Tutorial solutions week 6-8 Macroeconomics 2021 PDF

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this is a tutorial solution for week 6-8 materials from trimester 3 2021. The material is important for finals so be prepared...

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MCD 2090 Macroeconomics (week 7) Tutorial 7: Aggregate Demand and Aggregate Supply Analysis (Chapter 10) Section A – Homework 1. Explain the three reasons why the aggregate demand (AD) curve slopes downward. The three reasons the aggregate demand curve slopes downward are the wealth effect, the interest-rate effect and the international-trade effect.  The wealth effect refers to the effect that a change in the price level has on wealth and, therefore, consumption. An increase in the price level decreases the real value of household wealth, which decreases consumption.  The interest-rate effect refers to the effect that a change in the price level has on interest rates and, therefore, investment spending and consumption. An increase in the price level raises interest rates, which decreases investment spending and consumption spending, particularly on durable goods.  The international-trade effect refers to the effect that a change in the price level has on spending on exports and imports. An increase in the domestic price level increases export income and makes imports less expensive, which decreases net exports. 2. Explain how each of the following events would affect the AD curve. a. An increase in the price level b. An increase in government purchases c. Higher income taxes d. Higher interest rates e. Faster income growth in other countries a. An increase in the price level would cause a movement along the aggregate demand curve. b. An increase in government purchases would cause the aggregate demand curve to shift to the right. c. Higher income taxes would decrease disposable income, thereby decreasing consumption spending and causing the aggregate demand curve to shift to the left. d. Higher interest rates would decrease investment spending, net exports and consumer spending, particularly on durable goods, causing the aggregate demand curve to shift to the left. e. Faster income growth in other countries would increase Australian exports, causing the aggregate demand curve to shift to the right.

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3. Explain why the long-run aggregate supply (LRAS) curve is vertical. The long-run aggregate supply curve is vertical because in the long run changes in the price level do not affect the number of workers, the capital stock, or technology, which are the factors that determine potential GDP. 4. Explain how each of the following events would affect the LRAS curve. a. A higher price level b. An increase in the size of the labour force c. An increase in the quantity of capital goods d. Technological change a. A higher price level would cause a movement up along the long-run aggregate supply curve. b. An increase in the labour force would cause the long-run aggregate supply curve to shift to the right. c. An increase in the quantity of capital goods would cause the long-run aggregate supply curve to shift to the right. d. Technological change would cause the long-run aggregate supply curve to shift to the right. 5. Why does the short-run aggregate supply (SRAS) curve slope upwards? As the prices of final goods and services rise, the prices of inputs usually rise more slowly.  The higher price level increases profits and the willingness of firms to supply more goods and services.  A secondary reason the SRAS slopes upward is that, as the price level rises, some firms are slow to adjust their prices.  A firm that raises its prices slowly when the price level increases may find that its sales increase; therefore, the firm will increase production. 6. Explain how each of the following events would affect the SRAS curve. a. An increase in the price level b. An expectation of a higher price level in the future c. A price level that is currently higher than expected d. An unexpected increase in the price of an important raw material e. An increase in the size of the labour force a. A higher price level would cause a movement up along the short-run aggregate supply curve. b. An increase in what the price level is expected to be in the future would cause the shortrun aggregate supply curve to shift to the left. © Monash College

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c. A price level currently higher than expected would lead workers and firms to increase wages and prices, causing the short-run aggregate supply curve to shift to the left. d. An unexpected increase in the price of an important raw material would cause the short-run aggregate supply curve to shift to the left. e. An increase in the labour force participation rate would cause the short-run aggregate supply curve to shift to the right. Section B 7. What is the relationship between the AD, SRAS and LRAS curves when the economy is in equilibrium? When the economy is in long-run macroeconomic equilibrium, the short-run aggregate supply curve and the aggregate demand curve intersect at a point on the long-run aggregate supply curve.

8. Using AD-AS model, illustrate the impact of increasing AD on the price level, real GDP and unemployment in the short-run. Identify the state of the economy. Analyse the long-run adjustment.

Increasing AD increased real GDP, increased price level and decreased unemployment. Economy is in a boom or and expansion. In the long run, lower unemployment increases wages and cost of production. This shifts the SRAS to the left such that economy is back at the potential GDP. 9. Using AD-AS model, illustrate the impact of decreasing AD on the price level, real GDP and unemployment short-run. Identify the state of the economy. Analyse the long-run adjustment.

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Decreasing AD decreased real GDP, decreased price level and increased unemployment. Economy is in a recession or contraction. In the long run, higher unemployment decreases wages and cost of production. This shifts the SRAS to the right such that economy is back at the potential GDP. 10. Using AD-AS model, illustrate the impact of increasing SRAS on the price level, real GDP and unemployment short-run. Identify the state of the economy. Analyse the long-run adjustment.

Increasing SRAS increased real GDP, decreased price level and decreased unemployment. Economy is in an expansion with low inflation In the long run, lower unemployment increases wages and cost of production. This shifts the SRAS to the left such that economy is back at the potential GDP.

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11. Using AD-AS model, illustrate the impact of decreasing SRAS on the price level, real GDP and unemployment short-run. Identify the state of the economy. Analyse the long-run adjustment.

Decreasing SRAS decreased real GDP, increased price level and increased unemployment. Economy is in a stagflation. In the long run, higher unemployment decreases wages and cost of production. This shifts the SRAS to the right such that economy is back at the potential GDP.

12. List four variables that would cause a decrease in real GDP (a recession). Indicate whether changes in each variable increase or decrease aggregate demand or short-run aggregate supply. Next, state four variables that would cause an increase in the price level (short-run inflation). Indicate whether changes in the variable increase or decrease aggregate demand or short-run aggregate supply. Any of the factors that decrease aggregate demand (an increase in interest rates, an increase in personal income taxes or business taxes, an increase in the exchange rate, an increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP, a decrease in government purchases, a decrease in households’ expected future incomes, or a decrease in firms’ expectations of the future profitability of investment spending) would cause a decrease in real GDP, resulting in a recession. Any of the factors that decrease short-term aggregate supply (an increase in the expected future price level, an increase in the price of an important natural resource, workers and firms adjusting to having previously underestimated the price level, a decrease in the labour force or the capital stock, and a decrease in productivity) would cause a decrease in real GDP. Any of the factors that decrease short-run aggregate supply or any of the factors that increase aggregate demand would cause an increase in the price level—inflation.

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13. Use the following graph to answer these questions.

a. Which of points A, B, C or D can represent a long-run equilibrium? b. Suppose initially the economy is at point A. If aggregate demand increases from AD 1 to AD2, which point represents the economy’s short-run equilibrium? Which point represents the eventual long-run equilibrium? Briefly explain how the economy adjusts from the short-run equilibrium to the long-run equilibrium. a. Points A and C. b. Point D represents the short-run equilibrium and point C the long-run equilibrium. Workers and firms will adjust to the price level being higher than they expected. Workers will push for higher wages and firms will charge higher prices, causing short-run aggregate supply to decrease. 14. Suppose the price of a barrel of oil rose from US$100 to US$150. Use a basic aggregate demand and aggregate supply diagram to show the short-run and long-run effects on the Australian economy.

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The increase in oil prices decreases SRAS, causing the short-run real GDP to decrease and the price level to increase. Short-run equilibrium moves from point A to point B. In the long run, the increased unemployment leads workers to accept lower wages and firms to accept lower prices, which shifts the SRAS curve back to its initial position. Potential GDP is restored at the initial price level (point A). 15. Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows the economy in long-run equilibrium. Assume that there is a large decrease in the demand for exports. Show the resulting short-run equilibrium on your graph. In this short-run equilibrium, is the unemployment rate likely to be higher or lower than it was before the increase in exports? Briefly explain. Explain how the economy adjusts back to long-run equilibrium. When the economy has adjusted back to long-run equilibrium, how have the values of each of the following changed relative to what they were before the increase in exports? i. Real GDP ii. The price level iii. The unemployment rate The large decrease in the demand for exports shifts the aggregate demand curve to the left, moving short-run equilibrium from point A to point B with a lower price level and lower real GDP. The unemployment rate is higher because real GDP has decreased with no change in potential real GDP. Workers and firms will eventually adjust to the price level being lower than they expected. Workers will push for lower wages, and firms will charge lower prices, causing the short-run aggregate supply curve to shift to the rigt. In the long run, the economy will be in equilibrium at point C with a lower price level, the same level of real GDP (GDP 1) and the same unemployment rate.

16. Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows the economy in long-run equilibrium. Assume that there is an unexpected decrease in the price of oil. Show the resulting short-run equilibrium on your graph. Explain how the economy adjusts back to long-run equilibrium. In this short-run equilibrium, is the © Monash College

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unemployment rate likely to be higher or lower than it was before the increase in oil prices? Briefly explain. When the economy has adjusted back to long-run equilibrium, how have the values of each of the following changed relative to what they were before the unexpected increase in the price of oil? i. Real GDP ii. The price level iii. The unemployment rate An unexpected decrease in the price of oil causes the short-run aggregate supply curve to shift to the right. Equilibrium moves from point A to point B, with a lower price level and higher real GDP. The unemployment rate has decreased with real GDP above potential real GDP. The rise in real GDP and the decrease in unemployment lead workers to accept higher wages and firms to accept higher prices. The short-run aggregate supply curve shifts from SRAS2 back to SRAS1, and equilibrium moves from point B back to point A. When the economy has adjusted back to equilibrium at point A, real GDP, the price level, and the unemployment rate are back to their original values.

17. Draw a dynamic aggregate demand and aggregate supply graph showing the economy moving from potential GDP in 2014 to potential GDP in 2015, with no inflation. Your graph should contain the AD, SRAS and LRAS curves for both 2014 and 2015 and should indicate the short-run macroeconomic equilibrium for each year and the directions in which the curves have shifted. Identify what must happen to have growth during 2015 without inflation. To go from potential GDP in 2014 to potential GDP in 2015 without inflation, aggregate demand, long-run aggregate supply and short-run aggregate supply must all increase – or shift to the right on the graph – by the same amount.

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When answering questions based on articles, please note the following steps; Step 1: Read all the questions from the article. Step 2: Number all the paragraphs in the article Step 3: Browse through the article and match the questions and the paragraphs Step 4: Write the answers to the questions (Do not try to understand each and every word in the article)

18. Read the article and answer the following questions i. Why housing construction and renovation has increased the sales of household goods from Harvey Norman? Household goods are complementary to new houses, and therefore the rapid increase in new apartments in New South Wales and Victoria fueled an increase in sales of furnishings and white goods. ii. According to Gerry Harvey, what is the status of their businesses in different states? ‘Consumer confidence is also strong. At the moment, Melbourne and Sydney are the powerhouses of our business.’ He said housing activity was likely to remain solid thanks to a strong number of building approvals, particularly in NSW and Victoria. The mining downturn has dented sales growth from the group’s Queensland and WA stores, he added.

iii. Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows the economy in long-run equilibrium. Assume that there is a large increase in the demand © Monash College

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for household goods. Show the resulting short-run equilibrium on your graph. In this short-run equilibrium, is the unemployment rate likely to be higher or lower than it was before the increase in household goods? Briefly explain. Explain how the economy adjusts back to longrun equilibrium. When the economy has adjusted back to long-run equilibrium, how have the values of each of real GDP, price level and unemployment rate changed relative to what they were before the increase in demand for household goods? The large increase in the demand for household goods shifts the aggregate demand curve to the right, moving short-run equilibrium from point A to point B with a higher price level and higher real GDP. The unemployment rate is lower because real GDP has increased with no change in potential real GDP. Workers and firms will eventually adjust to the price level being higher than they expected. Workers will push for higher wages, and firms will charge higher prices, causing the short-run aggregate supply curve to shift to the left. In the long run, the economy will be in equilibrium at point C with a higher price level, the same level of real GDP (GDP 1) and the same unemployment rate.

THE SYDNEY MORNING HERALD 31 AUGUST 2016 Housing boom lifts Harvey Norman’s profit by Petrina Berry A boom in housing construction and renovation has driven a surge in Harvey Norman’s furniture, whitegoods and homewares’ sales. Harvey Norman’s net profit rose 30 per cent to $348.6 million in the year to June 30, as sales revenue growth for its franchisees in Australia more than doubled from the previous year. Franchisee sales revenue rose almost eight per cent to $5.3 billion, while a near $50 million rise in the value of Harvey Norman’s properties also contributed to profit growth. The company expects housing conditions in Australia to remain strong and to continue to drive its sales growth with the eight weeks of the current financial year already showing strong signs with sales up 6.4 per cent and comparable sales up 6.6 per cent from the same period a year ago. Chairman Gerry Harvey said computers, televisions, refrigerators, bedding and furniture were all selling strongly as low interest rates and population growth help fuel a property boom.

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‘Every three and a bit years you get an extra million people in Australia and that doesn’t look like changing. ‘Consumer confidence is also strong. At the moment, Melbourne and Sydney are the powerhouses of our business.’ He said housing activity was likely to remain solid thanks to a strong number of building approvals, particularly in NSW and Victoria. The mining downturn has dented sales growth from the group’s Queensland and WA stores, he added. Mr Harvey said the business has also benefited from the growing demand for technology, particularly devices connected to the Internet. Smart watches, smartphones and wearable fitness technology are among the group’s hottest selling consumer electronic devices. ‘(That’s) as well as the big advances in televisions; the curved screen and home theatre, which cost substantially less than what they did 10 years ago.’ Impressed investors drove Harvey Norman’s shares to an eight-year high, adding 14 cents, or 2.7 per cent, (to) $5.38. Source: Petrina Berry (2016), ‘Housing boom lifts Harvey Norman’s profit’, The Sydney Morning Herald, 31 August, ©2017 AAP. ; viewed 28 October 2016. 19. Complete Post-class homework after watching the video.

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MCD 2090 Macroeconomics (Week 8) Tutorial 8: Money, Banks and Reserve Bank of Australia (Chapter 11) Period 1 Section A – Homework 1. What is the difference between commodity money and fiat money? The good used as money with commodity money has value independent of its use as money, whereas the good used as money with fiat money, typically paper currency, does not have value independent of its use as money. 2. What are the functions of money? Can something be considered money if it does not fulfil all the functions? The four functions are medium of exchange, unit of account, store of value and standard of deferred payment. In the long run something will not serve as money if it does not fulfil all four functions. 3. What is the main difference between the M1 and broader definitions of the money supply? M1 is the narrowest measure of money, and includes only currency and demand deposits with banks. A broader definition of the money supply is M3, which includes M1, plus all other deposits of the private non-bank sector with banks operating in Australia. Broad money is the widest measure of Australia's money supply, which includes M3 plus deposits into non-bank deposit-taking financial institutions minus holdings of currency and deposits of non-bank depository corporations (such as finance companies, money market corporations and cash management funds). 4. Distinguish between money, income and wealth. Wealth equals the value of assets minus the value of any liabilities, or debts; income equals earnings during a period of time, such as a year; and money (using the M1 definition) is composed of currency plus the value of all demand deposits with banks. The central bank controls the quantity of money. The actions of the central bank have only an indirect effect on income and wealth. 5. Briefly explain whether each of the following is counted in M1. a. The coins in your pocket b. ...