Assignment: Economics for Decision Making 1

Instructions:

• Your assignment must be typed in a word document in .doc or .docx format - no pdf or .pages. Assignments submitted in any format other than word will not be marked.

• For calculation questions, you are required to display all workings.

• You must draw your diagrams by hand; then scan (or take a picture) and insert your drawings into your word document.

The online submission point of your completed assignment can be found under ‘Assessment' tab, Written Assignment folder, in the course website. When submitting students must also fill in the digital cover sheet provided in the folder. Failure to follow the submission requirements may result in a null mark.

Question 1

a) Explain the difference between the working age population and the labour force?

b) The current unemployment rate is 4.6% and the number of people in the labour force is 266,478.Use this information to find the following.

i. How many people are unemployed?
ii. If the working age population is 366,547, what is the labour force participation rate?

c) Suppose that the size of the labour force decreases by 20,000 people. What would happen to the unemployment rate? Assume that the number of people unemployed does not change. Explain your answer by referring to the relevant equation.

d) Tommy lost his job in the factory he worked in as the factory lost its competitiveness in the domestic market over cheap imported products. Tommy now cannot find a job that utilizes his skills. Is Tommy frictionally unemployed, structurally unemployed or cyclically unemployed? Explain your answer.

Question 2

a) Describe the various key roles of the Reserve Bank of Australia (RBA) as specified on their website.

b) i) Assume that the reserve ratio in a country is 16%. What would be the simple money multiplier?

ii) Suppose that customers deposit $2,000 into their banks. Based on the simple money multiplier calculated in part i), calculate the total change in the money supply available in the banking system.

iii) Calculate the total change in the money supply available in the banking system if the reserve ratio increases to 20%. Explain how money multipliers work.

c) The European Central Bank (ECB) would like to increase the interest rates in the economy. What open market operation (OMO) action should the ECB take? Explain in detail the OMO process and its implications for the cash rate, interest rates, inflation and GDP. Draw by hand the effect of the OMO process using the MD-MS diagram.

Question 3

a) Refer to the table below.

i. Using the information provided in the table above, plotthe Aggregate Demand & Aggregate Supply curves by hand. Insert your drawing below.

ii. Identify the macroeconomic equilibrium. Indicate this point on your drawing from part i.

iii. Assume potential GDP is at $275 Billion. Illustrate potential GDP on your drawing. Is there an inflationary or recessionary gap? Explain why.

b) Assume that Australia's macroeconomic equilibrium is equal to the potential GDP. Growth in China has slowed down, resulting in a decrease in the demand for Australian beef. Using AD- AS model, explain carefully the immediate and long term effects of the event towards the economy. Draw by hand the appropriate AD-AS diagram to support your explanation.

c) Watch the youtube video "South Korea's consumer confidence falls in August" and write a brief description of the event described in the video.

Assume that prior to the event South Korea's macroeconomic equilibrium was equal to potential GDP. Using the AD-AS model, explain carefully the immediate and long term effects of the event for the South Korean economy. Draw by handthe appropriate AD-AS diagram to support your explanation.