment rate. As cost of wage is one of the major component of production the wage
growth directly influences price level in the same direction.

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The proposition made by Phillips is supported by data of Australian labor market and
price level. The relation is however is moderate implying that there are various other factors that
influences inflation in Australia in addition to unemployment rate.
Answer 2
Answer a
Tariff is a specific form of duty that is imposed on import from outside countries. If India
placed a 30% tariff on chickpea exports from Australia, then the tariff raises price of Australian
Chickpea in Indian market (Mankiw, 2014). The increased price of chickpea in India discourages
people to consumed imported Chickpea from Australia. The decline in export cause trade
balance of net export to fall. Contraction of net export led to an inward shift of the aggregate
demand curve. As demand declines there is a contraction of both real GDP and price level.
Figure 2: Effect on an import tariff by India
(Source: as created by Author)

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Answer b
The external demand plays an important role in determining aggregate demand in an
economy. As demand for Australian wine in China increases, this increase export of Australian
wine to China. The higher demand stimulates Australian wine export. Given import an increase
in export earning improves the trade balance (Arestis & Sawyer, 2015). This has a positive
influence on aggregate demand. as net export increases, aggregate demand increases as well.
This shifts the aggregate demand curve outward. The expansion of aggregate demand moves the
macroeconomic equilibrium up. The new equilibrium is achieved at a higher price and output
level.
Figure 3: Effect of an increase in demand for Australian wine
(Source: as created by Author)
Answer c

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Among different components of aggregate demand, government spending is a major one.
The planned government expenditure influences aggregate demand. the increased government
spending stimulates aggregate demand. Government investment in Snowy Hydro 2.0 to generate
more electricity power capacity helps to reduce unit cost of electricity. As the cost of power bill
reduces household can spend more on consumption. This also boosts the aggregate demand
(Heijdra, 2017). The effect on real GDP and price level is explained in the figure below. With
increase in government spending, the aggregate demand curve shifts to the right from AD to
AD’. The equilibrium now shifts from E to E’. Corresponding to E’, higher real GDP and price
level is attained.
Figure 4: Effect of planned government spending
(Source: as created by Author)
Answer d
The falling price if oil is considered as a positive supply shock. The lower oil price
influences both aggregate supply and aggregate demand. Oil is used as one of the major input in

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many industries. With a fall in oil price, there will be a significant reduction in the cost of
production leading to an increase in aggregate supply. The lower cost of import further improves
trade balance leading to an increase in aggregate demand (rba.gov.au, 2018). As both aggregate
demand and aggregate supply increase, the real GDP will definitely rise. The impact on price
level is however ambiguous. It depends on the extent to which aggregate demand and aggregate
supply changes. The following three figures explain three possible cases depending on the
magnitude of changes in aggregate demand and aggregate supply.
Figure 6: AS change more than AD
(Source: as created by Author)

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Figure 6: AD change more than AS
(Source: as created by Author)
Figure 7: AD and AS changes by same magnitude
(Source: as created by Author)

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Answer e
Labor is one important input in production. An increase in immigration increases increase
strength of the labor force. With an increase in labor supply equilibrium wages fall in the labor
market. The excess supply of low cost of labor encourage business to expand output. This leads
to an increase in aggregate supply in the economy (Bernanke, Antonovics & Frank, 2015). The
increased supply is shown from a rightward shifts of the aggregate supply curve. Given the
aggregate demand, expansion of aggregate supply increases real GDP while creating a
downward pressure on price level.
Figure 8: Effect of immigration in AD-AS model
(Source: as created by Author)

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References list
Arestis, P., & Sawyer, M. (Eds.). (2015). Finance and the Macroeconomics of Environmental
Policies. Springer.
Australian Bureau of Statistics, Australian Government. (2018). Retrieved from
http://www.abs.gov.au/
Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill
Higher Education.
Box C: The Effects of the Fall in Oil Prices | Statement on Monetary Policy – February 2015 |
RBA. (2018). Retrieved from https://www.rba.gov.au/publications/smp/2015/feb/box-
c.html
Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in
context. Routledge.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Uribe, M., & Schmitt-Grohé, S. (2017). Open economy macroeconomics. Princeton University
Press.