Economics Exam Answers 2020 PDF

Preview

Summary

(a) Adam to give evidence against Barbara - at their joint trial in which they will be co-accused...

Description

QUESTION 1: GDP, INCOME AND ECONOMIC GROWTH Where GDP succeeds in projecting a country’s economic growth, it fails to correctly portray the economic wellbeing of a nation. As noted in the Harvard Business Review, ‘by definition GDP is an aggregate measure that includes the value of goods and services produced in an economy over a certain period of time’ (Debroy & Kapoor, 2019). However, what this fails to account for is the varied impacts – both positive and negative – in producing and developing such goods and services. Thus, while often conflated with wealth and welfare GDP is merely a means of measuring income. In recent weeks, Australia’s GDP gap has reached positive – indicating an economy operational at far less than its potential. Whilst GDP recognises the monetary impact this is having in relation to economic growth, what it neglects is the social effects associated. An example of this shortcoming is the role of social distancing during the COVID-19 pandemic. Whilst the economy continues to survive and income is being generated, little is being accounted for the loss of morale on those whose jobs have been suspended or lost, as well as the decreased social interactivity within workplaces as a result of at-home employment. What this suggests is that, although economic growth may be diminishing and subsequently indicated by the fall in Australia’s GDP, so too is the economic welfare of Australia’s population. Another failure is the value of leisure not being included in GDP. During the COVID-19 pandemic, Australians have found themselves seeking new alternatives to leisure activities, and while many have worked or educated from home their leisure time has consequently increased. Yet, whilst GDP may indicate this to be a negative effect economically, in terms of wellbeing the individual may value this time more than the economic trade-off. Similar arguments can be made for education – which could be suggested to have diminished in quality as a result of the switch to online teaching and learning during the coronavirus pandemic. Education is a key indication of wellbeing and quality of life – presenting great value to a country’s economic welfare and long-run economic growth. Nonetheless, GDP fails to account for this – further adding to its misleading and somewhat inaccurate nature. One method that may assist in more successfully representing economic welfare in Australia is the Fordham Index of Social Health (FISH). Consisting of a 16-point measurement of socio-economic indicators, the FISH index can offer a greater understanding of social and individual welfare where GDP is incapable of accounting (McGregor, 2008). Such measures would allow for a more extensive representation of living conditions in Australia, and subsequently the effects of long-run economic growth on Australian wellbeing.

Bibliography Debroy, B., & Kapoor, A. (2019, October). GDP Is Not a Measure of Human Well-Being. Retrieved from Harvard Business Review: https://hbr.org/2019/10/gdp-is-not-a-

measure-of-human-wellbeing#:~:text=GDP%20was%20not%20designed%20to,the%20well%20being%20of% 20citizens.&text=However%2C%20modern%20economies%20have%20lost,t%20refl ect%20a%20nation's%20welfare. McGregor, S. L. (2008, October). GDP and GPI. Retrieved from McGregor Consulting Group: http://www.consultmcgregor.com/documents/resources/GDP_and_GPI.pdf QUESTION 2: UNEMPLOYMENT AND INFLATION Frictional unemployment involves individuals transitioning between jobs, and thus is a voluntary decision taken upon by the concerning individual. As such, even during peak economic growth, there will still be a level of unemployment from a frictional standpoint, as people have freedom to move between employers (Reserve Bank of Australia, 2018). This also ensures that although an individual may be unemployed, this trend is typically temporary, and the individual will be back in the workforce in a short period of time. Where structural unemployment may arise due to changes in technology and declines in industry, this would often associate with a level of economic downturn as opposed to frictional unemployment – which may occur at any time. Seasonal unemployment on the other hand is often out of the employee’s control – with influence directly coming from consumer trends and the varying demands the industry experiences. Where industry relies on traffic of consumers at varying times of the year, such as tourism and agriculture, it is common for the individual to work in high volume during peak times – often much more than typical employees – in the hope of living off savings during quiet periods of business (Agarwal, 2020). This makes seasonal unemployment predictable, and thus can be economically planned for. Cyclical unemployment is also often out of the employee’s control, as market dictates that diminished supply and demand can no longer support the given industry at full capacity, either in periods of slow economic growth or economic contraction (Amadeo, 2020). This however does significantly diminish during periods of economic growth – however there is no escaping the fact that it remains a constant no matter how low the rate of unemployment. In addition to these concepts, it is also seen that younger demographics – particularly that of 15-21 contribute higher numbers of unemployment due to the commitments of schooling and study at this age. Often, the unemployment rate in this age group is high due to decreased demand for income, as many are still living at home or subsidised by parents etc. Fiscal policy principle is largely based on the ideas of British economist John Maynard Keynes, who presented a concept in which governments should change economic performance by adjusting tax rates and government spending, thus controlling inflation, stabilising business cycles and improving unemployment rates (Macquarie University, 2019). Australia’s unemployment issue lies primarily with the unskilled and youth unemployment, where individuals do not yet have the capabilities to be working extensively full time. By investing in in-school programs whereby individuals are required to work a minimum sixmonth period, coordinated by the education department, the youth will be gaining skills that

would otherwise be unobtainable as a result of education commitments. In regard to frictional unemployment, minimising the unemployment benefits for individuals who voluntarily leave employment to seek alternative work will ensure that people are not taking advantage of the benefit system – subsequently driving the individual to return to the workforce. Cyclical unemployment may also be diminished by expanding output and subsequently stimulating demand – a task made easier during economic growth periods. By ensuring there is demand for goods and services, there will be sufficient work for industry and thus eliminate the cause for cyclical unemployment.

Bibliography Agarwal, P. (2020, January). Seasonal Unemployment. Retrieved from Intelligent Economist: https://www.intelligenteconomist.com/seasonal-unemployment/ Amadeo, K. (2020, April). Cyclical Unemployment: Causes and Effects. Retrieved from The Balance: https://www.thebalance.com/cyclical-unemployment-3305520 Macquarie University. (2019). Australian Fiscal Policy. Retrieved from Macquarie University: https://libguides.mq.edu.au/c.php?g=696213&p=4937630#:~:text=Australian%20Go vernment%20Websites&text=Fiscal%20policy%20represents%20government%20spe nding,effort%20to%20control%20the%20economy. Reserve Bank of Australia. (2018). Unemployment: Its Measurement and Types. Retrieved from Reserve Bank of Australia: https://www.rba.gov.au/education/resources/explainers/pdf/unemployment-itsmeasurement-and-types.pdf

QUESTION 3: MONETARY POLICY As a period of significant economic downturn faces Australia, the RBA should look to direct their resources and actions toward the preservation of jobs, supporting incomes and businesses – ultimately ensuring economic stability. One of the key aspects of this is the continued steadiness of the Australian dollar – which is essential when trade and export resumes as COVID-19 restrictions are lifted. Should the Australian dollar fall much lower than its 18-year low in March, trade and financial flows with the rest of the world will be of significantly less value to the Australian economy. As consumption has taken a significant downturn in recent months, the RBA would benefit from continuing to decrease the cash rate below the current 0.25% – an already historic low. By conducting open market operations, the RBA can further regulate the money supply within the economy, thus smoothening liquidity conditions and subsequently minimising interest rates and inflation rate levels (Bazaz, 2018). As a result, lowering the cash rate would significantly increase Australian businesses and individuals’ borrowing power. Increase in household consumption, investment and demand will thus stimulate economic growth and ensure that Australians are minimising household saving – a concept of common occurrence during recession times. Prior to the coronavirus pandemic, Australia’s economic surplus pointed to a forecasted period of growth over time, and a possible fall of unemployment below 5% (Martin, 2020).

Yet now, the latest RBA predictions indicate a likely unemployment rate of over 10% suggesting that much still needs to be done in order to prevent greater jobless Australians. One possibility is the implementation of a term funding facility for the banking system – a concept which encourages lower cost of credit to businesses and incentivize lenders to support credit for small-to-medium size businesses. Due to a fixed interest rate of 0.25% for the next 3 years, Australia’s financial institutions will have access to over $90 billion in funding from the RBA – which will allow non-bank financial institutions to continue providing credit to Australian households and businesses (Reserve Bank of Australia, 2020). Businesses will receive returns on their investments and economic growth will subsequently foster. By allowing this to happen, investment will continue, and businesses will be able to continue providing service and employment, which will ultimately improve productivity and increase competition within the economy. Without investment, Australia’s economy will result in overconsumption – thus leading to an unbalanced economy.

Bibliography Bazaz, S. (2018, October). Open market operations explained. Retrieved from Economic Times: https://economictimes.indiatimes.com/wealth/personal-finance-news/openmarket-operations-explained/articleshow/66291857.cms?from=mdr Martin, P. (2020, May). The RBA says Australia’s economic recovery will be V-shaped, but there are reasons to doubt this. Retrieved from Smart Company: https://www.smartcompany.com.au/finance/economy/economic-recovery-covid19-rba/ Reserve Bank of Australia. (2020, April). Supporting the Economy and Financial System in Response to COVID-19. Retrieved from Reserve Bank of Australia: https://www.rba.gov.au/covid-19/ QUESTION 4: FISCAL POLICY Fiscal policy, especially in terms of stimulus is an essential factor in Australia’s economic revival post COVID-19. While the economic downturn experienced currently is similar to previous recessions, the government response must be structured quite differently as causation for the downturn is so unprecedented. The Federal Government’s $130 billion wage subsidy Job Keeper represents a fundamental discretional fiscal policy, ensuring that money is circulated within the economy and ultimately providing a lifeline for many industries (Australian Federal Treasury, 2020). Such an expansionary directive to increase government spending will ultimately increase aggregate demand, as money circulated back into the economy can be used to fund industries that are continuing trading. These measures are an essential aspect when an economy is in recession and unemployment is high – much like the current circumstances surrounding COVID-19. Australia’s response to the coronavirus pandemic was an automatic stabiliser – whereby a dramatic change in economic activity resulted in the need for government intervention.

By implementing the Job Keeper scheme when Australia entered this period of economic downturn, the Federal Government ensured a short-term stabilisation – allowing for full employment and price stability. As individuals remained working, so too did the economy continue to remain stable – thus eliminating any chance of market failure and deflation. As there is significant contraction in industries such as tourism, entertainment and retail – some of Australia’s most economically fundamental – the Job Keeper scheme also ensures that for long-run economic growth, providing ongoing structure and support (Denniss, Grudnoff, & Richardson, 2020). By allowing businesses to continue operation in times where health restrictions prevent such services, employers have been able to restructure their businesses to continue operation. Distilleries are now producing hand-sanitizer while the alcohol distribution slows down, and pubs and restaurants are acting as interim grocery stores for people who cannot get to crowded supermarkets. Through the access of the Job Keeper scheme, such actions are made possible and not only promote current employment but also encourage businesses to expand their trade, thus diversifying industry and subsequently enhancing long-run economic growth.

Bibliography Australian Federal Treasury. (2020, April). Jobkeeper Payment. Retrieved from Treasury.gov.au: https://treasury.gov.au/coronavirus/jobkeeper Denniss, R., Grudnoff, M., & Richardson, D. (2020). Design Principles for Fiscal Policy in a Pandemic - How to create jobs in the short term and lasting benefits in the long term. Canberra: The Australia Institute....