Fluent Essays

Need help with about 20 questions concerning first year macroecon topics. See the word document for the exact questions that need to be answered. Everything else on the pdf can be ignored. No references needed. Should come under 2000 words. 1 ECON1002 Macroeconomics for the global economy Weekly learning activity (LA) and discussion question set (DQs) tasks 1. Review weekly topics from your textbook, lecture slides and Prepare dot point answers to the weekly questions before lecture and workshop or tutorial. 2. Participate in discussions during weekly lectures and workshops by sharing your answers and updating your answers during lectures and workshops 3. DQs assessment a) Submit word processed (typed answers) for all odd number questions (Q1, Q3, Q5… ignore if there is no Q5) in week 10. b) Word limit per week is 300 word +/- 10\%. Word limit exclude graphs, and reference listing at the end of your work DO NOT EXCEED WORD LIMIT. c) Use APA referencing style (Last name(s0) and date of publication within document, followed by full reference for example (last name(s), initials, date, title, journal, volume and series number, pages QUESTIONS Week1 Introduction 1. Briefly discuss each of the following economic ideas: people are rational, people respond to incentives and optimal decisions are made at the margin. What is scarcity and why is scarcity central to the study of economics? 2. Australian university economics graduates spoke in interviews of how the study of economics provided a solid grounding that was helpful in their subsequent careers, which included working in government departments, private banks, other financial institutions and large private companies such as Shell, (School of Economics, University of Queensland) i The students commented that studying economics enabled them to: • Think logically and critically. • Develop a way of problem solving that they could apply to most decision making. • Consider alternative policy solutions and their consequences. 2 Why might studying economics be particularly a good preparation for being a top manager of a corporation, running your own business, working in international public organisations or having a leading role in government? 3. a. Assume that the state and territory governments throughout Australia (your country) increase the price of water in an attempt to reduce consumption for domestic use. What are the equity considerations with this policy? b. What is a free market? In what ways does a free-market economy differ from a centrally planned economy? 4. Briefly discuss the difference between microeconomics and macroeconomics. Briefly explain whether each of the following is primarily a microeconomic issue or a macroeconomic issue. a The effect of higher cigarette taxes on the quantity of cigarettes sold. b The effect of higher income taxes on the total amount of consumer spending. c The reasons for the economies of East Asian countries growing faster than the economies of sub-Saharan African countries. d The reasons for low rates of profit in the airline industry. 5. You have exams in economics and statistics coming up and five hours available for studying. The table shows the trade-offs you face in allocating the time you will spend in studying each subject. HOURS SPENT STUDYING EXAM SCORE CHOICE ECONOMICS STATISTICS ECONOMICS STATISTICS A 5 0 95 70 B 4 1 93 78 C 3 2 90 84 D 2 3 86 88 E 1 4 81 90 F 0 5 75 91 a Use the data in the table to draw a production possibility frontier graph. Label your vertical axis ‘Score on economics exam’ and label your horizontal axis ‘Score on statistics exam’. Make sure you label the values where your production possibility frontier intersects the vertical and horizontal axes. b Label the points representing choice C and choice D. If you are at choice C, what is your opportunity cost of increasing your statistics score? c Under what circumstances would A be a sensible choice? 3 Week 2 Prices 1. World production of wheat sometimes falls significantly due to extreme weather conditions, such as droughts. Draw a demand and supply graph to show the effect of a drought on the price of bread in Australia. 2. Chocolate lovers have been horrified by reports of a pending chocolate shortage. A recent report has predicted a worldwide chocolate shortage within the next five years which could cause the price of chocolate to double. The reasons for this prediction include an increase in diseases and pests affecting cocoa trees in some countries, such as Indonesia, and wars and instability in parts of West Africa, together with more secure production and profits for crops other than cocoa such as coffee and maize. On the demand side, growing incomes in countries such as China and India is leading to an increase in demand for chocolate. (Turnbull, 2015)ii Based on the above discussion, illustrate the following using demand and supply graphs for each of the below. a The effect on the supply of cocoa if the diseases and pests affecting the cocoa tree become worse. b The effect on the demand curve of cocoa if worldwide chocolate consumption continues to rise, particularly in countries such as China and India. c The effect on the world equilibrium price and quantity of cocoa if cocoa farmers in Indonesia substitute cocoa production with higher-value crops such as coffee and maize. d The effect on the equilibrium price of chocolate if all first-year students rush out and purchase chocolate for their economics lecturers. 3. Government regulations in Australia on the educational qualifications of those working in childcare centres require higher levels of formal training than a few years ago. Suppose that these regulations increase the quality of childcare and cause the demand for childcare services to increase. At the same time, assume that complying with the government regulations increases the costs of childcare businesses. Draw a demand and supply graph to illustrate the effects of these changes in the market for childcare services. Briefly explain whether the total quantity of childcare services purchased will increase or decrease as a result of the regulations. Week 3 GDP 1 a. Why in microeconomics can we measure production in terms of quantity, but in macroeconomics we measure production in terms of market value? b. If the Australian Bureau of Statistics added up the values of every good and service sold during the year, would the total be larger or smaller than GDP? c. In the circular flow of expenditure and income, why must the value of total production in an economy equal the value of total income? 4 2 a. Describe the four major components of expenditures in GDP and write the equation used to represent the relationship between GDP and the four expenditure components. b. Why does the size of a country’s GDP matter? How does it affect the quality of life of the country’s people? 3 a. Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next? How does the ABS deal with the problem inflation causes with nominal GDP? b. What is the main problem arising from the use of base year prices to measure real GDP? 4 a. Why does the size of a country’s GDP matter? How does it affect the quality of life of the country’s people? b. Is the value of a house built in 2000 and resold in 2018 included in the GDP of 2018? Why or why not? Would the services of the real estate agent who helped sell (or buy) the house in 2018 be counted in GDP for 2018? Why or why not? c. Which component of GDP will be affected by each of the following transactions? If you believe that none of the components of GDP will be affected by the transactions, briefly explain why. i. You purchase a new apartment. ii. You purchase a second-hand car. iii. An overseas person studies a degree at an Australian university. iv. A dairy farmer in Victoria produces milk which is shipped to Singapore. v. A Bakers Delight store purchases a new oven. vi. The government builds new roads to help improve access to mine sites in Western Australia. 5 a. Suppose that a simple economy produces only the following four goods and services: textbooks, hamburgers, shirts and cotton. Assume that all of the cotton is used in the production of shirts. Use the information in the following table to calculate nominal GDP for 2018. PRODUCTION AND PRICE STATISTICS FOR 2018 PRODUCT QUANTITY PRICE ($) Textbooks 100 60.00 Hamburgers 100 2.00 Shirts 50 25.00 Cotton 800 0.60 5 b. An artist buys scrap metal from the local steel mill as raw material for her metal sculptures. Last year she bought $5000 worth of scrap metal. During the year she produced 10 metal sculptures that she sold for $800 each to the local art gallery. The gallery sold all of them to local art collectors at an average price of $1000 each. For the 10 metal sculptures, what was the total value added of the artist and what was the total value added of the gallery? Week 4 Financial systems and business cycles Multichoice activity 1 (MCA1) due online this week by Friday 11.59pm 1 a. What is the ‘rule of 70’? If real GDP per capita grows at a rate of 7 per cent per year, how many years will it take to double? b. What is the most important factor in explaining increases in real GDP in the long run? What supportive government policies are crucial for long-run economic growth? 2 a. After reading about economic growth in this chapter, elaborate on the importance of growth in GDP, particularly real GDP per capita, to the quality of life of a country’s population. b. What is potential GDP? Does potential GDP remain constant over time? 3 The federal government in Australia has been running large budget deficits. Assume the government has stated that it will take actions that will turn the budget deficits into budget surpluses over time. a Use a market for loanable funds graph to illustrate the effect of the federal budget surpluses. What happens to the equilibrium real interest rate and the quantity of loanable funds? What happens to the level of saving and investment? b Now suppose that households believe that surpluses will result in the government cutting taxes in the near future, as they did in the 2000s when there were budget surpluses. As a result, households increase their consumption spending in anticipation of paying lower taxes. Briefly explain how your analysis in part (a) will be affected. 4 a. People who live in rural areas often have less access to capital and, as a result, their productivity is lower on average than the productivity of people who live in cities. An article in The New York Times quotes a financial analyst as arguing that ‘the core driver’ of economic growth in China ‘is the simple process of urbanization’ (Irwin, 2014)iii. What does the analyst mean by the ‘process of urbanization’? b. Why is the role of the entrepreneur much more important in the new growth theory than in the traditional economic growth model? 6 c. Many economists argue that if you really want to reduce world poverty then you should be supporting free-trade negotiations and those investors jetting around the world developing globalisation. What do free-trade negotiations and investors jetting around the world have to do with reducing poverty? 5 a. What is the economic growth rate and how is it calculated? b. What is the GDP deflator and how is it calculated? Use the data in the following table to calculate the GDP deflator for each year (values are in billions of dollars): Nominal GDP $ Real GDP $ 2 0 1 4 13 377 12 959 2 0 1 5 14 029 13 206 2 0 1 6 14 292 13 162 2 0 1 7 13 939 12 703 2 0 1 8 14 527 13 088 c. Which year from 2014 to 2018 saw the largest percentage increase in the price level as measured by the GDP deflator? Briefly explain. 7 Week 5 Growth sources and policies 1 a. Using the per-worker production function graphs below, show the effect on real GDP per hour worked of an increase in capital per hour worked, holding technology constant. Now, again using the per-worker production function graph, show the effect on real GDP per hour worked of an increase in technology, holding the quantity of capital per hour worked constant. b. What are the consequences for economic growth of diminishing returns to capital? How are some economies able to maintain high growth rates despite diminishing returns to capital? 2 a. What is the new growth theory? How does the new growth theory differ from the growth theory developed by Robert Solow? b. Why does the economic growth model predict that poor countries should catch up to rich countries in income per capita? Have poor countries been catching up to rich countries? 3 a. Why are firms likely to under-invest in research and development, which slows the accumulation of knowledge capital, slowing economic growth? Briefly discuss three ways in which government policy can increase the accumulation of knowledge capital. 8 b. Why does knowledge capital experience increasing returns at the economy level while physical capital experiences decreasing returns? 4. Why might some people in high-income countries be more concerned with certain negative consequences of rapid economic growth than people in low- income countries? 5. How might greater flexibility in labour markets and greater efficiency in financial markets lead to higher growth rates in real GDP per capita? Week 6 Unemployment Mid semester exam due this week today (online by Friday 11.59pm) 1. a. How is the unemployment rate calculated? What are the three conditions someone needs to meet to be counted as unemployed? b. What are the problems in measuring the unemployment rate? In what ways does the official ABS measure of the unemployment rate understate the true degree of unemployment? In what ways might the official ABS measure overstate the true degree of unemployment? 2. What would be some general reasons why a firm would lay off a substantial number of workers? 3 a. Prior to each federal election in Australia, the government always claims that they have created hundreds of thousands of jobs during their term of government. Is this claim correct? Briefly explain your answer. b. Hundreds of thousands of jobs were eliminated from the Australian economy in 2016. Does this explain why the unemployment rate also rose during this year? Explain. 4 a. What are the costs to individuals of being unemployed? Is the cost to society of unemployment equal to the sum of the costs to the individuals? Why or why not? b. In addition to the payment of unemployment benefits, discuss why extra costs are borne by the federal government during times of rising unemployment. 9 WEEK 7 Inflation 1 i. Briefly describe the major measures of the price level. ii. Which measure is used most frequently in Australia to measure changes in the cost of living? iii. Explain the difference and the link between the price level and the rate of inflation. iv. What potential biases exist in calculating the consumer price index? What steps has the Australian Bureau of Statistics taken to reduce the size of the biases? v. What is the difference between the consumer price index and the producer price index? 2. a. The following table shows the average percentage rises in full-time adult ordinary time earnings during the years 2014/2015 and 2015/2016, and also the CPI for these years (as at June) (Australian Bureau of Statistics, 2016).iv Use these data to discuss what happened to wages negotiations and wages growth over the period 2014/2015 to 2015/2016. ANNUAL WAGE RISE, \% 2014/15 2015/16 All sectors 1.99\% 2.22\% Private sector 2.01\% 1.97\% Public sector 1.71\% 3.41\% CPI 106.8 108.2 SOURCE: Australian Bureau of Statistics (2016), Average Weekly Earnings, Australia & Consumer Price Index, Australia, Time Series Workbook. b How can inflation affect the distribution of income? 3. a. Distinguish between demand-pull inflation and cost-push inflation, and give an example of a factor that might cause each to occur. b. If consumer spending in Australia continued to increase even though the Australian economy was close to or at full employment, what type of inflation might occur? Briefly explain. 4 10 a. If the price of electricity rises because of a carbon tax, why might this lead to inflation? What type of inflation would this be? b. At various times, much of Australia’s fruit crops in Queensland have been destroyed due to cyclones and associated floods. The scale of destruction has been sufficient to cause increases in the rate of inflation. Explain what type of inflation this would be classified as. Do you think the inflation rates at such times are entirely accurate? Briefly explain. WEEK 8 AE & OUTPUT Multichoice activity 2 (MCA2) due online this week by Friday 11.59pm 1. Suppose you read that business inventories increased dramatically last month. What does this tell you about the state of the economy? Would your answer be affected by whether the increase in inventories was taking place at the end of a contraction or recession or the end of an expansion? Briefly explain. 2. a. How would the demand forecast for a major Australian furniture manufacturer be affected by each of the following? i. A decrease in consumer spending in the economy i. An increase in real interest rates ii. An increase in the value of the Australian dollar relative to other currencies iii. A decrease in planned investment spending in the economy b Draw the consumption function and label each axis. Show the effect of an increase in income on consumption spending. Does the change in income cause a movement along the consumption function or a shift of the consumption function? How would an increase in expected future income or an increase in household wealth affect the consumption function? Would these increases cause a movement along the consumption function or a shift of the consumption function? 3. a. Unemployed workers receive unemployment benefits from the government. Does the existence of unemployment benefits make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment benefits? Briefly explain. b. Fill in the blanks in the following table. Assume for simplicity that taxes are zero. The numbers are in billions of dollars. 11 4 a. What is the meaning of the 45° line in the 45° line diagram? Use a 45°line diagram to illustrate macroeconomic equilibrium. Make sure that your diagram shows the aggregate expenditure function and the level of equilibrium real GDP and that your axes are properly labelled. What does the slope of the aggregate expenditure line equal? How is the slope of the aggregate expenditure line related to the slope of the consumption function? b. Is it possible for the economy to be in macroeconomic equilibrium at a level of real GDP that is greater than the potential level of GDP? Illustrate using a 45° line diagram. Briefly discuss the multiplier effect and use a 45° line diagram to illustrate the multiplier effect of a decrease in government purchases. 5 a. What is the difference between aggregate expenditure and consumption spending? Explain the difference between autonomous consumption and induced consumption. What is the formula for the multiplier? Explain why this formula is considered to be too simple. b. Some economists have referred to the impact of government infrastructure spending in Australia in the following way: ‘The investment multiplier will provide a further boost to the Australian economy.’ i. What do the economists mean by the ‘investment multiplier’? ii. Briefly explain what the economists means by saying that the investment multiplier would ‘provide a further boost to the Australian economy’. 6 Fill in the missing values in the following table. Assume that the value of the MPC does not change as real GDP changes. i. What is the value of the MPC? ii. What is the value of equilibrium real GDP? 12 Week 9 Ad & AS analysis 1 What are the variables that cause the AD curve to shift? For each variable, identify whether an increase in that variable will cause the AD curve to shift to the right or to the left. 2 Draw a dynamic aggregate demand and aggregate supply graph showing the economy moving from potential GDP in 2017 to potential GDP in 2018, with no inflation. Your graph should contain the AD, SRAS and LRAS curves for both 2017 and 2018 and should indicate the short-run macroeconomic equilibrium for each year and the directions in which the curves have shifted. Identify what must happen to have growth during 2015 without inflation. 3 Explain how each of the following events would affect the AD curve. a An increase in the price level b An increase in government purchases c Higher income taxes d Higher interest rates e Faster income growth in other countries 4 a. Explain why the long-run aggregate supply (LRAS) curve is vertical. b. Draw a dynamic aggregate demand and aggregate supply graph to illustrate how it is possible to have real GDP falling below potential GDP between two time periods at the same time as the price level is rising. 13 Week 10 Multichoice activity 3 (MCA3) due online this week by Friday 11.59pm Submit your word processed DQ answers(weeks 1-10) online this week by Friday 11.59pm. word limit total of 3000 words ( 300 words per week) 1. a. According to Peter Heather, a historian at the University of Oxford; during the Roman Empire the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells us, Germans of the Rhine region were using good- quality Roman silver coins for this purpose).(Heather, 2006)v i. What is a ‘medium of exchange’? ii. What does the author mean when he writes that Roman coins could have provided the German tribes with a medium of exchange? iii. Why would any member of a German tribe have been willing to accept a Roman coin from another member of the tribe in exchange for goods or services when the tribes were not part of the Roman Empire and were not governed by Roman law? b. On 1 January 2002, Germany officially adopted the euro as its currency, and the deutsche mark stopped being legal tender. However, even a decade later, many Germans were still using the deutsche mark to make purchases, with many stores in Germany continuing to accept it. Briefly explain how it is possible for people to continue to use a currency when the government that issued it has replaced it with another currency. 2. a. What is the main difference between the M1 and broader definitions of the money supply? b. Briefly explain whether each of the following is counted in M1. i. The coins in your pocket ii. The funds in your building society demand deposit account iii. The funds in your bank demand deposit account iv. Your MasterCard credit card limit c. Suppose you decide to withdraw $100 in currency from your bank demand deposit account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100. Is measuring income a way of measuring wealth? 14 3. Suppose you deposit $2000 in currency into your cheque account at a branch of the Commonwealth Bank, which we will assume has no excess reserves at the time you make your deposit. Also assume that the bank maintains a reserve ratio of 0.2, or 20 per cent. a Use a T-account to show the initial impact of this transaction on the Commonwealth Bank’s balance sheet. b Suppose that the Commonwealth Bank makes the maximum loan they can from the funds you deposited. Using a T-account, show the initial impact of granting the loan on the bank’s balance sheet. Also include on this T-account the transaction from (a). c Now suppose that whoever took out the loan in (b) writes a cheque for this amount and that the person receiving the cheque deposits it in a branch of the Westpac bank. Show the effect of these transactions on the balance sheets of the Commonwealth Bank and Westpac bank, after the cheque has been cleared. (On the T-account for the Commonwealth Bank, include the transactions from (a) and (b).) d What is the maximum increase in cheque account deposits that can result from your $2000 deposit? What is the maximum increase in the money supply? Explain. 4 a. What are the main roles of the Reserve Bank of Australia (RBA)? How does the RBA control liquidity in the overnight money market? b. Explain briefly why an open market purchase of government securities by the RBA increase bank reserve and why an open market sale of government securities by the RBA decrease bank reserves? 5 a. Explain why the RBA is targeting inflation in Australia. Explain the most frequent reason why the RBA uses open market operations in Australia. b. What is the quantity theory of money? How does the quantity theory explain why inflation occurs? According to the quantity theory of money, if the money supply is growing at a rate of 6 per cent per year, the economic growth rate is 3 per cent per year and velocity is constant, what will the inflation rate be? If velocity is increasing at 1 per cent per year instead of remaining constant, what will the inflation rate be? 6 a. What is hyperinflation? Why do governments sometimes allow it to occur? b. In April 2009, the African nation of Zimbabwe suspended the use of its own currency, the Zimbabwean dollar. According to a news article at that time: Hyperinflation in 2007 and 2008 made Zimbabwe’s currency virtually worthless despite the introduction of bigger and bigger notes, including a 10 trillion dollar bill. (Voice of America News, 2009)vi i. In the same article, Zimbabwe’s Economic Planning Minister, Elton Mangoma, 15 was quoted as saying the Zimbabwean dollar ‘will be out for at least a year’, and in January 2009, the government of Zimbabwe made the US dollar the country’s official currency. Why would hyperinflation make a currency ‘virtually worthless’? How might using the US dollar as its currency help to stabilise Zimbabwe’s economy? ii. An article on Zimbabwe describes conditions in summer 2008 as follows: Official inflation soared to 2.2 million percent in Zimbabwe—by far the highest in the world… [and] unemployment has reached 80 percent. (The New York Times, 2008)vii Is there a connection between the very high inflation rate and the very high rate of unemployment? Briefly explain. c. During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically. Do you think any groups in Germany benefited from the hyperinflation? Briefly explain. Week 11 Monetary policy and the RBA 1. Suppose a newspaper headline read: ‘Companies invest as interest rates reach a 20-year low’. Explain the connection between this headline and the monetary policy pursued by the RBA during that time. How might firms’ expectations that the rates of return on new investments are too low make monetary policy less effective in ending a recession? 2. Use the following graph to answer these questions. 16 a If the RBA does not take any policy action what will be the level of real GDP and the price level in year 2? b If the RBA wants to keep real GDP at its potential level in year 2, should it use an expansionary policy or a contractionary policy? Should the RBA be buying financial securities or selling them? c If the RBA takes no policy action what will be the inflation rate in year 2? If the RBA uses monetary policy to keep real GDP at its full-employment level, what will be the inflation rate in year 2? 3. For many years now, the RBA has used the cash rate as its monetary policy target. Why doesn’t it target the money supply at the same time? What are the main arguments used to support inflation targeting? What are the main arguments against inflation targeting? 4. a. Do you think that inflationary targeting has introduced an economic environment that is more conducive or less conducive to investment and economic growth? Explain your answer. b. In what ways is the RBA more independent of the federal government than other institutions like, for instance, the Federal Treasury? 5. a. What arguments do economists make in support of the independence of the RBA and what arguments are used against the independence of the RBA? b. Do you think that the RBA is truly independent of the government in its determination of monetary policy? Provide evidence for your answer. Week 12 Fiscal policy … Week 5 1. a) b) 3. a) b) 5. Week 7 1. i) ii) iv) v) 3. a) b) Week 8 1. 3. a) b) 5. a) b) Week 9 1. 3. a) b) c) d) e)