Macroeconomics

  Order Description     …. with the economy contracting sharply in the third quarter, inflation benign, and the unemployment rate nudging higher in recent months, it appears unlikely to raise them either. Bricks and mortar retail sales account for about 55 per cent of household consumption, which in turn is the biggest component of gross domestic product, the most commonly used measure of economic growth. Budget forecasts have pencilled in strong annual consumption growth of almost 3 per cent over the next two years. Business investment is expected to fall or stagnate. 3     Qu. 1(a) Use the aggregate expenditure (AE) model to explain the impact of ‘weak December retail sales’ on equilibrium output and (un)employment. In your answer make sure to discuss the equilibrating process of moving to the new macroeconomic equilibrium output. [4 marks] Qu. 1(b) With reference to 1(a) above, use the AE diagram to explain the concept of the multiplier and to show the extent of the multiplier effect stemming from the changes in retail sales. [4 marks] Qu. 2 Use the static aggregate demand-aggregate supply (AD-AS) model to explain the circumstances that may prompt the Reserve Bank (RBA) to lower interest rates later in the year - as per the statement “RBA moves back to an easing bias in recognition of the belowtrend domestic growth picture before mid-year”. In your answer, make sure to discuss and show the effect of RBA action on aggregate demand. [6 marks] Qu. 3 Referring to the final comment “Budget forecasts have pencilled in strong annual consumption growth of almost 3 per cent over the next two years. Business investment is expected to fall or stagnate”, use the dynamic AD-AS to depict the long run economic situation if the fall in investment over the next two years, in part, offsets the increase in consumption. Discuss the potential impact of this on output, employment and the price level. What would prompt whether or not the RBA takes any action? [8 marks]