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Subject Code : ECON1007
Country : Australia
ECON1007 Macro Economics RBA Case Study Aggregate Expenditure Model Economics Assessment Answer
Assessment Task:

Weak jobs situation calls for more RBA, government action to lift economy

The cavalry is already riding to support Australia’s flagging economy in the shape of recently delivered income tax cuts and reductions in interest rates in June and July. If news this week of further downgrades to the global growth outlook by IMF are not cause for added concern, data on the domestic front should spur doubt.

Job vacancies for skilled workers advertised online posted a sixth straight month of decline in June. Vacancies dropped 6.7 per cent. That’s not good news for the Reserve Bank which has set itself the task of lowering the unemployment rate to 4.5 per cent, from 5.2 per cent now. While more time is needed to see if lower interest rates and increased cash in the pockets of consumers will lift the economy, there is a sneaking feeling it won’t be enough.
Westpac chief economist Bill Evans this week forecast that the RBA would cut interest rates again in October and February, taking the official cash rate down to 0.5 per cent from 1.0 per cent now, pointing to the problem of softness in the job market.
RBA governor Philip Lowe is likely to intimate that further action on interest rates remains on the table when he speaks in Sydney today. Mr Lowe’s most recent guidance was that further cuts would be delivered “if needed”, suggesting a pause in the easing cycle for now. That’s still the case, but the period spent on the sidelines might not be that long.
Josh Frydenberg is also unlikely to escape the reality that more fiscal stimulus will be required to stave off rising unemployment and talk of recession. Andrew Boak, chief
economist at Goldman Sachs for Australia and New Zealand, said the budget stimulus rolled out thus far needs to be tripled if full employment is to be reached.

He estimates that income tax cuts and infrastructure spending will give GDP growth a tailwind of 0.5 percentage points in 2019-20, enough to shave only 0.1 percentage points off the unemployment rate. Yet, in the period ahead, a more concerted joint effort by the government and the RBA to lift the economy looks increasingly unavoidable.

AIMS AND OBJECTIVES OF MACROECONOMICS ASSIGNMENT
The assessment is primarily designed to advance your understanding and application of economic theory to real world situations. Particular attention is given to using particular models (i.e. AE model and static/dynamic AD/AS models) to analyse real world scenarios.

ASSESSMENT CRITERIA
Judging the quality of submitted material requires some judgment by academic staff. Rather than a simple formulaic approach, markers combine a number of elements to judge the quality of an assignment. In broad terms, assessment of your assignments will take into account:
Relevance of your answer to the question (Did you answer the question?)
Did you use a model and graphical representation to analyse the question?
Clarity of expression (Is it written well?)
Logical planning and sequence (Does the argument make sense?)
Did you provide theoretical support for the arguments used?
Was the question answered fully or only in part?
Where appropriate, were sources properly cited and referenced?
Overall presentation, including correct grammar, spelling and punctuation (Is the presentation of professional quality?)

Questions:

Qu. 1(a) Use the aggregate expenditure (AE) model to outline the potential effects of “recently delivered income tax cuts and reduction in interest” on economic output and (un)employment. In your answer, make sure to discuss the linkages in stimulating change and the equilibrating process of moving to a new macroeconomic equilibrium output.

Qu. 2(a) What is meant by the term ‘full employment’ in the statement, “the budget stimulus rolled out thus far needs to be tripled if full employment is to be reached”. In your answer, explain whether this means zero unemployment.

Qu. 2(b) Use the static AD-AS model to describe the situation where the budget stimulus is triple the amount as advocated by the chief economist of Goldman Sachs on macroeconomic equilibrium output and (un)employment. In your answer outline your assumptions.

Qu. 3 Use the dynamic AD-AS model to describe a longer run scenario where the government is trying to achieve full-employment through a variety of stimulus measures but were incorrect in their estimation of the major parameters determining long run full employment equilibrium.
In your analysis, discuss the implications of an incorrect prediction by the government in effecting their policy on equilibrium output and (un)employment.

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  • Uploaded By : Mitchell Lee
  • Posted on : October 12th, 2018
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