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BEA111 Intro to Markets and the Economy

Assignment 2 – Macroeconomics

Qu.1 Annual Real, Nominal GDP per capita   70 marks

The table below provides the average annual growth rates (%) in Nominal GDP, Real GDP, Real GDP per capita, prices and population for Australia over the last five decades.

a. Explain why does the real GDP growth rate differ from the nominal GDP growth rate?

(10 marks)

b. Explain why does the real GDP per capita growth rate differ from the real GDP growth rate?

(10 marks)

c. Explain which measure of GDP growth you think is most appropriate and use it to explain which decade Australia achieved its greatest economic growth?  

(20 marks)

d. Net Domestic Product (NDP) is GDP less the depreciation of capital (how much capital equipment is consumed or becomes obsolete). Currently, NDP only considers the depreciation of financial capital and does not include other forms of capital such as human capital, social capital and natural capital. Many economists suggest that a “true NDP” which includes the depreciation of all forms of capital is a better and a more “sustainable” measure of a nation’s economic growth than GDP.

i. Why might a “true NDP” be a more “sustainable” measure of a nation’s economic growth than GDP?

(10 marks)

ii. If nations focused on a “true NDP” instead of GDP how do you think it may affect government policy?

(10 marks)

iii. If the depreciation of all forms of capital is a constant proportion of GDP growth, why might it not matter whether NDP or GDP growth is the focus of government policy.

(10 marks)

Qu.2 Components of GDP and their determinants    60 marks

The chart below provides the expenditure components of real GDP:

C Consumption (consumption expenditure by households)

I Investment (capital expenditure by firms)

G Government (consumption and capital expenditure by all levels of government)

X Exports (expenditure on Australian goods and services by non-Australian firms)

M Imports (expenditure on imports by firms)

 in billion of dollars per quarter for Australian economy from March 2019 to December 2021.  

 

Source: Australian Bureau of Statistics (ABS), 2022, 5206.0, Australian National Accounts: National Income, Expenditure and Product, Table 2. Expenditure on Gross Domestic Product (GDP), Chain volume measures.

Explain how and why the Covid-19 pandemic has affected each of the five components of GDP expenditure.  Focus on explaining the level and movement of each component of GDP prior to Covid, during Covid and in the final December 2021 quarter.

 

Qu.3 Labour Market   60 marks

a. The table below provides the latest March 2022 seasonally adjusted labour market data for Australia and Tasmania, but some information is missing.

	E	UE	LF	NILF	POP	UR	PR
Australia	13,390		13,941		20,990		66.4%
Tasmania	262	12		176		4.5%
E = employed (000s) UE = unemployed (000s)		LF = labour force (000s) POP = population (000s)		NILF = not in the labour force (000s)		UR = unemployment rate PR = participation rate
Source: ABS 2022, 6202.0 Labour Force, Australia, Table 1. Labour force status by Sex, Australia - Trend, Seasonally adjusted and Original and Table 9. Labour force status by Sex, Tasmania - Trend, Seasonally adjusted and Original, ABS, Canberra.

i. Complete the table by filling in the figures that are missing.

(10 marks)

ii. Provide three reasons why Tasmania’s participation rate is lower than Australia’s.

(15 marks)

iii. Is the difference in Tasmania and Australia’s unemployment rate likely to be from differences in frictional, structural or cyclical unemployment?  Explain why.

(10 marks)

b. The table below provides seasonally adjusted labour market data for Tasmania in April and May 2020.

	E	UE	LF	NILF	POP	UR	PR
Apr-2020	249.69	16.40	266.09	179.76	445.85	6.2%	59.7%
May-2020	239.86	16.38	256.24	189.87	446.11	6.4%	57.4%
E = employed (000s) UE = unemployed (000s)		LF = labour force (000s) POP = population (000s)		NILF = not in the labour force (000s)		UR = unemployment rate PR = participation rate
Source: ABS 2022, 6202.0 Labour Force, Australia, Table 1. Labour force status by Sex, Australia - Trend, Seasonally adjusted and Original and Table 9. Labour force status by Sex, Tasmania - Trend, Seasonally adjusted and Original, ABS, Canberra.

Explain how the unemployment rate rose in Tasmania from April to March even though the number of unemployed people fell.

(15 marks)

c. What is frictional unemployment and how has technology allowed it to fall.  What is structural unemployment and when was it largest in Australia?

(10 marks)

 

Question 4 CPI, Inflation, Real v Nominal  80 marks

a. Calculate, compare and interpret the annual inflation rate in March 2022 for Hobart and Australia.

(15 marks)

b. Calculate the quarterly inflation rate for Hobart Australia in December 2021 and March 2022. When did Hobart experience its largest increase in prices?  Was this the same for Australia as a whole?

(15 marks)

c. Using the fact that the base year for the CPI is 2012-2013, interpret the CPI for March 2022 for Australia and Hobart.

(10 marks)

d. Calculate the real AWTE for Tasmania and Hobart for the June and December quarters in 2021.  Did real or nominal AWTE for Tasmania or Australia rise or fall in the 6-months to December?

(15 marks)

e. Explain what inflation does to the real value of debt and assets?  

(5 marks)

f. Explain who is likely to be negatively affected by inflation. Explain if anyone is likely to be positively affected by inflation.

(5 marks)

g. Distinguish between core and headline inflation. Explain which gives a better indication of the current increase and prices and which is better for long term planning and why this is so.

  (5 marks)

h. Ignoring any potential substitution, quality and new product bias in the CPI, Ignoring any potential substitution, quality and new product bias in the CPI, explain whether the CPI measures the cost of living and if so for who?  Explain why for some groups of people why their cost of living might be different to the CPI.

(5 marks)

i. Explain whether or not, two of the traditional costs of inflation, “menu-costs” and “shoe-leather costs”, are still significant in 2020s as they were in the 1970s.

(5 marks)

Question 5 AD and AS and the Australia Economy    50 marks

 

a. In the following graph, suppose the Australian economy moves from point A in year 1 to point B in year 2. Using the graph, briefly explain your answers to each of the questions.

i. Explain why the unemployment rate in year 2 is higher or lower than in year 1?

(4 marks)

ii. Explain what is the inflation rate in year 2?

(4 marks)

iii. What is the growth rate of real GDP from year 1 to year 2?

(6 marks)

iv. Explain where on the diagram and how the economy will move in the long run, if LRAS₂ stays constant and there is no policy intervention.

(6 marks)

b. Assuming the Australian economy was in long-run equilibrium in early 2022.  In the third quarter of 2022, Australia experienced supply shocks due to reductions in the availability of oil, with the SRAS curve shifting to the left.  Prior to this, however, the removal of COVID-19 restrictions has led to households wishing to spend accumulated savings, causing AD to shift to the right (Note: Assume that the shift in AD is less than the shift in SRAS).  

i. Draw the basic (static) aggregate demand and aggregate supply model to illustrate and explain what happens in the short-run real GDP, the price level and the unemployment rate when the economy suffers a supply shock.

(15 marks)

ii. Use the basic (static) aggregate supply and demand model to illustrate and explain what happens in the long-run real GDP, the price level and the unemployment rate following this supply shock.

(15 marks)

Question 6 Money, Financial Markets and the Reserve Bank    30 marks

a. The real interest rate  is given by   where   nominal interest rate and the rate of inflation.

Suppose the economy-wide demand for money is given by  where  is the price level,  is real GDP and  nominal interest rate.  

i. If inflation is and what level does the nominal interest rate need to be in order for the real interest rate to be ?

(2 marks)

ii. What value should the Reserve Bank set the nominal money supply if the price level is , real GDP is  and it wants the real interest rate to be be ?

(5 marks)

iii. Recall the nominal money supply consists of currency held by the public equal to   plus bank deposits to . Assume the economy is as described in part ii and the .  If the currency held by the public is given by  and bank reserve-deposit ratio is  calculate the size of the banks’ reserves?  

(5 marks)

iv. Explain what happens to the money supply if the reserve-deposit ratio increases?  

(3 marks)

v. Explain what happens to the money supply if the public holds less money as currency and keeps more in banks?  

(3 marks)

b. In response to the COVID-19 pandemic the reserve bank reduced the cash rate from 0.25 per cent in March 2020 to 0.1 per cent in November in November 2020. Explain using the Money-Demand/Money-Supply framework explain the following:

i. How the new equilibrium cash rate was reached.

(4 marks)

ii. What impact lowering the cash rate would have on consumption and investment.

(4 marks)

iii. If inflation were to rise significantly how could the RBA intervene.

(4 marks)