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    Qs Based On W13 Lecture

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    Mark S.P
    The document discusses questions related to macroeconomic concepts including: 1) Calculating the equilibrium level of output and budget deficit using an aggregate expenditures model. 2) Describing the channels through which monetary policy transmission mechanisms can influence components of GDP. 3) Determining the appropriate cash rate setting for the Reserve Bank of Australia in 2008 based on inflation and unemployment data, and how the answer would change given knowledge of the upcoming Global Financial Crisis. 4) Defining the neutral nominal interest rate and calculating other rates based on an inflation target and assumptions about real rates. 5) Inferring how the actual and structural budget balances would differ under alternative unemployment and government spending scenarios.

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    Qs Based On W13 Lecture

    Uploaded by

    Mark S.P
    27 views3 pages
    The document discusses questions related to macroeconomic concepts including: 1) Calculating the equilibrium level of output and budget deficit using an aggregate expenditures model. 2) Describing the channels through which monetary policy transmission mechanisms can influence components of GDP. 3) Determining the appropriate cash rate setting for the Reserve Bank of Australia in 2008 based on inflation and unemployment data, and how the answer would change given knowledge of the upcoming Global Financial Crisis. 4) Defining the neutral nominal interest rate and calculating other rates based on an inflation target and assumptions about real rates. 5) Inferring how the actual and structural budget balances would differ under alternative unemployment and government spending scenarios.

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    Qs based on W13 Lecture (1)

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    The document discusses questions related to macroeconomic concepts including: 1) Calculating the equilibrium level of output and budget deficit using an aggregate expenditures model. 2) Describing the channels through which monetary policy transmission mechanisms can influence components of GDP. 3) Determining the appropriate cash rate setting for the Reserve Bank of Australia in 2008 based on inflation and unemployment data, and how the answer would change given knowledge of the upcoming Global Financial Crisis. 4) Defining the neutral nominal interest rate and calculating other rates based on an inflation target and assumptions about real rates. 5) Inferring how the actual and structural budget balances would differ under alternative unemployment and government spending scenarios.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    27 views3 pages

    Qs Based On W13 Lecture

    Uploaded by

    Mark S.P
    The document discusses questions related to macroeconomic concepts including: 1) Calculating the equilibrium level of output and budget deficit using an aggregate expenditures model. 2) Describing the channels through which monetary policy transmission mechanisms can influence components of GDP. 3) Determining the appropriate cash rate setting for the Reserve Bank of Australia in 2008 based on inflation and unemployment data, and how the answer would change given knowledge of the upcoming Global Financial Crisis. 4) Defining the neutral nominal interest rate and calculating other rates based on an inflation target and assumptions about real rates. 5) Inferring how the actual and structural budget balances would differ under alternative unemployment and government spending scenarios.

    Copyright:

    © All Rights Reserved
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    of 3

    BUSS1040

    Questions based on Week 13 lecture

    1. Suppose the Planned Aggregate Expenditures (PAE) curve is given by

    Y = C + IP + G

    where C = 25 + c(Y – T – tY) where T = 25 is lump-sum taxes, t = 0.375 is the


    proportional tax rate and c=0.8 is the marginal propensity to consume. Planned
    investment is given by IP = 100 and government spending is G = 415.

    (a) Write down an expression for the PAE curve.


    (b) Draw a diagram with AE on the y-axis and output Y on the x-axis. Label the
    intercept and the slope of the PAE curve. Draw the curve showing points where
    AE equal Y.
    (c) Solve for the equilibrium level of output.
    (d) What is the budget deficit? [Hint: what is government spending less proportional
    and lump-sum tax revenue?]
    (e) Suppose the economy is currently at a below normal level of output and the
    government increases spending by 50 to G = 465 in order to stimulate the
    economy. Calculate the new level of output and the new budget deficit.
    (f) As an alternative to increasing government spending by 50 the government could
    make net cash transfers to households of 50. Suppose that rather than levying
    lump-sum taxes of 25 on households the government now makes net cash
    transfers to households of 25. This means T changes from 25 to -25. Calculate the
    new equilibrium level of GDP and the new budget deficit assuming G remains at
    415.
    (g) Based on your answers to (e) and (f), do you think government spending or cash
    transfers to households more effective at stimulating the economy? Explain the
    difference.
    (h) During the Global Financial Crisis, the Australian government increased spending
    and made cash transfers to households. Can you think of a reason why the
    government might have wanted to do both?
    (i) Describe how might your answer to (g) might change if households knew the
    cash transfer was temporary and T would go back to 25 in the following year?
    [Hint: how might the marginal propensity to consume out of a temporary cash
    transfer differ relative to a permanent cash transfer?]

    2. This question asks you about the conventional monetary policy transmission
    mechanism--that is, the different ways in which a change in interest rates affects
    components of GDP. Describe each of the following channels of the monetary policy
    transmission mechanism. For each channel explain which (one or more) components
    of GDP are affected, and whether the component would increase or decrease
    following a reduction in interest rates.

    (a) Intertemporal substitution channel


    (b) Business investment channel
    (c) Asset price and wealth channel
    (d) Cash-flow channel
    (e) Exchange rate channel

    3. The graph below shows inflation and the unemployment gap (the unemployment
    rate minus the natural rate of unemployment) for Australia up to the September
    quarter of 2008.

    (a) Suppose you were the Governor of the Reserve Bank of Australia in September
    2008. Based on the information in the graph do you think it would be
    appropriate to set the cash rate at a below average level, an average level, or an
    above average level? Explain you answer.
    (b) What major global event happened toward the end of 2008? If you knew this
    ahead of time how would your answer to (a) change? Explain.

    Inflation and Unemployment


    % %

    7 5

    6 4
    Unemployment rate less natural
    rate of unemployment (RHS)
    5 3

    4 2

    3 1

    2 0
    Inflation at annual rate (LHS)
    1 -1

    0 -2
    1993 1995 1997 1999 2001 2003 2005 2007
    4. Consider the following diagram from class.

    Suppose the inflation target for the Reserve Bank is 2.5 per cent. Now define the
    neutral nominal interest rate to be the level of the nominal interest rate when
    inflation is equal to the target level of 2.5 per cent. Let 𝜋! = 2.5 in the diagram.

    (a) Suppose the neutral real interest rate is 3 per cent. What is 𝑟! and 𝑖! in the
    figure? [Hint: use the definition from class for the neutral real interest rate]
    (b) Why is the slope of the green line greater than one?
    (c) What is 𝑖" if 𝜋" = 3.5 and the Reserve Bank increases the real cash rate by 1
    percentage point for each percentage point increase in inflation above the
    target?

    5. The following graph shows the actual and structural budget balance for Australia.

    (a) The unemployment rate was 4.2% in 2008 and 5.6% in 2009. How would the actual
    and structural budget balance in 2009 have differed if the unemployment rate in
    2009 had risen by more than it did between 2008 and 2009?
    (b) How would the actual and structural budget balance in 2009 have differed if the
    government had permanently increased spending on roads by $100bn?

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