Principles of Economics Summer A 2019/2020 Short-Answer Assignment

This economics assignment analyzes macroeconomic concepts, focusing on GDP, consumption expenditure, and unemployment. Question 1 examines the relationship between real GDP and consumption expenditure in different scenarios, applying Keynesian theory to predict changes in consumption based on GDP levels and government spending. Question 2 delves into Australia's unemployment rate, exploring its trends, regional variations, and the Reserve Bank of Australia's (RBA) interest in the national unemployment rate, referencing a Sydney Morning Herald article and RBA publications. The assignment highlights the impact of unemployment on the economy, including lower income and purchasing power, and discusses the RBA's policies to manage unemployment, such as interest rate cuts and wage adjustments. The paper also incorporates relevant data and statistics related to the unemployment rate in Australia.

Running head: PRINCIPLES OF ECONOMICS
Principles of Economics
Name of the Student
Name of the University
Author note

1PRINCIPLES OF ECONOMICS
Table of Contents
Answer to Question 1(a)..................................................................................................................2
Answer to Question 1(b)..................................................................................................................2
Answer to Question 1(c)..................................................................................................................3
Answer to Question 2......................................................................................................................3
References........................................................................................................................................6

2PRINCIPLES OF ECONOMICS
Answer to Question 1(a)
According to the diagram, the equilibrium is achieved where aggregate expenditure is
equal to output. The aggregate expenditure curve is denoted by C+ I+ G+ NX. Here expenditure
is denoted by E and output or GDP is denoted by Y. According to the question, the real GDP
were $200 initially. Hence, the aggregate expenditure curve remains in left equilibrium
(Davidson 2015). Thus, at this point output of the economy is smaller than its aggregate
expenditure. As a result, the aggregate demand in the economy is greater than equilibrium level.
As the aggregate expenditure of the economy is higher, the consumption expenditure also be
higher. Therefore, the consumption expenditure of the economy also tend to increase (Klein
2016). In addition, the economy would produce more in order to reach the desired level of output
and to meet the aggregate demand.
Answer to Question 1(b)
In the given question, another scenario is presented where the real GDP were initially $
900. In this scenario, the aggregate expenditure curve stays right of the equilibrium level.
Therefore, at this point where real GDP is equal to $900, output level of the economy exceeds
aggregate expenditure. Hence, the aggregate demand in the economy stays below the equilibrium
level (Sebastiani 2016). The aggregate expenditure of the economy is lower than its total level of
output. It would push the level of production in the economy down to adjust the level of
aggregate demand and aggregate expenditure. Therefore, as the level of aggregate expenditure
fall below the 45 degree equilibrium line. The consumption expenditure of the economy also
falls. Hence, there would be decreasing trend in consumption expenditure of the economy.

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Answer to Question 1(c)
According to the third scenario given in the question, the equilibrium of the economy is
achieved where 45 degree equilibrium line intersects with aggregate expenditure curve which is
denoted by C+I+G+NX. At this point expenditure is equal to the output. According to the
question, real GDP were $500 initially. Moreover, aggregate expenditure is equal to the level of
output at this point. Therefore, there is no difference between aggregate demand and aggregate
expenditure (Tily 2016). Hence, at this point where E = Y and Y = C+I+G+NX, where Y = $500.
The increase in government expenditure would increase the real GDP. As government
expenditure increased by $80, the real GDP would also scale up by $80. Therefore, the new real
GDP would be $500+$80 = $580.
Answer to Question 2
Figure 1: Unemployment rate in Australia

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Source: (Data.worldbank.org 2020)
Figure 1 represents the unemployment rate of Australia from 2009 to 2019. The country
witnessed a downward trend in unemployment rate. Moreover, in October 2019, the
unemployment rate of Australia was 5.3%. It was slightly down in November 2019 by 0.1%.
Therefore, in October 2019, the unemployment rate reached its all-time high in the span of 12
months. The unemployment rate was higher in different state of the country. However, the level
of unemployment varied depending on the different region of the country. For example, the
unemployment rate was 4.5% in New South Wales, which was lower than the total
unemployment rate of the country. On the other hand, in Tasmania, the unemployment was
greater than the total unemployment rate of the country. It stood at 6.8% (Eryk Bagshaw 2019).
The region of the country, which registered highest average rate of unemployment was Outback
Queensland.
On the contrary, the region, which witnessed lowest average level of unemployment rate
was Sutherland SA$ region. In August 2019, the country lost full time jobs of 15,500 within the
country. One of the important macroeconomic indicators is unemployment rate. It states the
overall performance of the country. As the unemployment rate increases, it brings economic
turmoil in the country. It also impacts the economic growth of the country. In addition,
unemployment rate lowers the level of income. As a result, the purchasing power of the
individual decreases. It also aggravates the social problem. Many economic issues such as lower
consumption growth, investment growth, domestic growth along with lower public demand
prevalent in Australia. It increased the concern of the RBA to control the national unemployment
rate. The Reserve Bank of Australia (RBA) undertook various policies in order to curb the
increasing rate of unemployment within the country (Rba.gov.au 2020). However, new job

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creation remained low in the country. In addition, the rate of unemployment of the country can
be controlled with the help of wages. The RBA planned to put upward pressure on the wages in
order to reduce the level of unemployment rate. However, according to the RBA, the
unemployment rate said to be at least 4.5% to put upward pressure on wages.
In current scenario, the unemployment rate of the Australia is way above the level of
4.5%. Though, the country witnessed a hike in part time unemployment rate by 50,200 in August
2019. As a result, it scaled up the level of employment by 34,700. Now the number of people out
for work also increased by 4100. Thus, the total number of population out for the work stood at
716,800. As the number of people out for the work increased and employment opportunity of the
country decreased. It widened the gap and intensified the problem of unemployment in Australia.
As a result, the labour market slack rose by 13.8% (Abs.gov.au 2020). It created a huge pressure
on the government of Australia to initiate an interest rate cut. The unemployment rate of
Australia reached 12 month high and tax cut of the government also found its way in economy.
Hence, it is essential for the Australian economy to initiate an interest rate cut. Though, the
interest rate cut may aggravate some economic problems due to slower economic growth. The
main reasons behind this growing unemployment rate include population policies and
infrastructure spending. Therefore, other than interest rate cut, government and monetary
authority of the country should also undertake various other measures to solve the problem of
unemployment. As the societal and economic growth of the country hampered due to higher
unemployment rate, the RBA focused on national unemployment rate.

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References
Abs.gov.au. (2020). Australian Bureau of Statistics, Australian Government. [online] Available
at: https://www.abs.gov.au/.
Data.worldbank.org. (2020). Unemployment, total (% of total labor force) (modeled ILO
estimate) - Australia | Data. [online] Available at:
https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?locations=AU&start=2009.
Davidson, P., 2015. What was the primary factor encouraging mainstream economists to
marginalize post Keynesian theory?. Journal of Post Keynesian Economics, 37(3), pp.369-383.
Eryk Bagshaw, S. (2019). Unemployment lifts to 12-month high as full-time jobs fall. [online]
The Sydney Morning Herald. Available at:
https://www.smh.com.au/politics/federal/unemployment-lifts-to-12-month-high-as-full-time-
jobs-fall-20190919-p52sum.html.
Klein, L.R., 2016. The keynesian revolution. Springer.
Rba.gov.au (2020). Reserve Bank of Australia. Economic Outlook | Statement on Monetary
Policy – May 2019. [online] Available at:
https://www.rba.gov.au/publications/smp/2019/may/economic-outlook.html.
Sebastiani, M. ed., 2016. The Notion of Equilibrium in the Keynesian Theory. Springer.
Tily, G., 2016. Keynes's General Theory, the Rate of Interest and Keynesian'Economics.
Springer.