Instructor14 October 2012Question 1Figure 1: AD-AS graphSource: Hall & Lieberman, 2007When the central bank lifts interest rates, spending on investment reduce, which facilitates reduction in aggregate demand. In the long-run, reduced investment spending results in unemployment that reduces overall output in the economy (Wessels, 2006). In the figure above, aggregate demand is likely to shift to the left of AD to a point like AD0.Increase in private domestic investment spending push the aggregate demand curve outward, and in the long-run, the output increase as the effect of investment spread in the economy (AD shifts to AD’) and output increase from (RDO to RDO’).
An increase in international oil shifts the aggregate supply curve inward, precipitating rise in aggregate commodity prices that reduce. As factor costs increase in long-term, investment decline and output in the economy reduce (Wessels, 2006). In the figure below aggregate supply changes (shift) from AS1 to AS2. This indicates that real domestic output decrease. Figure 2: AS graphSource: Hall & Lieberman, 2007An appreciation in the foreign exchange rate value of the economy’s currency will discourage domestic production for export, hence fewer exports will be realised and more imports will be enter the economy.
Imports become cheaper as compared to export. Decrease in export and increase in imports will shift the aggregate demand curve outward, thus overall output will be increase. A fall in real estate prices in the capital cities of the country will shift the aggregate supply curve outward, meaning consumption will increase that pushes the output of the economy up (Wessels, 2006). In the graph below, this is indicated by shift from AS1 to AS2.Figure 3: AS graphSource: Hall & Lieberman, 2007Lastly, in the case the country’s main exports fall in price while the goods the country imports from abroad rise in price, the aggregate demand shift outward, meaning increase in aggregate output for the economy.
This is indicated in the figure 1 where aggregate demand shift from ADto AD’. Question 2The selected macroeconomic issue concerns Australia’s monetary policy. This is a concept covered in the course, specifically in the area of exchange rates, capital flows and monetary policy. The primary goal of this section in the course was to establish how aggregate economy is affected by economic actions of change in exchange rates, capital flows and the monetary and fiscal policies.
The interest in this current macroeconomic aspect in the country is informed by the fact that recent developments in the economic have forced the government to get involved in establishing macroeconomic policies such as monetary policy and fiscal policy to address the concerns of economy appropriately. The selected article is titled ‘Australian dollar rises as RBA signals ease with money policy’ (Glynn, 2012). It was published on July 17, 2012, by the Australian Newspaper.
The article talks about the government step in the month of July not to cut interest rates due to the fact that the economy had shown strong prospects of growth. Moreover, the Australian government was interested in establishing the actual impact of earlier monetary policy (cut interest rates) to the economy. In other words, in the month of July, Australian government was confident that its monetary policy in the previous two months had contributed to stability of the economy. In this way, monetary policy can be said to have a general role of ensuring macroeconomic stability in the economy (Glynn, 2012).
Besides, monetary policy has been linked to low inflation, steady economic growth, balance-of-payment equilibrium, and interest and exchange-rate stability (Hossain, 2012).