General instructions for ECON2420 Assignment Two: Using the Right Model Well The Assignment tests your understanding and your ability to apply macroeconomic reasoning in its valid context. It is not a...

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General instructions for ECON2420 Assignment Two: Using the Right Model Well


The Assignment tests your understanding and your ability to apply macroeconomic reasoning in its valid context. It is not a mere copy-and-paste exercise.


Answers must be typed and in a normal font (e.g. Arial, Calibri, Times New Roman...) and in a standard size (preferably 11 or 12).


The word limits are reasonable, probably an over-estimate. If you exceed them, you have probably misunderstood the task and/or have included irrelevant material.


The document is designed for you to insert your answer into the space indicated. However, last- minute breakdowns in technology are possible, so you are permitted to upload a separate document, if questions are answered in the right sequence and it is completely clear which question and which part of the question your answer relates to. Of course, the world limits still apply.


Answer directly and clearly. Padding and irrelevance will lose marks, and more again if errors are included. There is nothing to gain by padding or irrelevance; you can only lose.


Do not waste space and words by defining basic terms; simply use them correctly.


Edit your answers both to avoid padding and to meet the word limits.


Standard abbreviations are allowed, but remember that C, I etc. have technical meanings (household consumption, private investment). Acceptable are M or MS for money supply, r for real interest rate, pi or π for the (%) rate of inflation, P for the price level of currently produced goods and services, Y and Y*, V for velocity of money, MP and FP, RBA, ESA (exchange settlement accounts), etc.


Diagrams may be hand-drawn, but this assignment is designed not to require drawing diagrams, and you are discouraged from doing so. Put things into words instead. (E.g., ‘The AD line shifts to the left resulting in a short-term slump and a long-run decline in inflation.’) If you really want to include a diagram, it is possible that you have misunderstood the question. However, if you believe you need to draw one, simply insert a photograph or screen capture into document that you upload.


For Sets One, Two and Seven, indicate whether each of these statements is trueT,falseF,or ‘it depends’#. E.g.highlightyour selection:T F #.OrT F#.


Explainwhy each is true or false, or in what significant circumstances it is true and/or in which significant circumstances it is false.


Set One [6 marks]


Consider these graphs:


i) The graphs above show that governments create fluctuations (or cycles) by running fiscal surpluses and then deficits.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


ii) Fiscal demand-stimulus in Australia today would be greater for a total tax cut of $1b.to low-income earners than a total tax cut of $1b. for high- income earners.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


iii) In short-run equilibrium, leakages equal injections. So T=G and the budget is balanced.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


2


Set Two (4 marks)


i) After the fiscal stimulus in the latest Budget, the federal government is encouraging households to spend their tax cuts on consumer goods rather than saving them. A Keynesian explanation is that saving is a leakage and only the imported component of consumption spending is a leakage.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


ii) Policy-makers rely more on fiscal stimulus in a slump when interest rates approach zero.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


3


Set Three [6 marks]


Refer to a speech by Glenn Stevens, ‘Inflation, Deflation and All That’, 4 December 2002.


https://www.rba.gov.au/speeches/2002/sp-dg-041202.htmlorhttps://www.rba.gov.au/publications/bulletin/2002/dec/pdf/bu-1202-3.pdf


In your answer, you may summarise, paraphrase or quote extracts from his explanation.


i) “Harmful deflation typically occurs in parallel to developments in prices for assets and balance sheets.” [Limit 40 words: 2 marks]


Explain:


ii) What does he mean by ‘good deflation’? [Limit 40 words: 2 marks] Answer:


iii) Stevens compares two scenarios in Graph 6. He states that deflation is not a problem, provided it is temporary. Explain his argument. [Limit 40 words: 2 marks]


Answer:


4


Set Four [4 marks]


i) When making a crucial decision, did GLS Shackle recommend the use of scenarios to help identify the most likely scenario so that decision-makers can focus on it and make plans on this assumption? Explain why, or why not. [Limit 40 words: 2 marks]


Explanation:


ii) Does Keynes argue that long-term expectations depend only waves of irrational psychology? If so, give one argument or point he uses in support. If not, state what he did argue. [Limit 40 words: 2 marks]


Explanation/answer:


5


Set Five: Miscellaneous (6 marks)


i) This year, COVID-related disturbances have reduced Australia’s net migration to about zero, instead of about 150 000, and construction is forecast to remain low over the short term. What principle of macroeconomics explains why a steady level of net investment in the construction of new offices, houses, retail centres etc. depends significantly on the steady growth of population. [Hint: look at the lecture recording for 24 Sept.] [Limit 5 words: 1 mark]


Answer:


ii) During recent decades, state how the slope and position of Australia’s Phillips Curve has changed [Limit 20 words: 1 mark]


Answer:


iii) What happens to Australia’s measured productivity while largescale investment in new mines is happening? Why? [Limit 20 words: 1 mark]


Answer:


iv) Over the last 30 years, does the quantity theory explain inflation over the trend in Australia? [Limit 20 words: 1 mark]


Answer:


v) During Australia’s mining boom this century, did Australia regularly achieve a positive balance of trade? If yes, state one year when it did not. If no, state one year when it did. [Limit 20 words: 1 mark]


Answer:


vi) Why does it matter for the price of assets that the stock of existing assets is much greater than the flow of newly produced assets?
[Limit 20 words: 1 mark]


Answer:


6


Set Six (4 marks)


Some economists argue as follows:


Suppose that Y=Y* currently. An increased rate of saving from income (a lower rate of consumption) reduces interest rates by raising the supply of savings that can be borrowed. Investors borrow the extra savings, and investment rises to replace the decline in consumption. Y remains at Y*.


Evaluate this argument. [Limit 80 words: 4 marks] Answer:


7


Set Seven (10 marks)


i) A rise in planned inventories is a leading indicator of an expansion.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


ii) A rise in the unemployment rate is a concurrent indicator of a recession.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


iii) Published data show that during the previous quarter (3 months) employment has risen that demand-pull inflation is rising. These indicators suggest that the growth of GDP is likely to increase in this or the next quarter.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


iv) A good leading indicator of changes in the rate of inflation during economic cycles is the change in the growth rate of the money supply.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


v) In Australia the index of consumer sentiment is usually a leading indicator.


IndicateT F #
Explanation: [Limit 40 words: 2 marks]


8


Set Eight (10 marks)


Here are EIGHT (8) key diagrams used in this course. Pick the correct diagram or select the correct pair of diagrams to respond to each item below.


It is possible that any one diagram is the correct answer more than once. It is possible that any one diagram is never the correct answer.


















Diagram 1



Diagram 2



Diagram 3



Diagram 4



Diagram 5



Diagram 6



9











Diagram 7



Diagram 8



i)(4 marks)Suppose that monetary policy is tightened.


This is shown in Diagram____.


Monetary policy affects interest-sensitive expenditure. Select ONE leakages and injections diagram _____, and explain why you selected one and not the other.


Explanation [Limit 60 words]:


ii)(2 marks)Suppose there is a rise in the confidence of investors (Irises). Using the relevant curve in the IS-LM framework, select one diagram that shows this


best.
This is shown in Diagram__.


Using the leakages and injections approach, choose one diagram that shows this best.


This is shown in Diagram__. No explanations are required.


iii)(4 marks)At the turn of the century there was the Y2K scare. People feared that the bank computers and ATMs could fail, and they withdrew cash. Central banks responded by increasing the supply of cash.


Select the one diagram that best represents these events.


Explain how this diagram represents these events, and explain why the central banks increased the supply of cash.


Explanation [Limit 60 words]:


ASSIGNMENT ENDS



Answered Same DayOct 25, 2021ECON2420University of Queensland

Answer To: General instructions for ECON2420 Assignment Two: Using the Right Model Well The Assignment tests...

Soma answered on Oct 28 2021
144 Votes
Set One [6 marks]
1.
i) The statement is F (False)
The above graph shows the government budget balance was running a deficit and then a fiscal surplus. The fiscal surplus is reflected by the positive share of nominal GDP where as the when
the balance is negative the government has a deficit.
ii) The statement is T (True)
Australian fiscal demand stimulus is targeted to the low-income earners. A tax cut for the lower income earners would likely to boost the aggregate demand and spur the economic growth.
iii) The statement is T (True)
Total Leakages = Total Injections
C + I + G + = C + S + Net Taxes
I +G = S+T
I-S= T-G
If I=S, then only T=G
When injections and withdrawals are equal to each other then the total expenditure equals to total income and the economy is said to be in equilibrium.
Set Two (4 marks)
i)
Total leakage in an open economy: C + I + G + (X-M)
Total injection is an open economy: = C + S + Taxes
C + I + G + (X-M) = C+S+T
S = I + (G – T) + (X – M)
In Keynesian explanation, savings in an injection, not a leakage.
ii) The statement is T (True)
Lower interest rate or near zero interest rate would reduce cost of borrowing, boost the consumption and investment expenditure, stimulate the aggregate demand thereby spur economic growth. Thus, policy makers rely more on interest rate to stimulate the aggregate demand.
Set Three [6 marks]
i) Deflation is harmful when it occurs aftermath of a boom that is accommodated with huge run up debt based on very optimistic expectations. When the expectations are not met then asset prices fall with a temptation to shore up their balance sheet.
ii) Some sort of deflation is good especially when it occurs after any technological breakthrough. Due to exceptionally strong growth in productivity, the income, profit and other economic activities expand despite the fall in price level.
iii) If deflation persist for a longer period it becomes harmful for the economy. A temporary drop in price level, even below the zero level, if caused by a short-term economic weakness then it would not be a worrying concern. (Stevens, 2002)
Set Four [4 marks]
i) Shackle's ‘Potential Surprise Theory’ (PST) has vast implications that provide theoretical support to scenario planning. The approach has bigger contribution to the use plausibility rather than probability and its focus on making alternatives on deterministic...
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