Solution
Robert answered on
Dec 24 2021
Answer 1.
a) A political election campaign involves huge government expenditure (G), and also
expenditure by the party not in power which increases consumption expenditure (C).
Both of these shift the aggregate demand rightward (or upward) in the short run, which
leads to increase in aggregate output and increase in price level in the economy. Whereas
in the long run, since the output cannot exceed the full employment level, there is only
high inflation in the economy. (Refer to Figure 1.)
) The increase in spending on infrastructure would increase the government expenditure
(G), and shift the aggregate demand curve rightwards (or upwards) in the short run,
which leads to increase in aggregate output and increase in price level in the economy.
Whereas in the long run, since the output cannot exceed the full employment level, there
is only high inflation in the economy. (Refer to Figure 1.)
c) Increase in international economic tu
ulence would discourage investments and hence
Investment (I) component would go down, pulling the aggregate demand curve leftwards
(or downwards), which leads to decrease in aggregate output and decrease in price level
in the economy. Whereas in the long run, the output will remain at the the full
employment level, and there is only deflation in the economy. (Refer to Figure 2.)
d) Depreciation of economy’s cu
ency would reduce the price of exports and hence
increase the demand for export goods in foreign country, so exports (X) will increase,
which will shift the aggregate demand curve to the right in the short run, which leads to
increase in aggregate output and increase in price level in the economy. Whereas in the
long run, since the output cannot exceed the full employment level, there is only high
inflation in the economy. (Refer to Figure 1.)
e) A fall of business confidence within the economy could discourage the investment
expenditure, so investments would fall, and this will pull the aggregate demand curve
leftwards (or downwards), which leads to decrease in aggregate output and decrease in
price level in the economy. Whereas in the long run, the output will remain at the the full
employment level, and there is only deflation in the economy. (Refer to Figure 2.)
f) An increase in export price would reduce the demand for exports (X), and a decline in
import price would increase the demand for imports (M), both of which reduce the net
exports (X-M), and hence pull the aggregate demand curve leftwards (or downwards),
which leads to decrease in aggregate output and decrease in price level in the economy.
Whereas in the long run, the output will remain at the the full employment level, and
there is only deflation in the economy. (Refer to Figure 2.)
Figure 1.
Figure 2.
Answer 2.
The news article from “The Australian” talks about the fiscal stimulus injected by the
government to recover from the recent financial crisis. This relates to the aggregate demand and
aggregate supply model from the course. The fiscal stimulus is nothing but government
expenditure on different heads to increase aggregate demand in the economy. The article
investigates that the impact of this fiscal stimulus was not as expected. The direct payments to
households in form of tax bonus for working Australians apparently had no effect on
consumption expenditure, particularly on non-durables. Also, the announcement of these
payments did not have much impact on the expenditure. The results were contradicting to the
government’s expectation and theory which suggests that government expenditure should
increase the aggregate demand and through multiplier effect should increase consumption
expenditure also.
The possible reason for this is explained in the article through the Ricardo-Ba
o effect, wherein,
such a tax bonus given by the government is expected (by the individuals) to be financed through
higher taxes in the future, so they increase their cu
ent savings, rather than increasing
consumption expenditure.
Also, it was investigated that spending could have been on durables which were mainly imported
in Australia, this further dampened the impact of tax bonus, and made fiscal stimulus ineffective.
Answer 3.
The unemployment rate of 5.5% as given by official statistics is unbelievable for most people in
Australia. This is because they witness more unemployment around them. It has been found by
the Roy Morgan Research firm that the real unemployment rate in Australia is 9.3%. There
appears to be a fault with the official statistics. The research firm claims that Reserve Bank of
Australia governs the nation only on the basis of status of the capital and cities.
This...