Macroeconomics Assignment: GDP, Unemployment, CPI, and AD Analysis

This macroeconomics assignment solution addresses key macroeconomic concepts, including Gross Domestic Product (GDP), unemployment, the Consumer Price Index (CPI), and Aggregate Demand (AD). The assignment begins by defining GDP and distinguishing between intermediate and final goods, calculating GDP for a simple closed economy. It then explores unemployment, differentiating between structural and employed individuals, and calculating unemployment and participation rates. The solution continues by calculating and interpreting the CPI to assess changes in the cost of living. The assignment also analyzes the factors influencing the downward slope of the AD curve, the impact of pessimism, changes in net exports, and wage changes on AD. Finally, it illustrates the effects of a decrease in consumption on the aggregate demand and supply model, including graphical representations and long-run adjustments.

Running Head: Macroeconomics
Task 6
Part 1
Gross Domestic Product (GDP) measures the country’s economy. It represents the
monetary value of everything produced within the country’s boarders by both citizens and
foreigners. The period for estimation of GDP is usually a year. An intermediate good is a
finished good that manufacturers purchase as an input for producing other finished goods (it’s
also a finished good). These goods are excluded from the measure of GDP to avoid the issue of
double counting. Cement can be used as both an intermediate good for housing activities
depending on the demand for housing, it’s an intermediate good when used for housing, but it’s a
finished good when it’s not used. When it’s used, the finished good is the built house.
Part 2:
The final goods and services in this case are Ipods, cars and legal services; steel is an
intermediate good and will be excluded from the GDP estimation. Now we calculate the value of
each by multiplying price by quantity
The value of Ipods = $300 * 5000 = $1,500,000
The value of Cars = $25,000 * 500 = $12,500,000
The value of Legal services = $2000 * 100 = $200,000
To calculate GDP we add up the values
GDP = 1,500,000 + 12,500,000 + 200,000 = $14,200,000
The GDP of this simple closed economy is $14,200,000
Part 3:
This person is unemployed because the person does not have a job, is actively seeking, and is
available for a job (Abs.gov.au, 2014). The person is structurally unemployed such that even if
there were job opportunities, he/she would remain unemployed.
Part 4:
This person should be considered employed because he/she has completed at least an hour of
works that was paying during the survey week (Lewis, 2017). 10 hours are much for one to be
considered employed.

Macroeconomics 2
Part 5:
Unemployment is that proportion of the labor force without jobs, actively seeking, and available
for a job (Amadeo, 2018). The total population = unemployed + employed + those not in labor
force = 500+8000+4000 = 12500. Labor force = Employed + unemployed = 8000+500 = 8500.
Unemployment rate = unemployed
labor force = 500
8500∗100 = 5.88%. Participation rate = Labor force
total population
= = 8500
12500∗100 = 68%.
Part 6:
Basket’s cost in 2005 = PQ
= PQ Computers + PQ Books + PQ Burgers
= (1700*2) + (25*50) + (1.00*150) = $4800
Basket’s cost in 2015 = PQ
= (1200*2) + (30*50) + (2.00*150) = $4200
CPI 2005 base year = 4800
4800∗100=100%
CPI 2015 base year = 4200
4800∗100=87.5 %
Following an explanation by Jan (2015), there was a decrease in CPI meaning that the cost of
living in 2015 was lower than that in 2005. The price decreased by 12.5%.
Task 7
Part 1:
The first reason for downward sloping of AD curve is Pigou's wealth effect where a
reduction in price makes consumers wealthier and their spending increase. The second reason is
Keynes's interest-rate effect where consumers demand money depending on the price level. A
lower price induces consumers to save more as less money is required to make purchases. More
saving increases the supply of loan driving down the interest rate and consequently an increase in
aggregate demand. Thirdly, Mundell-Fleming's exchange-rate effect where AD rises as net
export rise being stimulated by lower domestic interest rate resulting from falling prices.
Part 2:
Pessimism will lower the aggregate demand since people will change their consumption to be
lower so as to enable them to save some income that they will be able to make demand during

Macroeconomics 3
the economic downturn. They expect that unemployment level may rise and thus job security is
lost.
Part 3:
The aggregate demand will fall because the net export component will be reduced. The decrease
in exports is always associated with increased imports to avoid the higher domestic prices. Since
export minus import is a component of AD, its decrease directly decrease the AD.
Part 4:
The consumption component of the Aggregate demand is affected in this situation. The
consumers do not have sufficient wages to make their demand for both goods and services.
Weaker wages given the price levels tends to lower the Aggregate demand. Even with the
weaker wages, investors are not stimulated by the higher profits to hire more people.
Fig: How the decrease in consumption causes a change in the Aggregate demand and supply
Aggregate LRAS
Price AS0
P* AS1
P1 AD0
P2
AD1
Y1 Y* Aggregate output
At the long run equilibrium, the price level is P* and Y* is the real GDP level. The decrease in
consumption component of aggregate demand causes a shift of AD curve to the left from AD0 to
AD1. The associated equilibrium level is lower. This results in price level decreasing from P* to
P1. This represents a movement along the short run AS1. The real GDP declines from Y* to Y1.
As the economy adjusts in the long run, the Aggregate supply rises. This rise is represented by
the AS0 shifting to AS1. Thus in the long run the economy will shift back to the LRAS but the

Macroeconomics 4
price level will decline further from P1 to P2. The Aggregate output in the long run will be the
same as that what existed before the decrease in consumption.
References
Abs.gov.au. (2014). 6105.0 - Australian Labour Market Statistics, July 2014. [Online] Available
at: http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6105.0Feature%20Article53July
%202014 [Accessed 11 May 2018].
Amadeo, K. (2018). Unemployment, Its Causes, and Its Consequences. [Online] The Balance.
Available at: https://www.thebalance.com/unemployment-rate-3305744 [Accessed 11 May
2018].
Jan, O. (2015). Consumer Price Index. [Online] xplaind.com. Available at:
https://xplaind.com/228557/consumer-price-index [Accessed 11 May 2018].
Lewis, P. (2017). We need to find new ways to measure the Australian labour force. [Online]
The Conversation. Available at: https://theconversation.com/we-need-to-find-new-ways-to-
measure-the-australian-labour-force-68802 [Accessed 11 May 2018].