Part A Multiple Choice (choose the best answer to the question). Each question is worth one mark. (Total: 10 Marks)
Part A Multiple Choice (choose the best answer to the question). Each question is worth one mark. (Total: 10 Marks)
In the short run, if the economy begins at potential GDP, an increase in aggregate demand (1), whereas in the long run, an automatic mechanism brings (2)
1)
increases actual Real GDP and the price level.
increases the potential GDP level and the overall price level.
decreases actual Real GDP, making it less than potential GDP.
results in no change.
2)
the economy back to potential GDP but the price level remains higher.
the economy back to the initial price level but lowers GDP below potential GDP.
the economy to a point where both the price level and the real GDP are lower.
no change.
Consider the following economic variables and identify the correct movement of the aggregate demand curve (each is worth 0.25 mark):
If there is an increase in the interest rate, the AD curve will
shift to the left.
not shift at all.
shift to the right.
If there is an increase in government purchases, the AD curve will
shift to the left.
not shift at all.
shift to the right.
If there is an increase in households' expectations of their future incomes, the AD curve will
shift to the left.
not shift at all.
shift to the right.
If there is an increase in the value of the dollar relative to foreign currencies, the AD curve will
shift to the left.
not shift at all.
shift to the right.
In Figure 1, suppose the economy moves from point A in year 1 to point B in year 2.
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Figure 1
Calculate (each is worth 0.25 mark):
The growth rate of potential GDP from year 1 to year 2 is % (enter your response rounded to 2 decimal places).
The inflation rate in year 2 is % (enter your response rounded to two decimal places).
The growth rate of real GDP from year 1 to year 2 is % (enter your response rounded to two decimal places).
The unemployment rate in year 2 is % (enter your response rounded to two decimal places).
Between 2005 and early 2008 oil prices and house prices in Australia rose significantly, increasing the cost of living for Australians. During the same period the Reserve Bank of Australia (RBA) increased interest rates eight times. Do you think that the RBA was aiming to make Australians worse off by raising interest rates at a time when other expenses were also increasing?
Yes during this time, Indonesians temporarily seized the RBA and made
Australians worse off.
No the RBA was attempting to minimise unemployment by increasing the interest rate.
No the RBA was attempting to stimulate consumption and investment by increasing the interest rate.
No the RBA was attempting to combat inflation by increasing the interest rate.
Why might a supply shock lead to stagflation?
A supply shock shifts the SRAS curve to the left, decreasing the price level and decreasing actual GDP.
A supply shock shifts the SRAS curve to the left, increasing the price level and increasing actual GDP.
A supply shock shifts the SRAS curve to the right, increasing the price level and decreasing actual GDP.
A supply shock shifts the SRAS curve to the left, increasing the price level and decreasing actual GDP.
Which of the following would cause a decrease in real GDP (a recession)? (Select all that apply).
A reduction in consumer confidence that causes aggregate demand to fall.
An increase in government purchases that causes aggregate demand to rise.
An increase in interest rates that causes short-run aggregate supply to fall.
A reduction in consumer confidence that causes short-run aggregate supply to fall.
An increase in interest rates that causes aggregate demand to fall.
Which of the following would cause a decrease in real GDP (a recession)? (Select all that apply).
A reduction in taxes that causes aggregate demand to fall.
A reduction in the growth rate in foreign countries compared to domestic
growth that causes aggregate demand to fall.
An increase in oil prices causes short-run aggregate supply to increase.
An increase in oil prices that causes short-run aggregate supply to fall.
A recession in a foreign trading partner's country that causes aggregate supply to fall.
Which of the following would cause an increase in the price level (short-run inflation)? (Select all that apply).
An increase in the exchange rate of the dollar in relation to foreign currencies decreases short-run aggregate supply.
A reduction in personal income taxes that reduces aggregate demand.
An increase in government purchases that decreases short-run aggregate supply.
An increase in government purchases that increases aggregate demand.
A reduction in taxes that increases aggregate demand.
Which of the following would cause an increase in the price level (short-run inflation)? (Select all that apply).
An increase in oil prices that leads to a reduction in aggregate demand.
An increase in payroll taxes that leads to an increase in aggregate demand.
An increase in business optimism regarding future profitability that increases aggregate demand.
An increase in business pessimism regarding future profitability decreases short-run aggregate supply.
An increase in oil prices that decreases short-run aggregate supply.
Part B The following are news articles or excerpts from news articles. Choose any two (2) and analyse them critically applying relevant concepts covered in class. Discuss related policy issues or implications. Each question is worth 7.5 marks. Use proper referencing, where applicable. Limit your answer to a maximum of 3 pages including diagrams but excluding references (using 12pt font size) per question.
Question 1
South Asia is home to 9 of the worlds 10 cities with the worst air pollution, which causes 2 million premature deaths across the region each year and leads to significant economic costs. Large industries, powerplants and vehicles are dominant sources of air pollution around the world, but in South Asia, other sources make substantial additional contributions. These include combustion of solid fuels for cooking and heating, emissions from small industries such as brick kilns, burning of municipal and agricultural waste, and cremation.
(7.5 marks)
Question 2
The shipping industry is focusing on carbon neutral vessels that will limit the negative impact of CO2 emissions on the planet. Swedish firm Yara International has partnered with several other firms to build a cargo ship powered by green and blue ammonia. These clean ammonias do not use fossil fuels in their production so are a more environmentally friendly fuel source. The new ship is expected to launch in 2026.
The shipping industry is responsible for about 3% of the worlds global CO2 emissions and other firms are also building ships powered by greener fuels. Shipping giant Maersk ordered several carbon neutral ships in 2021 and expects to launch the first ship in early 2024. The industry is aggressively taking steps to reach net zero carbon emissions by 2050 if not sooner.
(7.5 marks)
Question 3
The U.S. National Home Price Index showed that home prices continued their upward trend, climbing for the past consecutive nine months to set a record high. Home prices increased by 0.6% in October despite mortgage interest rates that exceeded 7%. Experts believe the strong demand was driven by people who could absorb higher mortgage interest rates and those that paid cash. Other experts believe it was also due to a flurry of buyers who believed they should buy now before mortgage interest rates moved even higher. On the supply side, inventory is extremely limited. The hot housing market of the past several years has depleted national inventory levels and limited buyers choices. Well qualified buyers are bidding the prices up.
(7.5 marks)
Question 4
Outline the trends or movements in the Australian dollar (from Jan 2020 onwards). Discuss possible reasons behind the fluctuations and give examples as to how this might have affected or can affect other economic indicators such as unemployment, inflation,
net exports and ultimately the GDP of the economy.
Question 5
(7.5 marks)
President Biden posted a video on X (formerly Twitter) calling on firms to stop shrinkflation a day prior to Super Bowl Sunday. He pointed out that drink bottles were smaller and chips bags contained fewer chips while prices remained unchanged. The post is viewed as one way he can connect with the American public about his understanding of the financial pain of inflation. However, it is too late to change package sizes prior to the Super Bowl.
Companies often resort to shrinkflation tactics during periods of high inflation. Even though inflation is trending downward it remains stubbornly high relative to the past 10 years and is particularly harmful for low-income households. Democratic Senator Bob Casey from Pennsylvania published a recent report on inflation that found shrinkflation was noticeable during the period between January 2019 and October 2023. The smaller sizes pushed per unit costs up by over 20% during that time.
President Bidens message stated that American consumers were tired of the practice and that firms should halt shrinkflation. However, he did not provide suggestions on how the firms should handle the increasing prices of their inputs. The upcoming presidential election may be affected by inflation since 50% of Americans believe the U.S. economy is in a downturn and cited inflation and the overall higher cost of living as their justification for this perspective.
(7.5 marks)
Question 6
The prices of luxury Manhattan apartments are surging as a paucity of supply leaves those consumers with plenty of cash, bidding prices higher. The luxury market is defined as the apartments priced in the top 10% of the market. Most of these buyers spending millions of dollars on apartments pay cash and do not need to worry about financing at the current high mortgage rates.
One expert stated that the supply of luxury apartments was down by 24% relative to the pre-pandemic period. Falling prices post-pandemic pulled many buyers back into the market on the luxury side and now many buyers cannot find a property. High end condominium builders have sold almost all their inventory and cannot locate lenders willing to finance new developments.
Real estate brokers dont believe the situation will change soon since many of the buyers are not price sensitive. While the bottom of the Manhattan real estate market continues to fall, the top 10% continues to rise. However, even the average Manhattan apartment price of $1.96 million seems high to most of us.
