Assume the economy is initially in equilibrium at full employment.
a) Illustrate this situation using a diagram of the AD-AS model (including the long-run AS curve).
b) If investors suddenly became very optimistic about future profits, what would happen to the price level and real GDP in the long-run. Illustrate your answer using a diagram of the AD-AS model.
Principles of Economics Short-answer Assignment v2 (20% of final mark) Question 1 Assume the economy is initially in equilibrium at full employment. a) Illustrate this situation using a diagram of the AD-AS model (including the long-run AS curve). b) If investors suddenly became very optimistic about future profits, what would happen to the price level and real GDP in the long-run. Illustrate your answer using a diagram of the AD-AS model. Question 2 Complete the following table. YearWorking age population (millions persons)Labour force (millions persons)Employed (millions persons)Unemployed (millions persons)Participation rate (%)Unemployment rate (%)118,169,0009,642,000770,000210,671,0009,938,00057.82%318,763,00010,789,000738,0006.84%419,082,00058.52%6.45% Question 3 Let’s say the economy is experiencing a boom and the inflation rate has risen to 10%. a) What open market operations is the Reserve Bank of Australia likely to engage in? b) Explain how investment expenditure, consumption expenditure and net export expenditure are likely to be affected by the Reserve Bank’s decision. Question 4 According to the Keynesian model of the economy, aggregate expenditure is the key determinant of the equilibrium level of real GDP. Y = C + I + G + X – M C = C0 + c ? (Y – T) SymbolsMeaningValueYReal gross domestic productCConsumption expenditureC0Autonomous component of consumption expenditure$400 billioncMarginal propensity to consume0.8TTaxes imposed$150 billionIPlanned investment expenditure$50 billionGGovernment expenditure$200 billionXExport expenditure$20 billionMImport expenditure$25 billion a) Calculate the income-expenditure multiplier. b) Calculate the equilibrium level of real gross domestic product. c) If export expenditure increased from $30 billion to $60 billion (ceteris paribus), calculate the economic growth rate. d) If the marginal propensity to consume rose from 0.8 to...
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