Economic Principles: Analysis of GDP, Inflation, and Monetary Policy

This economics assignment delves into fundamental economic principles, examining key concepts such as Gross Domestic Product (GDP), inflation, and monetary policy. The assignment explores the limitations of GDP as an economic indicator, calculating real GDP and analyzing labor force participation. It further investigates inflation, differentiating between cost-push and demand-pull inflation, and calculating the weighted Consumer Price Index (CPI). The impact of monetary policy, including interest rate adjustments and their effects on aggregate demand, is analyzed. The assignment also assesses the effects of economic shocks, such as a housing market crash, and contrasts the price elasticity of demand for various goods. Finally, the assignment examines the Australian economy's response to the 2008 Global Financial Crisis and analyzes the impact of external economic factors on the country's aggregate demand, offering a comprehensive overview of macroeconomic principles and their practical applications. This assignment is a solved example that can be found on Desklib, a platform offering AI-driven study tools and past papers for students.

Running head: ECONOMIC PRINCIPLE
Economic Principle
Name of the Student
Name of the University
Author Note

1ECONOMIC PRINCIPLE
Table of Contents
Task 5.........................................................................................................................................3
Answer 1:...............................................................................................................................3
Answer 2:...............................................................................................................................3
Answer 3:...............................................................................................................................3
Answer 4:...............................................................................................................................4
Answer 5:...............................................................................................................................4
Answer 6:...............................................................................................................................4
Answer 7:...............................................................................................................................4
Task 6.........................................................................................................................................5
Answer 1:...............................................................................................................................5
Answer 2:...............................................................................................................................5
Answer 3:...............................................................................................................................6
Answer 4:...............................................................................................................................6
Answer 5:...............................................................................................................................7
Answer 6:...............................................................................................................................7
Answer 7:...............................................................................................................................8
Answer 8:...............................................................................................................................8
Task 7.......................................................................................................................................10
Answer 1:.............................................................................................................................10

2ECONOMIC PRINCIPLE
Answer 2:.............................................................................................................................10
Answer 3:.............................................................................................................................10
Answer 4:.............................................................................................................................10
Answer 5:.............................................................................................................................11
References................................................................................................................................13

3ECONOMIC PRINCIPLE
Task 5
Answer 1:
The GDP of a country, though being most widely used an indicator of economic
growth of the country, often fails to take into account the real productivity of the country. For
instance, when there is an acute inflation in the economy, the Nominal GDP increases, but
this increase is not attributed to increase in the production but to the increase in the overall
price levels. Again, at times of war or similar phenomena, the government expenditure
increases significantly, thereby increasing the nominal GDP of the country (Godley, 2012).
However, this increase does not happen due to increase in the production of goods and
services, thereby indicating that GDP cannot reflect the total production in an economy.
Answer 2:
The real GDP of 2015, with the base year 2011, is calculated by multiplying the
quantities of 2015 with the price levels of 2011, that is:
Real GDP 2015 = ∑ (Q2015*P2011)
= 120*10+45*15+210*40
= 1200+675+8400
=10275
Therefore, the Real GDP of 2015, with the base year being 2011is 10275 monetary units.
Answer 3:
A 45-year-old person leaving his job and working as volunteer and not looking for
any paid work does not fall under the labour force.

4ECONOMIC PRINCIPLE
Answer 4:
A person working for 10 hours a week paid and are not looking for other job can be
categorised as employed.
Answer 5:
A manufacturing worker who is out of job, looking for one but cannot work for three
months as he is looking after sick parent can be categorized under unemployed population.
Answer 6:
Many of the house owners, in “shanti towns”, in outskirts of Lime, situated in Peru,
do not pay land or municipal taxes, thereby increasing their incentives to buy residential
properties in the same. However, for the poorer section of the local population, the
implication is negative. This is because the properties for which no taxes are paid, cannot be
recognised or accounted for, which in turn indicates that these properties do not have any
exchange value. This thereby creates “dead capital in the economy”. The creation of dead
capital in the economy cannot lead to improvement in the economy as a whole and especially
of the situation of the poor people in Peru. Thus, it is not advantageous to fall in the poor
population of Peru.
Answer 7:
In any country, in general the informal sector comprises of those economic activities
which are not accounted for in the measurement of economic production of the country, like
that of the GDP of the country. Neither tax is imposed nor these activities are monitored. The
employment created in this sector are also of informal type, where the workers do not enjoy
any kind of security or benefits which are enjoyed by the workers in the formal sector.
The informal sector of that of Peru can be seen to be creating dead capital, which
cannot be exchanged or resold in the conventional markets, thereby creating a dead capital

5ECONOMIC PRINCIPLE
lock in the concerned economy. This in turn is expected to hinder the economic prosperity
and growth of the concerned country (Gilbert, 2012).
Task 6
Answer 1:
As the quantities are given, Weighted CPI has to be calculated, which is as follows:
Item Base Year
Price (1)
Current
Year Price
(2)
Current Year
Index (3)
(2/1)*100
Weights
(4)
Weighted
Price Index
3*4
Computers 1700 1200 70.59 2 141.18
Books 25 30 120 50 6000
Burgers 1 2 200 150 30000
Weighted CPI = Sum of weighted price indices/Total
weight
202 36141.18/202=
178.92
Thus, the weighted CPI = 178.92, which is approximately 179. This implies that the
price levels have increased by 79% approximately, compared to the base year.
Answer 2:
The cost pull inflation refers to the increase in the overall price level of the economy,
due to the increase in the price of goods and services owing to the general increase in the cost
of production in the economy. This is different from the demand pull inflation, in which the
price levels increase in the economy due to an increase in the overall demand for goods and
services in the same.

6ECONOMIC PRINCIPLE
Figure 1: Cost Push Inflation Figure 2: Demand Pull Inflation
(Source: As created by the author)
As can be seen from the above figures, the increase in price in Figure 1, is caused by
cost push inflation and that in the Figure 2, is caused by demand pull inflation (Blanchard,
Cerutti & Summers, 2015). In the former case, the increase in price is followed by decrease
in quantity, thereby lowering the Real GDP and in the second case increase in price is also
followed by increase in quantity, thereby increasing the Real GDP.
Answer 3:
Lower interest rate in an economy, increases the demand for investment in the
economy, thereby increasing the aggregate demand in the same and moving the AD curve
rightwards.
Answer 4:
Lower economic growth in other countries lead to lower exports in the home country
due to the lower demand in these countreis, thereby decreasing the aggregate demand and
shifting the AD curve leftwards.

7ECONOMIC PRINCIPLE
Answer 5:
When import prices increase, imports become expensive, thereby decreasing the
imports and increasing demand for domestic commodities. This increases the AD and shifts
the AD to the right.
Answer 6:
Figure 3: Long run and short run adjustments of a crash in housing market
(Source: As created by the author)
As can be seen from the above figure, due to the crash in the housing market, the
purchasing power as well as the demand for new housings by the residents are negatively.
The aggregate demand decreases from AD0 to AD1. In short run, the supply of housing
remaining AS0, the demand falls to Y1 from Y0 and the price falls from P0 to P1. In the long
run however, the supply increases from S0 to S1, thereby bringing back the long run number

8ECONOMIC PRINCIPLE
of houses demanded and purchased at the natural rate (Y0), but the price decreases even
further to P2.
Answer 7:
Group A consists of cars and refrigerators which are both luxury commodities. On the
other hand, Group B consists of nappies and burgers which are necessary goods. Thus, the
price elasticity of demand of the commodities of Group A is more than the price elasticity of
demand of the commodities of Group B. Therefore, during business cycles relative to the real
GDP, the demand as well as the sales of the commodities in Group A fluctuates considerably
more than the demand and sales of the commodities in Group B.
Answer 8:
The Global Financial Crisis of 2008, started in the USA as a sub-prime mortgage
crisis and percolated to almost all the major economies across the globe, including that of the
economy of Australia. However, Australia managed to avoid the negative implications of the
same to a considerable extent, owing to its robust economic policy frameworks, which can be
shown with the help of the following figure:

9ECONOMIC PRINCIPLE
Figure 4: AD-AS Dynamics in Australia during the Economic Crisis
(Source: As created by the author)
The government of Australia usually resorts to a tight monetary policy structure,
thereby maintaining surplus, which helps in situations like the concerned Global Financial
Crisis of 2008. At the time of the crisis, the country was also experiencing the huge mining
boom, which helped in creating employment, rising wages and keeping the aggregate demand
in the country floating, thereby helping the country in avoiding acute recession or economic
and productive stagnation. The external trade relations of the country with many other
economies, like that of China and Japan, also kept the exports and imports rising. These
factors working together help Australia to considerably avoid the acute negative economic
implications of the concerned crisis.

10ECONOMIC PRINCIPLE
Task 7
Answer 1:
The movement from A to B, shows a situation of creation of an inflationary gap, to
reduce which contractionary monetary policies will be required. This may include increase in
the rate of interest and other similar policies which help in reducing the money supply in the
economy.
Answer 2:
The effects of contractionary monetary policies can be seen in slowing economic
growth, which in turn results in increase in the unemployment in the economy. The
slowdown of the economic growth along with decreasing purchasing power reduces both the
confidence and the aggregate demand for goods and services of the consumers.
Answer 3:
Decrease in the cash rate implies a reduction in the rate of interest in the economy.
This have positive impacts on households who are borrowers as they have higher future
income. This effect is known as income effect and it leads to higher current as well as future
consumption of those households who are borrowers. However, for those households who are
net savers, this fall in the cash rate decrease their current as well as future consumption by
decreasing their income from interests received from the money which they are saving
(Mankiw, 2014). This dampens the increase in the consumption due to the low interest rates
to some extent.
Answer 4:
From the concerned article it can be seen that with the major trading partner countries
of Australia, including that of the USA, China and Japan, experiencing low economic growth
prospects owing to the fall in the price of oil, the external sector of the country is in trouble.

11ECONOMIC PRINCIPLE
The net exports of the country are expected to decrease, in this situation, thereby shrinking
the aggregate demand as can be seen from the following figure:
Figure 5: Fall in the aggregate demand
(Source: As created by the author)
With the expected shift of the aggregate demand curve from AD to AD1, both the
output as well as the price level in the country is expected to decrease. To combat this
situation of economic stagnation, RBA takes the step of reducing the rate of interest, in order
to stimulate investment and economic activities as a whole in Australia.
Answer 5:
In general, there are several exogenous as well as endogenous factors in an economy
which determines the success or failure of any policy implemented in the same. In this
context, the policy taken by the RBA, of reducing the rate of interest in the economy of
Australia, has been taken with the objective of stimulating investment and industrial and
economic growth in the country by increasing borrowing for investment and consumption
activities.