Principles of Economics

This document provides study material and solved assignments for Principles of Economics. It covers topics such as Keynesian economics, fiscal stimulus, net exports, and the comparison of the Australian economy with other countries.

Principles of Economics
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Principles of Economics
Question 1
The given economist would be considered as a Keynesian economist. This is because
Keynesian economists tend to be averse to the idea of austerity considering the adverse effect
that it has on the economic growth. As a result, austerity according to Keynesian economists
should only be carried out in periods of boom. On the other hand, neo-classical economists
tend to view austerity as a measure of stimulating economic growth (Barro, 2017). It is
evident from the statement that the author does not seem to view austerity in positive light
and considers it only a hog wash.
Question 2
Australia was able to prevent recession during the global financial crisis on account of large
fiscal stimulus package implemented by the Rudd government at the time. This stimulus
package needs to be reviewed in the background of four main components of GDP namely
government spending, consumer spending, private investment along with net exports. The
two components that played a pivotal role in avoiding recession were government spending
and consumer spending. Through the stimulus package, the government increased the
spending providing a boost to the economic activity. Also, tax rebates were given which
resulted in higher disposable income and hence boosted consumer spending (Mankiw, 2015).
Question 3
One of the key components of GDP is net exports. With regards to Australian economy,
about one-third of the exports comprise of iron ore, coal and other mineral commodities.
During the global financial crisis, there was a decline in the economic activity globally
leading to lower demand of various mining related commodities. Owing to drop in demand,
the prices of these commodities plummeted. The net result of this price drop along with lower
quantity offtake would have been that Australian exports would witness a significant decline
(Krugman, 2016). Owing to the significant decline in exports and no corresponding drop in
imports, there would be a decrease in the net exports leading to decline in GDP growth.
Question 4
The graph in question highlights the real GDP growth rate in Australia and New Zealand
from 1990 to 2015. It is evident that most of the years the growth rate of Australia tends to be
higher than New Zealand. Also, the variation in performance of NZ GDP growth is

Principles of Economics
significantly higher than Australia. Hence, even though there are some periods when GDP
growth rate in NZ is higher than corresponding value for Australia, the average GDP growth
rate during the period is higher for Australia as compared to NZ. This may be attributed to the
significant underperformance of NZ economy in difficult periods such as global financial
crisis.
Question 5
Based on the empirical performance of tha Australian economy and the comparison of the
same with other countries such as US and New Zealand, it is apparent that macroeconomic
policies in Australia have been far better with lesser issues. This needs to be indicated to the
Australian policymakers. Also, it is would be highlighted that rather than replicating the
practices in other countries assuming they are superior, it is imperative that a policy
continuity in Australia should be maintained. Even in case of adoption of a useful
macroeconomic policy from another country, it is imperative that suitable modifications
ought to be inserted based on Australian economic environment (Koutsoyiannis, 2014).

Principles of Economics
References
Barro, R. (2017) Macroeconomics: A Modern Approach. 4th edn. London: Cengage
Learning, pp. 64-65
Koutsoyiannis, A. (2014) Modern Macroeconomics. 4th edn. New York: Palgrave McMillan,
pp. 89
Krugman, P. (2016) Macroeconomics.3rd edn. London: Worth Publishers, pp. 105
Mankiw, G. (2015) Principles of Macroeconomics.6th edn. London: Cengage Learning, pp.
45-46