Intermediate Macroeconomics

Instructions

Answer all questions. You must show your work to receive credit. Be detailed! 

Question 1: 

Suppose that economist keeping track of economic data observe that output is beginning to rise from the current long-run equilibrium.

a) Jim, a Keynesian Economist, believes that high consumer confidence is the explanation. Please graph how high consumer confidence will lead to higher output

using the AD/AS model.

b) Is this rise in output a long run or just a short run change to the economy? Include any additional changes necessary to achieve a long run equilibrium in the absence of policy.

c) Provide a narrative of the events that move the economy from its original equilibrium to the higher level of output and, if left alone, how the economy would achieve a long-run equilibrium.

d) Robert, a Classical economist, suspects that new Liberal labour policies and a recent bad press about labour union behavior have weaken the collective bargaining and that this is the source of the improvement in output. Indicate how the decrease in wages results in increased output using the AD/AS model.

e) Statistics collected by the government indicate that output per worker has increased. What does this suggest? Does this information help to identify whether Jim or Robert is correct? Explain your answer.

F) The legislature believes Jim and would like to do something to correct output.

Propose a policy that parliament could enact that will return output to its original level. Use the AD/AS and any other graph that is appropriate to indicate how the policy will return output to the original level.

g) If Robert was actually correct, what impact will the policy have on output, both in the short run and in the long run? (Use whatever graphs you think are useful.)

Question 2:

Economic models can be used to understand the implications a policy proposal might have on an economy.

a) Suppose that the Australian economy is at equilibrium in the AD/AS model. Use the AD/AS model to graph Australia at the long run equilibrium.

b) A vacation to Sydney was the main plot line of a popular US television series.

Suppose that there is an increase in foreign tourist visiting Australia. Use AD/AS analysis to determine what impact this will have on the Australian economy in the short run. What happened to output, the price level, nominal wages, real wages, and the real interest rate?

c) Describe what happens in the economy in economic terms as it transitions from the initial equilibrium to the short-run equilibrium.

d) Why is the short run equilibrium not a long-run equilibrium?

e) In the absence of any intervention, capture what happens to the economy in the long run on your graph.

f) Describe what happens in the economy in economic terms as it transitions from the short-run equilibrium to the long-run equilibrium.

g) Suppose the government intervenes with a fiscal policy consisting of decrease in government spending. Capture what happens to the economy in the long run on your graph. Describe what happens in the economy in economic terms as it transitions from the short-run equilibrium to the policy induced equilibrium.

Question 3:

Suppose a shift to natural gas for electricity production (which Australia has inabundance) reduces the cost of energy within Australia.

a) Start with a new graph of the Australian economy at a long-run equilibrium. Capture what happens to the economy as a consequence a decrease in the cost of energy.

b) Describe in economic terms what happens as a result of the change.