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Macroeconomics Assignment Help
1. Describe what is meant by the marginal propensity to consume (mpc) and give its formula.
The marginal propensity to consume (MPC) is the term which identifies the proportionate change in the consumer spending by the change in disposable income which is the income after deduction of taxes and other applications. The income which can be consumed is the purchasing power or propensity to consume of a consumer. It is the addition in the value of the consumable income. It is also an addition to the Gross domestic profit as in consumer spending covers a large part of it (Economics Week, 2015). MPC can be calculated by following formula-
Where dC is percentage change in consumption and dY is percentage change in disposable income.
2. Assume that GDP rises from $550bn to $650bn. Assume that this results in the consumption of goods and services rising from $340bn to $400bn. What is the mpc?
The marginal propensity to consume (MPC) is the addition to the consumption by increase in the disposable income. It can be calculated as the percentage change in the consumption by percentage change in the disposable income. This proportionate change in the consumption and GDP ultimately boost the economy (Investment Weekly News, 2011).
MPC can be calculated by the following formula-
Here dC= % change in consumption,
dY= % change in GDP
As given in the situation the marginal propensity to consume is 1.67%.
3. Assuming that the domestic mpc remains constant, what will the level of consumption be if GDP rises to $700bn?
In the question it is given that the marginal propensity to consume remains constant and GDP rises to $700 bn. We will calculate the level of consumption (Investment Weekly News, 2011). For that we will assume
consumption as x, and solve the problem.
MPC = 1.67%
% Change in the GDP (dY) = $150 ($700- $550)
% change in the consumption (dC) = (x- $340)
Now we will put the above data in formula to calculate the value of x.
MPC = dC/dY
1.67% = (x-340)/150
As per the calculation the value of x is 590. So we can conclude that the level of consumption will be $590bn if the GDP rises to $700bn.
4. If Australian consumption of goods and services is $400bn, investment is $120bn, government expenditure is $150bn, exports of goods and services are $140bn and imports of goods and services are $145bn, what is the level of aggregate expenditure (E)?
Aggregate expenditure is the value which defines total productivity of a country. It includes all the activities happened in a country and also determines the economic position of a country. It can call as Gross Domestic product of an economy. It includes total consumption, investment, government spending, and net export. We can calculate aggregate expenditure by the following formula (Investment Weekly News, 2011).
E = C+I+G+NE
E = aggregate expenditure,
C = consumption of goods and services,
G = Government spending,
I = investment,
NE = net exports
Net exports can be calculated as – (Total export of goods and services – total import of goods and services)
So here net export will be,
NE = ($140bn - $ 145bn) = (-5bn)
Now we will calculate the aggregate expenditure by putting the values in the formula. (Calculations are in bn)
E = $400 + $120 + $150 + (-)$5
E = $665
As per the calculation we can state that level of aggregate expenditure or gross domestic product is $665bn.
5. Given your answer to (d), and assuming that GDP is currently $650bn, what will happen to GDP? Rise / Fall / Stay the same
Marginal propensity to consume (MPC) is the aggregate of the percentage change in the consumption over percentage change in the disposable income or gross domestic product. In the given situation the GDP is $650bn which is earlier $550bn is termed as increase in the disposable income of the country. It is a value addition in the income of the consumer which increases the purchasing power and consumption level of consumers (Arestis, Sawyer & Palgrave Macmillan, 2009).
The increased consumption helps to grow GDP of the economy and by giving opportunities for further investments. And also decrease the uncertainty. So we can conclude that the GDP will rise with the increase in the disposable income and consumption of the country.
1. Describe the relevant criteria that the Australian Bureau of Statistics use to determine whether a person is ‘unemployed’ and what problems do you see using this measure? (4 marks)
The Australian Bureau of Statistics (ABS) collects data about the activities in the labor market and defines the population on the basis of employment and unemployment by doing labor force surveys in the country. These surveys are done every month because the data collected is helpful to evaluate the market situation and position of economy. Resources which are unutilized and have a potential can be identified (Arestis, Sawyer & Palgrave Macmillan, 2009).
A definition of unemployment is taken from the standards of International Labor Organization (ILO). One hour work in a week is defined by ABS to calculate total unemployment.
2. Why is frictional unemployment inevitable in an economy?
Frictional unemployment is one of types of unemployment, where exist a friction between unemployment and re-employment. It is the time taken by an unemployed to find out a new job suiting his requirements. Friction unemployment generates from the unsatisfied employment. An employed person leaves its job and look for a job of his kind. An employee takes unemployment insurance which gives monetary help for the searching period.
Frictional unemployment is inevitable because the economy is dynamic and changes time to time. There is a growth in some sectors of economy and some are lying down. Some industries are recruiting more employees and some are retrenching. Temporary unemployment is increasing by this reason. The economy is affected by this problem because the consumer spending will be affected by this kind of unemployment, and GDP will be decreased. And the productivity of the country will also be affected. Government should make policies to decrease friction unemployment (McTaggart, Findlay & Parkin, 2013).
3. Is structural unemployment something macroeconomic policymakers should be concerned about? How does it differ from cyclical unemployment?
There are different types of unemployment, frictional, seasonal, structural, and cyclical unemployment. The structural unemployment is emerged by the changes in the business policies and patterns. In today’s economy the reason behind structural unemployment is technological changes which require skill and knowledge. The employer expects skilled employees and retires unskilled employees by recruiting new ones. Introduction of new machineries in place of labor increases structural unemployment. Structural unemployment affects the economy because it continues for long term and can generate other type of unemployment. Unemployment decreases total consumption of country and ultimately GDP reduces. So there should be some policies to decrease structural unemployment for example improving skills by giving trainings to employees (Oxelheim & Wihlborg, 2008).
Cyclical unemployment depends on the position of the economy. There are various phases from which businesses go through and it depends on the economy’s conditions. When demand decreases businesses starts to loss their profitability. They start to cut their cost, and retrenchment is a tool to reduce cost in any business management. Structural unemployment is different from cyclical unemployment as in structural remains for long duration in the economy and cyclical unemployment changes with change in the business cycle. Structural unemployment for long term can emerge cyclical unemployment. It affects the economy by giving impact on GDP (Stonecash, 2009).
1. Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation.
Inflation –inflation can be defined as the reduction in the value of currency of the country. Inflation can be effected by the factors like flow of money in the economy, demand of the money, decrease in the supply, and increase in the demand of products and services. Inflation can be classified on the basis of causes for example currency inflation, credit inflation, deficit- induced inflation, demand pull inflation, and cost- push inflation (Oxelheim & Wihlborg 2009).
In the concept of demand pull inflation, the rate of inflation increases by the increase in the demand. But the supply is limited as in the production is limited. This leads to increase in prices of products and services. Demand has a surplus over the supply and according to the law of demand and supply prices increases in this situation (Oxelheim & Wihlborg 2009). Factors which can be the reasons for demand pull inflation are as follows.
- The aggregate demand is more than the aggregate supply.
- Decrease in tax rates can increase the purchasing power of consumers which leads to increase in demands.
- Increase in the government purchase can hike prices by increase in demands.
In the diagram P1 and P2 are prices and the curve shows increase in the demand even if the increases in prices (Oxelheim & Wihlborg 2009).
Cost push inflation
The cost is important for the production process. Increase in cost will ultimately increase the price of product. Cost-pull inflation is the result in of increased cost of product and leads to fall in the productivity of the country. Less production means decrease in supply and demands will be stable. Prices will be increased ultimately (Oxelheim & Wihlborg 2009). Following are factors influencing cost-push inflation.
- Increase in the price of raw material and inputs.
- Increase in wages in the cost of production.
- Increase in the price of import by the increase in tax rats of government.
Cost of production increases and companies transfers this access cost to the consumers to maintain their profits. The hike in prices is the cause to cost-pull inflation.
Here P1 and P2 are changes in the prices and Q1 and Q2 are the quantity of supply.
2. Provide (describe) two (2) causes of each type of inflation.
Causes of demand-pull inflation-
- Increase in the demand of products and services leads to increase in the prices of products. This is because the production is limited and there emerges situation where there is surplus of demand over supply. Ultimately prices increases as the effect of the law of demand and supply (Storm, Naastepad, 2012).
- Another cause can be the access of money supply in the market. When the disposable income increases demand will increase and the inflation will increase. This addition in the purchasing power of the consumer can be by the increase in government spending, cut in tax rates, and increase in the government purchase.
Causes of cost-push inflation-
- Cost-push inflation is emerged by the increase in the cost of production (COP). The cost of production increases when there is increase in the cost of raw materials and inputs, increase in the wages, increase in the tax rates and government policies. Companies are not able to give the products on the same price and maintain their profitability. So the companies transfers this access cost on the consumers by increasing prices.
- When the costs are increased and decrease in supply because company will stop production process because of the losses, there will be more imports in the country on higher returns. This will decrease the value of currency. Cost push inflation is the reduction in value of currency because of increase in cost of production (Storm, Naastepad, 2012).
1. Explain the difference between the Keynesian and monetarist views on how an increase in the money supply causes inflation.
In macroeconomics there are two types of theories which focus on the supply of money to drive an economic cycle properly. These theories are Keynesian and Monetarist theory.
Keynesian theory of money supply
This theory is given by the economist John Maynard Keynes. He has explained the benefits of the flow of money in the economy. He focuses on the aggregate consumption in his theory. He defines impacts of sufficient money supply in economy. He says that the key factor to recover from the recession or depression is to increase consumer spending. If consumer spending will decrease the demands and profitability will be decreased. And if it will go through a long time the companies will do retrenchments or shut down their business. This will lead to a long term recession or worse (Wihlborg & Oxelheim, 2008).
According to the Keynesian the problem can be solved by increase in the demand. The government should increase its spending by the way of tax cuts, government grants and purchase of government bonds and securities. These actions will improve the flow of money in the economy and help to recover productivity and balance the prices.
Monetarist theory of money supply
This theory is given by the economist Milton Friedman. This theory covers limitation of the Keynesian theory. According to this theory the money supply in the economy is the key factor to control inflation. Money supply in an economy has a direct relationship with the inflation rate. Demand and supply should be balanced by increase or decrease the borrowings. According to this theory the government spending does not make a stable economy (Wihlborg & Oxelheim, 2008).
2. Why is the shape of the aggregate supply curve important to the Keynesian-monetarist controversy?
The Keynesian and monetarist approach defines the role of fiscal policy to drive the economy properly. The aggregate supply curve shows the level of demand and supply in economy. In the aggregate supply curve, the supply remains same as a straight vertical line which defines that there are no effects on supply by the change in the money level. The shape of aggregate supply curve defines the effects of money on demand and supply or we can say that it explains the inflation level (Wihlborg & Oxelheim, 2008).
The given activities can be classified within the nation’s balance of payments account as follows:
(a)DVD recorders imported into the nation from Japan
(i) Imports of goods (-)
(b)Insurance cover purchased in the nation by overseas residents
(x) Investment in the nation from overseas (+)
(c)The nation gives overseas aid to a developing country
(ix) The nation’s investments overseas (-)
(d)US car company sets up a factory in the nation
(x) Investment in the nation from overseas(+)
(e)Some of the nation’s residents take a holiday in Bali
(v) Other income outflows (-)
(f)Interest earned by the nation’s residents on overseas assets
(vi) Other income inflows (+)
(g)Running down the stock of foreign exchange in the Central Bank of the nation
(vii) Capital transfers sent overseas from the nation (–)
(h)Migrants to the nation transferring property to the nation
(viii) Capital transfers to the nation from overseas (+)
(i)New deposits made in banks in the nation by overseas residents
(xii) Short-term financial inflows (+)
(j)The nation’s palm oil is sold in the United Kingdom.
(i) Imports of goods (-)
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- Arestis, P., Sawyer, M.C. & Palgrave Macmillan 2009, Path dependency and macroeconomics, Palgrave Macmillan, New York.
- Hughes Hallett, A. 2012, "Alberto Alesina: The Science of Using Political Economy Concepts to Explain the Macroeconomic Landscape", Atlantic Economic Journal, vol. 40, no. 4, pp. 351-365.
- McTaggart, D., 1953, Findlay, C. & Parkin, M., 1939 2013, Macroeconomics, 7th edn, Pearson Australia, Frenchs Forest, N.S.W.
- Oxelheim, L. & Wihlborg, C. 2008, "Concepts of Macroeconomic Risk Management" in Oxford University Press, , pp. 16-34.