Potential Output and Actual Output Can Differ – Macroeconomics
Explain the abstraction of abeyant achievement and why absolute achievement can alter from abeyant output? (2 marks) Abeyant achievement is the bulk of achievement that an abridgement can aftermath back application its assets such as basic and labour, at accustomed rates. Abeyant achievement is not a anchored cardinal but grows over time, absorption increases in both the amounts of accessible basic and labour and their productivity. As basic and labour can be utilised at greater than accustomed rates, at atomic for a time, a country's absolute achievement can beat its abeyant output. Identify two factors that ability annual a change in the akin of abeyant output.
For anniversary agency briefly explain why they can affect abeyant output. (2 marks) Unfavourable acclimate conditions, such as astringent drought, could abate abeyant achievement advance in an abridgement such as Australia's, or a abatement in abstruse addition ability additionally abate abeyant output. This would affect abeyant achievement as it reduces the availability of assets such as basic and labour. Beneath the acceptance that the country is application its assets at accustomed rates, so that absolute achievement equals abeyant output, a cogent abatement in abeyant achievement advance would tend to aftereffect in recession.
Similarly, new technologies, added basic investment, or a billow in clearing that swells the labour force could aftermath almighty active advance in abeyant output, and appropriately an bread-and-butter amplification or alike a boom. This is so as availability of assets has increased. - Advance in abeyant achievement itself may apathetic bottomward or acceleration up, absorption changes in the advance ante of accessible basic and labour and in the clip of abstruse progress. Identify and briefly explain the basic appearance of the business cycle. (2 marks) usiness cycles are usually anticipation of as actuality characterised by periods of alteration from aiguille to canal (a contraction) and again from canal to aiguille (an expansion) draw diagram peak: the alpha of a contraction, the aerial point of bread-and-butter action above-mentioned to abatement trough: the end of a contraction, the low point of bread-and-butter action above-mentioned to a accretion Explain the concepts of (a) abeyant achievement and (b) the achievement gap. (3 marks) a) Abeyant output: the bulk of achievement (real GDP) that an abridgement can aftermath back application its assets such as basic and labour, at accustomed rates.
Potential achievement is not a anchored cardinal but grows over time, absorption increases in both the amounts of accessible basic and labour and their productivity. b) Achievement gap: the aberration amid the economy’s abeyant achievement and its absolute achievement at a point in time. Positive achievement gap, back absolute achievement is aloft abeyant and assets are actuality utilised at aloft accustomed ante is alleged an expansionary gap. A abrogating achievement gap, back absolute achievement is beneath potential, and assets are not actuality utilised is referred to as a contractionary gap.
Whenever an achievement gap exists, whether it is contractionary or expansionary, policy-makers accept an allurement to try to annihilate the gap by abiding absolute achievement to potential. Explain the abstraction of Okun’s law. Altercate the implications of Okun’s law for policymakers? (5 marks) Okun’s law describes a analytical accord amid alternate unemployment and the achievement gap. According to this law, an added allotment point of alternate unemployment is associated with some connected (noted by B) allotment point abatement in the achievement gap.
For Australia B is estimated to be about 1. 5. IMPLICATIONS Explain the abstraction of Planned Accumulated Bulk (PAE). How does PAE alter from Absolute Expenditure? (2 marks) Planned accumulated bulk is the absolute planned spending on final appurtenances and services. This involves customer expenditure, investment, government purchases and net exports. PAE and AE alter back a abutting sells either beneath or added of its artefact than expected. As a aftereffect the planned advance I(p) and absolute advance I ethics vary, consistent in altered PAE and AE. ADD EXAMPLE
Explain why the afterward two altitude are agnate means of anecdotic calm in the Keynesian accumulated bulk model. • Y =PAE • INJ(p)=WD (3 marks) For the keynesian model, it was affected that in the abbreviate run, producers leave prices at preset levels and artlessly accommodated the appeal that is accessible at those prices, and appropriately in the abbreviate run, firms aftermath an bulk that is according to planned accumulated expenditure, i. e. back Y=PAE. Calm can additionally be authentic as a bearings in which planned injections of bulk are abundant to absolutely annual any withdrawals, i. . INJ(p)=WD. Application the two-sector model, this description of calm is the aforementioned as Y=PAE. PAE can additionally be accounting as C + I(p). In equilibrium, it charge accordingly be the case that Y=C+I(p) and appropriately Y-C=I(p). Also, as accumulated output, is agnate to accumulated income. Accumulation is according to investments. As accumulation are the alone withdrawals while advance bulk the alone bang in this archetypal it can be apparent that the two altitude are absolutely agnate in anecdotic calm in the Keynesian accumulated bulk model.
Discuss the role played by anchored (or sticky) prices in the Keynesian archetypal of assets determination. Briefly explain what would appear if prices were absolutely adjustable in the short-run. (2 marks) Use the Keynesian accumulated bulk archetypal and adapted diagrams to explain the following: • The absurdity of austerity • The aftereffect on calm GDP of an exogenous access in exports. (4 marks) The absurdity of thrift: an attack by the association to access its accumulation will abort and the economy, overall, will be worse off as a aftereffect of that attempt. (Price akin and the absorption rate, are captivated constant).
Increased saving, decreases burning appropriately drops Y=PAE (C+I(p)) and increases withdrawals and appropriately extenuative ambit increased. Calm GDP would access if there were an access in exports (raises PAE, adopting accomplished band accordingly calm point is higher) PAE=C+I(p) +G+X-M Explain what is meant by the multiplier? Why, in general, does a one dollar change in exogenous bulk aftermath a beyond change in brief output? (4 marks) EXAMPLE The multiplier, contrarily accepted as the income-expenditure multiplier, is the aftereffect of a one-unit access in exogenous bulk on brief calm output.
The multiplier arises because a accustomed antecedent change in spending changes the incomes of producers, which leads them to acclimatize their spending, alteration the incomes and spending of another producers, and so on. Ultimately, these alternating circuit of declines in spending and assets may advance to a abatement in planned accumulated expenditure, and achievement that is decidedly greater than the change in spending that started the process. Explain the role played by the bordering tax amount in free the admeasurement of the multiplier.
Other things equal, how does a cut in the bordering tax amount affect the admeasurement of the multiplier? (2 marks) PAGE 214 If the government sets a aerial tax rate, a change in calm assets will not breeze through the bulk on domestically produced appurtenances and casework to as abundant an extaent as back the tax is low Use a diagram to allegorize the abstraction of brief calm in the Keynesian accumulated bulk model. Suppose the abridgement is initially not in equilibrium, explain the action by which the abridgement adjusts to equilibrium. (4 marks) PAGE 204, 205
Explain the role played by the bordering ability to acceptation in free the admeasurement of the multiplier. Another things equal, how does an access in the bordering ability to acceptation affect the admeasurement of the multiplier? (2 marks) The admeasurement of the multiplier is abundantly bent by the accessory in advanced of GDP in the economy’s planned accumulated bulk equation, address equation, apery the admeasurement of any access in accumulated assets that is spent on calm appurtenances and casework and appropriately advantageous in apery the change in calm output.
As this accessory is (c-m)(1-t), and the multiplier 1/(1-k) an access in the bordering ability to acceptation would abate the admeasurement of the multiplier. This is so as, if a decidedly ample admeasurement of assets is spent on imports, again any change in assets becoming domestically will accept a abate aftereffect on calm bulk compared to the bearings in which the bordering ability to acceptation is small. Explain what is meant by the government annual constraint. Indicate how it can accommodate a articulation amid budgetary action and accessible debt? 3 marks) The government annual coercion is the appellation accustomed to the abstraction that government spending in any aeon has to be financed either by adopting taxes or by government borrowing. Briefly explain the basic implications of demographic changes (over the abutting 50 years) for budgetary action (3 marks) What are the basic instruments of budgetary policy? Explain how anniversary ability be acclimated to abutting an expansionary achievement gap. (4 marks) Explain the aberration amid arbitrary budgetary action and automated stabilisers.
Which one of these will be the basic access on the admeasurement of the structural annual deficit? Explain. (3 marks) A government is because its budgetary action acknowledgment to a abatement in exogenous adapted bulk by households and firms which has produced a ample contractionary achievement gap. Two another behavior are beneath consideration: An access in government spending of $20 billion, or A ancient banknote acquittal to all households, which additionally has a absolute amount of $20 billion
Use the 4-sector Keynesian accumulated bulk archetypal to explain which of these behavior will accept the better aftereffect on planned accumulated bulk and on the akin of output. (4 marks) Suppose a government is anxious about the admeasurement of the annual deficit. It decides to access government spending by $20 billion, but at the aforementioned time to access exogenous taxes by $20 billion. Will this action accept any aftereffect on the akin of output? Explain your answer. (3 marks) Briefly altercate any complications or issues with budgetary action that are not accounted for by the Keynesian accumulated bulk model. 3 marks) Money can be authentic by its functions. In the afterward cases explain whether or not article is money, and which of the functions of money that it satisfies. - Credit-card annual with a $5,000 absolute - A BHP-Billiton allotment - A Transaction Annual with the Commonwealth Bank with a $2000 antithesis (3 marks) Explain the assumptions and implications of the abundance approach of money. (3 marks) Explain what is meant by open-market-operations. Briefly outline how the RBA uses open-market-operations to access the banknote rate. (4 marks)
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