1 econ1002 macroeconomics for the global economy

1. 1
ECON1002 Macroeconomics for the global economy
Weekly learning activity (LA) and discussion question set
(DQs) tasks
1. Review weekly topics from your textbook, lecture slides and
Prepare dot point answers to the weekly questions before lecture
and workshop or tutorial.
2. Participate in discussions during weekly lectures and
workshops
by sharing your answers and updating your answers during
lectures and workshops
3. DQs assessment
a) Submit word processed (typed answers) for all odd number
questions (Q1, Q3, Q5… ignore if there is no Q5) in week 10.
b) Word limit per week is 300 word +/- 10%. Word limit
exclude
graphs, and reference listing at the end of your work DO
NOT EXCEED WORD LIMIT.
c) Use APA referencing style (Last name(s0) and date of
publication within document, followed by full reference for

2. example (last name(s), initials, date, title, journal, volume
and series number, pages
QUESTIONS
Week1 Introduction
1. Briefly discuss each of the following economic ideas: people
are
rational, people respond to incentives and optimal decisions are
made
at the margin. What is scarcity and why is scarcity central to the
study
of economics?
2. Australian university economics graduates spoke in
interviews of how
the study of economics provided a solid grounding that was
helpful in
their subsequent careers, which included working in government
departments, private banks, other financial institutio ns and
large
private companies such as Shell, (School of Economics,
University of
Queensland) i The students commented that studying economics
enabled them to:
• Think logically and critically.
• Develop a way of problem solving that they could appl y to

3. most decision
making.
• Consider alternative policy solutions and their consequences.
2
Why might studying economics be particularly a good
preparation for being a
top manager of a corporation, running your own business,
working in
international public organisations or having a leading role in
government?
3.
a. Assume that the state and territory governments throughout
Australia (your
country) increase the price of water in an attempt to reduce
consumption for
domestic use. What are the equity considerations with this
policy?
b. What is a free market? In what ways does a free-market
economy differ from
a centrally planned economy?
4.
Briefly discuss the difference between microeconomics and

4. macroeconomics.
Briefly explain whether each of the following is primarily a
microeconomic issue
or a macroeconomic issue.
a The effect of higher cigarette taxes on the quantity of
cigarettes sold.
b The effect of higher income taxes on the total amount of
consumer
spending.
c The reasons for the economies of East Asian countries
growing faster
than the economies of sub-Saharan African countries.
d The reasons for low rates of profit in the airline industry.
5. You have exams in economics and statistics coming up and
five hours available
for studying. The table shows the trade-offs you face in
allocating the time you
will spend in studying each subject.
HOURS SPENT STUDYING EXAM SCORE
CHOICE ECONOMICS STATISTICS ECONOMICS
STATISTICS
A 5 0 95 70
B 4 1 93 78
C 3 2 90 84

5. D 2 3 86 88
E 1 4 81 90
F 0 5 75 91
a Use the data in the table to draw a production possibility
frontier graph.
Label your vertical axis ‘Score on economics exam’ and label
your
horizontal axis ‘Score on statistics exam’. Make sure you label
the values
where your production possibility frontier intersects the vertical
and
horizontal axes.
b Label the points representing choice C and choice D. If you
are at choice
C, what is your opportunity cost of increasing your statistics
score?
c Under what circumstances would A be a sensible choice?
3
Week 2 Prices

6. 1. World production of wheat sometimes falls significantly due
to extreme weather
conditions, such as droughts. Draw a demand and supply graph
to show the
effect of a drought on the price of bread in Australia.
2. Chocolate lovers have been horrified by reports of a pending
chocolate
shortage. A recent report has predicted a worldwide chocolate
shortage within
the next five years which could cause the price of chocolate to
double. The
reasons for this prediction include an increase in diseases and
pests affecting
cocoa trees in some countries, such as Indonesia, and wars and
instability in
parts of West Africa, together with more secure production and
profits for crops
other than cocoa such as coffee and maize. On the demand side,
growing
incomes in countries such as China and India is leading to an
increase in
demand for chocolate. (Turnbull, 2015)ii
Based on the above discussion, illustrate the following using
demand and
supply graphs for each of the below.
a The effect on the supply of cocoa if the diseases and pests
affecting the
cocoa tree become worse.
b The effect on the demand curve of cocoa if worldwide

7. chocolate
consumption continues to rise, particularly in countries such as
China
and India.
c The effect on the world equilibrium price and quantity of
cocoa if cocoa
farmers in Indonesia substitute cocoa production with higher -
value crops
such as coffee and maize.
d The effect on the equilibrium price of chocolate if all first-
year students
rush out and purchase chocolate for their economics lecturers.
3. Government regulations in Australia on the educational
qualifications of those
working in childcare centres require higher levels of formal
training than a few
years ago. Suppose that these regulations increase the quality of
childcare and
cause the demand for childcare services to increase. At the same
time, assume
that complying with the government regulations increases the
costs of childcare
businesses. Draw a demand and supply graph to illustrate the
effects of these
changes in the market for childcare services. Briefly explain
whether the total
quantity of childcare services purchased will increase or
decrease as a result
of the regulations.

8. Week 3 GDP
1
a. Why in microeconomics can we measure production in terms
of quantity,
but in macroeconomics we measure production in terms of
market value?
b. If the Australian Bureau of Statistics added up the values of
every good and
service sold during the year, would the total be larger or smaller
than GDP?
c. In the circular flow of expenditure and income, why must the
value of total
production in an economy equal the value of total income?
4
2
a. Describe the four major components of expenditures in GDP
and write the
equation used to represent the relationship between GDP and
the four
expenditure components.
b. Why does the size of a country’s GDP matter? How does it
affect the

9. quality of life of the country’s people?
3
a. Why does inflation make nominal GDP a poor measure of the
increase in total
production from one year to the next? How does the ABS deal
with the problem
inflation causes with nominal GDP?
b. What is the main problem arising from the use of base year
prices to measure
real GDP?
4
a. Why does the size of a country’s GDP matter? How does it
affect the quality
of life of the country’s people?
b. Is the value of a house built in 2000 and resold i n 2018
included in the GDP
of 2018? Why or why not? Would the services of the real estate
agent who
helped sell (or buy) the house in 2018 be counted in GDP for
2018? Why or
why not?
c. Which component of GDP will be affected by each of the
following

10. transactions? If you believe that none of the components of
GDP will be
affected by the transactions, briefly explain why.
i. You purchase a new apartment.
ii. You purchase a second-hand car.
iii. An overseas person studies a degree at an Australian
university.
iv. A dairy farmer in Victoria produces milk which is shipped to
Singapore.
v. A Bakers Delight store purchases a new oven.
vi. The government builds new roads to help improve access to
mine
sites in Western Australia.
5
a. Suppose that a simple economy produces only the following
four goods and
services: textbooks, hamburgers, shirts and cotton. Assume that
all of the
cotton is used in the production of shirts. Use the information in
the following
table to calculate nominal GDP for 2018.
PRODUCTION AND PRICE STATISTICS FOR 2018
PRODUCT QUANTITY PRICE ($)
Textbooks 100 60.00
Hamburgers 100 2.00

11. Shirts 50 25.00
Cotton 800 0.60
5
b. An artist buys scrap metal from the local steel mill as raw
material for her metal
sculptures. Last year she bought $5000 worth of scrap metal.
During the year
she produced 10 metal sculptures that she sold for $800 each to
the local art
gallery. The gallery sold all of them to local art collectors at an
average price of
$1000 each. For the 10 metal sculptures, what was the total
value added of the
artist and what was the total value added of the gallery?
Week 4 Financial systems and business cycles
Multichoice activity 1 (MCA1) due online this week by Friday
11.59pm
1
a. What is the ‘rule of 70’? If real GDP per capita grows at a
rate of 7 per cent per

12. year, how many years will it take to double?
b. What is the most important factor in explaining increases in
real GDP in the
long run? What supportive government policies are crucial for
long-run
economic growth?
2
a. After reading about economic growth in this chapter,
elaborate on the
importance of growth in GDP, particularly real GDP per capita,
to the quality of
life of a country’s population.
b. What is potential GDP? Does potential GDP remain constant
over time?
3 The federal government in Australia has been running large
budget deficits.
Assume the government has stated that it will take actions that
will turn the budget
deficits into budget surpluses over time.
a Use a market for loanable funds graph to illustrate the effect
of the
federal budget surpluses. What happens to the equilibrium real
interest
rate and the quantity of loanable funds? What happens to the
level of
saving and investment?

13. b Now suppose that households believe that surpluses will result
in the
government cutting taxes in the near future, as they did in the
2000s
when there were budget surpluses. As a result, households
increase
their consumption spending in anticipation of paying lower
taxes. Briefly
explain how your analysis in part (a) will be affected.
4
a. People who live in rural areas often have less access to
capital and, as a result,
their productivity is lower on average than the productivity of
people who live in
cities. An article in The New York Times quotes a financial
analyst as arguing that
‘the core driver’ of economic growth in China ‘is the simple
process of urbanization’
(Irwin, 2014)iii. What does the analyst mean by the ‘process of
urbanization’?
b. Why is the role of the entrepreneur much more important in
the new growth theory
than in the traditional economic growth model?
6

14. c. Many economists argue that if you really want to reduce
world poverty then you
should be supporting free-trade negotiations and those investors
jetting around the
world developing globalisation. What do free-trade negotiations
and investors
jetting around the world have to do with reducing poverty?
5
a. What is the economic growth rate and how is it calculated?
b. What is the GDP deflator and how is it calculated? Use the
data in the
following table to calculate the GDP deflator for each year
(values are in
billions of dollars):
Nominal GDP
$
Real GDP
$
2
0
1
4

15. 13 377 12 959
2
0
1
5
14 029 13 206
2
0
1
6
14 292 13 162
2
0
1
7
13 939 12 703
2
0
1
8
14 527 13 088
c. Which year from 2014 to 2018 saw the largest percentage
increase in the
price level as measured by the GDP deflator? Briefly explain.

16. 7
Week 5 Growth sources and policies
1
a. Using the per-worker production function graphs below, show
the effect on real
GDP per hour worked of an increase in capital per hour worked,
holding
technology constant. Now, again using the per-worker
production function
graph, show the effect on real GDP per hour worked of an
increase in
technology, holding the quantity of capital per hour worked
constant.

17. b. What are the consequences for economic growth of
diminishing returns to
capital? How are some economies able to maintain high growth
rates despite
diminishing returns to capital?
2
a. What is the new growth theory? How does the new growth
theory differ from
the growth theory developed by Robert Solow?
b. Why does the economic growth model predict that poor
countries should catch
up to rich countries in income per capita? Have poor countries
been catching
up to rich countries?
3
a. Why are firms likely to under-invest in research and
development, which slows
the accumulation of knowledge capital, slowing economic
growth? Briefly
discuss three ways in which government policy can increase the
accumulation
of knowledge capital.

18. 8
b. Why does knowledge capital experience increasing returns at
the economy
level while physical capital experiences decreasing returns?
4. Why might some people in high-income countries be more
concerned with
certain negative consequences of rapid economic growth than
people in low-
income countries?
5. How might greater flexibility in labour markets and greater
efficiency in financial
markets lead to higher growth rates in real GDP per capita?
Week 6 Unemployment
Mid semester exam due this week today (online by Friday
11.59pm)
1.
a. How is the unemployment rate calculated? What are the three
conditions
someone needs to meet to be counted as unemployed?

19. b. What are the problems in measuring the unemployment rate?
In what ways does
the official ABS measure of the unemployment rate understate
the true degree
of unemployment? In what ways might the official ABS measure
overstate the
true degree of unemployment?
2. What would be some general reasons why a firm would lay
off a
substantial number of workers?
3
a. Prior to each federal election in Australia, the government
always
claims that they have created hundreds of thousands of jobs
during
their term of government. Is this claim correct? Briefly explain
your
answer.
b. Hundreds of thousands of jobs were eliminated from the
Australian
economy in 2016. Does this explain why the unemployment rate
also
rose during this year? Explain.

20. 4
a. What are the costs to individuals of being unemployed? Is the
cost to society of
unemployment equal to the sum of the costs to the individuals?
Why or why
not?
b. In addition to the payment of unemployment benefits, discuss
why extra costs
are borne by the federal government during times of rising
unemployment.
9
WEEK 7 Inflation
1
i. Briefly describe the major measures of the price level.
ii. Which measure is used most frequently in Australia to
measure changes in the
cost of living?

21. iii. Explain the difference and the link between the price level
and the rate of
inflation.
iv. What potential biases exist in calculating the consumer price
index? What steps
has the Australian Bureau of Statistics taken to reduce the size
of the biases?
v. What is the difference between the consumer price index and
the producer
price index?
2.
a. The following table shows the average percentage rises in
full-time adult
ordinary time earnings during the years 2014/2015 and
2015/2016, and also
the CPI for these years (as at June) (Australian Bureau of
Statistics, 2016).iv
Use these data to discuss what happened to wages negotiations
and wages
growth over the period 2014/2015 to 2015/2016.
ANNUAL WAGE RISE, % 2014/15 2015/16
All sectors 1.99% 2.22%
Private sector 2.01% 1.97%

22. Public sector 1.71% 3.41%
CPI 106.8 108.2
SOURCE: Australian Bureau of Statistics (2016), Average
Weekly Earnings, Australia & Consumer Price Index,
Australia, Time Series Workbook.
b How can inflation affect the distribution of income?
3.
a. Distinguish between demand-pull inflation and cost-push
inflation, and give an
example of a factor that might cause each to occur.
b. If consumer spending in Australia continued to increase even
though the
Australian economy was close to or at full employment, what
type of inflation
might occur? Briefly explain.
4
10

23. a. If the price of electricity rises because of a carbon tax, why
might this lead to
inflation? What type of inflation would this be?
b. At various times, much of Australia’s fruit crops in
Queensland have been
destroyed due to cyclones and associated floods. The scale of
destruction has
been sufficient to cause increases in the rate of inflation.
Explain what type of
inflation this would be classified as. Do you think the inflation
rates at such times
are entirely accurate? Briefly explain.
WEEK 8 AE & OUTPUT
Multichoice activity 2 (MCA2) due online this week by Friday
11.59pm
1. Suppose you read that business inventories increased
dramatically last month.
What does this tell you about the state of the economy? Would
your answer be
affected by whether the increase in inventories was taking place
at the end of a
contraction or recession or the end of an expansion? Briefly
explain.

24. 2.
a. How would the demand forecast for a major Australian
furniture manufacturer be
affected by each of the following?
i. A decrease in consumer spending in the economy
i. An increase in real interest rates
ii. An increase in the value of the Australian dollar relative to
other currencies
iii. A decrease in planned investment spending in the economy
b Draw the consumption function and label each axis. Show
the effect of an
increase in income on consumption spending. Does the change
in income
cause a movement along the consumption function or a shift of
the consumption
function? How would an increase in expected future income or
an increase in
household wealth affect the consumption function? Would these
increases
cause a movement along the consumption function or a shift of
the consumption
function?
3.
a. Unemployed workers receive unemployment benefits from the
government.
Does the existence of unemployment benefits make it likely that

25. consumption
will fluctuate more or fluctuate less over the business cycle than
it would in
the absence of unemployment benefits? Briefly explain.
b. Fill in the blanks in the following table. Assume for
simplicity that taxes are
zero. The numbers are in billions of dollars.
11
4
a. What is the meaning of the 45° line in the 45° line diagram?
Use a 45°line
diagram to illustrate macroeconomic equilibrium. Make sure
that your
diagram shows the aggregate expenditure function and the level
of
equilibrium real GDP and that your axes are properly labelled.
What does the
slope of the aggregate expenditure line equal? How is the slope
of the
aggregate expenditure line related to the slope of the
consumption function?
b. Is it possible for the economy to be in macroeconomic
equilibrium at a level

26. of real GDP that is greater than the potential level of GDP?
Illustrate using a
45° line diagram. Briefly discuss the multiplier effect and use a
45° line
diagram to illustrate the multiplier effect of a decrease in
government
purchases.
5
a. What is the difference between aggregate expenditure and
consumption
spending? Explain the difference between autonomous
consumption and
induced consumption. What is the formula for the multiplier?
Explain why this
formula is considered to be too simple.
b. Some economists have referred to the impact of government
infrastructure
spending in Australia in the following way: ‘The investment
multiplier will
provide a further boost to the Australian economy.’
i. What do the economists mean by the ‘investment multiplier’?
ii. Briefly explain what the economists means by saying that the
investment
multiplier would ‘provide a further boost to the Australian
economy’.
6
Fill in the missing values in the following table. Assume that
the value of the MPC does

27. not change as real GDP changes.
i. What is the value of the MPC?
ii. What is the value of equilibrium real GDP?
12
Week 9 Ad & AS analysis
1
What are the variables that cause the AD curve to shift? For
each variable,
identify whether an increase in that variable will cause the AD
curve to shift to
the right or to the left.
2
Draw a dynamic aggregate demand and aggregate supply graph
showing the
economy moving from potential GDP in 2017 to potential GDP
in 2018, with no
inflation. Your graph should contain the AD, SRAS and LRAS
curves for both
2017 and 2018 and should indicate the short-run macroeconomic
equilibrium
for each year and the directions in which the curves have

28. shifted. Identify what
must happen to have growth during 2015 without inflation.
3
Explain how each of the following events would affect the AD
curve.
a An increase in the price level
b An increase in government purchases
c Higher income taxes
d Higher interest rates
e Faster income growth in other countries
4
a. Explain why the long-run aggregate supply (LRAS) curve is
vertical.
b. Draw a dynamic aggregate demand and aggregate supply
graph to illustrate
how it is possible to have real GDP falling below potential GDP
between two
time periods at the same time as the price level is rising.

29. 13
Week 10
Multichoice activity 3 (MCA3) due online this week by Friday
11.59pm
Submit your word processed DQ answers(weeks 1-10) online
this week by Friday 11.59pm. word limit total of 3000 words (
300
words per week)
1.
a. According to Peter Heather, a historian at the University of
Oxford; during the
Roman Empire the German tribes east of the Rhine River
produced no coins
of their own but used Roman coins instead:
Although no coinage was produced in Germania, Roman coins
were in plentiful
circulation and could easily have provided a medium of
exchange (already in
the first century, Tacitus tells us, Germans of the Rhine region
were using good-
quality Roman silver coins for this purpose).(Heather, 2006)v
i. What is a ‘medium of exchange’?
ii. What does the author mean when he writes that Roman coins

30. could have
provided the German tribes with a medium of exchange?
iii. Why would any member of a German tribe have been willing
to accept a
Roman coin from another member of the tribe in exchange for
goods or
services when the tribes were not part of the Roman Empire and
were
not governed by Roman law?
b. On 1 January 2002, Germany officially adopted the euro as
its currency, and
the deutsche mark stopped being legal tender. However, even a
decade later,
many Germans were still using the deutsche mark to make
purchases, with
many stores in Germany continuing to accept it. Briefly explain
how it is
possible for people to continue to use a currency when the
government that
issued it has replaced it with another currency.
2.
a. What is the main difference between the M1 and broader
definitions of the
money supply?
b. Briefly explain whether each of the following is counted in
M1.
i. The coins in your pocket

31. ii. The funds in your building society demand deposit account
iii. The funds in your bank demand deposit account
iv. Your MasterCard credit card limit
c. Suppose you decide to withdraw $100 in currency from your
bank demand
deposit account. What is the effect on M1? Ignore any actions
the bank may
take as a result of your having withdrawn the $100. Is
measuring income a
way of measuring wealth?
14
3. Suppose you deposit $2000 in currency into your cheque
account at a branch
of the Commonwealth Bank, which we will assume has no
excess reserves
at the time you make your deposit. Also assume that the bank
maintains a
reserve ratio of 0.2, or 20 per cent.
a Use a T-account to show the initial impact of this transaction
on the
Commonwealth Bank’s balance sheet.
b Suppose that the Commonwealth Bank makes the maximum
loan they

32. can from the funds you deposited. Using a T-account, show the
initial
impact of granting the loan on the bank’s balance sheet. Also
include on
this T-account the transaction from (a).
c Now suppose that whoever took out the loan in (b) writes a
cheque for this
amount and that the person receiving the cheque deposits it in a
branch
of the Westpac bank. Show the effect of these transactions on
the balance
sheets of the Commonwealth Bank and Westpac bank, after the
cheque
has been cleared. (On the T-account for the Commonwealth
Bank, include
the transactions from (a) and (b).)
d What is the maximum increase in cheque account deposits that
can result
from your $2000 deposit? What is the maximum increase in the
money
supply? Explain.
4
a. What are the main roles of the Reserve Bank of Australia
(RBA)? How does
the RBA control liquidity in the overnight money market?
b. Explain briefly why an open market purchase of government
securities by the
RBA increase bank reserve and why an open market sale of
government
securities by the RBA decrease bank reserves?

33. 5
a. Explain why the RBA is targeting inflation in Australia.
Explain the most frequent
reason why the RBA uses open market operations in Australia.
b. What is the quantity theory of money? How does the quantity
theory explain
why inflation occurs? According to the quantity theory of
money, if the money
supply is growing at a rate of 6 per cent per year, the economic
growth rate is
3 per cent per year and velocity is constant, what will the
inflation rate be? If
velocity is increasing at 1 per cent per year instead of remaining
constant, what
will the inflation rate be?
6
a. What is hyperinflation? Why do governments sometimes
allow it to occur?
b. In April 2009, the African nation of Zimbabwe suspended the
use of its own
currency, the Zimbabwean dollar. According to a news article at
that time:
Hyperinflation in 2007 and 2008 made Zimbabwe’s currency
virtually worthless

34. despite the introduction of bigger and bigger notes, including a
10 trillion dollar
bill. (Voice of America News, 2009)vi
i. In the same article, Zimbabwe’s Economic Planning Minister,
Elton Mangoma,
15
was quoted as saying the Zimbabwean dollar ‘will be out for at
least a year’,
and in January 2009, the government of Zimbabwe made the US
dollar the
country’s official currency. Why would hyperinflation make a
currency ‘virtually
worthless’? How might using the US dollar as its currency help
to stabilise
Zimbabwe’s economy?
ii. An article on Zimbabwe describes conditions in summer 2008
as follows:
Official inflation soared to 2.2 million percent in Zimbabwe—
by far the highest
in the world… [and] unemployment has reached 80 percent.
(The New York
Times, 2008)vii
Is there a connection between the very high inflation rate and
the very high rate

35. of unemployment? Briefly explain.
c. During the German hyperinflation of the 1920s, many
households and firms in
Germany were hurt economically. Do you think any groups in
Germany
benefited from the hyperinflation? Briefly explain.
Week 11 Monetary policy and the RBA
1. Suppose a newspaper headline read: ‘Companies invest as
interest rates reach
a 20-year low’. Explain the connection between this headline
and the monetary
policy pursued by the RBA during that time. How might firms’
expectations that
the rates of return on new investments are too low make
monetary policy less
effective in ending a recession?
2. Use the following graph to answer these questions.
16

36. a If the RBA does not take any policy action what will be the
level of real GDP
and the price level in year 2?
b If the RBA wants to keep real GDP at its potential level in
year 2, should it
use an expansionary policy or a contractionary policy? Should
the RBA be
buying financial securities or selling them?
c If the RBA takes no policy action what will be the inflation
rate in year 2? If
the RBA uses monetary policy to keep real GDP at its full -
employment level,
what will be the inflation rate in year 2?
3. For many years now, the RBA has used the cash rate as its
monetary policy
target. Why doesn’t it target the money supply at the same
time? What are the
main arguments used to support inflation targeting? What are
the main
arguments against inflation targeting?
4.
a. Do you think that inflationary targeting has introduced an
economic
environment that is more conducive or less conducive to
investment and

37. economic growth? Explain your answer.
b. In what ways is the RBA more independent of the federal
government than
other institutions like, for instance, the Federal Treasury?
5.
a. What arguments do economists make in support of the
independence of the RBA
and what arguments are used against the independence of the
RBA?
b. Do you think that the RBA is truly independent of the
government in its
determination of monetary policy? Provide evidence for your
answer.
Week 12 Fiscal policy
…
Week 5
1.
a)
b)
3.
a)
b)
5.
Week 7

38. 1.
i)
ii)
iv)
v)
3.
a)
b)
Week 8
1.
3.
a)
b)
5.
a)
b)
Week 9
1.
3.
a)
b)
c)
d)
e)