Economics for Decision Making

This document provides study material and solved assignments for Economics for Decision Making. It covers topics such as unemployment rate, labor force participation rate, money multiplier, open market operations, and the role of the Reserve Bank of Australia. The content also includes diagrams and explanations to help improve understanding of macroeconomics.

ECONOMICS FOR DECISION MAKING
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Question 1
a) I) Unemployment rate = 5.2%
Total size of labour force = 269.475
Unemployment rate = (Number of unemployed people/Total size of labour force)*100
5.2% = (Number of employed people/269475)*100
Solving the above, number of employed people = 14,013
ii) Labour force participation rate = (labour force size/ size of working population)*100
Hence, labour force participation rate = (269475/365547)*100 = 73.72%
b) Unemployment rate = (Number of unemployed people/Total size of labour force)*100
If the size of the labour force would decrease while the number of unemployed people would
remain the same, the unemployment rate would increase. This may be exhibited through the
following computation.
Unemployment rate = (14013/(269475-23000))*100 = 5.69%
Clearly, the unemployment rate has increased from 5.2% to 5.69%.
c) Tim is suffering from structural unemployment which is caused due to mismatch of skills.
It is evident that Tim is unemployed not because there are not jobs in the market or he is
looking for a better opportunity but on account of his skills are no longer required in the
market. As a result, there is a need to upgrade his skills to be employed again (Barro,
2017).
d) The economy is at full employment means that the unemployment is at the natural rate
while GDP is also at the optimum level where sustainable growth can happen. Any
unemployment rate below the natural rate would result in potential labour shortfall and
rising wages. Similarly, higher growth rate would lead to overheating of the economy
(Froyen, 2015).

Question 2
a) i) Simple money multiplier = 1/Reserve Ratio =1/0.2 = 5
ii) Total money deposited = $ 3,300
Total amount of money supplied in the banking system = 3,300*5 = $ 16,500
iii)New value of money multiplier = (1/0.16) = 6.25
Total amount of money supplied in the banking system = 3,300*6.25 = $ 20,625
iv)The impact of money multiplier can be explained using a numerical example.Suppose a
customer deposit $ 100 in the bank with a reserve ratio of 20%. As a result, the bank
keeps $20 and lends the remaining $ 80 to a customer. This customer deposits $ 80 in
bank where the bank would keep $16 (20% of $ 80) as reserve and tend the remaining
amount of $64. This money would again be deposited in the bank where 20% would be
reserved and remainder would be lent. This process is repeated till the amount to be lent
becomes zero. As a result, the initial $ 100 of the customer would bring a significantly
higher supply in the banking system (Mankiw,2016).
b) OMO refers to open market operations which involves the buying and selling of
government securities in order to inject or suck liquidity from the financial system. When
the RBA buys government securities through OMO, essentially it provides money to the
various financial institutions which leads to higher liquidity. On the other hand, when
RBA sells government securities through OMO, then money is taken from financial
institutions which lead to lower liquidity. The relevant diagram pertaining to effect of
OMO when the RBA buys government securities is shown below (Krugman &
Wells,2015).

It is evident that when the RBA buys government bonds there is a decrease in the interest rate
from r1 to r2 as the supply curve shifts from MS to MS’. The reduced interest rate would
increase demand for loans and hence provide a boost to the GDP by increasing consumer
spending and private investment. Since, consumer spending would increase, hence inflation
would also increase as a result of this action by the RBA. The cash rate in the process
remains unchanged (Dombusch, Fischer, & Startz, 2015).
It is noteworthy that if the RBA would sell the government bonds, then supply of money
would reduce which would result in higher interest rate. This would have an adverse impact
on demand and hence lower the GDP and inflation. The cash rate in the process remains
unchanged (Froyen, 2015).
c) The three key roles of RBA are indicated as follows (Mankiw, 2016).
 The monetary policy is determined by the RBA where the underlying objective is to
maintain price stability while ensuring robust growth and low unemployment rate.
 It aims to maintain a robust financial system through the regulation of banks and
various other directives so that the stability of the financial system remains intact.
 It is issuer of Australia’s currency which is required for the functioning of the
economy. RBA ensures that adequate amount of currency is available in the market.
Question 3

a) i) The requisite plot based on the given data is shown as follows.
ii) The macroeconomic equilibrium is indicated below.

As indicated above, equilibrium is attained at a price of $ 50 with an estimated real GDP of $
55 billion.
iii) The relevant diagram is shown below.
It is evident that there is a recessionary gap since the equilibrium GDP at $ 55 billion is less
than the potential GDP of $ 63 billion.
(b) The given situation can be explained using the following AD-AS curve.

Based on the given situation, it is evident that there is a drop in the demand for Australian
beef. This would lead to lower exports of beef to countries such as China and Indonesia.
Assuming all other factors as constant, this would lead to adverse impact on net exports.
Since one of the key components of AD is net exports, hence there would be reduction in the
aggregate demand leading to shift of AD curve from AD to AD1. However, the aggregate
supply curve does not exhibit any change and remains the same. The result of this shift is that
the equilibrium position changes owing to which there is a lower real GDP (Y1 to Y2) along
with lower prices. In the long term, the effect would be neutralised as beef would be
exported to other trade destinations or demand may again increase from China and Indonesia
leading to attainment of equilibrium GDP (Barro, 2017).
b) The given video pertains to the increasing incidence of e=commerce transactions in South
Korea. It reflects how both exports and imports of e=commerce items have increased in
the recent times. The growth in exports in this regards is higher than the imports. The
impact of this event can be illustrated using the AD-AS Model as shown below.

Currently the economy is operating at full employment. Hence, the equilibrium GDP has
been currently achieved. However, on account of higher e-commerce exports, the net exports
would increase which is one of the components of aggregate demand. As a result, AD cuve
would shift to the right and a new equilibrium would be achieved (Krugman & Wells, 2015).
The real GDP corresponding to this situation is Y1 and thereby more than the equilibrium
GDP which would cause overheating of the economy in the short run. Also, concerns
regarding inflation would also arise as shown owing to higher price. However, in the long
term the real GDP would attain the equilibrium level of Y* from the overheated position
exhibited immediately (Koutsoyiannis, 2016).

References
Barro, R. (2017). Macroeconomics: A Modern Approach (4thed.). London: Cengage
Learning.
Dombusch, R., Fischer, S. & Startz, R. (2015).Macroeconomics (10thed.). New York:
McGraw Hill Publications.
Froyen, A. (2015), Macroeconomics (3rded.). New Delhi: Pearson Education.
Koutsoyiannis, A. (2016). Modern Macroeconomics (4th ed.). London: Palgrave McMillan.
Krugman, P. & Wells, R. (2015).Macroeconomics (3rd ed.). London: Worth Publishers.
Mankiw, G. (2016). Principles of Macroeconomics (6th ed.). London: Cengage Learning