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Global Economy - Question 1

(a) As a response to the recent COVID-19 outbreak, the Commonwealth Government put in place lockdown restrictions. Using the dynamic AD-AS framework, analyse and demonstrate the impact of the COVID-19 pandemic on the level of output (or real GDP), unemployment, and inflation

The implementation of lockdown restrictions will result in increased unemployment due to restrictions on industries which will lead to increased level of unemployment in the economy. Moreover, as more and more people will get unemployed the household income will decrease, along with the aggregate demand because people will not have enough money to buy products and services.

The below mentioned diagram illustrates the impact of reduced aggregate demand on real GDP. As the aggregate demand falls the prices of the goods will decrease to account for the decreased demand and will lead to reduced real GDP.

Moreover, high cyclical unemployment will occur as the equilibrium point of the demand and supply gets more and more away from the potential GDP. This is so mainly because the output is substantially to the left of the potential GDP on the dynamic ad as model, as at the E1 equilibrium point.

(b) In response to the COVID-19 pandemic, in March 2020 the Commonwealth Government announced a fiscal stimulus which included income support for workers and businesses hit by the pandemic. Using the same dynamic AD-AS framework used in part (a), explain and illustrate the effect of the fiscal stimulus on the level of output (or real GDP), unemployment, and inflation.

The economic stimulus package announced by commonwealth government is aimed to improve the aggregate demand by supporting household and business income. In theory, the stimulus package should increase the aggregate demand which will lead to increased production, better employment and increased level of output. As the aggregate demand will increase, the supply of goods and services will also increase due to the law of demand and supply which will help to counter the detrimental effect of lockdown restrictions on the Australian economy. Increased aggregate demand will lead to a rightward shift in the demand curve which will in turn increase the price levels and encourage the industries to increase supply. In order to do so, industries will have to increase the level of input items such as raw materials and labour, which will support the employment and will most likely increase the employment level. Furthermore, this can lead to inflationary pressure because of the increase the in input prices due to high demand of the same. The situation can lead to a leftward shift in the aggregate supply curve. The shift of SRAS to the left will also result in an increase in the price level at the original equilibrium E0 to a new equilibrium at E1. Simply put, the increase in input prices will be passed along in terms of increase prices of outputs.

(c) Using the same dynamic AD-AS framework used in part (b), show what the impact of the fiscal stimulus would have been if Australia had no interactions in trade or finance with other economies (i.e. if Australia was a closed economy).

One of the most pertinent differences among the effects of fiscal stimulus package in an open versus closed economy is that some of the private spending which is induced by the higher flow of income to imports rather them locally produced outputs. This means that an open economy tends to facilitate the leakage of some part of the stimulus to foreign nations in terms of imports. This reduces the multiplier and consequently results in a decreased level of “bang from the buck” from the said stimulus package. Therefore, other things being equal, if Australia was a closed economy the stimulus package will have a better effect on domestic income and will support local industries by limiting the extent of foreign leakages.

Global Economy - Question 2

Bank’s reserve and checking account deposit will rise by $5,000

M1 is defined as the total sum of the currency which is held by the public, along with the transaction deposits at institutions. With an increased in the deposit, the accompanying double entry book keeping is credit customer deposit and debit cash. Now, the cash is effectively held back by the bank that’s why it is not included in M1, however the deposit of customer which was created because of the cash deposit is, so there is no change. This is so since the question does not ask for the immediate effect of the deposit.

Moreover, the bank has to hold $5,000 of the required reserves, which leaves $4,500 of the excess reserves for loans. Therefore, the bank will increase the checking account of the borrower by $4,500.

Global Economy - Question 3

a) Cost of basket in 2013(Base year) = sum of (Price in 2013 * Quantity in 2013)

= (8*12) + (4* 20) + (10*25) + (30 * 24)

= 96+80+250+720

= 1,146

Cost of basket in 2018 =

= (10*14) + (6*30) + (12*30) + (35*20)

= 1380

Cost of basket in 2019 =

= (15*5) + (8*40) + (14*25) + (40*22)

= 1625

Consumer Price Index (CPI) 2018

= Cost of market basket 2018/Cost of market basket 2013 (Base year) * 100

= 1380/1146*100

= 120.4

Consumer Price Index (CPI) 2019

= Cost of market basket 2019/Cost of market basket 2013 (Base year) * 100

= 1625/1146*100

= 141.7

Inflation rate between 2019 and 2018 =

= CPI in 2019 – CPI in 2018/CPI in 2018 * 100

= 141.7 – 120.4/120.4 * 100

= 41.7

b) Unemployment rate is the share of the labour force which is without a job and is represented in percentages. Workers are regarded as unemployed if they do not have work despite the fact that they are willing and able to do so. It provides insights into the spare capacity of an economy and of its unused human resources.

Unemployment rate

= Unemployed people/Total labor force * 100

= 0.831/11.965+75.000 (in millions)*100

= 0.831/86.965*100

= 0.9 per cent

Labour force participation rate is calculated by dividing the labour force by the total working age population. It is the measure to evaluate the total working age population in an economy and refers to the population which is in search of a job or is currently employed. It does not include people who are not actively looking for job such as homemakers, full time students or people over the age of 64 etc.

Labour force participation rate

  • = Labour force/Civilian non-institutionalized population
  • = 11.965+0.831/0.358+0.831+11.965
  • = 12.796/13.154
  • =0.9

Moreover, in case an economy is recovering from recession the unemployment rate tends to decline as industries demand more labour in order to increase production. This happens as while an economy is recovering from recession, its aggregate demand increases which encourage the industries to increase production which in turn requires more input. A more labour is demanded by industries the unemployment rate declines.

c) The nominal GDP is the value of all the final services and goods that are produced in an economy during a given year. It is expressed in monetary terms and takes into account the changes which occurred for all services and goods in a given year.

Nominal GDP in 2017

= (5,000*300) + (500*20,000) + (100*2,000)

= 11,700,000

Nominal GDP in 2018

= (6000*250) + (600*22000) + (250*2020)

= 15,205,000

The real GDP, on the other hand, is the value of services and goods that an produced in an economy in a given year, while accounting for inflation.

Real GDP in 2018

= (6000*300) + (600*20000) + (250*2000)

= 14,300,000

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Global Economy Assignment Help

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