1. Consider an economy initially at equilibrium level at near full employment. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy:
(a) The Central Bank within the economy lifts interest rates.
(b) There is an increase in private domestic investment spending.
(c) An increase in international oil prices.
(d) A fall in real estate prices in the capital cities of the country (hint: think of the effect upon one’s wealth level)
2. Show all three channels by which changes in interest rates affect economic activity. Under what conditions might expansionary monetary policy, that is, lower interest rates might not greatly affect domestic economic activity? (4 marks)
3. State the difference between:
- between Inflation and deflation.
- between the interest rate and the exchange rate
- between the balance of payments deficit and the budget deficit
- between the trade deficit and net foreign debt (4 marks)
4. Distinguish between demand pull and cost push inflation. Why might it be difficult to establish the extent to which a given rate of inflation is demand pull or cost push?
5a. The Australian dollar has fallen markedly against other major currencies. What is economic impact on local producers and consumers? (4 marks)
5b. Currently Australia is suffering from a structural budget deficit problem. What are the long term macroeconomic consequences of this? How should the Australian government deal with the problem? (4 marks)