Posted: November 3rd, 2015

MACROECONOMICS

12

Use the dynamic aggregate demand and aggregate supply model to explain what monetary policy stance the Reserve Bank of Australia should take if the economy is entering a period of high inflation.

Suppose the following table illustrates the values of real and potential GDP and the price level, if the Reserve Bank of Australia (RBA) does not change their current policy to be more contractionary or expansionary. Suppose that the RBA uses an appropriate policy and is successful in keeping real GDP at its potential level in 2014.

Year    Potential GDP            Real GDP        Price level

2013    $1.44 trillion   $1.44 trillion   144

2014    $1.47 trillion   $1.45 trillion   146

explain whether each of the following will be higher or lower than if the RBA had taken no action:

1. Real GDP.
2. Potential GDP.
3. The price level.
4. The unemployment rate.

13

The nominal wage, expected inflation, and actual inflation for a hypothetical economy in 2012 are presented in the following table. Calculate the actual and expected real wage, assuming the price level is 100 in 2011. Explain how firms will use this information in terms of hiring and what will happen to the unemployment rate.

Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model. Clearly show and identify the impact of the tax change. Show what happens to the price level and real GDP because of the tax change

14

Graph the demand for and supply of Australian dollars for euros. Suppose the Reserve Bank of Australia decides to follow a contractionary monetary policy. Show graphically and explain the effect of this policy on the demand and supply of dollars and the resulting change in the exchange rate of euros for dollars.

Suppose that health experts discover that French red wine lowers cholesterol. How will this affect the demand and supply of dollars in exchange for euros? Illustrate with a graph and explain. Will the dollar appreciate or depreciate?

15

Hypothetically, what would a report that argues that the dollar is ‘undervalued’ mean? How would foreign exchange markets respond to this information? Support your answer graphically.

Explain why a country might want their currency to appreciate against the currency of a major trading partner in order to fight inflation.

Suppose the flow of capital from Japan into Australia begins to slow in the coming year. Show how this would affect the value of the dollar in the market for Australian dollars (with the exchange rate defined as yen per dollar). If this occurs, what is the effect on the balance of trade in goods and services?