30128913_Task1 micro project

8/12/2019 30128913_Task1 micro project

1/9

Himanshu Garg

Student ID: 30128913 Page 0

2014

By: HIMANSHU GARG

Student ID: 30128913

Assignment B(Macroeconomics)

Business Economics BUECO5903


2/9

Himanshu Garg


Question 16:

If the Central Bank (Reserve Bank of Australia) bought $200 million of governmentsecurities from private sector money markets, other things being equal, what wouldbe the effect on the following? Explain your reasoning

(a) The economys monetary base;(b) Short-term money market interest rates;(c) Longer maturity interest rates;(d) Aggregate demand, economic activity and inflation.Answer 16)

a) When the central Bank buys government securities from private sector moneymarket, the effect will be an increase in economys monetary base as money willbe available in the money markets and banks.

b) Short- term money market interest rates will decrease as money is available andsecurity prices will increase.

c)Longer maturity interest rates will decrease as money will be released and bondprices will increase.

d) Aggregate demand, economic activity and inflation will increase as comsumerand firms will borrow more and credit purchases in response to less interest rateswill increase. Banks will lend more simulating spending buy households and firms.

Question 12:

(a) Illustrate and explain with diagrams the difference between demand-pull andcost-push inflation; (2.5 marks for the diagram, and 2.5 marks for the

explanation)

(b) Provide (describe) two (2) causes of each type of inflation(2.5 marks for 2 demand-pull causes, and 2.5 marks for 2 cost-push causes)


3/9

Himanshu Garg


Answer 12 a & b) Demand pull inflation is that which result from sudden increases in

consumer demand causing sudden increases in aggregate demand.

For example and Causes:

i) Reduction in banks interest rates which will result is more spending,more consumer and investment borrowing and less savings.

ii) Reduction in income tax rates and increases governmentexpenditure near the time of full employment. At first, the

reduction in income tax rates will increase household disposable

income which will increase aggregate demand. The sudden rise in

government expenditure would cause aggregate demand to shift

rightwards.

The above examples can be explained with the help of diagram below:

In the below diagram, a rightward shift aggregate demand creates reduction in the GDPgap. Equilibrium income increases from Y to Y and the level of price increases from P

to P.


4/9

Himanshu Garg


Cost-push inflation is mostly on the cost side with the factors of production.

The examples & Causes of Cost-push inflation are:

i) If government increases the rate of GST, the price of every factor ofproduction will also increase and the cost of production and the final retail

value contains GST from all factor and the retail value is passed on to the

consumer as a price increases. Therefore, resulting an increases in production

cost and shifts AS1 leftward to AS2, resulting in increase of price level from P

to P.

ii) Rise in industrial concentration can result in more oligopolistic collusion andincrease in non-competitive price which are transferred on to the consumer.

The above examples can be explained with the help of diagram below:

Price level

P

P

AD1

AD2

AS

Real GDPY Y YF


5/9


6/9

Himanshu Garg


Into which of the above categories would you put the following? (total 10 marks1

mark each)

(a) The nations palm oil is sold in the United Kingdom;(b) DVD recorders imported into the nation from Japan;(c) Interest earned by the nations residents on overseas assets;(d) Some of the nations residents take a holiday in Bali;(e) Insurance cover purchased in the nation by overseas residents;(f) The nation gives overseas aid to a developing country;(g) US car company sets up a factory in the nation;(h) Running down the stock of foreign exchange in the Central Bank of the

nation;

(i) Migrants to the nation transferring property to the nation;(j) New deposits made in banks in the nation by overseas residents;

Answer 18)

a) Exports of goods (+)b) Imports of goods ()c) Other income inflows (+)d) Imports of services ()e) Exports of services (+)f) capital transfers sent overses from the nation (-)g) Investment in the nation from overses (+)h) Drawing on reserves (+)i) Capital transfers to the nation from overseas (+)

j) Short-term financial inflows (+)

Question 11:

(a) Describe the relevant criteria that the Australian Bureau of Statistics use todetermine whether a person is unemployed and what problems do you seeusing this measure? (4 marks)


7/9

Himanshu Garg


(b) Do you agree or disagree with the following statement:With proper management of an economy, frictional unemployment need not

occur. Explain your reasoning ?

(c) Is structural unemployment something macroeconomic policymakers should beconcerned about? How does it differ from cyclical unemployment?

Ans 11)

(A)The australian beaurau of statistics conducts a survey every month in which theyconsider a person of age of 15 years as employed if he is working at least for an

hour and if he is working at least for an hour and if a person is 15 and over and

unemployed the question have they searched for a job in the last one month ifthey did they will be considerd as unemployed. Unemployed people are

categorised as new entants seeking jobs people who quit jobs or have lost their

jobs.

The unemployed rate is overstated and understated in finding correct

unemployement rate because a discourged worker is classified as not in labour

force where as he should be considered unemployed whereas some people to

gain legal benefits or hide jobs respectively.

(B)I disagree with the statement. As frictional unemployment is short termemployment and hence is caused due to change of project or jobs which require

employement for short term contracts such as construction work in which often

have a small break before starting another project or looking for another project

hence it is not something which needs to be worried about or caused due to

economy problem.

(C)Stuctural unemployment is something macroeconomics should be concernedabout because such unemployment is caused due to lack of skills, demandchanges and hence last longer to find a job a person will need to develop a new

skill or go for study course or training. It Is different from cyclical unemployment.

Cyclical unemployment is one which is caused due to ression but in this cause a

peson with a skill or proper traning might be unemployed because recession

brings about downturn in economy and hence decrease in jobs but once the


8/9

Himanshu Garg


recession is over there is a chance the same unemployed person with skills can

find the job but this is not the case structural unemplyment .

Question 13:

(a) Explain why the aggregate demand curve is downward sloping.(b) Explain the difference between the Keynesian and monetarist views on how an

increase in the money supply causes inflation.

(c) Why is the shape of the aggregate supply curve important to the Keynesian-monetarist controversy?

Ans 13)

(a) the reson why the aggregate deemand curve is downward sloping area s follows:

(1)as the national price level increases people will buy more imports and deemandand fewer domestic goods .

(2)as the price level rises,people will need more money to pay for goods. The extradeemand for money will drive up interest rate and reduce deemand.

(3)As the price level rises, the value of peoples savi gs will be worn.they maytherefore save more (and hence deemand fewer goods) to help restore the value

of their savings.

(b) keynesian view on how an increase in the money supply causes inflation it is

because increase in inflation wascaused due to factors in real economy such as

deemand pull and deemand push inflation. The money supply will start to adjust the rise

in aggregate deemand. We can say that keynesians believed that there was a casual link,

which was another way around. Rise in price level will cause in money supply, not that

rise in supply of money will cause a rise in supply of price. According to hius view it also


9/9

Himanshu Garg


means that an expansinary monetry policy which aims at increasing the money supply

will first redude the interest rate,which increases the investment level and consequently

aggregate deemand.The resulting effect will be a rise in the price level(inflation) as well

as increased output,unless the economy is at full employment outut.

Monetarist view on how an increase in the money supply causes inflation it is because

dwhen rise in money bussiness and consumers will think they have excess money,which

will be spent by firm or invested by consumers hence it will cause an increase in

aggregate deemand. Monetarist also states that when an increase in the money supply

directly affects the nominal aggregate deemand thereby raises the price level. This

argument is based on the equation of exchange,MV=PQ. If V is constant or nearly and M

increases,then PQ must also increase.If Q is already the full employment level of

output,then the increase in M will lead to an increase in P.

(c) The shape of the aggregate supply curve is more important to the Keynesian in

monetarist controversy beacause keynisan believe that the aggregate supply curve is

relatively flat.this mens that increases in aggregate deemand will add much more to real

GDP and little to the price level.Monetarists believe the aggregate supply curve is

relatively steep. This means that inctrases in the aggregate deemand curve increse real

GDP by a rather small amount, but the price level rises shaply.Accordingly to keynesian

the aggregate supply (AS) curve is more horizontal rather than vertical there can be

impacts on employment and output according to stablization policy. Whereas

monetarists consoder the economy policy to be inherently stable,thei view about

aggregate supply is that it is more vertical so according to monetarist discretionary

stablization policy is not so important.

Documents

30128913_Task1 micro project