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Simple keynesian model
Course:- Microeconomics
Reference No.:- EM13430




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1. Consider a macroeconomy was initially at equilibrium level of real GDP.  Using an aggregate supply diagram and aggregate demand or model of the economy, graphically explain and discuss the short-run and long-run effects of the following events upon the economy:

(a) The Central Bank within the economy reduces interest rates.

(b) There is an increase in private domestic investment spending.

(c) An increase in international oil prices.

(d) A depreciation in the foreign exchange rate value of the economy's currency.

(e) A fall in real estate prices in the capital cities of the country in question (hint: think of the effect upon one's wealth  level)

(f) The country main exports rise in price while the goods the country imports from abroad fall in price ie its terms of trade improves in the country' favour

2. Collect an article from an Australian newspaper that relates to the current Australian macroeconomy.

3. Many people find the current unemployment figures for Australia a bit unbelievable. Why is this? Why might the official statistics be inaccurate.

4. Using the simple Keynesian (J-W) model to assess the implications for equilibrium GDP and the level of savings of an increase in the savings function. What happens to the level of savings? What would happen to equilibrium income if there is a sustained rise in private investment spending?

5. State the difference between:

- Money multiplier and income expenditure multiplier.

- between the interest rate and the exchange

- between the balance of payments deficit and the budget 

-between the trade deficit and net foreign debt

6. Assuming that the money market is initially in equilibrium, trace through the effects of a rise in the money supply on the money market on the interest rate and also on output, employment and the price level.

7. Distinguish between ongoing demand pull and ongoing cost push inflation. Carefully draw them.  Why might it be difficult to establish the extent to which a given rate of inflation is either demand pull or cost push?

8. Using the AD-AS model show how the Australian economy has continued to expand year after year since 1991. What are the macroeconomic dangers facing Australia? When commentators suggest that the Australian economy is a two speed economy what are they referring to?

9. The central bank (the Reserve Bank of Australia) decided to implement an expansionary policy action. What would you expect to happen to the nominal interest rate, the real interest rate and the money supply? Under what economic circumstances IS this type of policy action be appropriate? What dangers might ensue from it

10. Why has the Australian dollar soared over the last five years? What are the domestic economic implications for producers and for consumers?




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