AFE1303 Economics for Decision Making Assignment Solution: Analysis

This economics assignment solution covers key macroeconomic concepts, including unemployment calculations, labor force participation rates, and the money multiplier. It analyzes the impact of open market operations on interest rates and the goods and services market, as well as the Reserve Bank of Australia's roles. The assignment also explores aggregate demand and supply, recessionary gaps, and the effects of slower economic growth in trading partners. Finally, it examines the impact of increased e-commerce transactions in South Korea on macroeconomic equilibrium. The solution provides detailed calculations, explanations, and diagrams to illustrate these concepts, making it a valuable resource for students studying economics.

Running head: ECONOMICS FOR DECISION MAKING
Economics for Decision Making
Name of the Student
Name of the University
Course ID

1ECONOMICS FOR DECISION MAKING
Table of Contents
Question 1........................................................................................................................................2
Question a....................................................................................................................................2
Question b....................................................................................................................................2
Question c....................................................................................................................................3
Question d....................................................................................................................................3
Question 2........................................................................................................................................4
Question a....................................................................................................................................4
Question b....................................................................................................................................5
Question c....................................................................................................................................6
Question 3........................................................................................................................................7
Question a....................................................................................................................................7
Question b....................................................................................................................................9
Question c..................................................................................................................................10
References......................................................................................................................................12

2ECONOMICS FOR DECISION MAKING
Question 1
Question a
i.
The current unemployment rate in Tommynation is recorded as 5.2%. Total number of
people in the labor force is 269, 475. As unemployment rate is the percentage of unemployed
people in the labor force, the number of unemployed people in can be computed as
Unemployed people=Labor force × rate of unemployment
¿ 269,475 ×0.052
¿ 14012.7 14013
ii.
The working wage population is given as 365547. The labour force participation rate can be
computed as
Labor force participation rate= Labour force
Working age population × 100
¿ 269475
365547 ×100
¿ 73.7 %
Question b
If the size of labour force decreases with number of unemployed people remaining
unchanged, rate of unemployment would increase (Goodwin et al., 2015). If size of labour force
decreases by 23000, the size of labour force now becomes (269475 – 23000) = 246475

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The new rate of unemployment in the economy is
Unemployment rate= Number of unemployed people
Labor force ×100
¿ 14013
246475 ×100
¿ 5.7 %
Therefore, as the size of labour force decreases by 23000, rate of unemployment decreases from
5.2% to 5.7%.
Question c
Tim lost his jobs in a manufacturing factory. The factory went bankrupt due to lost
competitiveness in the domestic market over the cheap imported products. Tim is unable to find
a job that utilizes his skills. This type of unemployment is called structural unemployment. Tim
is unemployed because of skill mismatch leading to structural unemployment.
Question d
Full employment refers to an economic state where all available labours in the economy
are fully utilized in an efficient manner. Under condition of full employment, the economy
embodies highest amount of skilled and unskilled labourers. The full unemployment refers to any
level of unemployment that is above 0 percent. Full employment exists without any demand
deficit or cyclical unemployment. The economy’s actual unemployment rate is equal to natural
rate of unemployment (Uribe & Schmitt-Grohe 2017) When all the labour resources are fully
utilized, real GDP matches to the level potential GDP.

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Question 2
Question a
i.
Money multiplier= 1
Reserve ratio
¿ 1
0.2
¿ 5
ii.
Given the money multiplier of 5, if customers deposit $3300 into their banks, money
supply in the banking system increase to
Money supply=$ 3300 ×5
¿ $ 16500
iii.
If the reserve ratio decreases to 16%, the new money multiplier for the economy is
Money multiplier= 1
0.16
¿ 6.25
Total amount of money supply with the initial deposited amount of $3300 the can be
determined as
Money supply=6.25 ×3300

5ECONOMICS FOR DECISION MAKING
¿ $ 20625
iv.
The process of money multipliers explains how an increase in monetary base increases
the money supply by a multiplied amount. Suppose that in the banking system there is excess
reserve of $100. Bank lends the money to earn interest rate. Borrowers then use this money to
buy some goods or services (Palley, 2015) Sellers then receive $100 and deposit the amount in
bank. If the reserve requirement is R = 0.10, then bank keeps ($100 * 0.10) = $10 as reserve and
give loans ($100 - $10) = $90 of the excess reserve. The borrowers’ then use to money to
purchase something. Seller receive $90 and deposit in the bank. Bank again keeps (90*0.10) = 9
as reserves and loans rest of $81. This process continuous having a multiplied effect on deposited
money.
Question b
Figure 1: Impact of OMO process

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Interest rate in the economy is determined from the forces of market demand and market
supply. If ECB wants to increases interest rate in the economy policy should be taken to lower
the money supply. To achieve this goal ECB needs to sell government securities in the open
market. As banks purchase the securities, they have less reserve to lend. This lowers the money
supply in the economy. In the above figure DD and SS indicate the respective money supply and
money demand curve. A lower money supply given the money demand shifts the money supply
curve inwards from SS to S1S1. As a result, interest rate increases from r* to r1. The change in
money market equilibrium and associated interest rate affects the goods and service market
influencing real GDP and inflation (Johnson, 2017). In response to higher interest rate, spending
and investment in the economy declines lowering the aggregate demand. Consequently, there is a
decline in GDP and inflation.
Question c
The three key roles of Reserve Bank of Australia are as follows
 Maintenance of price stability in Australia
 Maintenance of full employment in the economy (rba.gov.au, 2014).
 Maintenance of currency stability and achieving prosperity and well-being of people
living in Australia

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Question 3
Question a
i.
Figure 2: Aggregate demand and aggregate supply
ii.
Macroeconomic equilibrium occurs where aggregate demand curve intersects the
aggregate supply curve (Agenor & Montiel, 2015). In the above figure, macroeconomic
equilibrium is shown by point E. Corresponding to the equilibrium, the equilibrium level of real
GDP is 55 Billion and associated price level is at $50.

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iii.
Figure 3: Potential GDP and recessionary gap
Potential GDP of the economy is at $63 billion. The equilibrium real GDP is less than the
potential GDP meaning the economy is not full utilizing all of its resources and hence, operates
below the full employment real GDP. The distance between equilibrium level of real GDP which
is below the potential GDP and the level of potential GDP is termed as termed as recessionary
gap (Heijdra, 2017). Under such a situation, real GDP is so low that firm in the economy do not
hire all the available workers resulting in high unemployment.

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Question b
Figure 4: short run and long run effect of slower economic growth of trading partner
The macroeconomic equilibrium in an economy occurs where short run and long run
aggregate supply curve and aggregate demand. In the above figure macroeconomic equilibrium
occurs at point E. At this point, equilibrium real GDP equals the potential GDP at Y*. The
associated price level is at P*. Now the slower economic growth of trading partners including
China and Indonesia lowers the export demand of Australia. This will shift the aggregate demand
curve to the left to AD1. In the short run, the decline in aggregate demand shifts causes both
output and price level to level indicating a recessionary pressure (Mitchell, 2019). Price lowers to
P1 and real GDP lowers to Y1. In the long run however, workers and firms adjusted to lower price
level which in turn reduces cost of production. This will shift the short run aggregates supply
curve to shift to the right to SRAS2. Australian economy in the long run back to the potential
GDP at Y* with a lower price level at P2.

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Question c
Transaction in E-commerce of South Korea increases significantly in the last three years.
Both export and import have grown considerably. The transaction has been increased by 25%
mainly due to increased demand for K-beauty and K-music and stationary goods. Sales of
foreign goods increased by 31% in the last year. Total export and import of online goods
increased by 36 percent and 32 percent resp. Sales of K-pop products jumped by 62 percent
while sales of cosmetics increased by 14 percent compared to the previous year. US is the largest
importer South Korean items followed by China, EU and Japan. In the last year, US’s share in
direct purchase of South Korea has declined while that of China’s share has increased by more
than 10 percent.
Figure 5: short run and long run effect of increase in E-commerce transaction
The event described the recent increase in E-commerce transaction of South Korea.
Overseas sales increases more than the overseas purchase, there is a net gain from trade. Now,

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suppose the economy initially at an equilibrium denoted by E1 in the above figure. Now a crease
in net export due to increase in sales of online items the aggregate demand curve shifts rightward
from AD1 to AD2. In the immediate short run, equilibrium shifts from E1 to E2. Real GDP
exceeds the potential GDP creating inflationary gap (Heijdra, 2017). As price level increase, cost
of production increases lowering short run supply shifting the aggregate supply curve to the left
to SRAS2. The economy reaches to a new equilibrium at E3. GDP backs to the potential GDP at
Y1 while price level increases to P3.

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References
Agenor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University
Press.
Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in
context. Routledge.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Johnson, H. G. (2017). Macroeconomics and monetary theory. Routledge.
Mitchell, W. (2019). Macroeconomics. Macmillan International Higher Education.
Palley, T. I. (2015). Money, fiscal policy, and interest rates: A critique of Modern Monetary
Theory. Review of Political Economy, 27(1), 1-23.
rba.gov.au. (2014). Functions and Objectives | Reserve Bank of Australia Annual Report – 2014 |
RBA. Retrieved from
https://www.rba.gov.au/publications/annual-reports/rba/2014/functions.html
Uribe, M., & Schmitt-Grohe, S. (2017). Open economy macroeconomics. Princeton University
Press.