Aggregate Demand and Aggregate Supply, Growth of the Australian Economy - Assignment Example

Question 1 Real GDP at equilibrium = $800 billion Government increases spending by = $20 billion a. MPC or Marginal Propensity to Consume = 0.6 Output Multiplier = 1 / (1 – MPC) Output Multiplier = 1 / (1 – 0.6) = 1 / 0.4 = 2.5 times Multiplier for a propensity to consume of 0.6 is 2.5 b. An increase in government spending of $20 increases real GDP and results in an increase in equilibrium. The new equilibrium tends to be Equilibrium GDP = Old GDP equilibrium + (Increase in investment * Multiplier) = 800 + (20 * 2.5) = 800 + 50 = $850 billion The new equilibrium GDP becomes to be $850 billion c. MPC or Marginal Propensity to Consume = 0.8 Output Multiplier = 1 / (1 – MPC) Output Multiplier = 1 / (1 – 0.8) = 1 / 0.2 = 5 times Multiplier for a propensity to consume of 0.6 is 5 b. An increase in government spending of $20 increases real GDP and results in an increase in equilibrium. The new equilibrium tends to be Equilibrium GDP = Old GDP equilibrium + (Increase in investment * Multiplier) = 800 + (20 * 5) = 800 + 100 = $900 billion The new equilibrium GDP becomes to be $900 billion The above increase in spending which equals to $20 billion results in different equilibrium GDP due to the change in multiplier which has an effect on the final consumption and spending pattern Question 2 Aggregate demand and aggregate supply help to determine the equilibrium level both in terms of quantity and pricve. But before moving on it is important to understand the key terms Demand: Quantity of goods a consumer is willing to purchase at a particular price. Aggregate Demand: Total market demand of goods at a certain price. It is the sum of the total individual demands and gets affected by change in price. Supply: Quantity of goods a supplier is willing to supply at a particular price. Aggregate Supply: Total market supply of goods at a certain price. It is the sum of the total individual supply and gets affected by change in price. This helps to determine the equilibrium demand of oil and the price to be as follows The above graph shows that the equilibrium demand of petrol is Q1 and the price is P1. At this point the demand matches supply and there is neither extra supply nor shortage thereby resulting in the market forces to determine the equilibrium. This ensures the most effective point and ensures that the society is able to get the best interest. Now, when the price of petrol has eased as seen from the case (Oil, 2011) it would result in the it would increase the demand as people will be willing to consumer more oil. This will make the demand for oil to go up. On the other hand the supply would contract little because some supplier won’t be willing to supply oil at this price resulting in a decrease in supply. The new equilibrium on the other hand will look as follows The decrease in price will result I a situation where the consumers are willing to demand more as the price is low. Since, the supply at this price will be low it will create a gap between demand and supply and getting an equilibrium level will be difficult. But, since the demand is still going up despite the prices so instead of an decrease in price it will be matched by the increase in price and demand and more and more people want to purchase oil despite the change in price. This will make the graph to look as follow The above graph shows that despite the fall in oil price the demand for oil has grown substantially which has resulted in an increase in price. This is shown in the above graph which reflects the fact that the price of oil has increased and demand has also increased as shown above resulting in a change in aggregate demand and aggregate supply. Question 3 The Australian economy is witnessing growth on the backdrop that the developing countries like China and India have increased the demand for Australian resources. This has resulted in a situation where the demand for resources has increased as a result of which the demand for labour has grown. This has made the unemployment level to fall and the way in which the demand for the resources are increasing it is bound to fall further which will help the Australian economy to grow. The demand for labour and supply of labour is shown below The above graph shows that due to increase in demand of resources and skilled labour the demand for labour has grown which has resulted in the wag rate to move high from W1 to W3. This has resulted in the economy to ensure that the employment level improves which is seen by a change in the employment level. This corresponds to the fact that the unemployment level has decreased resulting in better wages and growing opportunity for the working class. This matches with the grwoth in the equilibrium level as seen below The above graph shows that due to rise in wages and employment level the equilibrium level has also grown. This is seen above where both the demand and supply has increased which has resulted in the shift in equilibrium quantity and price thereby resulting in a situation where the economy is growing and has resulted in the unemployment level to fall resulting in more employment. Part b The initiative of the government through improved training and development will further help the ecomony as it will help to provide the required initiative and will guide the work force to be better prepared to handle the responsibilities. The development of training and other facilities will help the labour supply to be more efficient and will further push down the unemployment rates and increase the wages as the supply of labour will be of high quality which will result in the labour to be paid high. This is shown in the graph below The graph shows that imparting the required training will help to develop the workforce better and ensure that better opportunities are provided to the employees. This will increase the bargaining power of the labour and will result in a rise in employment level along with an increase in wages. This will thereby reduce unemployment level further. This will also have an effect on the GDP and employment level as the equilibrium quantity will grow more compared to the price which will help to check inflation and result in better productivity as shown below Thus, the economy will be able to grow better and will be able to highlight the different areas which have helped them and ensure that the labour forces are able to get a better salary. This will result in more people joining the workforce and finally result in creating a situation where the economy is able to achieve a higher equilibrium level. References Oil. 2011. Prepare for more pain at the pump. Retrieved on September 25, 2011 from http://www.smh.com.au/money/prepare-for-more-pain-at-the-pump-20110509-1eewa.html#ixzz1LpyU3cS3 Read More