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ECON 1010 - Macroeconomics Assignment - RMIT University, Australia

Question 1: True, False or uncertain

Explain whether each of the following statement is true, false or uncertain. Start your answer by selecting one of the three statements - "True", "False" and "Uncertain" and then provide arguments to justify your selection (be brief and concise in less than 100 words). You need to make assumption clear, reasonable and explicit if making any. The quality and logic of arguments determine your marks.

a) Nominal interest rates are always higher than real interest rates.

b) If the lockdown measure due to a further spread of COVID-19 pandemic is extended to international flows of goods and services across the Australian border, saving in the national income account must be equal to the investment in Australia.

c) The price of cars produced in Australia sold to consumers in the United States (US) goes up. This means that GDP deflator and the CPI rise in the US.

d) An increase in the money multiplier (M) and a decrease in the reserve ratio (R) occur during the financial crisis.

Question 2: COVID-19 in the macroeconomy

Starting with the long-run equilibrium in the aggregate demand and supply (AD-AS) model. Consider the macroeconomic effects of the lockdown measures due to COVID-19. In each part of your answer, please be brief and concise in less than 100 words. You need to make assumption clear, reasonable and explicit if making any. The quality and logic of arguments determine your marks.

a) Explain this development in the AD-AS framework in words (Diagrammatic representation not required).

b) Show Part a) using AD-AS figure. Ensure to include short-run supply curve (SRAS), long-run supply curve (LRAS) and aggregate demand (AD) and to label the X-axis and Y-axis of the figure. Also, mark the equilibrium price and quantity before and after the lockdown.

c) Fiscal and monetary policy measures can be taken as the response to the development in part a). Explain the policy measures in writing. Diagrammatic representation of the effects of these policies not required.

d) What are the possible long run impacts of the recommended policy measures in part (c). Explain the impact in writing. Diagrammatic representation not required.

e) Continue on the long-run, the government starts to register the budget surplus after having paid off the large budget deficits incurred as the policy measured in part c). What happens to the quantities of saving and investment and (real) interest rates with this development? Explain in writing. Diagrammatic representation not required (Hint: try to explain the step by step).

Question 3: Short answers

For each short answer, the word limit is 100 words. You need to make assumption clear, reasonable and explicit if making any. The quality and logic of arguments determine your marks.

a) Donald Trump promised a more aggressive fiscal policy with a large increase in spending and significant tax cuts leading to a much larger government (budget) deficit. The US economy was at near the full employment (the unemployment rate in the US was low below 5%), what do you expect will be the response of the US Central Bank in terms of changes to the cash rate? Explain.

b) The Central Bank of New Zealand has a higher inflation target than the Reserve Bank of Australia. Does this tend to depreciate or appreciate the New Zealand dollar against the Australian dollar? Explain.

c) What are the reasons for increasing convergence between emerging economies (defined as countries with lower GDP per capita but growing rapidly) and advanced economies (countries with high GDP per capita but lower growth)? Explain.

d) You have successfully secured the mortgage of worth in $1,000,000 from the Bank to purchase a house. After the contract has been written, inflation in the economy turned out to lower than what was expected. Who gained and lost from this development? Explain.

e) The government (and the central bank) has an easier job of dealing with the macroeconomic impacts of consumers and investors being pessimistic about the future of the economy than the period of stagflation. Do you agree? Explain.