RMIT Classification: Trusted
Final Assessment ‘Student template’
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This section contains five questions. Each question is worth 4 marks, with section total of 20 marks. For each question, explain whether the given statement is true, false or uncertain. Start your answer by selecting one of the options – “True”, “False” or “Uncertain” and then provide arguments to justify your selection (be brief and concise and present your arguments in 100 or less words). You need to ensure your assumptions are clear, reasonable and explicit if making any.
The world price of oil has risen recently. For Australia (which is a net exporter of oil), this development will imply that the CPI will increase by much more than the GDP deflator.
Susan started her new job as an editorial assistant in prestigious media company in 2018. She negotiated on a wage contract where for next two years (till 2020), her salary was indexed to rise by 1% each year. In 2019, actual CPI inflation turned out to be 2%. This has negatively affected Susan’s purchasing power and she was not able to afford the same standard of living as before.
Suppose, the negative shock of the pandemic has pushed the economy far below its productive capacity (or potential GDP). To boost the economy, the government has decided to expand government spending (G). Government should exercise caution in implementing this policy as increase in government spending may ‘crowd out’ private spending.
Suppose government provides tax rebate to small business on their business-related expenditure. Assuming no change in government budgetary position, this policy is likely to have a positive effect on household (or private) saving in the economy (Hint: think about the effect of this policy in Loanable Funds Market)
The saving rate (gross domestic saving as a % of GDP) in Australia, a small open economy, was 15% in 2011 while the investment rate (domestic investment as a % of GDP) was 25%. As a result, there was net outflow of capital from Australia in 2011.
This section contains three scenario-based questions. Each question is worth 10 marks, with a section total of 30 marks. All the questions have 3 subparts. All the questions are compulsory.
Coronavirus pandemic and resultant shutdown measures to contain it have plunged the economy of United States (US) into severe contraction in 2020. As a result, the Fed (central banking system of the US) followed expansionary monetary policy of cutting down the interest rates and managed to restore the economy back to its potential level (Y*) by the end of 2021.
a) Assuming, the US economy was at Y* before the start of the pandemic, show the events as described above using the AD-AS model. Also, carefully explain in words (100 or less) stating explicitly any assumptions you may have made here. (4 marks)
[footnoteRef:1]Graph . (2 marks) [1: Make sure to label the variables represented on the X-axis and Y-axis of the graph clearly. Also mark the curves in the graphs clearly indicating what they represent. ]
(Note: You can choose to show the development from 2020 to 2021 in the US economy using two graphs or in one graph only.)
Explanation (2 marks)
b) How would the expansionary monetary policy by the Fed of lowering interest rates (as mentioned above) affect the four components of aggregate demand? You must state whether the policy has resulted in ‘increase’, ‘decrease’ or ‘no effect’ on each of these components. (4 marks)
c) Suppose the Fed was not able to restore the economy back to Y* using conventional interest rate based monetary policy. Can you suggest two unconventional monetary policy measures that the Fed could undertake. (You don’t have to explain these measures.) (2 marks)
Answer the questions on the effects of active fiscal policy on the economy in various scenarios:
a) Suppose, the financial crisis in Asia Pacific region reduces the demand for Singaporean exports. This negative demand shock severely affects Singapore which is a small open economy. As a result, Singaporean economy went into recession (output falls below the potential level). Assume, economy was in good shape before the shock (operating at its potential capacity Y*). Suppose the government of Singapore decide to boost its spending (G) to counteract the fall in AD due to fall in exports (NX component of AD).
· Do you think government has to increase G by the same amount as fall in NX? (1 mark).
· Explain your reasoning in 50 words or less (2 marks).
· Is crowding out a concern here? (1 mark)
b) Suppose, the Australian economy is in good shape (operating at its productive capacity Y*). However, because of upcoming elections the Australian government decides to boost its spending (G).
· How will this policy of fiscal expansion affect the level of interest rates in the economy (assume balanced budget before this expansion)? (1 mark).
· Explain your answer in writing. Diagram is not needed. (2 marks).
· Is crowding out a concern in this scenario? (1 mark).
c) Suppose, government is undertaking expansionary fiscal policy because of recessionary concerns. How will the effectiveness of the policy be affected if public is feeling cautious and not spending much? Present your arguments in 100 words or less. 2 marks (Hint: think about the size of the multiplier effect).
Disasters – such as bushfires, floods, earthquakes, terrorist attacks and epidemics/ pandemics – obviously have a huge impact on society and our economy.
In this article, economist Janine Dixon looks at how to measure the economic cost of Australia’s summer bushfires and the effects on GDP.
“Take care when examining the economic impact of fires: GDP doesn’t tell the full story”, by economist Janine Dixon, The Conversation 17 Jan 2020
(PDF file of the article is provided on Canvas Assessment page as well.)
a) What are the shortcomings of GDP as a measure of wellbeing highlighted by the article? Explain in 100 words or less (2 marks). Give some examples of how GDP does not capture the full extent of the negative impact of disasters. (2 marks).
b) Discuss the long-term repercussions of these bush fires on Australia’s productive capacity. Explain in 150 words or less using production function how these bushfires will affect some of the factors of production. (4 marks)
c) What according to the author is the main problem of aggregated measures (such as GDP, GNI, leisure adjusted GNI etc.) (1 mark). How, according to the author, economic analysis can be modified to remedy this. (1 mark)
(End of assessment)
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