Topic 4: Product Market

Q 2.6 How would an increase in growth rate of GDP in India and China affect Australian net
exports?

Q 1.5 Explain how each of the following events would affect the AD curve?
b.Higher income taxes (and the ‘opposite’, - lower).
c. Higher interest rates (and the ‘opposite’, - lower).
d.Faster income growth in other countries, (and the ‘converse’ – slower).

Q 2.7 Explain how each of the following events would affect the SRAS?
b. An increase in costs of production
c. An unexpected increase in the price of an important raw material

Application Question

Explain the effect of each of the following on the equilibrium price level and quantity. Clearly
explain the effect on price and RGDP.
a. Because of shortages of skilled workers the government increases the immigration of skilled
workers.
b. Australia’s major trading partners experience lower real GDP growth with lower income
growth.
c. The price of an imported and essential raw material decreases and at the same time falling
interest rates cause an increase in consumer optimism.

Topic 7: Exchange rate market

MC 10. The effect of an appreciation of the US dollar relative to the AUD will be:

MC 11. As a result of the change in Q10 above, net exports in the United States (US) will:

Problems and Applications:

2.6 Consider the demand for and supply of Australian dollars for euros. Explain the effect of an
increase in interest rates in Europe by the European Central Bank (ECB) on the demand for
and supply of dollars and the resulting change in the exchange rate of euros for Australian
dollars. Assume that interest rates in Australia have not changed.

Application Question

(a) Suppose the Australian dollar and Japanese yen are initially in equilibrium at ¥100 = $1.
Imagine now the Japanese economy experiences a strong economic recovery with rising
GDP and falling unemployment, while conditions in the Australian economy remain stable.
How will this change the exchange rate between the dollar and the yen? Explain your
answer with reference to the exchange rate market.

(b) Explain the impact of the following economic conditions on the Australian dollar exchange
rate market.
Interest rates in Australia’s increase relative to interest rates in the USA and Europe and at
the same time Australian demand for imports decrease.

Topic questions for revision s2 2020 1

Topic 9: Monetary Policy

MC 2. The purchase of government securities by the RBA in the open market will cause

MC 3. Which of the following best describes the cause-effect chain of an easy / expansionary
money policy?

MC 7. If the RBA attempts to reduce demand-pull inflation, the most correct policies would be to

MC 10. When the Central Bank sells government bonds, the reserves of the banking system

MC 12. If the Central Bank conducts open-market sales, which of the following three increase:
interest rates, prices, investment spending?

2.3 ‘What is the cash rate? What role does it play in monetary policy?’

3.2 If the RBA believes the economy is about to fall into a recession what actions could it take?

3.3 If the RBA believes that the inflation rate is about to increase above its target rate, what
actions could it take?

Application question

The Reserve Bank can implement an expansionary monetary by using its open market operations
to purchase securities.
Explain how the purchase of securities by the RBA will impact on GDP.
In your answer identify the objectives that this monetary policy is attempting to achieve and its
impact on the money supply and interest rates.

Topic 8: Financial System, Money and Credit Creation

Assume that a bond with no expiration date pays a fixed $80 annual interest and is selling for its
face value of $1400.
a. Calculate the interest yield on the bond.
b. If the ‘market’ value of the bond increases to $2000, calculate the new interest yield.
c. Based on the answer to part (b), explain what would happen to the price of the bond if
comparable investments in the economy were associated with interest yields of 5%.

Topic questions for revision s2 2020 2

Topic 10: Fiscal Policy

MC 6. If consumption spending increases from $350 million to $358 million when income increases
from $412 million to $432 million it can be concluded that the relevant marginal propensity to
consume is

GDP(Y) Consumption (C)

$0 $60
100 120
200 180
300 240
400 300
500 360
MC 7. Refer to the above information. The equation which represents the consumption schedule
for this economy is:

MC 9. Assume in a private economy that the equilibrium level of income is $380 and the MPS is
0.25. Now suppose government collects taxes of $50 and spends the entire amount. As a result,
the new equilibrium level of income is?

MC 13. Suppose the MPC is 0.75. If the government increases expenditures by $10 billion how
far does the economy grow? If the government decreases taxes by $10 billion how far does the
economy grow?

2.8. The hypothetical information in the following table shows what the situation will be in 2019
if the government does not use fiscal policy:

Year Potential GDP Real GDP Price level

2018 $2,100 billion $2,100 billion 111.5

2019 $2,300 billion $2,100 billion 113.0

(i) If the government wants to move real GDP to its potential level in 2019 should it use
expansionary or contractionary fiscal policy?
(ii) And should it increase or decrease government expenditure? Increase or decrease taxes?
(iii) Assume the MPC = 0.6,
- What is the change in Government Expenditure required to bring the economy back to
potential GDP and in what direction?
- What is the change in Taxes required to bring the economy back to potential GDP and in what
direction?

Problems
2. You are given the following information about an economy:

GDP ($m) Consumption ($m) Investment ($m) Govt ($m)

100 90 50 20
200 170 50 20
300 250 50 20
400 330 50 20
500 410 50 20

a. Calculate the marginal propensity to consume.

b. At what value of GDP does equilibrium exist?
c. Calculate the value of the multiplier.
d. If government spending increased by $40 million, what would be the new equilibrium GDP.

Topic questions for revision s2 2020 3