Consider a macro economy was initially at equilibrium level of real GDP

1. Consider a macro economy 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 reduces interest rates.

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

 (c) An increase in international oil prices.

(d) 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 Price level.

f) The country main exports rise in price while the goods the country imports from abroad fall in price i.e. its terms of trade improves in the country’ favour. 

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

3. 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?

4. State the difference between:

- Money multiplier and pay use multiplier.

5. 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.

6. Distinguish between on-going demand-pull and on-going 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?