ECO12 Macroeconomics Assignment: Study Period 2, 2019

This macroeconomics assignment addresses key economic concepts and their interrelationships. The assignment begins by examining the impact of weak wage growth on an economy, illustrating how it can lead to stagnation by affecting consumer demand, production, and employment, and how it impacts various economic factors. It includes a diagram showing the mechanism of economic slowdown. The second part explores the components of an economy (inflation, wage growth, productivity, investment, interest rates, and economic growth), and analyzes how low values across these components can trigger economic stagnation, and discusses the role of the Central Bank in mitigating these effects through interest rate adjustments and their impact on aggregate demand and supply, represented in a diagram. The third part focuses on the Australian context, analyzing the impact of part-time workers on unemployment and inflation, considering the government's role in managing the economy, and the effects of changes in the natural rate of unemployment, visualized with diagrams. The assignment concludes by critiquing the government's economic assumptions and policies, especially in relation to NAIRU (Non-Accelerating Inflation Rate of Unemployment).

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Course ID

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Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................3
Answer 3a...................................................................................................................................5
Answer 3b..................................................................................................................................6
References..................................................................................................................................8

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Answer 1
Wage rate shows the amount of an individual is earning from doing job. Higher the
wage rate higher will be the income. It is known from the economic theory that more income
induces the consumption and thereby with every unit, increase in income there is increase and
increase in marginal propensity to consume. Therefore, a weak wage growth influences the
economy like higher wage rate does but must be in adverse manner (Mishel, Gould and
Bivens 2015). Weak wage growth means there will be low increase in the income of the
people and thus increase in consumption of goods will face a slowdown. The slowdown in
the consumer market will reduce the demand for products in the economy. The weak wage
growth drives the economy into stagnation by affecting several economic factors by the fall
in demand. The fall in demand for the goods reduces the price of the goods and thereby
profitability of the producers and sellers. Witnessing the falling demand and perceiving the
reduction in profitability the producers will reduce their production. The cut in firm’s
investment and thereby production process reduces the demand for workers. It will affect the
employment and wage rate of the workers and thereby unemployment and growth rate of
wage will fall (Bell and Blanchflower 2018). Hence, there will be crunch in business sector
and fall in the economic condition. Therefore, productivity of the economy will fall. The
revenue of government will fall too due to this problem (Ullah 2016). Hence, overall income
the economy lowers and a stagnation occurs in the economy. The mechanism of the
occurrence of economic stagnation due to weak wage growth is shown in the diagram given
below.

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Figure 1: Economic slowdown
Source: (Created by the Author)
Answer 2
The major components of an economy are inflation, wage growth, productivity
improvement, business investment, real interest rate and economic growth (Kiley 2015). To
have a better and well performing economy the above-mentioned components should be
balanced. However, as per the statement in the question low value of all the components
affect the economy in adverse manner. Stagnation occurs when all the components remains
low (Summers 2014). An economy suffering from such an event requires a policy that might
be able to pull it from the situation, as it cannot revive itself under free market conditions.
Low wage growth causes expected income of individuals of a country to fall and if this
persists for a long time then the people tend to reduce consumption in fear of lower expected
future income. As a result, the demands for goods fall and thereby prices of goods fall too.
The fall in prices pulls down the inflation rate and results in low inflation rate (Williams
2016). Low prices of goods, their fall in demand discourages the sellers to produce more, and
for this reason, they stopped investing more on their production process, rather sellers cut the
existing rate of production by disinvesting. Cut in production of goods demands less workers
and thereby unemployment rate might or the employees have to work for less wage.
Therefore, wage growth falls further and the vicious cycle keeps on rolling. Hence, after a
period the economy of the country will suffer from economic slowdown due the low
economic growth caused due to the above happenings (Awan and Khan 2014). Therefore, to

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encounter the adverse condition of the economy the Central Bank will cut the interest rate
and try to boost the economy of the country. A cut in interest will enable the investors to lend
more from the bank as the cost of lending has fell. Therefore, there will be more investment
and more production in the economy as per conventional economic theories. The firms will
employ more and increase the wage of the workers. Increase production will push the supply
of the economy and thereby aggregate supply curve (AS) shifts to the right (Rao 2016). On
the other hand, as the income of the people has increased due to rise in wages the
consumption will rise and thus the demand of the goods. The increase in demand pushes the
aggregate demand curve (AD) to the right. However the change in price level depends on the
magnitude by which AD or AS has increased, if the increased in AD is greater than AS then
price level will rise, if both are equal then price level remains the same and if AS is greater
than AD price level will fall. According to change in price level, inflation changes, since both
share a positive relationship between them. The mechanism explained above due to cut in
interest rate is shown diagrammatically below.
Figure 2: Increase in AD and AS
Source: (Created by the Author)

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Answer 3a
In 1992, the unemployment rate in Australia was above 10 per cent. With the
increase in part-time workforce, the unemployment rate has decreased over time and is
currently recorded as 5 per cent. Therefore, it can be argued that the increase in part-time
worker has contributed to the economy. The inflation rate of Australia has gradually
decreased in the recent years, and is one of the effect of increasing part-time workers. The
government always try to decrease the unemployment rate. As part-time workers are not
regarded as unemployed, the unemployment rate decreases even if most of the workers are
not fulltime employed (Stitglitz 2014). The salary of part-time workers tend to be lower than
the full-time workers and thus the consumption demand remains low and thus the demand for
goods stays low. Therefore, the inflation rate does not increase significantly and the rate
remains at the NAIRU level.
The natural rate of unemployment is the level of unemployment at which an economy
remain at the steady state equilibrium, that is the economy produces the amount of output it
produces at full employment level. However, the full employment does not mean that there is
no employment, but it means that there is only structural and frictional unemployment and
thus the economy cannot be optimized by recruiting more workers to the economy. The full
employment level is thus achieved in the long run and is given by the long run aggregate
supply curve (LRAS). Therefore, full employment level in the long run is given by the
difference between the total number of worker in the labour force and natural rate of
unemployment. Hence, change in natural rate of unemployment changes the rate LRAS
curve. The increase and decrease in natural rate of unemployment rate shifts the LRAs to the
left and to the right respectively. The mechanism is shown in the diagram given below.

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Figure 3: Shift in LRAS due
to change in natural rate of unemployment
Source: (Created by the Author)
Answer 3b
Figure 4: Increase in
inflation

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Source: (Created by the Author)
The government of Australia has mistakenly assumed that the NAIRU is at 5 per cent,
which is 1 per cent above the desired NAIRU. Thus, to decrease the unemployment rate of
the economy the government intends to boost the economy by increasing the demand. To
increase demand the government cut tax rate due to which disposable income of the
individuals increase and thereby consumption demand increases (Gale and Samwick 2014).
As a result, the aggregate demand curve will shift to the right and the price level will increase
as the AS curve shifts to the left to maintain the full employment level output. The rise in
price level thus increases the inflation rate.

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References
Awan, A.G. and Khan, R.E.A., 2014. The Enigma of US Productivity Slowdown: A
Theoretical Analysis. American Journal of Trade and Policy, 1(1), pp.7-15.
Bell, D.N. and Blanchflower, D.G., 2018. The lack of wage growth and the falling
NAIRU. National Institute Economic Review, 245(1), pp.R40-R55.
Gale, W.G. and Samwick, A.A., 2014. Effects of income tax changes on economic
growth. Economic Studies, https://www. brookings.
edu/wpcontent/uploads/2016/06/09_Effects_Income_Tax_Changes_Economic_Growth_Gale
_Sa mwick. pdf.
Kiley, M.T., 2015. What can the data tell us about the equilibrium real interest
rate?. Available at SSRN 2665710.
Mishel, L., Gould, E. and Bivens, J., 2015. Wage stagnation in nine charts. Economic Policy
Institute, 6, pp.2-13.
Rao, B.B. ed., 2016. Aggregate demand and supply: a critique of orthodox macroeconomic
modelling. Springer.
Stiglitz, J.E., 2014. Unemployment and innovation (No. w20670). National Bureau of
Economic Research.
Summers, L.H., 2014. US economic prospects: Secular stagnation, hysteresis, and the zero
lower bound. Business Economics, 49(2), pp.65-73.
Ullah, N., 2016. The Relationship of Government Revenue and Government Expenditure: A
case study of Malaysia.

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Williams, J.C., 2016. Monetary policy in a low R-star world. FRBSF Economic Letter, 23,
pp.1-23.