BEA121 Economic Policy In Action Assignment

Qu.1 Australian Economic Performance 50 marks

Find the Australian Bureau of Statistics ABS 5204.0 Australian System of National Accounts 2021-22 on the internet, on the "Data Download" tab.

click the link to download the MS Excel spreadsheet for

• Table 1. Key National Accounts Aggregates. and From Table 1 Collect for Jun-1961 to Jun-2022:
• GROSS DOMESTIC PRODUCT: Chain volume measures - Percentage changes ;
• GDP per capita: Chain volume measures - Percentage changes ;
• These are all real figures as Chain volume measures = real

1. Calculate the long run average of real GDP growth and real GDP per capita growth (in %) from June-1961 to June-2022.
   Compare the results and explain what the gap or difference between real GDP growth and real GDP per capita growth represents assuming that %?(GDP/POP) = %?GDP – %?POP.*(10 marks)
2. Produce a chart of real GDP annual growth and real GDP per capita annual growth (in %) from June-1961 to June-2022. Ensure it has a title and all axes are labelled and dates display correctly.
   How has the Australian economy performed compared to its long-term average real GDP growth and average real GDP per capita growth over the last 5 years?(20 marks)
3. Produce a table showing the average of real GDP growth, real GDP per capita growth and the difference between the two for each of the five decades 1970s to 2010s (all in %). [1970’s=1970 to 1979, 1980’s=1981 to 1989 etc.]. Assume that %?(GDP/POP) = %?GDP – %?POP.
   In which decade did Australia achieve the greatest economic growth? Compare the performance of Australia’s economy in the 2000s to the 2010s. (20 marks)

Qu.2 History of Macroeconomics 30 marks

1. Explain the different views about trade held by Merchantalists and Classical economists (such as David Ricardo).(10 marks)
2. Explain why and when the Keynesian school of macroeconomics rose to prominence and explain its solution to the macroeconomic conditions at the time.(10 marks)
3. How do the Keynesian and Classical views on prices and markets affect their views on government intervention in the macroeconomy?(10 marks)

Qu.3 Australian Keynesian Model 70 marks

1. Use the table below and the concept of inventories to explain how aggregate expenditure (AE) was less than production (GDP) in 2022 and explain how production increased by more than expenditure from 2021 to 2022?.(10 marks)
2. Use the following table to answer the questions below.
   • Calculate and interpret the marginal propensity to consume (mpc) and the marginal propensity to import (mpi).
   • Calculate and interpret the size of the Open Economy Multiplier .
   • Explain why the multiplier effect occurs. .(10 + 10 + 10 = 30 marks)
3. Use the following table to answer the questions below.
   • In the absence of any other changes (ceteris paribus), what does the open economy Keynesian model suggest that the change in real GDP should as a result of the change in real Autonomous Government Spending? Compare it to the actual change in real GDP from 2021 to 2022.
   • What does this suggest about either the derived Keynesian Multiplier or the measure of autonomous spending used in the analysis? .(15 + 15 = 30 marks)

Qu.4 Exchange Rates 50 marks

On the 15th of February 2021, the Australian Dollar (AUD) was worth 0.78 US Dollars (USD), the highest it had been for four years, but then fell to 0.61 by the 10th of October 2022. For, example see https://tradingeconomics.com/australia/currency

1. Explain using the example of an Australian firm that sells cheese to the USA for $100 in Australian dollars (AUD), why the fall in the AUD-USD exchange rate is beneficial for Australian exporters.(5 marks)
2. Explain using the example of Australian firms that import trucks from the USA for $100,000 each in USA dollars (USD), why the fall in the AUD-USD exchange rate is harmful to Australian importers. (10 marks)
3. How does the depreciation of the Australia Dollar affect inflation in Australia? (5 marks)
4. Explain whether the fall in the AUD-USD exchange rate is likely to increase or reduce Australia’s Current Account surplus. Explain whether the fall in the AUD-USD exchange rate is likely to increase or reduce Australia’s GDP.(10 marks)
5. Compare the official interest rates of the United States and Australia from Feb 2021 to October 2021 to provide an explanation of the fall in the AUD relative to the USD over this period with some evidence.
   For example see: https://tradingeconomics.com/united-states/interest-rate
   and: https://tradingeconomics.com/australia/interest-rate Note that the compare feature on tradingeconomics.com is misleading. Ensure you examine the actual level of interest rates.
   (10 marks)
6. The AUD appreciated against the USD briefly after the 7th of June RBA announcements of interest rate increases but depreciated after the 5th of July announcement. Use this table from that from www.tradingeconomics.com that shows the Actual and Anticipated (forecast) interest rate increases from the RBA to explain why this occurred. (10 marks)

Qu.5 Balance of Payments 80 marks

Some countries such as Timor-Leste have current account deficits while others such as Australia have current account surpluses.

1. What does the current account measure? What does Timor Leste’s negative current account indicate about its net exports and net income? What does Australia’s positive current account indicate about its net exports and net income?(15 marks)
2. What does the capital account measure? What does Timor Leste’s negative current account indicate about its capital account, capital flow into and out of the country, saving and investment? What does Australia’s positive current account indicate about its capital account and capital flow into and out of the country, saving and investment? (25 marks)
3. Explain why the level of net foreign debt increasing or decreasing in Timor-Leste and Australia.(10 marks)
4. Explain why rising government net foreign debt is more of a concern than a rising private net foreign debt.(10 marks)
5. Draw two loanable funds markets, one for Timor-Lest and one for Australia. Assume that both countries can borrow or invest at a world real interest rate of 2%. Draw the demand and supply for loanable funds for each country, so that the loanable funds from or to the world are consistent with their capital account balances. [Hint: look at See WS05-Qu11](10 marks)
6. If Timor-Leste can freely access capital (or loanable funds) from world capital and financial markets at a real interest rate of 2% (as in part e above) why is the Twin Deficits Hypothesis not a concern? If Timor-Leste could not access any capital from the world capital and financial markets, explain why government budget deficits, may slow down the Timor-Leste economy.(10 marks)

Qu.6 Money 50 marks

1. Use the Money-Price Equation and the table below to calculate the Velocity of Money in March 2003 and March 2023. What does this suggest about Fisher’s view about the velocity of money?
2. Now using the table and your answer above calculate the percentage growth in Nominal GDP (PY), Real GDP (Y), Prices (P), Money (M) and the Velocity of Money (V), that is %?Y, %?P, %?M and %?V over the whole 20 year period. (10 marks)
3. Convert the 20-year growth rates (g20) from ii. for Y, P, M and V to an equivalent 1-year growth rate using the following formula g1 = (1+g20)^1/20-1. (10 marks)
4. Using the 1-year (or annual) growth rates in part c to calculate %?Y x %?P and %?M x %?V and report the modified (2nd order) %? of the money-price equation, given by:
   %?Y + %?P+ (%?Y x %?P) = %?PY = %?MV = % ?M + %?V + (%?M x %?V). (10 marks)
5. Given your answer in d. above, explain why the large increase in the money supply did not result in a huge increase in prices as Monetarists such as Fisher suggest.(10 marks)

Qu.7 Bonds, Interest Rates and Monetary Policy 70 marks

Suppose that Australian Treasury Bonds issued for $1000 that have one year to maturity, have a coupon rate of 2.50% are currently trading for $984.63.

1. What is the current annual rate of the bonds (or yield) and explain why this is also the nominal annual interest rate in the economy and the cash rate? (10 marks)
2. Explain why Australian Treasury Bonds with 10 years to maturity currently have an annual yield of about 3.9%, below the current nominal interest rate. (10 marks)
3. The yield curve for US Bonds “inverted” in 2022 (see https://economictimes.indiatimes.com/markets/stocks/news/u-s-yield-curve-inverts-again-what-is-it-telling-us/articleshow/92688482.cms). What does this mean and why is it important? (10 marks)
   If the RBA wishes to raise nominal interest rates from their current rate to 4.35%,
4. Should the RBA expand the money supply or reduce it? With a fully labelled diagram, show any effects on the supply and demand of money and change in the cash rate from its original to its new level. Use numbers where you can.(20 marks)
5. What should the RBA do with one-year-to-maturity bonds that have a coupon rate of 2.5% in order to achieve higher interest rates? With a fully labelled diagram show any effects on the supply and demand of such bonds and their effect on bond prices. Use numbers where you can. What will the bond price be?

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