23566 Economics For Business

Employ the aggregate demand and supply model for the Australian economy, to analyse the consequences for real GDP and the general price level of the following scenarios. Confine your analysis to the short-run. In your response clearly state your assumptions.

 

(a) the price of iron ore, a major export product, increases substantially,

(b) a favourable set of weather conditions leads to a substantial rise in Australian agricultural output,

(c) the government spends significant money in developing a broadband internet network across the country,

(d) the price of oil, a product Australia primarily imports, fall substantially.

Increase in the Price of the Iron Ore

Export earning is one of the essential components that influence the aggregate demand (Blanchard & Johnson, 2013). Being a major Australian export, the growth in the price of iron ore will increase the export earnings of the country. As a result, the aggregate demand of Australia will increase making the real Gross Domestic Product and the general price level in the economy to increase.

he climb in the price of iron ore will result in growth in export earnings and hence increase the aggregate demand. The expansion in the total demand is shown by the shift of the AD curve rightwards from AD to AD1. Consequently, the real output increases from Y1 to Y2 and the prices from P1 to P2 as shown on the graph one above.

A Substantial Rise in Australian Agricultural Output

A favorable weather that results in the increase in agricultural production in Australia is good for the economy. This occurrence will increase the aggregate supply in the Australian economy. The rise in the aggregate supply will result in a reduction in the price and expansion in the real GDP of the country.

The increase in the aggregate supply is shown by the shift in the aggregate supply curve from SRAS₁ to SRAS₂. As a result, the real GDP increases from Y1 to Y2 and the general price in the economy drop from P2 to P1.

Developing a Broadband Internet Network

Government’s initiative of developing a broadband internet network in the country shows an increase in investment. An investment is a constituent of aggregate demand, and thus we anticipate the total demand to be raised by this government’s action. Better internet coverage can enhance several business activities such as online trading and advertisements. As a result, real Gross Domestic Product and general prices will increase.

Investment in the broadband internet network will make the aggregate demand curve to shift towards right from AD to AD1. This change leads to an increase in both the Gross Domestic Product and the general prices.

Fall in the Price of Oil

Oil is an important commodity that influences many economic activities in a country. Oil prices indirectly determine costs such heating, transportation, and manufacturing (Boyes & Melvin, 2012). Therefore, a drop in the price of oil will result in a reduction in the costs associated with economic production in Australia. Low cost of production will make the aggregate supply to increase and hence a drop in general prices and an increase in the real output. 

A decline in oil price will reduce the cost of production and thus the AS curve will shift rightward from SRAS₁ to SRAS₂. The general price will drop from P2 to P1 and the real output increase from Y1 to Y2. 

Bibliography

Blanchard, O., & Johnson, D. R. (2013). MACROECONOMICS. Boston : Pearson.

Boyes, W. J., & Melvin, M. (2012). Macroeconomics. Mason, OH: South Western.