The paper "Australia's Unemployment Rate" is an outstanding example of a micro and macroeconomic assignment. A step taken by the central bank to reduce interest rates is termed as monetary policy. One of the instruments deployed by the central bank is open market purchases that often have the effect of increasing money in circulation consequently reducing interest rates. As a result, aggregate spending and investment demand rise up. Due to the multiplier effect, real GDP goes up. Figure 1: a model of an economy If the economy is initially at equilibrium Y1, a reduction in interest rate, say from 10% to 6%, will shift the aggregate expenditure curve from AE1 to AE2.
This increase in expenditure is also shown by an increase in aggregate demand from AD1 to AD2. In the short run, income will increase as interest rate increases. However, the income will stabilize in the long run, Y2. An increase in private domestic investment spending increases the aggregate expenditure, which in turn raises real GDP in the short run from Y1 to Y2. Income, however, stabilizes at Y2 in the long run as shown in figure 1. If international prices increase, more goods would be exported.
This has the effect of increasing aggregate expenditure. The rising aggregate expenditure is also associated with rising short-run income. This income will be stable in the long run at Y2. A depreciating currency means that domestic goods are cheap hence; the economy will export more goods. Net exports will therefore increase in the short run hence raising aggregate expenditure. This has the impact of rising income, which however remains stable in the long run at Y2.
A fall in real estate prices means that the wealth of individuals has declined. Consumption will therefore decrease and shift AE downward. Eventually, GDP will fall by multiple of consumption. Where terms of trade in a country improve, net exports tend to increase. Since net exports determine aggregate expenditure, improving terms of trade increases aggregate expenditure, which eventually expends real GDP from Y1 to Y2. Income will stabilize in the long run as shown in figure 1. Question 2 Scott (2013) presented an article highlighting the government’ s rejection of spending cuts that were intended to attain a surplus in the budget.
Australian Bureau of Statistics. (2013, Jan 17). Australia's unemployment rate increased 0.1 percentage points to 5.4 percent in December 2012. RBA. Retrieved from http://www.abs.gov.au/ausstats%5Cabs@.nsf/mediareleasesbyCatalogue/46DF E12FCDB783D9CA256B740082AA6C?Opendocument.
Battellino, R. (2010, August 20). Twenty Years of Economic Growth. Reserve Bank of Australia. Retrieved from http://www.rba.gov.au/speeches/2010/sp-dg- 200810.html.
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Frisch, H. (1983). Theories of Inflation. Cambridge: Cambridge University Press.
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Scott, J. (2013, Jan 19). Australia Rejects Spending Cuts to Reach Surplus, Swan Says. Bloomberg L.P. Retrieved from http://www.bloomberg.com/news/2013-01- 18/australia-rules-out-spending-cuts-to-reach-surplus-swan-says.html.
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