ECON 1012 University of Adelaide College Aggregate Money Supply and Aggregate Money Demand Paper

Description

ourse Learning Outcomes: 2 & 3Topic/s of Primary Focus: Macroeconomic FundamentalsAggregate Supply and Aggregate DemandMoney and Inflation(May also include content from previous topics.)For this assignment, you will refer to the ReserveBank of Australia’sOctober Monetary Policy Decision media release, available at the below link:https://www.rba.gov.au/media-releases/2021/mr-21-22.htmlThe minutes of that meeting may also be of use: https://www.rba.gov.au/monetary-policy/rba-board-minutes/2021/Task:For this assignment, you are asked to provide your own analysis of RBA’s October Monetary Policy decision. This must be in your own words, and reflectyou own understanding and application of course content.As part of this analysis, ensure that you include and focus on the following:•The reasons for the RBA’s decision, including reference to various economic variables and what they indicate about the state of the economy andwhat policies might be appropriate.•What the policy position, particularly the main position around the cash rate target,means in terms of the RBA’s implementation, and how that is transmitted to impact economic activity.Makesure to use key terminology and course concepts where appropriate.Format:The format of your response should be an essay-style response.You do not need to spend as much attention on formal essay structure as you might for a persuasive or research-based essay. Instead you should focus on communicating your ideas in a clear and concise manner and making sure there is a logical flow of ideas and explanation.Word Limit:800 words (excluding diagrams and references)2 Diagrams:Whereyou use diagramsof course models, it is best if they arecreated by you. You could either draw them by hand and scan/photo them into your document. Or prepare them electronically. However,they shouldbe your own workto better reflect your understanding.If you wish to include diagrams or tables of datafrom other sources, you can also do that with clear and appropriate referencing.Referencing:This is not a research assignment. So you do not necessarily need to find other references. You should answer the question based on what you have learnt in the course and the linked RBA page/s.However, it is important that if you do take content directly from other sourcesincluding course materials, both quoting andparaphrasing, that you appropriately reference to show what is your own original thoughts and what ideasyou have borrowedfrom others.Please refer to the Academic Integrity Module within the course for further guidance and links regarding referencing, plagiarism, and academic integrity.Where referencing is used, itcan be in any standard style, so long as it is consistent. The Harvard referencing style is preferred, as it is the standard in Economics and is also common in Business disciplines.https://www.adelaide.edu.au/writingcentre/resource…-guidesAll submissions will be analysed with the assistance of Turnitin, checking for plagiarism against other students in the class and external sources

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Business Cycle Fluctuations
Business Cycle ????
• Business cycle: the tendency for real GDP to fluctuate?? around a
trend GDP, known as potential GDP
• What is potential?? GDP:= Yf
•
– Yf is known as potential ?? GDP and is where all inputs are used at their
sustained ?? capacity, including labour used at full employment
– Where GDP is at the highest level without causing inflation to accelerate ??
Temporarily ??? GDP can rise above or below GDP
• Yf is known as potential ?? GDP and is where all inputs are used at
their sustained ?? capacity, including labour used at full
employment
– When workers and other inputs are being used beyond normal capacity:
Real GDP > Potential GDP ? Positive Output Gap (expansionary gap)
– When workers and other inputs are being used below normal capacity:
Real GDP < Potential GDP ? Negative Output Gap (recessionary gap) The University of Adelaide College 2 Business Cycles Definitions • Business Cycle: The business cycle is the fluctuation (expansion and contraction) of output over time. • Recession ????: periods of the business cycle where output is falling. • Expansion????: periods of the business cycle where output is rising. © Playconomics, LHS 3 Australian GDP/capita The University of Adelaide College 4 The University of Adelaide College 5 Expansionary ?? gap • The amount of resources in the economy is limited. • When demand is too high relative to supply, – Demand for labour is very high; – Demand for office space is very high, causing rents to increase; – Demand for construction workers is very high, causing increasing housing and construction to rise • Therefore, when Y>Potential, this cannot be sustained??
and inflation will begin to accelerate??
• Therefore, our model predicts GDP will return to potential
GDP
The University of Adelaide College
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The University of Adelaide College
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Recession
• In a recession, demand for resources is typically low, so
– Factories are operating below normal industrial utilization rate ??
???
– Many office buildings are empty
– Unemployment is above the natural rate
• Under our model, inflation will soon fall causing GDP to
return to potential GDP
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Recession Definitions
• Technical Definition: 2 quarters of negative economic
growth
• Other definitions: GDP growth below trend ?this is what is
shown on our AD/AS diagram)
• Slowdown: GDP growth below trend
– Eg suppose trend growth for India is 7%, but this year it grows at 3%.
This is a slowdown.
Adapted from © Playconomics,
LHS
Stylised Business Cycle
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China slowdown or new trend?
Adapted from © Playconomics,
LHS
Identify the recession(s)
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Great Depression
Difference from Trend of GDP/capita
Above average growth
Below average growth
Avg Growth: 3.5%/yr
Since 2008: 2.5%/yr
© Playconomics, LHS
Business Cycles in the Model
Business Cycles in the Model
• We know the world is interesting:
– new firms open and old firms close
– consumers desire new products and services
– trading partners change how much they want to buy from
or sell to us
– governments change their priority areas of spending
• How do periods of positive and negative output gaps
appear in the model?
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Recession on diagram
• (1) Initially at potential
GDP, a
• (2) assume unanticipated
shock to AD, i.e., fall of
exports. AD shift to left
• (3) in super short run, prices
may be sticky and we move
to a’
• (4) eventually inflation rises
in SR and we move to b.
• (5) in LR, expected inflation
and nom W rise and we
move to c
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Expansion on diagram
• (1) Initially at potential GDP, a
• (2) assume unanticipated
positive shock to AD, i.e.,
increase of exports. AD shift to
left
• (3) in super short run, prices
may be sticky and we move to

• (4) eventually prices fall in SR
and we move to b.
• (5) in LR, expected inflation
and nom W falls and we move
to c
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Why does expected inflation change in
the LR?
Recession
Expansion
• When inflation falls below
expected in a recession, the
labour market in the LR lowers
its expected inflation rate due
to the weak economy and low
inflation, causing expected
inflation to fall
• When inflation rises above
expected in an expansion,
labour market in LR raises its
inflationary expectation to
cope ?? with higher demand
and expected inflation rises
• (Hint: given resources are
fixed, high demand in LR must
increase expected inflation).
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Business Cycle in Data
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Business Cycles in the Data
• Easy to see in the model when there is a recession.
What about in the real world?
• A recession can be more broadly thought of as a
period of reduced economic activity
• Simple statistical definition: GDP/capita falls for two or
more consecutive ??? quarters (shaded parts)
• Modern macroeconomists, central banks and policy
makers generally consider a variety of indicators ??
including:
– GDP
– Employment
– Real income
? Sales
? Industrial production ????
© Playconomics, LHS
21
% Change in Australian GDP/capita
Simple statistical definition of Recession
Recession? Slow down?
© Playconomics, LHS
Business Cycles and Long Time Periods
• LRAS curve is shown as vertical in the model
• However, as technology changes and innovations occur,
the same amount of capital, labour and land can
produce more ? LRAS in real world shifts right over time
• We avoid doing this in our course to simplify the model
(teachers: use China as an example to show LRAS increasing
over time)
© Playconomics, LHS
23
Business Cycles in Real World
• Instead of describing business cycles only as periods of
positive and negative growth we could also compare actual
growth to the trend of growth
• Periods of growth lower than average growth can be thought
of as slow-downs
• Take GDP/capita index from slide 5 and subtract the
trendline ???
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Trend v Actual GDP
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Difference from Trend of GDP/capita
Above average growth
Below average growth
Avg Growth: 3.5%/yr
Since 2008: 2.5%/yr
© Playconomics, LHS
Fiscal Policy
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Fiscal policy????
• Fiscal Policy: the government‘s use of increasing or
decreasing government expenditure or taxes to stimulate
?? or dampen ??economic activity.
• Fiscal policy can be used by the government to:
?
Stimulate ?? real GDP and reduce unemployment,
?
affect inflation, and
?
increase economic growth.
Fiscal Policy
Taxes (revenue)
• Income Tax
• Company Tax
• GST Tax (goods and
services tax)
• Other taxes (petrol,
cigarettes, alcohol get
higher taxes)
Government Expenditure
•
•
•
•
Health
Education
Public Infrastructure????
Military
Expansionary???? Fiscal Policy
• Used when the country is in a recession (LOW production,
low demand, high UE, low GDP).
• The government will increase spending (G) and/or
decrease taxes (T) to stimulate economic activity.
– Private economy is weak
– So the gov aims to boost demand (boost public demand)
• The purpose is to increase AD and move the economy
back to the full-employment level of output.
Expansionary Fiscal Policy
LAS
SAS
Price level
AD1
P3
P2
P1
AD2
Y1
Y2
Yp
AD3
Real GDP
10-31
Contractionary Fiscal Policy
• Used to control demand-pull inflation
.
• The government will decrease spending (G) and/or
increase taxes (T) to contract economic activity.
• The purpose is to decrease AD and move the economy
back to the full-employment level of output.
Contractionary Fiscal Policy
LAS
Price level
SAS
P1
P0
AD1
AD2
Yp
Y1
Real GDP
10-33
Pros and Cons of Fiscal Policy
• Advantage: changing G directly shifts AD (rather than
influencing IR and then having C and I change)
• Disadvantages: Fiscal policy can be slow to have an effect:
– Bureaucratic ??? and parliamentary process?????
– Many policies take years to have their full effect, eg building an
airport.
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Other interesting slides they don’t
have
Great Depression
SCHOOL OF ECONOMICS
ECON 1012 PRINCIPLES OF ECONOMICS
TOPIC 11 – EMPLOYMENT AND UNEMPLOYMENT
© Playconomics, LHS
This Topic’s Outline
• Employment and Unemployment (Chapter 11)
– Measuring Employment and Unemployment
– Problems of Unemployment
– Types of Unemployment: Seasonal, Frictional, Structural &
Cyclical
• Tutorial Assignment
– This week’s questions are due Friday at 6pm
– Questions for next week are posted, due next Friday at 6pm
• Playconomics
– There are no ‘macro’ islands to play so keep working through
S&D, Equilibrium, Perfect Competition and Monopoly … then
International Trade
2
© Playconomics, LHS
Measuring Employment and Unemployment
Definitions (from Australian Bureau of Statistics)
• Employed: Civilians aged ? 15 who worked ? 1 hour in the last
week for pay or profit or payment-in-kind or for a family business.
• Full-time & Part-time Employment: Workers are full-time if they
work ?35 hours/week and part-time if they work Pd)
Let this small country open up to trade:
• What happens to P?
• What quantity do domestic producers supply?
• What quantity do domestic consumers demand?
• How much is exported?
• What happens to domestic CS?
• What happens to domestic PS?
• What happens to domestic TS?
• What are the gains from trade?
• Where do the gains come from?
9
An Exporting Country (Pw>Pd)
Say Pd = $10 and Pw = $15
P* = Pd = $10
Adapted from © Playconomics, LHS
P* = Pw = $15
10
Adapted from © Playconomics, LHS
Adapted from © Playconomics, LHS
© Playconomics, LHS
An Importing Country (Pw
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Explanation & Answer:
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macroeconomic fundamentals

Aggregate Money Supply

Aggregate Money Demand

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