Macroeconomics and Economic Policy

The assignment delves into various facets of macroeconomics focusing on the Australian economy. It examines concepts such as aggregate demand and supply, their interactions, and how they influence key macroeconomic indicators like GDP, inflation, and unemployment. The role of monetary policy in shaping these variables is also explored, with a specific focus on the Reserve Bank of Australia's (RBA) actions and their impact on economic growth during times of financial crisis or fluctuations in global commodity prices. The assignment includes graphical representations to illustrate key concepts and real-world examples to demonstrate the practical application of macroeconomic principles.

Running head: ECONOMIC ASSIGNMENT
Table of Contents
Task 5..........................................................................................................................................................1
Answer 1..................................................................................................................................................1
Answer 2..................................................................................................................................................1
Answer 3..................................................................................................................................................1
Answer 4..................................................................................................................................................1
Answer 5..................................................................................................................................................2
Answer 6..................................................................................................................................................2
Answer 7..................................................................................................................................................2
Task 6..........................................................................................................................................................2
Answer 1..................................................................................................................................................2
Answer 2..................................................................................................................................................3
Answer 3..................................................................................................................................................4
Answer 4..................................................................................................................................................4
Answer 5..................................................................................................................................................4
Answer 6..................................................................................................................................................5
Answer 7..................................................................................................................................................7
Answer 8..................................................................................................................................................8
Task 7..........................................................................................................................................................9
Answer 1..................................................................................................................................................9
Answer 2..................................................................................................................................................9
Answer 3..................................................................................................................................................9
Answer 4................................................................................................................................................10
Answer 5................................................................................................................................................10
References.................................................................................................................................................12

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Task 5
Answer 1
Gross Domestic Product represents monetary values of goods and services produced
within the nation. GDP does not capture production in non-market form and hence does not
reflect total production within the economy. Non-market production signifies production activity
in which output is exchanged at free or at values that are not economically significant. This
includes production activities by government, non-profit institution or by household.
Answer 2
Real GDP in 2015 with 2011 as base
( 120∗10 ) + ( 45∗15 ) + ( 40∗210 )
¿ 1200+675+8400
¿ 10275
Answer 3
The old person is considered as employed as he is working as a volunteer and is not paid
for his labor.
Answer 4
The person is considered as employed because he is engaged in a work and gets payment
for his work

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Answer 5
The manufacturer worker is considered as unemployed specifically frictional
unemployment.
Answer 6
This is a disadvantageous situation to be poor in Peru because when owners do not pay
any land tax or municipal rate then it is considered as unrecognized property and do not have
any exchange value. This creates dead capital and poor cannot expect any improvement from
their present situation.
Answer 7
Informal sector is the least developed sector and has contribution in providing
employment to those unable to get formal jobs. This is evidenced in Botswana. In Peru as well
informal sector hinders economic growth by creating dead capital that are unproductive in nature
and create capital lock situation (globalriskinsights.com 2014).
Task 6
Answer 1
Product
Quantity(2005
)(Q0)
Price(2005)
( P0)
Price(2015
)(P1) Q0P1 Q0P0 CPI
Comput
er 2 $1,700.00 $1,200.00 $2,400.00 $3,400.00 87.50%
Books 50 $25.00 $30.00 $1,500.00 $1,250.00
Burgers 150 $1.00 $2.00 $300.00 $150.00
Total 202 1726 1232 4200 4800
Consumer price index= Current year prices of the basket
Base year prices of thebasket ∗100=87.50 %

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Answer 2
Cost-push inflation
Cost-push inflation is resulted from an increase in input prices, which enhances the
production cost. The increasing cost leads to decrease in supply and price rises because of a
shortage of supply (Weale et al. 2015). In contrast, demand-pull inflation is caused because of a
rise in demand keeping the supply constant. This is shown in the following figure.
Figure 1: Cost Push inflation
(Source: as created by the Author)

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Because of rise in production cost, the aggregate supply curve shifts left from AS to AS1.
Given aggregate demand AD, price will raise from P0 to P1. As shown from the figure, real GDP
will decrease from Y0 to Y1. In contrast, in case of demand pull inflation real GDP increases.
Answer 3
Aggregate demand curve measures the total spending of the economy on domestic goods
and services. Aggregate Demand comprises of four major components- Consumption,
Investment, Government Spending and Net export that is export less import.
Interest rate is the cost of investment. A lower interest rate means a lower cost of investment.
This boosts investment in the economy and aggregate demand rises. This will be reflected from a
rightward shift of the aggregate demand curve.
Answer 4
Slower economic growth in other nations implies a decline in demand in these countries.
This affects the demand for exported goods in the nation and hence, earnings from export will be
decreased. Given import spending, a decline in export earnings reduces net export. As result,
aggregate demand will be reduced and aggregate demand curve will shift leftward.
Answer 5
When import price increases then cost of import rises. Given earnings from export, a
rising import cost means a decline in net export earnings. This will decrease aggregate demand
causing a leftward or inward shift of the demand curve.

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Answer 6
Figure 2: Macroeconomic equilibrium
(Source: As created by Author)
Above figure shows the macroeconomic equilibrium as obtained from the forces of
aggregate demand and aggregate supply. Correspondingly, equilibrium level of output is Ye and
Price is Pe.
When Property Market Crashes that is price fell by a significantly large amount, then
value of the asset people own declines. This leads to reduction in the household spending at all
level of prices. This causes a leftward shift of the aggregate demand curve. This is explained in
the following.

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Figure 3: Shift in the aggregate demand curve
(Source: as created by the Author)
As a result, of shift in the aggregate demand curve both price level and real GDP fall
from its equilibrium level.

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Figure 4: short run and long run adjustment in the economy
(Source: As created by the Author)
Prices and wages in the economy start falling as the economy is operating at a lower level
than the potential. A fall in nominal causes reduces cost of production and increases supply.
Therefore, short run aggregate supply curve will shift rightward from SRAS to SRAS1. At the
end, the economy will return its earlier equilibrium level Ye with a declining price level P2
Answer 7
In times of business cycle fluctuation production and demand fluctuate. The sales for
goods like cars and refrigerators are likely to fluctuate more in response to any are fluctuation as
the demand for these goods are more sensitive. On the other hand Huggies nappies and

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McDonald’s Macs are like necessary goods. Therefore, sales of these products are less affected
from business cycle relative to real GDP.
Answer 8
Figure 5: Aggregate demand and aggregate supply framework
(Source: As created by Author)
Government of Australia adapts tight monetary policy, which helps government to
maintain a budget surplus and extend its support at times of financial crisis. During financial
crisis, Australian mining had increased household disposable income and wages. This helped to
maintained consumption growth and hence boosted aggregate demand. Increase in mining
investment maintained investment balance. Continuous growth of export increases net export and

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further increases aggregate demand. All these together help Australia to avoid negative growth
rate at times of financial crisis.
Task 7
Answer 1
The economy can produce beyond potential GDP with presence of a high rate of inflation
fuelled by high aggregate demand. Now to achieve potential GDP the economy needs to be
contracted slightly. To achieve this, appropriate monetary policy was to reduce the available
money supply. This will increase the interest rate which is cost of investment. With declining
investment the economy contracts and finally achieve potential GDP.
Answer 2
As the economy contracts, employment opportunities will shut down. This increases
unemployment in the economy. The increasing interest rate make saving more attractive and
reduce the availability of income that can be spent on consumer goods. This reduces consumer
confidence.
Answer 3
When there is a fall in cash rate then that effect transmitted to rates in money market and
yields from bonds. Decline in the cash rate declines the interest rate prevailing in the economy.
When return from saving reduces, then this discourages savings of the household and hence,
increases consumption.

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Answer 4
Figure 6: Aggregate Demand and Aggregate Supply framework
(Source: As created by the author)
Three major trade partners of Australia US, China and Japan are facing a weak growth
prospective following a very low oil price. This is going to affect Australian economy through its
impact on net export and aggregate demand decreases. The situation is described in the above
figure. The AD curve will shift leftward causing a decline in both output and price level. To
counter this effect, RBA decides to decline interest rate to maintain stability in the growth rate.
Answer 5
When interest rate declines then people prefer to hold their money in liquid form rather
than keeping them in banks. This raises investible fund in the economy. There should be enough

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scope of productive investment to make such a policy successful. Otherwise excess liquidity in
the economy might lead to liquidity crisis.

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References
Lemaitre (2014). Peru's informal mining sector threatens economic growth | GRI. [online]
Global Risk Insights. Available at: http://globalriskinsights.com/2014/02/perus-informal-mining-
sector-threatens-economic-growth/ [Accessed 19 Oct. 2017].
Weale, M., Blake, A., Christodoulakis, N., Meade, J.E. and Vines, D., 2015. Macroeconomic
policy: inflation, wealth and the exchange rate (Vol. 8). Routledge.