QUESTION
Answer : 1
(i). Full employment equilibrium is that level of an economy of a country where the Net national Income is at a level where there employment for everyone who wishes to work. This can be explained as the perfect equilibrium between the demand and supply of employment.
Price Level Aggregate supply curve
Equilibrium
Aggregate Demand curve
Real GDP
From the above figure it can be understood that when the aggregate demand and supply meet at some point that is the equilibrium level. When the expectations of the buyers and sellers about the price levels match with the actual price then equilibrium is attained. At this level the economy is said to be full employed.
(ii).Supply shocks causes instability in the economy of a nation. When the world crude oil prices increases this will affects most of the economies across the globe. This will automatically increase the price levels for firms where oil is a major item to carry out their production. This will lead to increase in price levels as firms would try to stabilise their profit margins due to such price rise. The demand will come down as the oil price rise also leads to reduction in GDP.
LRAS(There is an inward shift in the
aggregate short supply curve due to oil price rise)
Price Level
P2
P1 SRAS2
SRAS1
Aggregate demand curve
Y2 Y1 Yfc GDP
The effects of such supply shocks will depend on the type of the economy prevalent in a nation. If an economy is mostly manufacturing oriented then the price rise of oil will have an adverse impact while for service oriented economies it may not have much impact.
(iii). The government can reduce the interest rates so that the spending is increase and likewise it will also prevent from sudden collapse of the output levels drastically and also the employment levels can be stabilised much more.
Answer :2
(i)Open market operations refer to the activities that are undertaken by the reserve bank of Australia in order to buy and sell government bonds for controlling the interest rates. The inflation is controlled by either increasing or decreasing the reserve money kept by banks with the central bank. The reserve bank will increase the interest rates during the times of high inflation. These interest rates are changed by bringing about a change in the money supply. This in turn is done by the reserve bank by selling or buying the securities from banks.
In case of inflation the money supply has to be decreased and for this the Reserve bank will sell securities to the banks. This will lead to a flow of money from banks to reserve bank and thus the money left with banks is reduced that is the lending power of the banks is cut down. This automatically reduces the money supply and this increases interest rates. When the money supply is reduced and the interest rates go up, the spending power is also reduced and this will curb the inflation prevalent in the economy.
(ii)Effect on the money market:
Interest rate Money supply
Money Demand
Quantity of Money
Quantity fixed by Reserve bank
The equilibrium in the market is achieved by adjusting the interest rates and the money supply is changed accordingly. If the interest rates are higher than the equilibrium then the people will hold money that is lower than that created by reserve bank. And due to this there is a tendency for the interest rates to come down. In case the interest rates go down then the reverse will be the scenario. Only at a given level of interest rates the money supply will be equal to the money held by the people.
Effect on consumption:
When there is a change in the money supply made by the reserve bank through the open market operations there is an impact on the spending power or the consumption pattern of the households as well as the firms.
Price Level
AD1 AD2 AD3
Quantity of output
The increase in the purchases of securities will lead to a shift in the aggregate demand curve from AD1 to AD2. Thus there is a increase in the income levels also which will automatically increase the spending power of the households leading to increase in their consumption pattern.
Answer 3
Fall in US interest rates:
Domestic Money Market
Interest rates S
I1 E1 S1
i E2 D
l1 l2 Quantity of Lending
If the Reserve Bank reduces the interest rates then it can have a direct impact on many other economic variables. When the cash rate is reduced and the open market operations are undertaken then there will be fall in the interest rates. This will in turn increase the consumption and investment. So, the households will start spending more and lending also will be much easier.
Decline in US RGDP:
Price Level AS AS1
Pe1 E1
Pe E
Pe2 E2
AD AD1
E e1 E2 Production (GDP)
A decline in the GDP may lead to the more exports of Australian commodities and the imports will reduce drastically. The reason is that the local made goods in Australia is much cheaper than importing from other countries. As a result the economy of Australia will do well and there will be increase in production and income levels too. This will lead to demand for labour and unemployment will also reduce as result of all these factors the exchange rate will appreciate.
Fall in general Price Level in US:
Price Market for Australian Dollar
S
0.45 E1
0.35 E2 D
D1
0.6 0.8
Quantity per day($)
When the price level falls in USA, this will affect the domestic market of the Australia. The consumers in Australia will now start using imported goods which will become cheaper as compared to their domestic goods. The price increases for the domestic goods. This will lead to lesser production and sales and also the demand will reduce drastically. With this the export market for Australia will have an adverse effect and the overall demand for the Australian dollar will decline leading to exchange rate depreciation.
2.The exchange rate of USD/AUD is expected to be 0.856 by end of 2012.
Reasons:
1. Offlate the pair of USD/AUD which had been trading at 1.035 has dipped to a great extent falling well below 0.979
2.The investors are looking for safer currency options due to the high volatility of the currency pair.
2. B
8.D
13.A
24.D
Question no:28 there is no figure 14.2 as mentioned. SO its not possible to check your answer.
30. D
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