Newcastle International College ECON1002 Assignment Solution

This economics assignment addresses key macroeconomic concepts, including different types of unemployment (cyclical, frictional, structural, and natural rate), the definition and types of money, and the Australian monetary system. It explores the demand for money and other financial assets, analyzing the impact of interest rates and national output. The assignment also examines how the private banking system affects the money supply in Australia. Furthermore, it defines inflation, explaining why a small amount is considered beneficial for economic activity, and identifies the two major causes of inflation, relating them to the current falling price of oil. The solution provides detailed explanations and answers to each question, offering a comprehensive understanding of the topics covered.

Running head: ECONOMICS
Economics
Name of the student
Name of the university
Author note

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Table of Contents
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................3
Answer 4....................................................................................................................................4
Answer 5....................................................................................................................................5
Answer 6....................................................................................................................................5
Answer 7....................................................................................................................................6
Reference list..............................................................................................................................7

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Answer 1
The various types of unemployment are :
a) Cyclical unemployment: this type of unemployment takes place when the workers
lose their jobs due to downturns in the business cycle.
b) Frictional unemployment: this type of unemployment takes place when worker has
left his job and is in search of another one.
c) Structural unemployment: structural unemployment results when there is a mismatch
between the available jobs and the level of skills of the unemployed (Ezzy 2017).
d) Natural rate of unemployment: this is the lowest level of unemployment an economy
can reach.
Answer 2
Money is a kind of item which is generally accepted for the services or goods in a
particular country. There are four types of money which is fiat money, fiduciary money,
commodity money and commercial bank money. Money is the medium of exchange which is
accepted during making any kind of transactions (Brunnermeier and Sannikov 2016). Money
also acts as store of value, unit of accounting and medium of exchange. The measures of
money supply are M0, M1, M2 and M3.
Answer 3
The Australian monetary system does not require any minimum reserves of its banks.
One of the main policy of the Reserve Bank of Australians to maintain an inflation rate of
around 2 percent which does not hamper the economy. There is absence of regulatory
requirement for banks for holding exchange settlement funds in Australia (Bade and Parkin
2015). The domestic market operations made by the Reserve Bank are mostly carried out by

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the Domestic market Department. Currently the fiat monetary system prevails in most of the
countries. The national currency in Australia is the Australian dollar (AUD).
Answer 4
The demand for money is known to be affected by many factors such as income level,
rate of interest along with inflation rate. Money is demanded for carrying out everyday
transactions. The three reasons for holding money is precautionary motive which states that
investment in cash rarely lose value. Another is the transaction motive which states that
money is useful for conducting transactions every day (Keynes 2018.). The third one is the
speculative motive which states that it provides a return to the money holders.
The other type of financial assets except money are stocks, loans and bonds. Stock is
one of the famous financial asset which is a piece of paper that represents something of a
value. On the other hand bond is a fixed income security which is a debt instrument created
for the purpose of raising capital.
When the rate of interest rises, the opportunity cost also increases which result to the
decrease in the quantity of money demanded. Therefore, it can be said that when the interest
rate rises, the price level increases leading to increase in the decrease in money demand.
Figure 1 Impact of interest rate in money demand.
(Source: Keynes 2018.)

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Answer 5
The banknotes of Australia are produced by the Reserve Bank of Australia. They
account for more than 90 percent of the value of Australian currency. The banking in
Australia is mainly dominated by mainly four major banks which are commonwealth bank of
Australia, national Australia Bank, Australia and New Zealand Banking Group and Westpac
Banking Corporation. These four banks are the pillars of Australia and the government will
be rejecting any mergers between the big four banks. The banks in Australia have a loan book
which over 200 percent of GDP and the creation of credit is still growing the loan book
(Manalo, Perera and Rees 2015). The credit creation in the private banks have increased a lot
and have added more than around $US30 to the economy.
Answer 6
The increase in the level of price of the services and goods in an economy over a
period of time is termed as inflation. It is also termed as the quantitative measure of the rate
at which the average piece level of the basket of goods in the economy will be increasing
over a period of time. It is measured in various ways depending on the types of goods and
services that is considered.
A small amount of inflation is always considered good for the economy since, it helps
in raising production. Inflation will also leads to increase in demand which will be triggering
more production in the economy (HUSSEIN. and STUDENT 2017). A small amount of
inflation also makes easier for the debtors who is known to repay their loans with money
which is less valuable than the money which they borrowed. This will increase borrowing
and lending and will again lead to rise in the increasing level of spending.

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Answer 7
Inflation are of mainly two types which are the demand pull inflation and cost push
inflation. Demand pull inflation mainly results from the cut in the rate of interest, rise in
money supply and higher wages. The cost push inflation on the other hand takes place due to
high expectation of inflation, devaluation and higher wages.
One of the major cause of inflation is consumer confidence which states that when
there will be low rate of inflation, consumers will be spending more money as they will
become confident. This will drive up the prices since producers will be charging more
leading to inflation. Another cause is reduction in supply which is one of the basic causes of
inflation. When the demand for commodities increases, the available supple decreases
(Brunnermeier and Sannikov 2016). Therefore, when fewer items are available, consumers
have to pay higher prices which leads to inflation.
The falling price of oil means there will increase in demand for oil more rapidly
compared to the productive capacity. In the short run, the business cannot help in raising the
production as supply does not increase so fast. Therefore, the equilibrium of the economy
moves and rises resulting to demand pull inflation.

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Reference list
Bade, R. and Parkin, M., 2015. Foundations of microeconomics. Pearson.
Belongia, M.T. and Ireland, P.N., 2015. Interest rates and money in the measurement of
monetary policy. Journal of Business & Economic Statistics, 33(2), pp.255-269.
Brunnermeier, M.K. and Sannikov, Y., 2016. The I theory of money (No. w22533). National
Bureau of Economic Research.
Ezzy, D., 2017. Narrating unemployment. Routledge.
HUSSEIN, A.A. and STUDENT, M., 2017. EFFECT OF INFLATION RATE ON STOCK
MARKET RETURNS IN UGANDA SECURITY EXCHANGE.
Keynes, J.M., 2018. The general theory of employment, interest, and money. Springer.
Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian
economy. Economic Modelling, 47, pp.53-62.