Macroeconomics Assignment Solution: Detailed Question and Answer

This document presents a comprehensive solution to a macroeconomics assignment, addressing key concepts such as unemployment, inflation, and monetary policy. It explains how the Australian Bureau of Statistics (ABS) classifies unemployment, differentiating between frictional, structural, and cyclical unemployment. The assignment further explores demand-pull and cost-push inflation, discussing their causes and implications, and contrasting the views of monetarists and Keynesians on inflation. It also delves into the role of the central bank in money creation through bank deposits and fractional-reserve banking. A detailed example illustrates the money creation process with calculations of loan amounts and reserve ratios. Desklib is a valuable resource for students seeking similar solved assignments and study materials.

Macroeconomics Assignment 1
Question and Answer: Macroeconomics Assignment
Name of the Student
Course Name
Professor’s Name
University Name
City and State
Date

Macroeconomics Assignment 2
Question and Answer: Macroeconomics Assignment
Question 2 (a)
The Australian Bureau of Statistics (ABS) classify unemployment levels based on
criteria, which comprise three basic factors, including without work, presently available for
work, and actively seeking for work. Foremost, without work criterion distinguishes those
individuals who have a job and those people who do not. In ABS view, a person working for
at least one hour within the reference week is considered employed (Gregory and Smith,
2016, p. 235). The Bureau believes that any time worked irrespective how small represents a
form of employment. The second criterion, actively seeking work, explores individuals who
actively search for employment for about four weeks but have not found a job. ABS classifies
such individuals as unemployed. Active job seeking includes telephoning, applications for
various jobs, registering with a hiring agency, and tendering for work among others. Lastly,
currently available for work criterion reflects the unemployment data of the present available
labor supply within a specified period. It helps to assess and evaluate measures and
fluctuations in unemployment levels. Although ABS use the three principles to identify key
indicators in the labor market, they are not satisfactory because of ever-changing economic
structures. For instance, it is irrational to consider someone employed because he or she
works one hour for the reference week. The criteria will be successful if it measures
unemployment based on the minimum basic amount of salary required for survival.
Question 2 (b)
Frictional unemployment refers to the form of the unemployment that arises owing to
the time spent searching for or transitioning from one occupation to another. Frictional
unemployment is inevitable in an economy because individuals search for a job while others
are switching companies every day (Abel, Bernanke, and Croushore, 2017, p. 47). Indeed, in
an economic structure in which individuals can freely change their occupations and in which

Macroeconomics Assignment 3
employers have the power to fire or dismiss inefficient employees, it is hard to eliminate
frictional unemployment. Workers will often search for better job opportunities.
Question 2 (c)
Macroeconomic policymakers need to be concerned about structural unemployment
because it is either long-lived or permanent and necessitate robust policies to correct it. In
light of Abel, Bernanke, and Croushore (2017), structural unemployment denotes a situation
in which structural changes such as technological advancement adjust labor demand patterns
(34). Policymakers should always ensure macroeconomic policies do not result in structural
changes because certain skills in the labor market may become inappropriate or unnecessary.
Structural unemployment differs from cyclical unemployment in that the former is long-lived
and challenging to address, but the latter is usually short-lived and can be addressed within a
short period. For instance, high-technology machinery replaces employees indefinitely but a
cyclical disturbance such as changes in retirement age affect the labor market for a short
period and its adverse effects can be easily addressed.
Question 3 (a)
Inflation refers to the increase in the prices of services and commodities. When the
prices of goods and services increase, the consumer’s purchasing power decreases (Abel,
Bernanke, and Croushore, 2017, p. 56). Economists claim that demand side, supply side, or
both cause inflation. According to Chu and Lai (2013), inflation caused by demand-side
factors is referred to as demand-pull inflation while that caused by supply-side factors is
known as cost-push inflation (234). Firstly, demand-pull inflation transpires when Aggregate
Demand (AD) increases at a rapid rate than Aggregate Supply (AS). In this way, the demand
exceeds supply, and thus, the firms respond by increasing prices of the services and
commodities. With the rapid growth in the economy, aggregate demand shifts from AD1 to
AD2 while long-run aggregate supply remains constant thus increasing prices from p1 to p2.

Macroeconomics Assignment 4
The level of output also increases from Y1 to Y2. This situation is illustrated using the graph
below:
Source: (https://www.investopedia.com)
On its part, cost-push inflation is also referred to as “wrong type” inflation. It is
associated with deteriorating living standards. The short-run aggregate supply shift to the left
from SRAS1 to SRAS2 thus increasing prices from P1 to P2 while reducing output from Y1
to Y2. Notably, cost-push inflation cause both falling output and inflation thus making it
challenging to address it. This situation is illustrated in the figure below:

Macroeconomics Assignment 5
Source: (https://www.investopedia.com)
Question 3 (b)
Several factors cause the two types of inflation. Examples of two factors that cause
demand-pull inflation include exchange rate depreciation and economic monetary stimulus.
When exchange rate depreciates, exports become cheaper while imports become costly. With
low level of imports from the consumers, while the exports increase, the aggregate demand
rise. Additionally, with monetary stimulus in the economy mainly owing to decrease in
interest rate, there is increased demand because consumers can borrow at a low rate (Wood,
2014, p. 131). On the other hand, two examples of factors causing cost-push inflation are
higher wages and supply shock. Wages act as expenses to the firms. Therefore, strong labor
unions may cause inflation by pushing for higher wages, which increase production costs,
and thus, higher prices for commodities. Supply shock also leads to cost-push inflation when

Macroeconomics Assignment 6
prices of significant commodities such oil rises. As a result, firms experience higher transport
costs thus driving services and commodities’ prices up.
Question 4 (a)
Monetarists argue that inflation represents a monetary phenomenon. However, they
believe in the Phillips Curve, which states that there exists an inverse relationship between
unemployment and inflation. On their part, Keynesians believe in demand-pull versus cost-
push inflation, where economic growth rate determines the level and type of the inflation.
They claim that in an economy where the demand surpasses production, the demand-pull
inflation occurs. However, Keynesians do not believe in the notion that rise in money supply
inevitably causes inflation unlike the monetarists (Wood, 2014, 128). These different
perceptions between the two groups can be explained using both cost-push and demand-pull
types of inflation.
Monetarists base their assumption “only money matters” on the argument that near or
at full employment, excessive money supply causes a rise in aggregate demand thus leading
to inflation. Indeed, a rise in nominal money supply makes the aggregate demand curve to
shift rightward thus enabling individuals to possess excess cash balances. Consequently,
people tend to increase their level of spending leading to an increase in prices of services and
commodities. The price continues to increase until aggregate demand matches to aggregate
supply. On the other hand, Keynesians postulate that inflation arises from the non-monetary
sector. For instance, a tax cut may lead to a rise in aggregate demand because of augmented
consumption expenditure leading to increased business investments or government
expenditure. The tenet of Keynesian theory is that the government expenditure is inflationary.
Therefore, the government can print additional money if a need arises.

Macroeconomics Assignment 7
Question 4(b)
The monetarists maintain that the Aggregate Demand (AD) is relatively elastic while
the Aggregate Supply (AS) is inelastic in relation to the price level and expansion of money
supply. In this regard, they plot AS curve as a vertical straight line indicating that adjustments
in the quantity of money (M) do not affect on real output or employment level. Figure 1(a)
illustrates this argument. When AD curve shift to AD1 owing to increase in M while AS
remains fixed, the price increases from P1 to P2. The real income level remains the same at
OQ. Monetarists claim that these variations in expenditure (MV) and money income in the
economy principally results from money supply fluctuations. In their view, demand for
money and velocity of circulation (V) remains constant owing to the slow variation of their
determinants. In this perception, inflation is a monetary phenomenon, which suggests that
with sufficient monetary flow, prices tend to increase. Money supply increase does not have a
permanent impact on the functioning of an economy. Thus, policymakers should reduce the
growth of money to a minimum in order to contain inflation.
On their part, proponents of Keynesian theory believe that AS is considerably more
elastic and greater compared to the elasticity of AD to the price. The increase in government
spending (G) or money supplies through either deficit or otherwise, it leads to a positive
effect on output and employment level (Wood, 2014, p.141). Figure 1(b) demonstrates this
argument. AS is represented as a vertical line from point F. AD intersects with AS to
establish the price level P and real output. The shift in aggregate demand curve to AD1 based
on the change in G and M, the price rises less proportionately, and thus, real income become
OQFP1. In light of Keynesians, the overall increase in price from P to P1 represents reflation
instead of inflation. In their view, inflation arises from post full employment scenario.
Therefore, a further increase in money supply increases aggregate demand to AD2 thus
pushing prices up from P1 to P2 since AS curve remains vertical.

Macroeconomics Assignment 8
Source: (http://www.economicsdiscussion.net/keynesian)
Question 6 (a)
Yes, I agree that central bank is responsible for money creation through bank
deposits. The central bank enjoys the autonomy and monopoly to regulate bank operations,
including money creation. Indeed, the central bank oversees the modern banking system
through fractional-reserve banking whereby money supply of the country is expanded beyond
the amount deposited by the client (Lawrence, 2018, n.p). This process creates broad money
in the banking system. The central bank (Reserve bank of Australia) directly determines the
interest rate by regulating the base interest rate. In this way, it indirectly influences stock
prices, exchange rate, and the economy's wealth. In light of monetarists and some Austrians,
the central bank has the mandate to control the money supply using its monetary operations,
including policies on money creation. Therefore, it is monetary authority responsible for
money creation
Question 6(b)
Depositing a pay cheque in my bank account from another bank does have an effect
on the money supply because money was already deposited and used. The reserve maintained

Macroeconomics Assignment 9
in the initial bank still remains, and the amount of money in the country does not change
since they were already in the banking system.
Question 6(c)
The maximum amount the bank can lend will be calculated using the money creation
formula, which requires retention of 10% reserve of the deposited amount. In this regard,
WestPack bank can only lend out $900 to its customers when it receives $ 1000 because the
central bank requires it to retain 10% in its reserve ratio. Consequently, bank’s clients can
only use $900 to pay for services and goods. Then, $900 will be expected to be deposited
back to the bank holding all other factors constant. This scenario represents the primary step
in the process of WestPack bank money creation. So far, WestPack bank has generated $900
of money as well as the credit of a similar amount. Clients of the bank can use this amount to
purchase assets thus contributing to economic growth. Assuming the entire amount was
redeposited in the bank again, WestPack bank has an additional $810 to lend to its customers.
The process continues until the initial amount of $1000 creates new deposits (money) and
credit (loans) to a value of $9000. Indeed, WestPack’s balance sheet will have expanded from
$1,000 to $10,000. The process of money creation is illustrated in the table below:
Steps Customer Deposits
in $
10% reserved as
cash at hand in $
Loans made in $
Step 1 1,000 100 900
Step 2 900 90 810
Step 3 810 81 729
Step 4 729 72.9 656.1
Step 5 656.1 - -
Etc. - - -
Total 10,000 1,000 9,000

Macroeconomics Assignment 10
Notably, WestPack bank can lend a maximum amount of $ 9,000
Question 7 (a)
No. The sale of government securities to banks is meant to reduce money supply in
the economy. This decrease of available money leads to available in the economy leads to the
shrinking of investments and spending because the accessibility of loans becomes
challenging owing to use of money to buy government securities.
Question 7 (b)
No. Borrowing from banks to boost government expenditure makes the available
money for lending limited because banks will prefer to lend money to the government owing
to security reasons. In light of Bernanke et al. (2018), government spending from borrowing
does not automatically lead to an economic boom because the government has to recover the
money borrowed through taxes to repay the debt thus offsetting the anticipated increase in
money supply from government spending (96).
Question 7 (c)
Yes. Central bank purchase of government securities from banks will lead to an
increase in money supply. The banks will have more money to lend to its clients, and thus,
they will borrow more funds. As a result, increased borrowing will lead to increased spending
thus increasing money supply.
Question 7 (d)
Possibly. Agreement by the central bank governor and treasurer to reduce target
inflation rate would possibly increase the money supply. The low rate of inflation expectation
makes individuals not to demand high salaries or wages, and thus, firms to increase their
spending. Indeed, if companies’ expect reduced inflation rate, they become more conscious

Macroeconomics Assignment 11
about market prices. However, some individuals may prefer to wait until the policy is
implemented to purchase goods and services at relatively low prices.

Macroeconomics Assignment 12
Bibliography
Abel, A., Bernanke, B. and Croushore, D. (2017). Macroeconomics. NY: Pearson.
Bernanke, B.S., Laubach, T., Mishkin, F.S. and Posen, A.S., 2018. Inflation targeting:
lessons from the international experience. Princeton University Press.
Chu, A.C. and Lai, C.C., 2013. Money and the welfare cost of inflation in an R&D growth
model. Journal of Money, Credit and Banking, 45(1), pp.233-249.
Gregory, R.G. and Smith, R.E., 2016. 15 Unemployment, Inflation and Job Creation Policies
in Australia. Inflation and Unemployment: Theory, Experience and Policy Making,
pp. 325.
Lawrence, G. (2018). An overview of the functions of money, and how money and credit are
created in the NZ economy, examining the roles of the Reserve Bank and private
sector banks. [online] interest.co.nz. Available at:
https://www.interest.co.nz/opinion/77033/overview-functions-money-and-how-
money-and-credit-are-created-nz-economy-examining [Accessed 28 May 2018].
Wood, J.H., 2014. Are There Important Differences between Classical and Twenty-First-
Century Monetary Theories? Did the Keynesian and Monetarist Revolutions
Matter?. History of Political Economy, 46(1), pp.117-148.