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Consider a macro economy was initially at equilibrium level of real GDP. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate

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Consider a macro economy was initially at equilibrium level of real GDP. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy: 2. Collect an article from an Australian newspaper that relates to the current Australian macroeconomy. In a paragraph indicate which section of the course it applies to, why you selected the article and provide a brief summary of what the article is about (1 mark) 3. Many people find the current unemployment figures for Austra...

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Question Preview:

Consider a macro economy was initially at equilibrium level of real GDP. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy: 2. Collect an article from an Australian newspaper that relates to the current Australian macroeconomy. In a paragraph indicate which section of the course it applies to, why you selected the article and provide a brief summary of what the article is about (1 mark) 3. Many people find the current unemployment figures for Australia a bit unbelievable. Why is this? Why might the official statistics be inaccurate (1 mark) 4. Using the simple Keynesian (J-W) model to assess the implications for equilibrium GDP and the level of savings of an increase in the savings function. What happens to the level of savings? What would happen to equilibrium income if there is a sustained rise in private investment spending? (2 Marks) . State the difference between: Money multiplier and income expenditure multiplier. Between the interest rate and the exchange rate Between the balance of payments deficit and the budget deficit Between the trade deficit and net foreign debt (2 marks) 6. Assuming that the money market is initially in equilibrium, trace through the effects of a rise in the money supply on the money market on the interest rate and also on output, employment and the price level. (2 marks) 7. Distinguish between ongoing demand pull and ongoing cost push inflation. Carefully draw them. Why might it be difficult to establish the extent to which a given rate of inflation is either demand pull or cost push? (2 marks) 8. Using the AD-AS model show how the Australian economy has continued to expand year after year since 1991. What are the macroeconomic dangers facing Australia? When commentators suggest that the Australian economy is a two speed economy what are they referring to? (2 marks) 9. The central bank (the Reserve Bank of Australia) decided to implement an expansionary policy action. What would you expect to happen to the nominal interest rate, the real interest rate and the money supply? Under what economic circumstances IS this type of policy action be appropriate? What dangers might ensue from it(2 marks) 10. Why has the Australian dollar soared over the last five years? What are the domestic economic implications for producers and for consumers? (3 marks)

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Consider a macro economy was initially at equilibrium level of real GDP.  Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy:

(a)  The Central Bank within the economy reduces interest rates.

In case the Central Bank increases the interest rate, it will result into tightening of the providing credit. All of it will cause increase in the cost of capital and there will be reduction in the money supply. This condition will force the aggregate demand curve to move shift leftwards. If the interest rate is increased, the banks will be encouraged to lend money. But, because of the reduction in demand there will be a fall in supply.

(b) There is an increase in private domestic investment spending.

In case the private domestic investing increases, the demand for the goods will increase which means that the aggregate demand curve will shift rightward, thus causing an increase in the equilibrium price.

(c) An increase in international oil prices.

As per the law of demand and supply, if there is an increase in oil price, it should result into a fall in the demand for oil. But, this law does not work as is in the case of oil because it is a necessary product and the people will buy it even if there is an increase in its price. In this case,

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