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Exam%Study% Mul-ple%Choice:% Unemployment:"dealing"with"issues"of"measurement"of"unemployment"and"also"the"meaning"of"overall" employment"levels"in"the"short-run"models"" Calcula9ons:" Labour"Force"Par9cipa9on"Rate"="Labour"Force/"Popula9on"of"working"age"x"100" Unemployment"Rate"="No."of"unemployed/"Labour"Force"x"100" Labour"Force"(L)"="employed"(N)"+"unemployed"(U)" Problems:% 1. numbers"of"discouraged"workers"increase"during"a"recession"therefore"unemployment"rate"might" appear"higher"and"lower"than"it"actually"is"" 2. quality"of"work"is"not"captured"" 3. people"who"claim"to"be"unemployed"but"work"for"cash"" Types"of"Unemployment:"" 1. Cyclical%Unemployment:"caused"by"business"cycle"contrac9ons,"i.e."recession:"failing"economic"ac9vity" leads"to"cut-backs"on"produc9on"" 2. Fric-onal%Unemployment:%short-term"unemployment"arising"from"the"process"of"matching"workers" with"jobs,"i.e."school"leavers,"people"looking"for"first"9me"work,"returning"work"force"aRer"absence," people"who"have"quit/lost"and"are"looking,"economy"grou9ng"and"matching"workers"with"jobs"" 3. Structural%unemployment:%underemployment"arising"from"a"persistent"mismatch"between"skills"and" characterises"of"workers"and"the"requirements"of"jobs,"i.e."mining"boom"over"structural"unemployment" goes"down,"people"move"or"retrain"" 4. Seasonal%Unemployment:%unemployment"due"to"factors"such"as"weather,"varia9ons"in"tourism"and" other"calendar"related"events;"some"industries"are"especially"prone"to"cyclical"unemployment,"i.e."retail" during"holiday"season" The"unemployment"rate"will"never"be"0"-"always"some"form"of"unemployment;"even"if"economy"is"working" at"capacity;"fric9onal"unemployment"occurs"! Tutorial"Ques9ons:" Tutorial%5%(Wk6)% 1. Categorise"the"following"instances"according"to"whether"they"are"fric9onal,"structural,"cyclical,"seasonal" unemployment."" a. Khaled"used"to"work"as"an"autoworker,"and"due"to"the"decline"of"the"auto"industry,"is"now"unemployed" and"thinking"about"retraining"as"a"bicycle"assembler"" Structural%unemployment:"the"structure"of"the"economy"is"changing"and"Khaled"is"no"longer"qualified"for" exis9ng"jobs"in"his"area"-"his"industry"having"restructured"and"reduced"employment"" "" b."Prasad"lost"his"job"during"a"recession." Cyclical"unemployment"-"the"recession,"a"business"cycle,"caused"this" c."ARer"raising"two"children,"Mona"has"started"looking"for"a"job"and"send"out"a"few"job"applica9ons" Fric9onal"unemployment"-"a"regular"shiR"in"and"out"of"the"employment"and"the"labour"force"

d."James"has"just"finished"his"job"as"manning"polling"booths"at"the"last"elec9on"for"the"AEC"" Seasonal"unemployment"-"the"AEC"is"a"seasonal"employer,"i.e."elec9on"season"" 2."Suppose"the"popula9on"is"300mil."There"are"146"mil"employed,"and"7.2"million"unemployed"" a. what"is"the"unemployment"rate?" Unemployment"rate"="unemployed/"Labour"Force"x"100"" ="7.2/153.2"x"100"="4.67%" Labour"Force"="unemployed"+"employed"="146"+"7.2"="153.2" b."now"suppose"that"1million"of"the"7.2"million"unemployed"become"so"discouraged"that"they"drop"out"of" the"labour"force"-"what"is"the"unemployment"rate"now"" Labour"Force"="146"+"6.2"="152.2"" Unemployment"Rate"="6.2/152.2"x"100"="4.1%" 3."From"Data"" a. what"is"the"labour"force"in"2014"and"2015?" Labour"Force"="unemployed"+"employed"" 2014:"LF"="7.4"+"105.2"="112.6" 2015:"LF"="8.1"+"104.2"="112.3"" b."labour"force"par9cipa9on"rate"" Labour"Force"Par9cipa9on"Rate"="labour"force"/"no."of"working"age"people"x"100"" 2014:"112.6/168.2"x"100"="66.9%" 2015:"112.3/169.5"x"100"="66.3%" c."what"is"the"unemployment"rate"" unemployment"rate"="no."of"unemployed/"labour"force"x"100"" 2014:"7.4/112.6"x"100"="6.57%" 2015:"8.1/112.3"x"100"="7.21%" 4."Not"all"16"to"19"year"olds"are"in"the"labour"force,"with"most"people"this"age"in"school"or"university."The" unemployment"rate"refers"only"to"the"propor9on"of"those"in"the"labour"force"without"jobs,"not"the"en9re" age"cohort"in"the"general"popula9on."" 5."True/false"-"if"the"actual"rate"of"unemployment"is"above"the"natural"are"of"unemployment,"then"the" economy"is"opera9ng"above"its"full"capacity?" False,"its"the"opposite"-"the%natural%rate%of%unemployment%is%the%unemployment%rate%that%exists%when%the% economy%is%opera-ng%at%poten-al%GDP,%i.e.%full%capacity%%

6."use"the""steady"state"of"the"‘bathtub’"model"of"employment"to"describe"the"two"major"variables"that" government"policy"can"poten9ally"affect"to"reduce"the"natural"employment"rate." Long"Run"equilibrium"steady"state"model""

only"two"ways"to"alter"the"model:" 1. change"job"finding"rate"(f)" 2. change"job"separa9on"rate"(s)" Increases"in"the"separa9on"rates"will"put"more"people"out"of"a"job,"while"increases"in"finding"rates"will"put" more"people"into"a"job."Therefore"the"government"should"pursue"policies"that"will"increase"job"finding"rates" and"lower"separa9on"rates.""

Na-onal%Income%Accoun-ng:"simple"calcula9ons"and"an"understanding"of"what"is"included"in"the"accounts" and"methods"of"calcula9ng"GDP"" 1. The"expenditure"measure"of"GDP"" Y"="C"+"I"+"G"+"NX! ! adds"up"the"market"value"of"all"domes9c"expenditure"made"on"final"goods"and"services"in"a"period," including;"consump9on"(C),"investment"expenditure"(I),"government"expenditures"(G)"and"net"exports"(NX)"-" add"all"of"the"expenditures"together"to"determine"GDP"(na9onal"expenditure,"Y).""

2. The"income"measure"GDP" add"up"all"the"income"earned"by"households"and"firms"in"the"year."The"total"expenditures"on"all"of"the"final" goods"and"services"and"also"income"received"as"wages,"profit,"rents,"and"interest"income"-"adding"them"all" up"determines"GDP"

- one"person’s"expenditure"is"another"person’s"income"" GNI"="GDP"+"incomes"earned"by"foreign"residents"" 3. The"produc9on"measure"of"GDP"" Requires"3"stages"of"analysis:"" a. gross"value"of"output"from"all"sectors"es9mated"" b. intermediate"consump9on,"i.e."cost"of"materials,"supplies"and"services"used"in"produc9on"final"output"is" derived"" c. gross"output"is"reduced"by"intermediate"consump9on"to"develop"net"produc9on""

Tutorial"Ques9ons:" Tutorial%3%(Wk4)% 1. From"data"calculate:" a. country’s"net"exports:"" Net"exports"="exports"-"imports"" ="650"-"450"="200"" b."calculate"the"country’s"GDP"" "" Y"="C"+"I"+"G"+"NX"" Y"="3600"+"800"+"1000"+"200"="5600"" 3."Intel"seems"20"000"worth"of"computer"chips"and"MicrosoR"sells"5000"worth"of"soRware"to"Dell"which" then"sells"80"000"worth"of"computers"to"JB"which"then"resells"the"computers"to"retail"customers"for"100" 000."" Primary:"$20"000"value"added"by"intel"(assuming"$0)"+"$5"000"by"MicrosoR"="$25"000" Intermediate:"$80"000"-"$25"000"="$55"000"by"Dell"" Final:"$100"000"-"$80"000"="$20"000"by"JB-Hifi"" Total"Value"Added"to"GDP"="25"000"+"55"000"+"20"000"="$100"000""

GDP%Growth%Rates" Rate"="(Final"-"Ini9al)/Ini9al"" - through"compound"interest;"rela9vely"low"annual"growth"rates"can"lead"to"big"changes"over"9me"" Nominal%v%Real%GDP% Nominal"GDP:"measure"of"GDP"at"current"market"prices"(NOT"ADJUSTED"FOR"INFLATION),"aka"in"current" dollars" Real"GDP:"is"an"infla9on"adjusted"measure"of"the"value"of"goods"and"services"produced"by"an"economy"in"a" given"period,"aka"GDP"adjusted"for"infla9on"" Nominal"GDP"="Real"GDP"x"Price"Level" - infla9on"driving"higher"GDP"-"nominal"increase"only"" Real"GDP"-"produce"more"goods"or"services,"or"beqer"goods"and"services;"real"increase"" - controls"for"infla9on,"using"same"set"of"prices"over"9me"" Included"in"GDP:"goods"and"services"transacted"through"the"market"" Not"included:"health"of"people,"changes"in"environmental"condi9ons,"ac9vity"that"does"not"occur"in"market" serng,"i.e."paren9ng"at"home,"illegal"transac9ons""

AD-AS"Model" AD-curve" Rela9onship"between"price"level"and"the"quan9ty"of"real"GDP"demanded"by"households,"firms"and"the" government,"i.e."the"whole"economy""

Is"downward"sloping"because:" 1. The"wealth"affect:"a"change"in"the"price"levels"affect"real"wealth"and"therefore"consump9on"" 2. the"interest"rate"effect:"a"change"in"the"price"levels"affect"real"interest"rate"and"therefore"investment"" 3. the"interna9onal"trade"effect:"a"change"in"the"price"level"affects"rela9ve"real"price"of"foreign"and" domes9c"goods"and"also"interna9onal"exchange"rates"and"NX"" AD%ShiUs:% - slope"movements"along"the"curve"-"due"to"endogenous%factors%" - shiRs,"i.e."to"the"right"or"leR"-"due"to"exogenous%‘shocks’%% Exogenous"Shocks:" 1. changes"in"government"polices,"i.e."taxes;"government"purchases"" 2. changes"in"expecta9ons"of"households"and"firms"" 3. changes"in"foreign"variables"in"economies"outside"the"domes9c"economy,"e.g."rela9ve"income"levels" between"countries"" AS"Curve:" Two"versions:" SRAS:"a"curve"that"shows"the"rela9onship"in"the"SR"between"the"price"level"and"the"quan9ty"of"real"GDP" supplied"" LRAS:"same"for"LR" LRAS:"in"long"run"price"level"does"not"effect"GDP"as"money"is"neutral"-"there"is"no"trade-off"between"those" two"" LRAS%shiUs:%" - changes"in"the"price"level"do"not"affect"LRAS"" - LRAS"curve"does"shiR"when"" - number"of"workers"in"the"economy"increases" - more"machinery"and"equipment"is"accumulated"" - technological"change"occurs"" The"LRAS"curve"shiRs"because"poten9al"GDP"increases"over9me"(assuming"posi9ve"growth)"" SRAS:%SR"rela9onship"between"price"level"and"real"GDP"supplies,"in"the"SR,"firms"will"produce"more"in" response"to"higher"prices"-"money"ISN’T"NEUTRAL"in"the"SR" Curve"is"upwards"slowing"because:" 1. money"illusion:"in"SR"people"may"be"inaccurate"about"what"is"happening"with"prices"and"wages,"i.e." think"infla9on"is"2%"and"invest"more,"but"actual"infla9on"was"5%"(no"price"increase"in"real"terms)"" 2. S9cky"Wages:"inability"to"adjust"real"quan99es"in"response"to"changes"in"monetary"quan99es,"i.e." wages"take"more"9me"to"adjust"than"prices,"based"on"things"like"contrast"and"social"conven9ons"such"as" percep9ons"to"fairness"" 3. S9cky"Prices:"for"goods"and"services"-"there"may"be"long"term"contracts"with"purchases"or"complete" pricing"schemes"that"take"9me"to"adjust"" SR%shiUs%and%movements:% - changes"in"price"level"are"shown"as"movements"along"the"sta9onary"SRAS"curve"" - shiRs"occur"from"‘exogenous"shocks’" Exogenous"Shocks:" - expected"changes"in"the"future"price"level" - adjustments"of"workers"and"firms"to"errors"in"past"expecta9ons"about"price"level"" - unexpected"changes"in"price"of"import"natural"resources"" Variables%that%shiU%both%SRAS%and%LRAS:% 1. increase"in"the"labour"force"(L)"and/or"increase"in"the"capital"stock"and/or"in"resources"(K)""

2. technological"change"(A)"" -"add"recession"and"expansion"in"wriqen"notes"" "%

Macroeconomic%Schools%of%Thought:"monetarism,"the"basic"assump9ons"of"neoclassical"school"v"Keynes," Real"Business"Cycles"and"New"Classical"Economics,"Keynesians,"and"Keynes’"thinking"on"investment""

Monetarism:%" Quan9ty"Theory"of"Money:"monetarism"is"built"on"an"accoun9ng"iden9ty" MV"="PT""

-

M"="amount"of"money"in"economy"" V"="velocity"of"money" P"="weighted"average"price"of"goods"and"services"in"an"economy"" T"="no."of"transac9ons"goods"and"services"sold""

MV"="PT"-"rela9onship"suggests"how"the"amount"of""money"in"an"economy"will"directly"affect"the"price"level" and/"or"output"level."" - want"stable"infla9on;"fix"supply"of"monetary"growth"" Fisher%Theorem:% Fisher’s"rela9onship:"growth"in"P"="growth"in"M"-"growth"in"Y"" If"he"is"correct,"then:" - If"M"grows"at"a""faster"rate"than"economic"growth,"there"will"be"infla9on"" - if"M"grows"at"a"slower"rate"than"economic"growth,"there"will"be"defla9on"" - if"M"grows"at"the"same"rate"as"economic"growth,"the"price"level"will"be"stable"" Lecture"Q’s:" 1. Suppose"the"money"supply"is"currently"growing"at"4%"per"year,"while"real"GDP"is"growing"at"2%." Calculate"the"infla9on"rate"assuming"Fisher"is"correct"about"his"assump9on"regarding"the"velocity"of" money:" fishers"assump9on"is"that"the"velocity"of"money"is"constant,"meaning"the"growth"rate"of"the"velocity"of" money"is"zero."" Infla9on"rate"="growth"rate"of"the"money"supply"-"economic"growth"rate"" Infla9on"Rate"="0.04"0.02"="2%"" He%was%incorrect%about%V%being%constant%% Key%RBA%policy%levers:% the"RBA"has"levers"it"uses"to"achieve"its"tac9cal"goals"and"effect"the"border"legislated"strategic"goals"of" monetary"policy:" 1. Cash"rate"-"interest"rate"on"loans"in"the"overnight"money"market"(RBA"sets"this"directly)" 2. Open"market"opera9ons"(OMOs):"RBA"purchasing"or"selling"financial"instruments"" 3. Money"supply"management:"RBA"has"influence"over"the"money"supply"more"directly"

Monetary%Policy:% The"management"of"interest"rates"by"the"RBA"in"order"to"influence"the"level"of"economic"ac9vity.""

- Monetary"policy"is"a"demand-side"policy"because"changes"in"interest"rates"impact"consump9on,"planned" investment"and"next"exports"""

- An"aim"is"to"keep"economic"growth"close"to"trend"growth"levels"and"avoid"excessive"infla9on"and" unemployment;"counter"cyclical"" Management"of"Interest"Rates:" The"RBA"manages"interest"rates"by"controlling"the"cash"rate;"the"supply"of"money."changes"in"the"cash"rate" influence"other"interest"rates"in"the"economy,"which"in"turn"affect"AD"and"macro"economic"performances."" Demand%for%money" - money"demand"curve"downwards"sloping;"inverse"rela9onship"between"interest"rate"and"demand"for" money."Why:"opportunity"cost"" - cash"has"no"rate"of"return"by"itself"" - interest"rate"on"financial"asset"is"the"OC"of"holding"money"" - low"rates"decrease"OC"of"holding"money"" - high"rates"increase"OC"of"holding"money"" Money"is"a"Unique"Good:" - means"to"an"end"" - represents"liquidity;"to"get"what"we"want"" -derived"demand" -" " Interest Rate

" "" "

MD, Demand for money Q of money

"

ShiRs"and"Movements"along"Money"Demand"Curve:" Two"most"important"variables"that"shiR"the"money"demand"curve"are:" 1. Real%GDP:"the"greater"the"income"is,"the"greater"the"demand"for" money"" 2. The%Price%Level:%As"(nominal)"prices"increase"you"need"more" (nominal)"cash"to"make"any"given"purchase"" ShiR"(outwards)"to"the"right:"an"increase"in"real"GDP"or"an"increase"in"the" price"level"will"shiR"money"demand"to"the"right"" ShiR"(inwards)"to"the"leR:"a"decrease"in"real"GDP"or"a"decrease"in"the"price"level"will"shiR"money"demand"to" the"leR"" The%Supply%For%% Money%%

- unique:"means"to"end,"supplied"monopolis9cally"monetary"authority"augmented"by"banking"system,"i.e." RBA"is"primary"supplier"and"therefore"determines"the"shape"of"the"money"supply"curve"

- producing"money"is"now"costless"(rela9vely"cheap"to"print)" RBA"has"two"choices"on"supplying"money;" 1. Monetary"targe9ng:"serng"the"money"supply"as"a"ver9cal"curve,"fixing"MS"at"a"certain"level"" 2. Interest"Rate"Targe9ng:"supply"money"into"the"market"un9l"a"desired"market"interest"rate"results,"i.e."a" horizontal"curve" Equilibrium"in"the"money"markets"is"where"Md"="Ms"" " Monetary"Targe9ng""

Interest"Rate"Targe9ng"

"

"

MT:"When"the"RBA"increase"money"spy"the"curve"moves"to"the"right"(outwards)"and"the"equilibrium" interest"Rate"Falls""

IRT:"Interest"Rate"Targe9ng"is"now"more"commonly"used"" -"the"money"supply"will"be"adjusted"to"water"the"level"is"necessary"to"keep"the"interest"at"the"rate"targeted."" RBA"takes"money"in"and"out"through"buying"and"selling"government"securi9es:" cost"of"prin9ng"money"-"profit"="seigniorage"" Managing"Business"Cycle:"" Infla9on"Targe9ng"-"stays"between"an"acceptable"range;"2%-3%"in"Australia"" Money%Market%model%v%Loanable%Funds%Model"" Money"Market"Model"focuses"on"short"term"nominal"rate"of"interest,"i.e."market"for"‘cash’,"a"short"run"need" driven"by"the"monetary"base"and"the"interest"rate"set"akin"to"the"RBA’s"cash"rate"" The"loanable"funds"model"is"concerned"with"longer"term"borrowing"and"lending"devoted"to"investment"(I)," i.e."market"for"capital"which"is"deployed"mainly"for"longer-term"investment"needs"and"where"the"interest" rate"represents"the"‘cost"of"capital’."" "When"conduc9ng"monetary"policy,"it"is"the"short-term"nominal"interest"rate"that"is"most"affected"y" increases"and"decreases"in"liquidity"-"there"is"a"close"connec9on"between"movements"in"the"short-term" nominal"interest"rate"and"the"long-term"real"interest"rate"" How%Interest%Rates%affect%AD:% - interest"rate"is"used"directly"by"central"banks"to"manage"the"business"cycle"" - interest"rate"works"indirectly"on"AD" - does"not"affect"G" - but"affects"the"other"components"of"AE"

- C,"I,"NX"" Expansionary%and%Contrac-onary%monetary%policy:% 1. An"expansionary"policy"" - RBA"decreases"SR"rates"" - Other"interest"rates"fall" - investment,"consump9on"and"net"exports"increase"" - The"AD"curve"shiRs"to"the"right"by"more"than"it"otherwise" would"have" - Real"GDP"and"the"price"level"rise"by"more"than"they" would"have"without"the"policy"" 2."A"contrac9onary"policy"" - RBA"increases"SR"rates" - There"interest"rates"rise"" - investment,"consump9on"and"NX"decrease"" - The"AD"curve"shiRs"to"the"right"by"less"than"it"otherwise" would"have"" - Real"GDP"and"the"price"level"rise"by"less"than"they"would" have"without"the"policy""

Policy%Lags:%% 1. Recogni9on"lag"-"delay"before"RBA"recognises"that"a"contract"is"imminent"" 2. Impact"lag"-"the"9me"taken"for"monetary"policy"to"affect"real"GDP"-"9me"lags"may"reduce"the"ability"of" monetary"policy"to"impact"on"the"economy"at"the"appropriate"9me""

Tutorial"Ques9ons:" (Wk%11%Tut%10)% 1. how"well"might"each"of"the"following"media"fulfil"the"four"func9ons"of"money"if"introduced"today?" Might"their"func9onality"improve"if"they"were"introduced"at"some"future"date"as"the"economy"evolved?" Four"func9ons"of"money"are:" 1. medium"of"exchange"" 2. unit"of"account"" 3. store"of"value"" 4. standard"of"deferred"payment"" a. Flower"bulbs;"would"be"poor"of"3"and"4"because"they"don’t"last"long."They"would"not"be"good"for"1"or"2" wither,"as"they"rent"easy"to"standardise"and"not"easy"to"transport"and"keep"" b. painted"pieces"of"wood;"would"be"beqer"for"3"and"4"as"they"could"keep"for"a"long"9me."They"also"could" be"standardised"easy"and"therefore"meet"2."Their"weakness"would"be"ease"of"handling."" c. precious"metals"(e.g."gold"or"silver);"since"they"have"served"well"in"the"past"they"would"do"well"now," however,"they"are"bulkier"than"paper"money"and"EFTPOS"as"weaker"on"1"than"current"alterna9ves."" d. cryptocurrencies;"not"really"medium"of"exchange"as"not"a"lot"of"people"accept"it."" 2."If"the"reserve"ra9o"is"20%:" a. what"is"the"maximum"increase"in"demand"account"deposits"that"will"result"from"an"increase"in"bank" reserves"of"$20"000?"" Simple"deposit"mul9plier"="1/RR"-"1/0.2"="5"" 5x"20"000"="100,000"-"therefore"the"maximum"increase"in"demand"account"deposits"that"will"result"form"an" increase"in"bank"reserves"of"$20"000"is"$100"000.""

b. what"will"be"the"net"new"money"created"in"the"economy?" new"money"created"will"be"$100,000"-"$20,000"="$80,"000"" c. what"will"happen"to"new"money"crea9on"if"the"reserve"ra9o"falls?"Rises?"" as"RR"rises/falls,"money"crea9on"-"net"and"gross"-"falls/"rises" -"is"that"the"lower"the"RR"is,"the"greater"the"propor9on"of"deposits"that"is"lent"and"re-lent,"increasing"the" total"net/gross"amount"of"money"created."" d. is"it"likely"that"the"actual"money"crea9on"in"the"economy"will"be"equal"to"the"money"crea9on"as"arrived" at"through"your"calcula9ons?"" No,"assuming"20%"is"considered"to"be"necessary"reserves,"banks"may"hold"reserves"above"that"and"people" will"probably"not"put"all"their"money"into"demand"deposits"and"the"money"created"will"be"less"than"that" suggested"by"the"simple"RR"formula."" 3."true/"false;"the"cash"rate"is"the"main"‘lever’"that"the"RBA"uses"to"control"liquidity"in"the"overnight"money" market."" False,"the"cash"rate"is"an"important"signal"and"does"affect"banking"system"liquidity."" -"but"the"RBA"controls"liquidity"in"the"overnight"money"market"mostly"through"the"use"of"open"market" opera9ons"(OMOs)."OMOs"refers"to"the"buying"and"selling"of"financial"instruments"such"as"bonds"and" Commonwealth"Government"Securi9es"either"through"repurchase"agreements"or"outright"purchase"or"sale." By"conduc9on"OMOs"the"RBA"is"able"to"effect"the"level"of"liquidity"in"the"economy."In"other"words,"they"can" change"the"supply"of"money"within"the"economy"and"thus"influence"the"overnight"cash"rate"and" subsequently"other"interest"rates."" 4."Acco...