Macro1 (ECON1010), 2sem 2015 Assignment

Short Answer Questions: Provide the answers in the space provided belowThe font size has to be at least 12. (4 marks in total). You have decided to deposit $2,000 in a savings account in the Commonwealth Bank, which does not have any excess reserves at the time when you make a deposit. (1 mark for each)How does your deposit change the Bank’s T-account?Show the T-account changes. Assets Liabilities Commonwealth Bank of Australia Now the Bank is told to maintain a reserve ratio of 0. 2 (ie, 20 percent). The Bank decides to make the maximum possible loan from the deposited funds. Following from the T-account in Part a), what does theT-account look like now? Assets Liabilities Now, somebody who took out the loan in Part b) writes a cheque for the amount and then the person receiving the cheque deposits it in WestPac Bank which also maintains a reserve ratio of 0. 2. Show how this changes the T-account of WestPac Bank. Assets Liabilities Westpac If the process of money creation continues what is thetotal money supply resulting from your initial $2,000 deposit? (3 marks in total)Suppose that the price level inAustraliais expected to rise by7%in 2016. (1 mark for each)Why do some economists claim that we should not worry too much about inflation at this level?Other economists think that there aresignificantcosts associated with inflation above 2-3%. What are they?What are the other costs be to consider if the inflation rate unexpectedly turns out to behigher than 7%? (4 marks in total)Consider an economy that is initially in long run equilibrium in the AD-AS diagram as shown in Figure below. Use the Figure to demonstrate the following changes. Suppose people in the economy start to become a bit worry about the future of the economy and decided to save more. This translates into an increase in private saving (we assume that this happens given any real interest rate and price level). How does this change the aggregate price level, real income and unemployment in the short run? Explain and illustrate it in AD-AS diagram below (1 mark)Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations) LRAS P P0 SRAS0 Y YLR AD0 On the same diagram illustrate the adjustment process to long run equilibrium (assuming that real potential output remains unchanged, so no change in LRAS), and explain the final impact on the price level. (1 mark)Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations) LRAS P P0 SRAS0 Y YLR AD0 Suppose many Australian firms mistakenly expect that there will be an increase in the relative price of their own products as compared to others (including relative to the input costs and wages they pay). This should shift the SRAS curve. Start with the equilibrium point shown in the Figure below and use it to demonstrate the following changes. How does this change the aggregate price level, real income and unemployment in the short run? Explain and illustrate in the AD-AS diagram (1 mark)Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations) LRAS P P0 SRAS0 Y YLR AD0 On the same diagram illustrate the adjustment process to long run equilibrium (assuming that real potential output remains unchanged, so no change in LRAS), and explain the final impact on the price level. (1 mark)Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations) LRAS P P0 SRAS0 Y YLR AD0 (4 marks)Read the article from the Age which starts “Don’t waste any time worrying about it: Australia is heading into a recession…”(the article can be found here: . theage. com. au/comment/automotive-transformation-scheme-cancellation-may-drive-the-economy-over-the-edge-20150904-gjfdsg. html”>http: //www. theage. com. au/comment/automotive-transformation-scheme-cancellation-may-drive-the-economy-over-the-edge-20150904-gjfdsg. html)The author argues that the Australian economy is inevitably heading into recession. What reasons does he give for this and do you agree with them? Supposing the economy is heading for recession what in your view should (or can) the Australian government do to deal with this? You need to writeat least half a page in length. Answer here

Macro1 (ECON1010), 2sem 2015 Assignment

Short Answer Questions:

Provide the answers in the space provided below

The font size has to be at least 12.

(4 marks in total). You have decided to deposit $2,000 in a savings account in the Commonwealth Bank, which does not have any excess reserves at the time when you make a deposit. (1 mark for each)

How does your deposit change the Bank’s T-account?Show the T-account changes.

Assets

Liabilities

Commonwealth Bank of Australia

Now the Bank is told to maintain a reserve ratio of 0.2 (ie, 20 percent).The Bank decides to make the maximum possible loan from the deposited funds. Following from the T-account in Part a), what does theT-account look like now?

Assets

Liabilities

Now, somebody who took out the loan in Part b) writes a cheque for the amount and then the person receiving the cheque deposits it in WestPac Bank which also maintains a reserve ratio of 0.2. Show how this changes the T-account of WestPac Bank.

Assets

Liabilities

Westpac

If the process of money creation continues what is thetotal money supply resulting from your initial $2,000 deposit?

(3 marks in total)Suppose that the price level inAustraliais expected to rise by7%in 2016.(1 mark for each)

Why do some economists claim that we should not worry too much about inflation at this level?

Other economists think that there aresignificantcosts associated with inflation above 2-3%. What are they?

What are the other costs be to consider if the inflation rate unexpectedly turns out to behigher than 7%?

(4 marks in total)Consider an economy that is initially in long run equilibrium in the AD-AS diagram as shown in Figure below. Use the Figure to demonstrate the following changes.

Suppose people in the economy start to become a bit worry about the future of the economy and decided to save more. This translates into an increase in private saving (we assume that this happens given any real interest rate and price level).

How does this change the aggregate price level, real income and unemployment in the short run? Explain and illustrate it in AD-AS diagram below (1 mark)

Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations)

LRAS

P

P0

SRAS0

Y

YLR

AD0

On the same diagram illustrate the adjustment process to long run equilibrium (assuming that real potential output remains unchanged, so no change in LRAS), and explain the final impact on the price level. (1 mark)

Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations)

LRAS

P

P0

SRAS0

Y

YLR

AD0

Suppose many Australian firms mistakenly expect that there will be an increase in the relative price of their own products as compared to others (including relative to the input costs and wages they pay). This should shift the SRAS curve. Start with the equilibrium point shown in the Figure below and use it to demonstrate the following changes.

How does this change the aggregate price level, real income and unemployment in the short run? Explain and illustrate in the AD-AS diagram (1 mark)

Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations)

LRAS

P

P0

SRAS0

Y

YLR

AD0

On the same diagram illustrate the adjustment process to long run equilibrium (assuming that real potential output remains unchanged, so no change in LRAS), and explain the final impact on the price level. (1 mark)

Answer here (Tips: to create new lines (AD, SRAS), simply copy the existing curves and move to the new locations)

LRAS

P

P0

SRAS0

Y

YLR

AD0

(4 marks)Read the article from the Age which starts “Don’t waste any time worrying about it: Australia is heading into a recession…”

(the article can be found here:.theage.com.au/comment/automotive-transformation-scheme-cancellation-may-drive-the-economy-over-the-edge-20150904-gjfdsg.html”>http://www.theage.com.au/comment/automotive-transformation-scheme-cancellation-may-drive-the-economy-over-the-edge-20150904-gjfdsg.html)

The author argues that the Australian economy is inevitably heading into recession. What reasons does he give for this and do you agree with them? Supposing the economy is heading for recession what in your view should (or can) the Australian government do to deal with this? You need to writeat least half a page in length.

Answer here