Business Economics Assignment: Analyzing Macroeconomic Equilibrium

This business economics assignment delves into various macroeconomic concepts, starting with an analysis of the Aggregate Demand-Aggregate Supply (AD-AS) model and the effects of fiscal policies such as changes in personal income tax, worker skill levels, and net exports. It examines how these factors shift the AD and AS curves, influencing price levels and output. The assignment further explores the limitations of fiscal policies in achieving specific GDP levels, the inevitability of frictional unemployment, and the government's concern regarding structural unemployment. Inflation is discussed through demand-pull and cost-push perspectives, highlighting their causes and differing impacts on output. The assignment contrasts Keynesian and Monetarist views on the sensitivity of price levels to aggregate demand and concludes with an analysis of the foreign exchange market, detailing the demand and supply of Australian dollars and the impact of shifts in these curves on the currency's value. Desklib provides access to this and many other solved assignments.

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BUSINESS ECONOMICS ASSIGNMENT

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Contents
Question 9..................................................................................................................................3
Question 10................................................................................................................................6
Question 11................................................................................................................................7
Question 13................................................................................................................................8
Question 14................................................................................................................................8
Reference..................................................................................................................................11

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Question 9
a)
Figure 1: The rightward shift in the AD curve
(Source: Agénor & Montiel, 2015)
The decrease in the personal income tax will increase the disposable income of the
customers. Consumption which is a component of aggregate demand will increase and hence
the AD curve will shift to the right. Consequently, both the price and the output will increase.
b)

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Figure 2: the shift in the AS curve
(Source: Mankiw, 2014)
Increase in the level of skill of the worker would influence the supply side. The supply side
would produce more products at the given price and hence the AS curve would shift to the
right. The resultant equilibrium would show a higher output and lower prices.
c)

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Figure 3: Decrease in the aggregate demand
(Source: Heijdra, 2017)
Net export is a component of aggregate demand and defined as a gap between the export and
import of an economy. When the export reduces, the next export reduces and hence the
aggregate demand curve shifts to the left side (Uribe & Schmitt-Grohé, 2017). The
unchanged aggregate supply curve and changed aggregate demand curve reflects a lower
output and lower prices in the economy.
d)

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Figure 4: The rightward shift in the supply curve
(Source: Johnson, 2017)
Increase in the capital stock increase the capacity of the supply side. Therefore the aggregate
supply curve shifts to the right side. The intersection of the new aggregate supply and the
initial aggregate demand curve shows an increase in output and a decrease in the price level.
Question 10
a)
1. Fiscal policies such as an increase in the tax rate in order to achieve a specific level of
GDP reduce the motivations of the worker. Therefore productivity reduces and the
aggregate supply curve reduces too. Therefore the desired level of GDP is not
achieved (Moreira & Savov, 2017).
2. Increase in government spending to improve the social benefits and hence the GDP
may increase the price level in the economy as well.
3. Fiscal policies to achieve a desired level of GDP are vulnerable to the authenticity of
the information.

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b)
Frictional unemployment is inevitable because the nature of the economy is changing. While
some of the sectors of the economy are expanding, some may contract that result in a stable
rate of frictional unemployment (Stock & Watson, 2016).
c) Yes, the government should be concerned about structural unemployment as it makes a
part of the labour obsolete. This type of unemployment is different from cyclical
unemployment in the sense that it does not change with the business cycle.
Question 11
a)
Figure 5: The demand pull and cost push inflation
(Source : Rezai & Stagl, 2016)
In the demand-pull inflation aggregate demand increase and aggregate supply remains the
same. The new equilibrium shows higher price which is inflation of money. On the other
hand, cots push inflation is due to the increase in the cost of operation of the supply side. The
aggregate supply increases and the new equilibrium show a higher price. Another difference
between them is that demand-pull inflation increases output while cost-push inflation reduces
it.
b)
Causes of demand pull inflation
1. Increase in the money supply

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2. Increase in the GDP and hence the income
Cause of cost-push inflation
1. Increase in the price of input such as labour
2. Natural disaster (Nakamura & Steinsson, 2018).
Question 13
a) The Keynesian school of economics believes that the price level of economics is not
sensitive to the change in the aggregate demand. Therefore, an upward sloping supply curve
is necessary for the behaviour of the market to be consistent with the empirical evidence.
Monetarists school of economics believe that demand does influence the price in the market
and hence aggregate supply curve is a vertical straight line (Ghysels, 2016). Monetarists
believe that the invisible hand clears the market and hence demand influences the price level.
b) If the investment demand curve was vertical, the monetarists’ view of policies would be
more correct.
c)
The Keynesian increase in money supply does not increase the output in the market. On the
other hand, the monetarists increase the supply of money increases the output as the demand
for the goods and the services increases with the higher money supply.
Question 14
a) In the foreign exchange market, importers of Australian goods in different countries
demand the Australian dollars to buy the products from the Australian market (Rezai & Stagl,
2016).
b) Australian importers who are importing different goods from different countries of the
world are exchanging their currency in the exchange market. Therefore they are supplying
Australian dollars in the market.
c)

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Figure 6: The exchange market
(Source: Developed by the learner)
The equilibrium exchange rate is where the demand and the supply interact. In the case of the
above figure, the equilibrium is at a point where the price of an Australian dollar is 80 Yen.

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d)
Figure 7: The reduction in the value of Australian currency
(Source: Developed by the leaner)
Now if the demand increases the demand curve will shift to the right side. At the same time if
the supply reduces the supply curve will shift to the left side as shown in the above figure.
The resultant equilibrium will show a reduced value of the Australian dollar against the
Japanese Yen.
e) In this case, the exchange rate of the Australian dollar has depreciated.

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Reference
Agénor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University
Press.
Ghysels, E. (2016). Macroeconomics and the reality of mixed frequency data. Journal of
Econometrics, 193(2), 294-314.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Johnson, H. G. (2017). Macroeconomics and monetary theory. Routledge.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Moreira, A., & Savov, A. (2017). The macroeconomics of shadow banking. The Journal of
Finance, 72(6), 2381-2432.
Nakamura, E., & Steinsson, J. (2018). Identification in macroeconomics. Journal of
Economic Perspectives, 32(3), 59-86.
Rezai, A., & Stagl, S. (2016). Ecological macroeconomics: Introduction and
review. Ecological Economics, 121, 181-185.
Stock, J. H., & Watson, M. W. (2016). Dynamic factor models, factor-augmented vector
autoregressions, and structural vector autoregressions in macroeconomics.
In Handbook of macroeconomics, Vol. 2, pp. 415-525
Uribe, M., & Schmitt-Grohé, S. (2017). Open economy macroeconomics. Princeton
University Press.