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ECO220Macroeconomic Analysis

FACULTY OF COMMERCE

Subject Outline200540

*ECO220*

Macroeconomic Analysis

ECO220 Subject Outline

Faculty of Commerce

Subject Co-ordinatorDr Roderick Duncan

Session offeringAutumn 2005(February - June)

Educational designerPauline Graf

Produced by Learning Materials Centre, Charles Sturt University, Albury - Bathurst - Wagga Wagga, New South Wales, Australia.

Published November 2004

Mailing information

This subject has one mailing consisting of:

Subject Outline The Subject Outline provides an overview of the subject, introduces the lecturer, and contains a list of required resources which may include prescribed texts. It also contains the assignments and their due dates.

Study Guide The Study Guide gives an introduction to, and commentary on, each topic, and integrates the resources in a structured topic-by-topic pattern for the session’s work.

Readings The Readings are a collection of published material necessary for successful completion of the subject.

Printed at Charles Sturt University

© Charles Sturt University

Previously published material in this book is copied on behalf of Charles Sturt University pursuant to Part VB of the Commonwealth Copyright Act 1968.

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ContentsPage

Your subject coordinator 1

Subject information 2Introduction to subject 2Subject content 3Learning objectives 3

Suggested study schedule 4

Student subject surveys 5

Resources 5Prescribed text 5Supplementary texts 5Library services 6Electronic communication 6Residential school 7

Assessment 7Terms 7Grades 7Assessment schedule 8Due date 8Assessment regulations 8Variations to assessment 8Submission of assignments 8Late submission of assignments 10Special consideration 10Academic conduct 11Plagiarism 12Presentation of assignments 13Academic learning skills assistance 14

Assignment details 15Assignment 1 15Assignment 2 18Assessment criteria for Assignment 2 20Final examination 21

Sample examination paper 22

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ECO220 Macroeconomic Analysis

Welcome to a new session of study at Charles Sturt University. This subject extends the study of macroeconomics to encompass a comprehensive model of an open economy such as Australia. Emphasis is placed on the relationship between real and financial sectors of the Australian economy and the impact of various internal and external shocks to the domestic economy and its financial markets.

Your subject coordinatorDr Roderick Duncan, BEc(Hons), PhD

Dr. Duncan is a lecturer in economics and finance at CSU. Prior to this, he taught at the Georgia Institute of Technology in Atlanta, USA. He studied for his undergraduate degrees in economics and law at the Australian National University and his doctorate in economics at Stanford University. His research interests centre on development problems in Third World countries and especially the links between natural resources and development. He has also been known to write on disparate topics, such as the relationship between rising female education and falling marriage rates.

Academic enquiries

Any questions concerning the teaching of this subject can be made by contacting your subject coordinator:

Phone:Email:

(02) 6338 [email protected]

or the Secretary, School of Marketing and Management on tel: (02) 6338 4277, fax: (02) 6338 4228, email: [email protected] .

Consultation procedures

The subject coordinator will be available for student consultation. You will normally be informed of the details of such consultation via the online subject forum or by letter.

Other enquiries

Service Albury Bathurst Wagga Wagga

Student Services Help Desk

(02) 6051 6828 (02) 6338 4678 (02) 6933 2405

Student Services Help Desk Message Service

1800 67 0679 1800 67 0679 1800 67 0679

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mailto:[email protected]

mailto:[email protected]


A full list of contact numbers is provided in the Distance education manual – Putting it together. If you leave a telephone message, you should leave your message with the following information in this order:

1. your name and student number;2. your telephone number;3. the code and name of the subject related to your enquiry;4. your message.

Subject informationSubject code: ECO220

Subject name: Macroeconomic Analysis

Subject co-ordinator: Dr Rod Duncan

Credit points: 8

Pre-requisite: ECO120 Macroeconomics

Introduction to subject

This subject builds on previous study of macroeconomics. The focus of the subject is slanted towards understanding the impact of global macroeconomic activity and international finance markets on the domestic economy.

Australia can be described as a small open economy. With its advanced financial system and floating exchange rate it is strongly integrated into the global economy. Events in the major economies and key financial markets impact strongly on the domestic Australian economy. Exchange rates, interest rates, stock prices and foreign economic policies are vital factors in determining Australia’s future economic progress. In particular the finance markets of the world are increasingly sensitive to economic events in the major world economies. Shocks in key financial markets are also increasingly important for the functioning of individual economies, especially the small open economies like Australia.

The prescribed textbook has a stronger global and finance market focus than is traditionally found in texts on macroeconomics. It has been selected because this is the focus intended in this subject. Although not an Australian text, it is more globally focused than most US publications. Its author, Olivier Blanchard, is an internationally renowned macroeconomist who although based in the US, has a background in France, and hence his text includes case material and analysis related to a number of the world’s economies.

Another feature of this subject is the expectation that students will remain cognisant of current economic and financial issues throughout the semester and be able to analyse these issues using the tool kit of economic techniques provided in the text. Assignment work will demand an awareness of current issues as well as an understanding of the text material.

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Subject content

Four modules have been provided to guide you in your studies. Mastery of the precise learning objectives for each module will enable you to achieve to overall subject goals.

Module 1 The basics of macroeconomic analysis

Topic 1.1Topic 1.2

IntroductionThe basic macroeconomic model

Module 2 The supply side

Topic 2.1Topic 2.2Topic 2.3Topic 2.4

The labour marketAS and AD in the macroeconomic modelThe Phillips Curve – the national rate of unemploymentMoney growth and economic activity

Module 3 Expectations and open economy macroeconomics

Topic 3.1Topic 3.2

The role of expectations Open economy macroeconomics

Module 4 Macroeconomic crises and economic policy

Topic 4.1Topic 4.2

Macroeconomic problemsMacroeconomic policies

Learning objectives

At the completion of this module you should be able to:

Recall the basic concepts and definitions of macroeconomics

Recall the basic macroeconomic theory of aggregate output determination (the goods market)

Recall the fundamental elements of this theory: exogenous and endogenous variables; equilibrium output, autonomous spending, consumption function

Illustrate the basic theory of aggregate output determination using graphical and mathematical techniques

Explain the dynamics of the aggregate output determination model

Explain the distinction between money and bonds, wealth and saving, stocks and flows

Explain the determinants of the demand for money and its relationship to the demand for bonds

Define the velocity of money and explain its relationship to interest rates

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Explain the determinants of the supply of money

List the components of the money supply and understand how the money supply is changed

Describe the determinants of investment

Derive the IS and LM curves

Explain the factors which cause the shape of and shifts in the IS and LM curves

Demonstrate an understanding of the equilibrium condition generated by the IS-LM model

Examine the impacts of Fiscal and Monetary Policy using the IS-LM model

Demonstrate an understanding of the dynamics of the IS-LM model

Suggested study schedule

Week Week commencing

Topics

Module 1 The basics of macroeconomic analysis1 21 February Topic 1.1 Introduction2 28 February Topic 1.2 The basic macroeconomic model3 7 March Topic 1.2 The basic macroeconomic model

Module 2 The supply side4 14 March Topic 2.1 The labour market5 21 March Topic 2.2 AS and AD in the macroeconomic model6 28 March Topic 2.2 AS and AD in the macroeconomic model7 4 April Topic 2.3 The Phillips Curve – the national rate of unemployment

Assignment 1 due Wednesday, 6 April 2005

Module 3 Expectations and open economy macroeconomics

8 11 April Topic 2.4 Money growth and economic activity

9 18 April Topic 3.1 The role of expectations

10 25 April Topic 3.1 The role of expectations

11 2 May Topic 3.2 Open economy macroeconomics

12 9 May Topic 3.2 Open economy macroeconomics

Assignment 2 due Wednesday, 11 May 2005

Module 4 Macroeconomic crises and economic policy13 16 May Topic 3.2 Open economy macroeconomics14 23 May Topic 4.1 Macroeconomic problems15 30 May Topic 4.2 Macroeconomic policies16 6 June Revision

14-25 June Examination period

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Student subject surveysIt is University policy that all subjects are evaluated at least once every three years through the student subject survey procedure administered by the University’s Centre for Enhancing Learning and Teaching (CELT). Information from this process is provided to subject coordinators to assist in maintaining or improving the quality of teaching, assessment, and administration of subjects. The Faculty of Commerce values your feedback very highly and does make appropriate changes to its subjects. If you are interested in the details of any enhancements to this subject as a result of the latest survey, please contact the subject coordinator.

ResourcesThe learning resources for this subject consist of:

Subject OutlineStudy GuideReadings

Prescribed text

Blanchard, O & Sheen, J 2004, Macroeconomics, Australian edition, Pearson Education, NSW, Australia.

You are also recommended to purchase the study guide that accompanies this text.

Findlay, D 2002, Study Guide and Tutorial – Macroeconomics, Prentice Hall, New Jersey.

There is no separate Study Guide to go with the new Australian edition.

Supplementary texts

The subject will closely follow the sequence and approach of the required text. The Study and Tutorial guide provided for this text by Findlay is a valuable resource and hence a recommended addition. Some additional readings are provided in the course materials as well as references to a select number of texts. These are considered useful additional readings should you find the need. Of this group the Australian version of the text by Dornbusch et al is probably the best alternative.

Students are also expected to remain well informed of current macroeconomic and financial affairs via the quality financial press. You should notice that much of the source for analytic comment in the better newspapers comes from publications such as the RBA’s Bulletin, the Treasury’s Roundup, and international magazines such as The Economist.

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Dornbusch, R, Fischer, S & Kearney, C 2001, Macroeconomics Australian Edition, 8th edn, McGraw Hill, Sydney.

Miles, D & Andrew, S 2002, Macroeconomics – understanding the wealth of nations, John Wiley & Sons.

Gordon, RJ 2003, Macroeconomics, 9th edn, Addison Wesley.

Library services

You can find on the Library Services web site full details of how we can help you find books, articles, Australian and international databases, full-text newspapers and journals, electronic reference collections as well as links to other libraries and their catalogues:

http://www.csu.edu.au/division/library/

Library contact details are published on the website as well as in the Distance education manual – Putting it together.

AlburyBathurstWagga Wagga

1800 006 8561800 027 2071800 808 369

Electronic communication

This is an online supported subject. Depending on which resource you have access to, you are encouraged to read either the section of the Distance education manual – Putting it together that relates to information technology, the booklet entitled get on with I.T., or the CD ROM entitled get on with I.T. They each provide comprehensive details about the University’s online services, including how to gain access to those services.

A range of information and services concerning this subject is accessible through your personalised area (my.csu) of Charles Sturt University’s web site at the following URL:

http://my.csu.edu.au

my.csu is a secure (password-protected) web site that enhances navigation of the University’s online environment. It brings together information that relates to you. For example, Personal Details provides your textbook lists, examination timetables, academic transcripts and examination results, finance balances, and direct access to online subjects and forums. This web site also contains your eBox where official University communications will be sent, e.g. HECS information, messages from the Vice-Chancellor.

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http://my.csu.edu.au/

http://www.csu.edu.au/division/library/


Every distance education subject offered has an online Subject Outline. This outline links to learning resources and services available to assist you with the subject. These services include direct access to the:

internet links and resources relevant to your subject;

online subject forum which provides you with an opportunity to engage in discussion with your subject coordinator and other students enrolled in the subject;

a subject email address that allows you to contact your subject coordinator;

Electronic Assignment Submission Tracking System (EASTS) that allows you to submit your assignments online; and

library, allowing you to search for subject information and resources.

Please note that due to the dynamic nature of the World Wide Web, some web sites may have been moved or links may have become inactive. Your assistance in reporting new, moved and inactive web sites through your subject forum is appreciated.

Residential school

There is no residential school for this subject.

Assessment

Terms

There are three items of assessment, two assignments and an examination.The two assignments are worth a total 50% and the examination is worth 50%. Failure to submit an assignment will result in that student forfeiting all marks associated with that item of assessment. To pass the subject, students must submit all the assignments and pass the final examination.

Grades

Final grades for this subject are awarded by the Commerce Faculty Assessment Committee in accordance with the University’s Assessment Regulations.

Marks may be scaled to produce a distribution of grades which conforms to the expected norms specified in the University’s and Faculty’s Assessment Regulations.

High marks in the continuous assessment items will not automatically guarantee a specific award. In order to qualify for a Credit, Distinction or High Distinction a student is expected to achieve a commensurate mark in the final examination.

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Assessment schedule

Assessment Value Due date* Return date**

Assignment 1 25% Wednesday, 6 April 2005 27 April 2005

Assignment 2 25% Wednesday, 11 May 2005 1 June 2005

Examination 50% Exam period (14-24 June 2005) Not applicable

* due date is the last date for assessment items to be received at the University** applies only to assessment items submitted by the due date

Due date

You should note that this subject uses a due date system for assignments; i.e. the stated date is the last date for acceptance for that assignment; it is not the date by which the assignment must be posted. You must timetable your work schedule so you have plenty of time to ensure your work arrives on time.

Assessment regulations

The assessment practices of all University subjects are conducted in accordance with the University’s regulations on Assessment which are published in the Academic Manual http://www.csu.edu.au/acad_sec/manuals/g1.rtf and Section 6 of the University Handbook.

Variations to assessment

Should it be necessary to vary the assessment in this subject, you will be notified in writing by the subject coordinator, or subject convenor where one is appointed, in accordance with the Awards, Courses and Subjects policy (Part L6.3, section 1.4) of the Academic Manual:

http://www.csu.edu.au/acad_sec/manuals/l6-3.rtf

Submission of assignments

It is recommended that your name and your student number be included in the header or footer of every page of any assignment.

Charles Sturt University has a centralised assignment receipt centre. Unless they are submitted electronically (refer to the next section) all assignments should be accompanied by a completed assignment cover sheet and either mailed to the following address:

Assignment SectionLearning Materials CentreCharles Sturt UniversityPrivate Bag 2Bathurst NSW 2795

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http://www.csu.edu.au/acad_sec/manuals/l6-3.rtf

http://www.csu.edu.au/acad_sec/manuals/g1.rtf%20


or lodged at any campus via the special assignment post box located outside the Learning Materials Centre on each campus. These boxes are cleared at 5 pm each week day.

The Assignment Section will record the receipt of your assignment on the computer system, date stamp and return the acknowledgment card to you and forward the assignment directly to the subject coordinator.

Electronic Assignment Submission Tracking System (EASTS)

Assignments can be submitted electronically to the CSU Assignment Section via EASTS (Electronic Assignment Submission Tracking System).

In order to access the EASTS, go to the online Subject Outline for this subject. On the Overview page you will find a link called Electronic Assignment Submission where you are given step-by-step instructions to guide you through the online submission process. EASTS has a help function that will allow you to print out instructions to assist you in this process if required.

Note:

A message will be sent to the email address, as recorded on the system under ‘My Email’, confirming the receipt of your assignment via EASTS.

A duplicate assignment cover sheet will be attached to the assignment on receipt at CSU.

Assignments submitted electronically via EASTS will be returned, after marking, by post, not electronically.

Assignment return

You should normally expect your marked assignment to be despatched to you within three weeks of the due date, if your assignment was submitted on time.

If an assignment is submitted on time but not returned by the return date, you should make enquiries in the first instance to the subject coordinator. If the subject coordinator is not available, contact the Student Services Help Desk:

AlburyBathurst Wagga Wagga

(02) 6051 6828(02) 6338 4678(02) 6933 2405

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Late submission of assignments

The Faculty of Commerce has resolved not to accept faxed assignments under any circumstances.

If you find you are having difficulties in progressing with an assignment do contact your lecturer before the due date regarding an extension. If your assignment is not submitted on time the assignment will be penalised if an extension has not been granted. Extensions are not automatic.

Work related requests for an extension will not normally be granted. Assume that the unexpected will happen and leave enough time to cope.

Penalties for late assignments

The penalty for late submission of an assignment without obtaining the subject coordinator’s approval for an extension will be 10% deduction per day including weekends, of the maximum marks allocated for the assignment, i.e. 1 day late – 10% deduction, or 2 days late – 20% deduction. For example, for an assignment worth 20 marks, the calculations depending on the penalty given are as follows:

Marks received (before penalty)Less 1 day late penaltyStudent’s final mark

Marks received (before penalty)Less 2 days late penaltyStudent’s final mark

18 marks 2 marks 16 marks

18 marks 4 marks 14 marks

Assignments more than 10 days late will not normally be accepted for marking or the meeting of assessment requirements.

Special consideration

Academic regulations provide for special consideration to be given if you suffer misadventure or extenuating circumstances during the session (including the examination period) which prevents you from meeting acceptable standards or deadlines.

Applications for special consideration must be submitted in writing and include supporting documentary evidence. Such applications should be sent to the Student Administration Office.

For further information about applying for special consideration please refer to Part C3 – Special Consideration Regulations - of the Academic Manual, at the web site:

http://www.csu.edu.au/acad_sec/manuals/c3.rtf

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http://www.csu.edu.au/acad_sec/manuals/c3.rtf


Academic conduct

The University’s Student Charter expects that you, as a student, will be honest in your studies and research and that you will not do anything that will interfere with or frustrate the studies and research of other students.

In particular, you are expected to:

acknowledge the work of others in your assignments and other assessable work;

not knowingly allow others to use your work without acknowledgment;

report honestly the findings of your study and research; and

use only permitted materials in examinations.

The Student Charter is published on the Web at:

http://www.csu.edu.au/acad_sec/manuals/p9.rtf

Further information as to what constitutes academic misconduct may be obtained from the Student Academic Misconduct Rule at:

http://www.csu.edu.au/acad_sec/manuals/g12.rtf

Copies of the Rule are available from the University Library.

The Student Charter also expects you to use responsibly the educational facilities and resources we provide to you. In particular you should abide by:

The Rule of the Library

http://www.csu.edu.au/division/library/libabout/rule.htm

The Code of Conduct for Users of Electronic Facilities

http://www.csu.edu.au/acad_sec/manuals/o3.rtf

Copies of these documents can be obtained from the Library or the Computer Centre Help Desk.

Academic conduct is an important matter as penalties for breaching the above Rules and Code include suspension or exclusion from the University. The University Exclusion regulations are available in the Rules and Codes of conduct section of the Academic Manual at:

http://www.csu.edu.au/acad_sec/manuals/icontm.htm

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http://www.csu.edu.au/acad_sec/manuals/icontm.htm

http://www.csu.edu.au/acad_sec/manuals/o3.rtf%0D

http://www.csu.edu.au/division/library/libabout/rule.htm%0D

http://www.csu.edu.au/acad_sec/manuals/g12.rtf%0D

http://www.csu.edu.au/acad_sec/manuals/p9.rtf%0D


Plagiarism

It is unfair to honest students that other students cheat or plagiarise. Charles Sturt University takes a serious view of plagiarism and cheating in any form of assessment, and will take appropriate steps to detect plagiarism including using electronic plagiarism detectors.

Plagiarism consists of a person using the words or ideas of another as if they were his or her own. That is, using, or attempting to use, another person’s work without acknowledgement. The important message here is that if you use the work of another person then it must be acknowledged. The phrase “using another person’s work” includes, but is not limited to:

- using study guide material without acknowledgement;- paraphrasing the work of another person;- directly copying any part of another person’s work;- summarising the work of another person;- using or developing an idea or theme derived from another person’s work;- using experimental results obtained from another person’s work; and- in the collaborative projects, falsely representing the individual

contributions of the collaborating students where individual contributions are to be identified.

Other forms of cheating will also be treated with the utmost seriousness. The university reserves the right to electronically scan students’ assignments for the purposes of verifying originality.

Penalties for plagiarism are listed in the Academic Regulations under the Student Academic Misconduct Rule. The penalties include: a caution or reprimand; awarding of zero marks in the assignment, essay, project, test, examination or other work in respect of which academic misconduct has occurred; a fail in the subject; a fine; suspended enrolment; or exclusion from the University.

The Faculty of Commerce has acquired computer software which can link electronic or scanned assignments to online data to accurately detect plagiarism. The software can also detect situations when students submit assignments which include the work of other students. The software system used by the Faculty is called “Turnitin”. The Faculty reserves the right to require submission of assignments in electronic form. More details of this software can be found at the following web sites:

http://www.turnitin.com/

http://www.turnitin.com/static/products_services/plagiarism_prevention.html

Please note that we would much prefer to encourage students to submit assignments which clearly acknowledge sources rather than to detect plagiarism and to impose penalties. Recent penalties applied to plagiarism have included automatic failure and suspension from the University.

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http://www.turnitin.com/static/products_services/plagiarism_prevention.html

http://www.turnitin.com/


To assist students to understand how to reference and avoid unintentional plagiarism the Library has provided a guide to referencing assignments, essays, theses and dissertations.

Division of Library Services 2003, Referencing guide, 7th edn, Charles Sturt University, Bathurst, NSW.

http://www.csu.edu.au/division/library/tutorial/reference/refbib.htm

Presentation of assignments

Your essay should meet the following expectations:

1. Answer the question set, keep to the topic and include all relevant issues.

2. Go beyond what other people have said on the topic. Express their ideas in your own words but add your own ideas and opinions. To do this you need to analyse and criticise ideas where appropriate and argue your point of view. Support your arguments and opinions with referencing.

3. Show in the content of your essay that you have read the set texts and that you have consulted a reasonable range of books and journals.

4. Be clear and concise in your expression paying particular attention to sentence structure. Put yourself in the reader’s position and ask ‘Is the meaning clear?’

5. Include a separate synopsis of your paper and a separate conclusion.

6. Pay attention to the rules of writing in relation to paragraphing, punctuation, spelling etc.

7. Use headings for sections of your essay where appropriate. (See recent journal articles for example).

8. Acknowledge the sources of both direct quotes, ideas of others and background information by the use of appropriate references.

9. Attach a bibliography of the books and journal articles used in the assignment.

10. Adhere to the word limit. If an assignment ‘turns out’ much longer than required, rewrite it concisely. Marks will be deducted from essays which exceed the word limit excessively (say, by 10%).

In this subject you are expected to be familiar with all of the techniques of academic writing including style, structure, layout, notation and bibliographic referencing.

The preferred referencing system is the Harvard method. If you are unfamiliar with this you are required to purchase the CSU book entitled How to write better essays: a guide, available from the University Bookshop. As well as general

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advice on essay writing, the book contains a full description of Harvard reference listing.

You can also obtain a copy of the Division of Library Services 2003, Referencing guide, 7th edn, Charles Sturt University, Bathurst, NSW. This booklet is available online through the CSU Library website:


You should include in your reference list only those articles and books that you have actually cited. You may have read other articles and books but these should be included only in the bibliography.

The assignments you are required to submit in this subject involve mathematical calculations, and the presentation of essays, short written answers and reports. Typed assignments are always preferred, however, you may submit handwritten answers if you cannot have your assignments typed, providing that your handwriting is legible. Penalties will be imposed for illegible work, bad spelling and poor grammar. In submitting all assignments and all types of answers (i.e. calculations and written answers) you must pay close attention to presentation.

In answering essay and short answer questions make certain that you have attached a bibliography to your assignment which acknowledges all the sources you have used in developing your answer. For calculation questions students must show all workings.

Academic learning skills assistance

Visit the learning skills website for advice about assignment preparation, academic reading and notetaking, referencing, and preparing for exams at:

http://www.csu.edu.au/division/studserv/learning

You can also contact an adviser through the Student Services Help Desk on any of the following numbers:

AlburyBathurstWagga Wagga

(02) 6051 6828(02) 6338 4678(02) 6933 2405

You may also contact the Student Services Help Desk online at:

http://www.csu.edu.au/help

Queries regarding the content of this subject should be directed to your subject coordinator.

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http://www.csu.edu.au/help

http://www.csu.edu.au/division/studserv/learning



Assignment details

Assignment 1

Due date: Wednesday, 6 April 2005

Value: 25% of total assessment in subject

Assessment rationale

This assignment is designed for you to:

demonstrate your understanding and knowledge of the relevant topics in very specific and clear ways;

use your numerical skills in analysing the practical macroeconomic issues;

apply the theoretical issues in the real world context.

Assessment criteria

Your assignment will be marked based on the following criteria:

Correctness of your answers.

Supporting arguments.

Demonstrated evidence of clear understanding of the topics and the specific questions.

Ability to write your answers in a clear and targeted manner.

Answer all questions.

All questions have equal marks.

Question 1 (1 5 = 5 marks)

Consider the following numerical version of the IS-LM model:

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(Note that in this problem, money demand is assumed to be linear to make the mathematics easier.) Try to keep decimal fractions (like .0667) in the form of simple fractions (2/30) until calculating your final values for Y, I, and so forth.

a. Solve the equilibrium real output (Y). (Hint: Substitute the expression for the interest rate (given in the LM equation) into the IS equation, and solve for Y.)

b. Solve for the equilibrium interest rate (i). (Hint: Substitute the value you obtained for Y above into either the LM equation or the IS equation, and solve for i. You can substitute into both equations to check your work.)

c. Solve for the equilibrium values of consumption spending and investment spending, and verify the value you obtained for Y by adding up C, I and G.

d. Now suppose that government spending increases by 500 to 700. Solve again for Y, i, C and I, and once again verify the in equilibrium.

e. Summarise the effects of the expansionary fiscal policy in part f) by stating what has happened to Y, i, C and I.

Question 2 (2.5 2 = 5 marks)

a. Fiscal policy, just like monetary policy, cannot change the natural level of output. Why then is monetary policy considered neutral but fiscal policy is not?

b. Suppose that you are advising a government that wants to reduce its inflation rate. It is considering two options : a gradual reduction over several years and an immediate reduction. If the only criteria you were to consider was the sacrifice ratio, which option would you take? Why might you want to consider this criteria?

Question 3 (1 5 = 5 marks)

Suppose the Phillips curve is given by :

Where,

Also suppose that is initially equal to zero.

a. What is the natural rate of unemployment?

Now suppose that the rate of unemployment is initially equal to the natural rate. In year t the authorities decide to bring the unemployment rate down to 3% and hold it there forever.

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b. Determine the rate of inflation in years t, t+1, t+2, t+10 and t+15.c. Do you believe the answer you gave in (b)? Why or why not?

Now suppose that in year t+5, increases from 0 to 1.

d. Why might increase like this? What is the effect on un ?

Suppose that the government is still determined to keep u at 3% forever.

e. What will the inflation rate be in years t+5, t+10 and t+15?


What if the interest rate has no effect on investment? Suppose that investment is not responsive to the interest rate.

a. Can you think of a situation where this may happen?b. What does this imply for the slope of the IS curve?c. What does this imply for the slope of the LM curve?d. What does this imply for the slope of the AD curve?


Using the Aggregate Supply relation , explain how each of the following events will affect the price level ;

a. 5% increase in b. Increase in mark-up (c. Decrease in output (Y)d. Increase in z

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Assignment 2

Due date: Wednesday, 11 May 2005

Value: 25% of total subject assessment

Maximum length: 2,000 words (excluding tables, graphs, bibliography, etc.)


This assignment is designed for you to:

apply the theoretical knowledge of macroeconomics to explain the practical events in the Australian economy;

demonstrate your level of understanding and the level of research effort;

develop your abilities to collect and interpret statistical data;

develop your ability to communicate in writing and create a professional presentation.

Assessment criteria

Please refer to the specific criteria for Assignment 2.

Topic

Assess the impacts of changes in monetary policy in Australia on output, employment, inflation and exchange rates during the last five years (January 2000 – December 2004).

Use changes in ‘target cash rate’ as the indicator of monetary policy changes. Remember, money supply has to go up to reduce the target cash rate and vice versa.

Hints

You must do research to write a good assignment. Try to use different sources of information (from web and hard copies) and analyse them properly.

Write in essay format. The essay should be divided into different sections (as per your perception and convenience), but it must have an introduction and a conclusion.

Must use graphs and tables to illustrate.

Try to be more analytical than descriptive (i.e. analyse the information and try to explain the movements).

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Collect data and information on changes in monetary policy, real GDP growth, unemployment rate, inflation rate and exchange rate for the required five years (sources are given below). You may include additional related variables as well to explain the impacts on the economy.

Try to identify the impacts of cash rate changes on the variables mentioned in the topic. Comment on the level of impacts. Explain why impacts on some areas are stronger than the others.

Present trend data in graphs to explain the relationships clearly.

Use all the theoretical concepts learned in this subject so far (particularly the relationships explained in Topic 2.4) to explain the actual situation in Australia. Explain clearly the difference you observe between theories and practice in this situation.

Source of data and information

Statistical data

The Australian Bureau of Statistics (http://www.abs.gov.au)The Reserve Bank of Australia (http://www.rba.gov.au).

Quick data sources

RBA site – go to ‘Statistics’, then :

For Target Cash Rate : ‘Changes in Target Cash Rate’ table.

For GDP : Table G10 under ‘Bulletin Statistical Tables’. You need to work out growth rates from absolute figures. It may be advisable to use quarterly growth rates.

For Unemployment : Table G7 under ‘Bulletin Statistical Tables’.

For exchange rate : Table F11 under ‘Bulletin Statistical Tables’.

For inflation : Table G1 under ‘Bulletin Statistical Tables’.

For additional data you may look at RBA and ABS sites.

Data and information

Reserve Bank of Australia (http://www.rba.gov.au).Commonwealth Treasury (http://www.treasury.gov.au)Financial newspapers and journals [e.g. the Australian Financial Review (http://afr.com.au)]

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http://afr.com.au/

http://www.treasury.gov.au/

http://www.rba.gov.au/

http://www.rba.gov.au/

http://www.abs.gov.au/


Assessment criteria for Assignment 2

Specific criteria

1. Relevance of content to topic (20% of marks)

Demonstration of clear understanding of the relevance of the subject you are analysing.

Overall understanding of the assignment objective.

(10% of marks for each)

2. Clarity of arguments (30% of marks)

Quality of logical arguments Effective linkages between concepts and sections Clarity of concepts


3. Data collection and presentation (20% of marks)

Collection of appropriate data Presentation of data (tables, graphs, etc.)


4. Presentation and organisation of the essay (20% of marks)

Quality of organisation - should comprise of an introduction, body (may be in several well identified sections) and conclusion – should have clear paragraph structure (with sub-headings, if you feel necessary) and linkages.

Quality of presentation - expressed clearly, concisely and within word limit, clear graphs and tables.


5. Reference (10% of marks)

All source material should be appropriately referenced in the essay and a list of all materials be included in the bibliography at the end of the essay.

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Final examination

Due date: Examination period

Value: 50% of total assessment in subject

Note

You must sit and pass the final examination in order to pass the subject.


The final exam is designed to:

allow you to demonstrate your overall understanding of the subject;

give you wider scope in answering and in interpreting different concepts and practical problems in macroeconomics;

assess whether you have clearly understood and remembered essential concepts, knowledge and terms covered in the subject.

Assessment criteria

Marks will be awarded based on the following criteria:

Correctness of your answers.

Supporting arguments.

Demonstrated evidence of clear understanding of the subject and the specific questions.

Ability to write your answers in a clear and targeted manner.

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Sample examination paper

FACULTY OF COMMERCE

AUTUMN SESSION EXAMINATION

ECO220 MACROECONOMIC ANALYSIS

LECTURERS: Dr. P. K. Basu and Dr. H Kidane

DAY & DATE: TIME: 13.50 – 17.00 hoursWRITING TIME: Three hours READING TIME: Ten minutes

MATERIALS SUPPLIED BY UNIVERSITY: 1 x 24 page answer bookletGeneral Purpose Answer Sheet

MATERIALS PERMITTED IN EXAMINATION: Battery/solar Calculator (not programmable, no printer), 2B Pencil/Eraser, simple English dictionary.

NUMBER OF QUESTIONS : Part A: 25; Part B : 5 out of 9

INSTRUCTIONS TO CANDIDATES:

1. Enter your name and student number and sign in the space provided at the bottom of this page.

2. This is a closed book examination.3. Part A: Answer all twenty-five (25) multiple-choice questions. (25 marks)4. Part B: Answer five (5) of the nine (9) questions. (75 marks)

This examination is worth 50% of the assessment for this subject.

INSTRUCTIONS TO INVIGILATORS:

THE QUESTION PAPER MUST NOT BE RETAINED BY THE CANDIDATE.

STUDENT NAME: ............................................ STUDENT NO.: ........................

STUDENT SIGNATURE: .........................................................................................

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PART A(25 marks)

Answer the following twenty-five (25) questions on the multiple choice answer sheet provided.

Choose the correct (best alternative) answer to each question.

1. Total saving in an economy is the sum of private saving and

a) Taxes.b) Government spending.c) The excess of taxes over government spending.d) Fixed investment.

2. If the GDP deflator is less than one, then:

a) nominal GDP is larger than real GDP. b) prices in the base period are lower.c) real GDP is greater than nominal GDP.d) the quantity of output produced in the base period is larger than the

quantity in the current period.

3. Suppose the GDP deflator in year t equals 1.2 and equals 1.35 in year t+1. The rate of inflation between year t and year t+1 is:

a) 0.15%b) 15%c) 12.5%d) 1.125%

4. For an economy, C = 100 + 0.75 Yd. An one-time permanent increase in disposable income (Yd) of $ 200 million will cause consumption to rise by:

a) $ 150 millionb) $ 200 millionc) Less than $ 150 milliond) More than $ 200 million

5. An increase in the price level will tend to cause:

a) the LM schedule to shift up (left).b) the LM schedule to shift down (right).c) the LM schedule to become more interest rate inelastic.d) the LM schedule becomes less interest rate inelastic.

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6. A tax cut will cause:

a) The IS curve to shift to the right.b) The LM curve to shift down.c) The LM curve to shift up.d) The IS curve to shift to the left.

7. In the aggregate supply relation, an increase in current output causes:

a) An increase in unemployment.b) An increase in the current price level.c) An increase in the price level expected next year.d) An increase in the labour force.

8. When Y < Yn , we know that :

a) P > Pe

b) P < Pe

c) P = Pe

d) None of the above

9. Suppose workers and firms expect price level (P) to increase by 5%. Given this information, we would expect that:

a) The nominal wage (W) will increase by more than 5%b) The nominal wage (W) will increase by less than 5%c) The nominal wage (W) will increase by exactly 5%d) The real wage (W/P) will increase by 5%

10. After a fiscal expansion, which of the following is a complete list of variables that must increase?

a) Consumption and investment.b) Consumption, investment and output.c) Consumption and output.d) Consumption, output, investment and the interest rate.

11. Suppose the Phillips Curve is represented by the following equation:

The natural rate of unemployment in this economy is:

a) 12%b) 6%c) 5.5%

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d) none of the above.

12. Original Phillips Curve shifts immediately when :

a) Expected rate of inflation changes.b) Oil price changes.c) Labour force changes.d) Expected rate of unemployment changes.

13. Suppose un = 7% and that t-1 = 4%. If ut = 7%, we know that ,

a) Inflation in t will be less than 4%.b) Inflation in t will equal 4%.c) Inflation in t will be greater than 4%.d) More information will be needed to answer this question.

14. A consumer’s human wealth is:

a) The present discounted value of expected future after-tax labour incomeb) The sum of financial and housing wealthc) Wealth that cannot be taken from a person, by lawd) Any asset that makes life easier to live.

15. Siegnorage is equal to:

a) The rate of inflation.b) Real money balances.c) The percentage growth rate of nominal money.d) The percentage growth of nominal money times real money balances.

16. An analysis of consumption and investment suggests that:

a) Consumption is more volatile than investment.b) Investment and consumption exhibit approximately the same degree of

volatility.c) Investment is more volatile than consumption.d) A permanent change in income will have a relatively larger effect on

consumption than on investment.

17. Suppose policy makers want to increase output and keep net export constant. Which of the following policies would most likely achieve this?

a) An increase in government spending.b) A real depreciation.c) An increase in government spending and an increase in the real

exchange rate.d) A reduction in the real exchange rate.

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18. Which of the following will improve the trade balance?

a) An increase in foreign output.b) A decrease in the real exchange rate.c) An increase in government spending.d) All of the above.

19. Implementing an expansionary fiscal policy that had been fully anticipated by financial markets will cause:

a) Stock prices to rise.b) Stock prices to fall.c) Stock prices to remain unchanged.d) Ambiguous effects on stock prices.

20. Looking at the experience of many nations, it seems that the more independent the central bank,

a) The smaller the budget deficit.b) The less stable the government.c) The lower the rate of inflation.d) The greater the time inconsistency problem in making policy.

21. When Australian $ depreciates relative to US $, the Australian $ price of US goods:

a) Increases.b) Decreases.c) Is not affected.d) Depends on the effects of trade policies.

22. A devaluation represents:

a) An increase in the pegged value of the domestic currency.b) An increase in the pegged value of the domestic currency.c) A reduction in the foreign price level.d) An increase in the domestic price level.

23. According to the hysteresis explanation, the current high unemployment in Europe is due to :

a) A high natural rate of unemployment.b) Current low levels of government spending.c) Current high levels of taxes.

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d) Current restrictive monetary policy.

24. An increase in the money supply aimed at increasing aggregate output is referred to as

a) Contractionary fiscal policyb) Expansionary fiscal policyc) Expansionary monetary policy d) Contractionary monetary policy

25. An upward sloping yield curve suggests that

a) Financial markets expect long-term rates to increaseb) Financial markets expect long-term rates to fallc) I1t > ie

1t

d) I1t < ie1t

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PART B

(75 marks)(5 × 15 marks each)

Answer any five (5) of the nine (9) questions.

Please draw diagrams when applicable

QUESTION : B.1

Suppose that money demand is given by ;

Md = $Y (0.16 - 0.29 + 0.38 – i)

If $Y = $ 150, Supply of money = $ 30 and the financial market is in equilibrium,

i) What is the interest rate ?ii) If the Reserve Bank of Australia wants to increase i by 10 percentage points

(for example, say from 2% to 12%), at what level should it set the supply of money?

Explain your answers.

QUESTION : B.2

a) Why is the wage-setting relation ( W = Pe F(u,z)) downward sloping?b) Why is the price-setting relation ( P = (1 + (mark-up)) W ) a horizontal line?c) Explain how the natural rate of unemployment is determined with the help of

these two relation?

QUESTION : B.3

“Prices in the stock markets are not moving rationally. They are not also linked with the fundamental economic variables.” Discuss the above statement.

QUESTION : B.4

Show the effects of each of the following shocks on the position of the IS, LM, AD and AS curves in the medium-run. Then show the effect on output, the interest rate, and the price level, also in the medium-run. Assume that before the changes, the economy was at the natural level of output.

a) An increase in consumer confidence.b) An increase in taxes.

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QUESTION : B.5

Suppose the unemployment benefits increased permanently.

a) What will happen in the short run? Illustrate with the:

i)AD and AS diagramii) IS-LM diagram

b) What will happen in the long run? Illustrate with the:

i) AD and AS diagramii) IS-LM diagram

QUESTION : B.6

Discuss the main costs and benefits of inflation. Using the Taylor’s rule, explain how close should the central bank stay to the inflation target.

QUESTION : B.7

Define the real exchange rate. What happens to the price of US goods in terms of Australian goods when the real exchange rate (for Australia) appreciates?

QUESTION : B.8

Consider an economy with a fixed exchange rate. Assume that the price level is fixed.

a) What is the effect on equilibrium income and trade balance of a depreciation in the first six months after the depreciation?

b) What is the effect on equilibrium income and trade balance of the depreciation after the first six months?

QUESTION : B.9

Write short notes on any two of the following:

a) Interest rate parityb) Yield curvec) Tobin’s qd) Hysteresis

Answers to MCQs – Autumn 2002

1. c

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2. c3. c4. a5. a6. a7. b8. b9. c10. d11. b12. a13. d14. a15. d16. c17. c18. a19. c20. c21. a22. a23. a24. c25. a

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