BUS700: Aggregate Expenditure and Fiscal Policy – Economics

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Economics Assignment:

Suppose that the Australian economy is at its equilibrium, and the Australian government has decided to reduce its spending on welfare supports.

(a) Discuss the short-run effects of the spending cuts on macroeconomic variables – particularly on equilibrium output, inflation, and unemployment rates. In your discussion, draw and use aggregate expenditure (AE) and AD-AS model together to explain the process that moves the economy to its new equilibrium output.

The Australian economy is at full employment long-run equilibrium and the inflation is consistent with RBA’s target rate. Suppose that the Australian government increases spending on social infrastructure and education. Assume that the RBA maintains a stable monetary policy and everything else remains unchanged.

(b) Draw and use AD-AS model to analyze and explain how the increase in government spending would affect real GDP, inflation rate and the unemployment rate in the short-run and in the long-run (the long- run adjustment process).

Assume that an economy is at full employment long-run equilibrium.

(c) Using the AD-AS graph, discuss how a sudden supply-side shock would affect the equilibrium output, price level and the unemployment rate in the short-run first. Then discuss what type of fiscal policy would you advise the government to implement to return the economy to its long-run equilibrium. Explain the long-run adjustment process.

(d) Briefly explain the key role of Automatic stabilizers operating in fiscal policy. Then explain how the two automatic stabilizers would work in an economic expansion.

Monetary Policy and Exchange Rates

In December 2012, Japan commenced quantity expansion of money, Yen, as one of the key monetary policies. The Bank of Japan (BOJ) increased the quantity of money by 80 trillion Japanese Yen every year through open market operation in an attempt to support the troubled Japanese economy. The large increase in the quantity of money was expected to have significant impacts on a range of economic sectors
in Japan and global financial markets.

(a) Analyse and discuss how the quantity expansion of Japanese Yen would have affected interest rate, investment, and consumption, aggregate demand, real GDP and price level in Japan. Draw AD-AS model to explain your analysis.

(b) Explain, in the short run, how and why the expansionary monetary policy in Japan would likely to change the flow of funds between Japan and Australia if Australian interest rates were on hold.

c) Given such an expansionary monetary policy in Japan, answer the following three questions.
(i) Draw the exchange rate graph showing the movement of Japanese Yen against the Australian dollar (hint: use demand for and supply of Japanese Yen, with A$/Yen).

(ii) Discuss how such an expansionary monetary policy would likely to affect the value of Japanese Yen and the exchange rate (depreciation or appreciation) against the Australian dollar.

(iii) Discuss how the change in the exchange rate would likely to influence Japanese exports and imports, the current account balance (improve or worsen) and the competitiveness of the Japanese economy in the global market.

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Posted on : February 16th, 2018
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