1. Consider a macroeconomy was initially at equilibrium level of real GDP.

Using
an aggregate demand and aggregate supply diagram or model of the economy,
graphically illustrate and discuss the short-run and long-run effects of the
following events upon the economy:

(a) The Central Bank within the economy lifts interest rates.
(b) There is an increase in private domestic investment spending.
(c) An increase in international oil prices.
(d) An appreciation 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 (hint: think of
the effect upon one’s wealth level)
(f) The country’s main exports fall in price while the goods the country imports
from abroad rise in price

2. Why is are quarterly movements in a country‘s GDP measure so important?

What is it called when a country has two successive negative quarters of
economic growth?

A: Business cycle and recession

3. Why does a market based economic system need to be monitored or is, in

fact, a market system basically self-stabilising?

A: It is not self- stabilising, its volatile (its volatile because information flows very fast
these days, and consumer react fast) and so it requires monitoring.

4. Currently Australian consumers are paying off their debts and not
spending. Using the simple Keynesian model to assess the implications for
equilibrium GDP and the level of savings of an increase in the savings
function. Conversely what would happen to equilibrium income if there is a
sustained rise in private investment spending?

A: Pay off debt = Savings increase S↑, Consumption decrease C↓. Not spending
= Consumption decrease C↓.

5. State the difference between:

-uncertainty and risk.

-between the interest rate and the exchange rate
- between the supply side shocks and demand side shocks
-between a 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.
A: At ________ interest rate _________ Investment _________ and consumption
__________ GDP ______________ employment _________ price_____________.

7. Why do professional and market economists monitor a whole number of

economic and business indicators? What are they trying to achieve in doing
this?

A: Economics and business indicators establish the phase of business cycles – GDP
trend line.

8. Why is a depreciation of a country currency not necessarily a bad thing?. Why is

a country’s appreciation of its currency on the foreign exchange market not
necessarily a good thing?

9. The central bank 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 would
this type of policy action be appropriate ?

A: Monetary policy. Include both full employment economy and not-full

employment economy.

10. Why under flexible exchange rates does a nation not have too worry too
much about a balance of payments deficit? What other specific advantages
do flexible exchange rates give to the operation of economic policy with
specific regard to the effectiveness of fiscal policy and monetary policy?

A: exchange rate – for economic exchange with the rest of the world. What will
happen to demand of AUD to buy Australian products (exports)? What will
happen to supply of AUD to buy foreign products (imports).

When exchange rate is flexible – if Australian export increase, the demand for
AUD will increase as a result AUD will appreciate.

What will happen to balance of payment.

Effects of exchange rates in current assets – balance of trade (export – import)

and interest on investment.

Effects of exchange rates in financial a/c – flow of capital (inflow-outlfow)

official reserves – used to keep exchange rate at a certain level.

balance of payment surplus = (export – import) + (capital inflow – capital outflow)

>0

balance of payment deficit = (export – import) + (capital inflow – capital outflow) <
0

fiscal policy more efficient in _____________________________

monetary policy more efficient in __________________________