Running Head: ECON 7074

Macro Economics Analysis

2nd Take-Away home Assignment

Name.

Institution Affiliation.

Date.
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Question One

a) Discretionary fiscal policies mean government policies which change government

expenditure or taxation. It aims at expanding or declining the economy as necessary. From

the thirty-year Australian Government, revenue chart, it is clear that when economic activity

contracts, a recession occurs. Smaller sales are responsible for weak earnings causing

joblessness, and sales are weak. Sometimes a vicious cycle emerges that more government

spending can be mitigated by security networks and other means (Attinasi, & Klemm, 2016).

From fiscal 1993 to 1999, government revenue budget deficits reduced by 12.26%.

However, from the year 2005 to 2011, there seemed to be a decrease in balance surplus an

adverse increase in budget deficits. Sequentially, the debt-to - GDP rate drops even if the

total debt rises, as the economy grows faster than the Federal Debt. Economy can also kill

balanced budgets. This is due to the failure of surpluses to put the debt on a sustainable

course. Not the total level of debt is important but the level of debt is a percentage of the

economy as a whole. Therefore, all the government needs are to avoid this increase is that the

debt grows less slowly than GDP.

Depending on their public financial management (PFM) and regulatory systems, the

profoundly affected countries have adopted various budgetary allocation approaches. To

address these new economic and fiscal constraints, adaptations to the revenue-side of budgets

are required. Due to uncertainties surrounding preparations of the budget for Australia, with

new budgets due mid-May, the budget for 2020-2021 has been delayed to October. The

Government has meanwhile laid down a supply bill, a precautionary measure used to

guarantee financial supply in an emergency when bills of appropriations are not adopted in

the usual timing.

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Question Two.

From early reserve banks, the modern banking system was developed. They often kept

gold and valuable metal safeguards at a cost to consumers and traders. Goldsmiths They

issued receipts for those deposits. The creation of money as coin-cutting started before the

17th century London lending of goldsmith bankers. Later, receipts were used as money

instead of gold. Goldsmiths realized that they never redeemed much gold they had stored.

Goldsmiths were able to levy gold by issuing receipts for creditors who agreed to repay gold

and interest. Goldsmith bankers found that they were able to make loans by writing new

receptions that changed the world (Huber, 2016).

Endogenous money is an endogenous money supply of an economy. In this case, it is not

an exogenous external body such as a central bank who interacts with other economic

variables (Palley, 2017). The number of reserves must be a compulsory restriction for lenders

to hold theory, and the Central Bank must decide directly on the number of reserves. While

theory of the money multiplier may be a useful way of entering money and banks, it does not

describe precisely how money is created. This is different from the theory of endogenous

money, which describes how money was created (Xiong, et.al, 2019).

There was more credit growth form app. 2015 than the money supply. Credit growth

increased merely by 4-5%, meaning that there was a significant increase in both the public

and private sector. This means that the citizens from China could borrow and spend more.

The money supply, on the other hand, showed some decrease in the mid-2016. This indicates

that there was less value of money in the economy, or otherwise, the country took more

credits yet for private investments.

Question Three
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a) .

π=e−(u – u)+ v

This equation shows that unemployment is linked to inflation and inflationary movements.

This parallels the relationship of consumption with price level, which in the Short-run Supply

Curve is reflected.

The curve is showed below:

The Line crossing A and B in the figure above indicates long-run effects on the inflation itself. In

the long term, inflation comes from an increased supply of money. However, in the short term,

the prices of other forces can vary considerably.

b) In either case, the price level is unchanged by the IS or productivity shock in a new short-

term equilibrium with optimal monetary policies. This means price stability by means of the

implementation of the optimum system that we defined as the adjustment of the supply of cash in

response to shocks to achieve the hypothetical neoclassical output level. Price stability is not the

objective per se, in other words, but the outcome of the best policy implementation.
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c) If the nominal interest rate remains the same, real interest rate fall, then the expected

inflation rises. If the Central Bank maintains the same nominal interest rate, then the real interest

rate drops as the curve slides down and down and right. This provides a monetary stimulus

equivalent, increasing usual output channels until the short-term end of inflation rises.

d) The marginal product of capital is the increasing overall consumption which is the product

of an increase in one unit of capital while maintaining constant all other inputs. Identifying the

marginal capital product is essential because companies make decisions about investment by

comparing their marginal capital product with their capital costs. It makes sense to increase the

consumption of capital when the marginal capital produced is higher than the cost of capital but

once the marginal capital generated falls below the cost of the capital, added capital further

results in a decrease in the company’s profit.

The Cobb-Douglas consumption function with constant returns to scale is mostly the best

represented for an economy of total consumption.

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References.

Attinasi, M. G., & Klemm, A. (2016). The growth impact of discretionary fiscal policy

measures. Journal of macroeconomics, 49, 265-279.

Huber, J. (2016). Sovereign Money: beyond reserve banking. Springer.

Palley, T. I. (2017). The theory of endogenous money and the LM schedule: prelude to a

reconstruction of ISLM. Brazilian Journal of Political Economy, 37(1), 3-22.

Xiong, W., Li, B., Wang, Y., & Stanley, H. E. (2019). The versatility of money multiplier

under Basel III regulations. Finance Research Letters.