BUE 1508 Macroeconomics
Assignment Second Semester 2014
1 Consider a macroeconomy 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 lifts interest rates.
(b) There is an increase in private domestic investment spending.
(c) An increase in the good and services tax (GST)
(d) An appreciation in the foreign exchange rate value of the economy’s currency.
(e) A fall in real estate prices in the capital cities of the country (hint: think of the effect upon one’s wealth level)
(f) The country’s main exports fall in price while the goods the country imports from abroad rise in price (3 marks)
2 Why are quarterly movements in a country‘s GDP measure so important? What is it called when a country has two successive negative quarters of economic growth? (1 mark)
3 Why does a market-based economic system need to be monitored or is, in fact, a market system basically self-stabilising? (1 Mark)
4 Currently, Australian consumers are paying off their debts and not spending as freely as they did prior to the Global Financial Crisis. Using the simple Keynesian model to assess the implications for equilibrium GDP and the level of savings of an increase in the savings function. Conversely what would happen to equilibrium income if there is a sustained rise in private investment spending? (2 Marks)
5. State the difference between: 0.5 mark
-uncertainty and risk.
-between the interest rate and the exchange rate
- between the supply side shocks and demand side shocks
-between a 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)
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7 Why do professional and market economists monitor a whole number of economic and business indicators? What are they trying to achieve in doing this? (2 marks)
8 Why is a depreciation of a country currency not necessarily a bad thing? Why is a country’s appreciation of its currency on the foreign exchange market not necessarily a good thing? (2 marks)
9 The central bank decides 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 and credit growth? Under what economic circumstances would this type of policy action be appropriate? (2 marks)
10 Why under flexible exchange rates does a nation not have too worry too much about a balance of payments deficit? What other specific advantages do flexible exchange rates give to the operation of economic policy with specific regard to the effectiveness of fiscal policy and monetary policy? (3 marks)
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