Macroeconomics
` UNIVERSITY OF SOUTH AUSTRALIA SCHOOL OF COMMERCE ECON1007 MACROECONOMICS STUDY PERIOD 5, 2018. Internal and External students Written ASSIGNMENT Due date: 7th October 2018 (11.00 pm) 2 Econ1007 Macroeconomics Assignment SP5 2018 ASSIGNMENT TOPIC Assignment 2 Written assignment Weighting: 25% Length Word limit: 1250-1500 words in total (including diagrams, references and all text) Due Date: Sunday 7th October 2018 11.00 pm Topic Read the news article below and answer all questions. Jobs boom puts RBA under pressure to raise interest rates by Jacob Greber Australian Financial review; July 19, 2018. With official labour market data for June showing employers added three times as many jobs as forecast, some economists are warning the Reserve Bank risks being blindsided by a more rapid fall in the 5.4 per cent unemployment rate and faster inflation. "The key things to watch are whether upward momentum in inflation and wages continues, and the unemployment rate falls. The latter can happen at a faster pace than is incorporated in the RBA's forecasts." Employment surged by 50,900 people, with four in five taking up full-time positions, the Australian Bureau of Statistics reported on Thursday. … Reserve Bank policy makers repeatedly signalled they are in no hurry to begin normalising the nation's ultra-low cash rate. Jobs boom puts RBA under pressure to raise interest rate. Despite the upbeat commentary, Australia's central bank is unlikely to lift the official cash rate before the second half of next year, according to financial market futures pricing, with several high-profile economists not anticipating hikes until 2020 at the earliest. … Annette Beacher, an economist at TD Securities, suggested money market investors are "asleep at the wheel" in anticipating the official cash rate will remain unchanged through into the first half of 2019. 3 Econ1007 Macroeconomics Assignment SP5 2018 "If the unemployment rate slumps towards 5 per cent sooner rather than later (ie, not so gradual after all), the RBA's rhetoric 'should' turn more hawkish by year end. "I do think wages are about to pop, but will they be 3 per cent as the RBA is soft-targeting?" she said, noting that union-negotiated wages agreements have lifted in recent months. All eyes are now on next week's official second-quarter inflation numbers, which economists predict will show are still at the bottom end of the Reserve Bank's 2-3 per cent target. One factor keeping the jobless rate from falling more rapidly is Australia's participation rate, which edged up to 65.7 per cent in June from 65.5 per cent in May. While that means more jobs need to be created to pull the jobless rate down, higher participation is often seen as a sign of a strong labour market as more workers are encouraged to look for jobs. Helped by booming NSW and Victorian economies, the labour market has grown by 339,000 jobs over the past 12 month, with just under half in the nation's biggest state. The official figures mirror other indicators of an improving labour market, including rising job vacancies, which have reached the highest annual growth in 7½ years, as well as surveys showing businesses are enjoying positive conditions and expect to add more workers. 4 Econ1007 Macroeconomics Assignment SP5 2018 Answer all Questions below: Qu. 1(a) Explain what is meant by the statement, “One factor keeping the jobless rate down from falling more rapidly is Australia’s participation rate which edged up…”, by highlighting the connection between jobs growth, participation rate and unemployment rate. (3 marks) Qu. 1(b) The article states that most of the job growth is with “ …four in five taking up full- time positions”. Explain whether or not the official unemployment rate is affected by job growth occurring mainly in the form of full-time positions in comparison to part-time positions. In your answer explain the implications of this for the concept of measuring ‘full’ employment. (3 marks) Qu.2 Use the aggregate expenditure (AE) model to depict the situation that has occurred over the past few months in terms of the resulting impact on economic output and (un)employment. In your answer make sure to discuss the equilibrating process of moving to a new macroeconomic equilibrium output. (4 marks) Qu. 3 Use the static AD-AS model to analyse the circumstances where the RBA is “..blindsided by a more rapid fall in the 5.4 per cent unemployment rate and faster inflation”, and does not raise interest rates; and jobs growth and the fall in the unemployment is greater than expected. In your answer make sure to use the static AD-AS model show the initial impact on output and the price level, and also explain the longer run implications if the Reserve Bank fails to raise interest rates if economic circumstances as predicted by some market economists eventuate. [6 marks] Qu. 4 Use the the dynamic AD-AS model(s) to explain the economic circumstances which will determine whether the Reserve Bank adopts the approach where “the official cash rates will remain unchanged through into the first half of 2019” in contrast to the circumstances where it will “turn more hawkish” and will raise interest rates over the next 12 months. [6 marks] Overall Presentation [3 marks] Total 25 marks 5 Econ1007 Macroeconomics Assignment SP5 2018 AIMS AND OBJECTIVES OF MACROECONOMICS ASSIGNMENT The assessment is primarily designed to advance your understanding and application of economic theory to real world situations. Particular attention is given to using particular models (i.e. AE model and static/dynamic AD/AS models) to analyse real world scenarios. ASSESSMENT CRITERIA Judging the quality of submitted material requires some judgment by academic staff. Rather than a simple formulaic approach, markers combine a number of elements to judge the quality of an assignment. In broad terms, assessment of your assignments will take into account: Relevance of your answer to the question (Did you answer the question?) Did you use a model and graphical representation to analyse the question? Clarity of expression (Is it written well?) Logical planning and sequence (Does the argument make sense?) Did you provide theoretical support for the arguments used? Was the question answered fully or only in part? Where appropriate, were sources properly cited and referenced? Overall presentation, including correct grammar, spelling and punctuation (Is the presentation of professional quality?) For access to learning resources associated with assignment preparation see the learning hub located at: https://lo.unisa.edu.au/course/view.php?id=4074 REFERENCES AND PLAGIARISM You are expected to answer written questions in your own words. In written academic work you must acknowledge the source of your information (including set textbooks) but only those references that are actually used should be cited. You should use the Harvard referencing system. (see: https://lo.unisa.edu.au/course/view.php?id=3839 ) ACADEMIC INTEGRITY The university is committed to academic integrity and has policies and procedures in place to ensure academic integrity. More information about academic integrity (AI) can be found in the Assessment policies and procedures manual at: http://www.unisa.edu.au/policies/manual/ Or visit the AI Module website https://lo.unisa.edu.au/mod/book/view.php?id=252142 which explains in detail how students can work with integrity at the University. ANY WORK CONTAINING WORK THAT HAS BEEN JUDGED TO CONTAIN PLAGIARISM WILL SCORE ZERO MARKS; SERIOUS ACADEMIC MISCONDUCT MAY RESULT IN SUSPENSION FROM THE UNIVERSITY. PENALTIES FOR LATE ASSIGNMENTS Late assignments that do not have approved extensions will incur a penalty: for every day late, ten per cent will be deducted. No assignments will be accepted after 7 days past the due date. https://lo.unisa.edu.au/course/view.php?id=4074 https://lo.unisa.edu.au/course/view.php?id=3839 http://www.unisa.edu.au/policies/manual/ https://lo.unisa.edu.au/mod/book/view.php?id=252142 Slide 1 Macroeconomics Study Period 5 2018 Dr Ronald Donato Lectures 4 (chapter 9: to page 253) Aggregate Expenditure (AE) and Output in the Short Run 2 Copyright ©2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd)–9781488612497/Hubbard/Macroeconomics/4e • Well done to all – completing Online test 1. (Don’t stop - keep going!) • Practise Quiz 2 available from this Friday. – Covers same material as online test 2 – Chapters 5, 6 and 9 • Online Test 2 due Sunday- Sept 9th (11.00pm) – See course outline. Reminder will be sent again next week Reminder – Online Test 2 (what already!) 1. Understand how macroeconomic equilibrium is determined in the Aggregate Expenditure (AE) model. 2. Discuss the determinants of the four components of aggregate expenditure (C, I, G and NX) and define the marginal propensity to consume and the marginal propensity to save. 3. Understand concept of macroeconomic equilibrium using 45 degree AE model. Learning objectives 3 Copyright ©2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd)–9781488612497/Hubbard/Macroeconomics/4e Copyright ©2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) –9781486010233/Hubbard/Macroeconomics 3/e Aggregate expenditure Aggregate expenditure model: A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant. Aggregate expenditure (AE): The total amount of planned spending in the economy—the sum of consumption, planned investment, government purchases and net exports. 4 The aggregate expenditure model LEARNING OBJECTIVE 1 Copyright ©2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd)–9781488612497/Hubbard/Macroeconomics/4e Copyright ©2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) –9781486010233/Hubbard/Macroeconomics 3/e Aggregate Expenditure (AE) – comprises 4 components: • Consumption (C) • Planned investment (I) • Government purchases (G) • Net exports (NX) BUT difference between planned AEp and actual AEa The aggregate expenditure model LEARNING OBJECTIVE 1 5 Copyright ©2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd)–9781488612497/Hubbard/Macroeconomics/4e Copyright ©2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) –9781486010233/Hubbard/Macroeconomics 3/e Macroeconomic equilibrium Ye: Planned Aggregate expenditure AEp = GDP (production) Total production is matched by planned Expenditure. No unplanned buildup or rundown of inventory/stock Note: Actual AEa ≡ GDP (always equals - identity) But Ye: Planned AEp = GDP The aggregate expenditure model LEARNING OBJECTIVE 1 6 Copyright ©2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd)–9781488612497/Hubbard/Macroeconomics/4e Copyright ©2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) –9781486010233/Hubbard/Macroeconomics 3/e Difference between AEp and AE originates from: difference planned Investment (Ip) and actual Investment (Ia) Inventories: Goods that have been produced but not yet sold. Ie stock held on hand Actual investment will equal planned investment only when level of unsold stock (i.e inventory levels) on hand is planned. If unsold stock planned then: Ia = Ip () If unsold stock not planned then: Ia = Ip () The aggregate expenditure model LEARNING OBJECTIVE 1 7 Copyright