Economics for Decision Making

ECONOMICS FOR
DECISION MAKING
STUDENT ID:
[Pick the date]

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).