ECO202 Macroeconomics Assignment 1: Analysis of Economic Principles

This macroeconomics assignment, completed by a student, delves into several key economic concepts. It begins by examining the factors influencing the value of the dollar and differentiating between real and nominal interest rates, emphasizing their relevance. The assignment then explores the characteristics of economic downturns, distinguishing between recessions and depressions and analyzing factors contributing to them. The analysis extends to supply and demand dynamics, determining equilibrium, and assessing the impact of world prices and tariff barriers. Finally, the assignment investigates various types of unemployment, including structural, cyclical, frictional, and involuntary unemployment, and mentions the labor market trends in Australia. The assignment provides a comprehensive overview of core macroeconomic principles.

MACROECONOMICS ASSIGNMENT 1
MACROECONOMICS ASSIGNMENT
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MACROECONOMICS ASSIGNMENT 2
Question1
a.
The dollar losing its value means that it has dropped the rate at which it is exchanged with other
foreign currencies. (Bénétrix, Lane and Shambaugh 2015, p.S98). The dollar is said to have
depreciated against the other foreign currencies. People say the dollar has lost its value due to the
explained reasons below.
When investors from other countries prefer to variegate their investments with assets of other
currencies other than the dollar. This is a choice of the foreign investors but it may be influenced
by more attractive returns in the other countries having a higher currency value. This makes
people who use the dollar to say the dollar has lost its value since investors prefer it in
diversifying their portfolios (Staszczak2015, p.175).
When the country’s debt makes the government to either increase the taxes or reduce its
spending. The government can decide to come up with such policies to restrict spending and
dampen economic growth and hence investors find higher returns in different countries. This
implies that the dollar currency has depreciated allowing the country to have a large debt. If the
country has a trade deficit, it has more dollars going out than coming in, and that creates debt.
The foreign currency markets get flooded with dollars, and the dollar gets weaker. This has the
self-balancing effect that a weaker dollar makes the exports sell better, and it also makes imports
more expensive so traders buy fewer imports by supply and demand.
When the country prints more money increasing the money supply in the market: This causes too
much money to chase after a few available commodities in the nation. The scarcity of the money
gets lost and this makes the supply of the money to increase. Increased supply of money in the

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nation reduces the value of the dollar currency. This makes people conclude that the value of the
dollar has decreased. When money is rare it would be worth a lot hence the dollar increases its
value.
When the demand of the dollar goes down compared to other currencies in the trading currency
markets: Currency traders change money from one currency to another. And the currency that
happens to be more in demand among currency traders goes up relative to other currencies.
When comparing the number of goods and services a dollar can purchase within the trading
periods: If it purchases fewer goods and services as compared with the previous trading period,
then it is said to have lost its value. We determine the value of a dollar by assessing the number
of goods or services it can purchase. Consumer Price Index is used to solve the number of goods
that a dollar can purchase. It compares the number of goods and services in the last period with
the current period.
b.
Interest rates are very vital as part of the financial economy. They help in the evaluation and
comparison of different kinds of investments and loans in different periods of time. The real
interest rate is the rate of interest that is modified to do away with the result of the causes of
inflation (Taylor and Wieland 2016, p.147). This rate shows the real yield of lending money or
the real cost of borrowing money over time. When the true rates of inflation are known, the real
interest is not predictive.
The nominal interest rate shows no corrections should be done on the impact of inflation. This
indicates only the real amount a borrower should pay after getting any loan. Advertisements on
bonds, loans, and bank accounts show only the nominal interest rates. Before inflation is

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accounted into, a consideration of the nominal rates is done. When the nominal rates are low
consumers are encouraged to take more loans and increase their expenditure (Laubach and
Williams 2016, p.57).
Real interest rates are more important than the nominal interest rate because they attract investors
to take more risk in the market. Nominal interest rates don’t adjust for inflation. Inflation should
be adjusted to reflect the direct proportionality with the rate of interest.
Question2
a.
It is always said by people that a period of reduced economic activity is when a neighbour loses
their jobs and a major economic contraction is when you lose your own job. An economic
depression is when the economy is going through a great downfall. It mostly results from an
undesirable activity usually on the basis Gross Domestic Product (Karabarbounis and Neiman
2013, p.61).
When controlling prices and wages: Wages and prices are not allowed to be reduced by the
companies when the government is in control of them. The companies or businesses may have to
get dismissed for the consumers to survive.
Consumers can lose confidence: When consumers lose confidence in the existing economy, they
cannot really outlive. They may be forced to change the way of spending and eventually the
demand decreases. Signals like the worsening of rates of unemployment, high rates of inflation,
property sales decline and credit cards increase.

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There can be crashing of the stock market: Stock market usually comprises of the investors and
the stocks who virtually are the shareholders. When the market goes through a downfall,
investments value follows the same route. This lowers the rate of confidence in the economies.
b.
A great depression is a rampant decrease in the value of total consumer spending (Farmer 2012,
p.693). for instance, during the year 1929, it took a long period of about ten years for the greatest
depression to come to an end. This was the worst depression of all times in an economy. It
happened from October 1929 to 1939 the same month. The core reason for depression is said to
be the Nazi who came over to overthrow Germany, during the Second World War. The growth
of the economy of the affected countries was greatly ruined. During that period, there was a rose
market crash in the countries.
Savings is usually a portion of the aggregate investments of a person’s income and Marginal
Propensity to save is just the gradient of the savings function. It shows how much one’s
expenditure increases if their income increases with a margin of one dollar. It is often positive.
Question3
a.
The demand and supply are equal at the point of equilibrium. (Cook 2017, p.127)
D = 12300 – 240PS = 6700 + 60P
Then, D = S
12300 – 240 P = 6700 + 60 P

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60 P + 240 P = 12300 - 6700
300 P = 5600
P = 18.667 dollars
The equilibrium will be
D=12300-240[18.667] and S=6700+60[18.667]
D=7820 unitsS=7820.02units
b.
When the price is set at a point in the world, to get the quantity demanded in the domestic
country, then the world price will be substituted in the demand function. That is D =12,300 –
240(20) =7,500 while to get the supplied quantity, then the equilibrium price will be substituted
in the supply function. That is S = 6,700 + 60 (18.667) = 7820.02vans.
320 vans will be exported due to low prices in the domestic country compared to the price in the
world. The suppliers will be favoured by the set price since they will supply more in foreign
countries. The domestic consumers will oppose the world price since it is not favouring them at
all hence reducing the demand for them on domestically using the vans.
c.
The tariff barrier increases the price of imports (Johnson, H.G., 2013, p. 31). This leads the
producers to supply more of the commodities in the domestic country since the demand for local
goods and services will rise up. The exports increase but the imports will decrease due to the

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increase in the prices. The importers will oppose the tariff since they will not import more vans
due to the increase in their prices. The domestic consumers will also decline the tariff since they
don’t have a variety of vans and they can experience an increase in the van prices in the domestic
country since their choice is limited.
Domestic producers will support the tariff since it makes them produce more vans for domestic
consumption as well as exports. The collected revenue from the tariff will be 1times 700 vans
units = 700 units.
Question4
Unemployment is when a person is willing and able to work but doesn’t find a job at all
(Mavromaras, Sloane and Wei 2015, p. 2413).
Structural unemployment: It happens where there is a difference between the jobs that are
available and the people willing and searching for work. This difference could be as a result of
job seekers not having the skills required to do the jobs, or because the jobs available are far
away from the people seeking jobs. People may be unemployed if they work in firms or
industries that are deteriorating in size or possess skills that could be changed as a result of large-
scale advances in technology. It is hard for them to get jobs in another firm and they may have to
enhance their skills or migrate to other regions that might have more job opportunities.
Cyclical Unemployment: This occurs when the cycle of business income goes down due to low
demand for the commodities. If the demand for goods is low, the firms respond through lowering
the number of workers so as to lower the cost and to reduce their production rates. The
circumstance goes on and creates more unemployment due to the laid-off workers lacking

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enough money to buy the commodities hence reducing the ability to purchase goods in the
market.
Involuntary unemployment happens where one is able and willing to work for a given wage rate
but cannot secure a job. Creation of mergers or downfall in the economy are examples of forms
of involuntary unemployment (Jang, Park and Rhee 2013, p.3585).
Frictional unemployment: This occurs when persons meander between jobs in the labour market,
as well as when people transition into and out of the labour force. It is generally the shorter-term
type of unemployment. Workers have to move between jobs for a flexible labour market and this
aids in the achievement of an efficient allocation of labour all over the economy. People may not
find jobs abruptly and they have to invest time and effort in looking for the right job. Businesses
also take time looking for suitable personnel to fill the vacant job. Due to this, people searching
for jobs don’t immediately secure jobs and may go through a period of unemployment
temporarily.
The labour markets trends in Australia give a clear indication on the recent regional labour
market and vital data analysis about the economy that can be used to make great decisions about
the coming future (Trakman 2012, p. 83).
Over previous years in Australia, the retarded growth rate has been there until it has made an
increase in the research in this particular sector. The unemployment rate has been reduced
significantly mostly in the non-temporary jobs. In the education and health sectors, growth has
been witnessed by providing improved services. The mining sector is one of the key sources of
the factors of productions that lead to Australia economy succession and a strong influence on
the economic prevailing wages (Krugman 2017, p. 31).

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In the labour force, the working-age varies in the rate of participation. The labour supply to the
workers is influenced by the variation and it makes the workers reflect the changes in the
economy through measuring the unemployment rates and growth of the labour force.
The trend shows that securing jobs for the youth is easier than that of the elderly people. Jobs
were not readily available for the youths in the past period since they were insufficient in the
government offices, unlike the current situation.

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References
Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C., 2015. International currency exposures,
valuation effects, and the global financial crisis. Journal of International Economics, 96, pp.S98-
S109.
Cook, P.J., 2017. The demand and supply of criminal opportunities. In Crime Opportunity
Theories (pp. 127-153). Routledge.
Farmer, R.E., 2012. The stock market crash of 2008 caused the Great Recession: Theory and
evidence. Journal of Economic Dynamics and Control, 36(5), pp.693-707.
Jang, B.G., Park, S. and Rhee, Y., 2013. Optimal retirement with unemployment risks. Journal
of Banking & Finance, 37(9), pp.3585-3604.
Johnson, H.G., 2013. Optimum tariffs and retaliation. In International Trade and Economic
Growth (Collected Works of Harry Johnson) (pp. 31-62). Routledge.
Karabarbounis, L. and Neiman, B., 2013. The global decline of the labor share. The Quarterly
Journal of Economics, 129(1), pp.61-103.
Krugman, P., 2017. Crises: The price of globalization? In Economics of Globalisation (pp. 31-
50). Routledge.
Laubach, T. and Williams, J.C., 2016. Measuring the natural rate of interest redux. Business
Economics, 51(2), pp.57-67.
Mavromaras, K., Sloane, P. and Wei, Z., 2015. The scarring effects of unemployment, low pay,
and skills under-utilization in Australia compared. Applied Economics, 47(23), pp.2413-2429.

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Staszczak, D.E., 2015. Global instability of currencies: reasons and perspectives according to the
state-corporation hegemonic stability theory. Brazilian Journal of Political Economy, 35(1),
pp.175-198.
Taylor, J.B. and Wieland, V., 2016. Finding the equilibrium real interest rate in a fog of policy
deviations. Business Economics, 51(3), pp.147-154.
Trakman, L.E., 2012. Investor-state arbitration or local courts: Will Australia set a new trend?.
Journal of world trade, 46(1), pp.83-120.