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Question:

Qu. 1(a) Explain what is meant by the statement, “One factor keeping the jobless rate from falling more rapidly is Australia’s participation rate which edged up…”, by highlighting the connection between jobs growth, participation rate and unemployment rate.
 
Qu. 1(b) The article states that most of the job growth is with “…four in five taking up fulltime positions”. Explain whether or not the official unemployment rate is affected by job growth occurring mainly in the form of full-time positions in comparison to part-time positions. In your answer explain the implications of this for the concept of measuring ‘full’ employment.
 
Qu.2 Use the aggregate expenditure (AE) model to depict the situation that has occurred over the past few months in terms of the resulting impact on economic output and (un)employment. In your answer make sure to discuss the equilibrating process of moving to a new macroeconomic equilibrium output.
 
Qu. 3 Use the static AD-AS model to analyse the circumstances where the RBA is “...blindsided by a more rapid fall in the 5.4 per cent unemployment rate and faster inflation” and does not raise interest rates; and jobs growth and the fall in the unemployment is greater than expected. In your answer make sure to use the static AD-AS model show the initial impact on output and the price level, and also explain the longer run implications if the Reserve Bank fails to raise interest rates if economic circumstances as predicted by some market economists eventuate.
 
Qu. 4 Use the dynamic AD-AS model(s) to explain the economic circumstances which will determine whether the Reserve Bank adopts the approach where “the official cash rates will remain unchanged through into the first half of 2019” in contrast to the circumstances where it will “turn more hawkish” and will raise interest rates over the next 12 months.
 
 

Answer:

Answer to question 1 (a):

Job growth is a statistical measurement through which the government of any country can track creation of new jobs on a monthly basis (Adelino, Ma and Robinson 2017). Hence, this figure measures economic expansion of the country and consequently represents health of the national economy.

Labour force participation rate, on the other side, measures the proportion of working-age population, which actively engages within a country’s labour market. They can be engaged through working or seeking for a job (Elsby, Hobijn and ?ahin 2015). Thus, participation rate gives the indication of available supply of labour compare to the working age population for producing goods and services. Hence, this rate provides the distribution of the total working force of a country.

The unemployment rate is another concept related with labour market. This rate represents the share of total labour force, which is jobless, in terms of percentage. This rate is considered as a lagging indicator, which implies measurable economic factor. This factor changes when the economy starts to follow a specific trend (Theut Riis, Thorlacius, Knudsen List and Jemec 2017). Thus, this unemployment rate rise when the economy experiences poor conditions and jobs become scarce. On the contrary, if the economy follows a healthy rate as well as huge number of jobs, then this rate could be decreased. In this context, it can be mentioned that labour force participation rate and unemployment rate has opposite relation.

Thus, these three indicators has close link through which labour market of Australia can be described. Through job growth, the economy can increase its labour force participation rate in job market. This in turn can reduce the unemployment rate and represent a healthy labour market (Mokyr, Vickers and Ziebarth 2015). Thus, according to the given scenario, more jobs are need to create for reducing the unemployment rate.

Answer to question 1 (b):

The official unemployment rate is used in Australia to understand its labour market condition. This situation occurs when someone wants to work though becomes unable to find one. The job growth in this country fails to achieve the target, as full-time employment level declines. The number of part-time job increases considerably and this reduces the rate of jobless workers (Beveridge 2014). Labour market in Australia has reached almost near to its full employment level. Therefore, unemployment rate is not reducing further, as many people are entering into the job market for seeking job. As a result, work force participation rate also becomes high. However, overall the number of part-time work becomes high compare to full-time work.

Full employment implies an economic situation, where the economy can successfully utilises all available labour resources efficiently. Full employment considers both skilled and unskilled labours. Job growth considers both part-time and full time work while unemployment rate of Australia also considers the same (Frey and Osborne 2017). Thus, job growth cannot affect official unemployment rate due to full-time positions compare to part-time ones.

Answer to question 2:

Aggregate expenditure model is equal with the sum of planned household consumption (C) along with investment (I), government expenditure (G) and net exports (NX) at a particular price level. Hence, the equation of aggregate expenditure (AE) is as follows:

AE= C+I+G+ NX

AE measures aggregate amount that households and firms intend to spend on goods and services at each income level. The economy can reaches to an equilibrium level if aggregate expenditure equates with aggregate supply or total output of the economy (Rodríguez 2018). If the economy produces output at its full employment level then total expenditure equates with total output. However, if the economy experiences more expenditure compare to aggregate supply than output or prices can be increased due to higher demand (DiMasi, Grabowski and Hansen 2016). On the contrary, if the economy experiences excess supply compare to aggregate expenditure then prices or output level can be reduced and this in turn can reduce total national income or gross domestic product of the economy.

However, if the economy achieves full employment level before attaining the equilibrium then the economy can experience inflationary gap. In this situation, demand for goods and services become higher compare to aggregate supply. The Australian economy can experience in near future as the economy has almost attained its full employment level. Moreover, the country also creates more employment opportunity (Rudebusch and Williams 2016). In this situation, potential GDP of this country becomes low compare to the real GDP. Thus, to overcome this inflationary pressure, the Australian government can take fiscal policy by reducing its total expenditure (Hubbard et al. 2014). With this process, the government can lower its aggregate expenditure for equating it with aggregate output at its potential level.

 

Answer to question 3:

The aggregate supply (AS) curve represents total amount of output provided by household and firms at particular prices and wages. The aggregate demand curve is the combinations of real income and price levels, representing equilibrium goods market. The interest rate effect can determine this curve. This happens when a lower price level increases real money balances and reduces the interest rate (Hsing 2017). This in turn increases investment expenditure. Moreover, long-run aggregate supply curve represents the amount of goods and services that an economy produces with inputs at full employment. In static AD-AS model, the long-run supply (LRAS) curve does not shift. This implies that the economy does not experience any growth. Moreover, it is assumed that the inflation is constant during this period. Initially, actual GDP equates with potential GDP. However, any shock in aggregate demand can generate economic recession or inflation. In this situation, aggregate demand curve shifts towards left or right (Azevedo and Leshno 2016). Moreover, in both situations, firms adjust their production level as well as price level according to this aggregate demand. It continues until potential GDP equates with actual GDP again. For this, the model is called static

In above figure, Qp represents long-run equilibrium where potential GDP equates with actual real GDP. In the given situation, Australian economy is in expansionary phase. Consequently, aggregate demand increases and actual short-run GDP exceeds its potential GDP. In figure, aggregate demand shifts upward from AD0 to AD1. Fort this, the economy can experience inflation. However, to reduce this excess demand, firms can produce more output and increase price level (Cavoli and Wilson 2015). Consequently, the short-run aggregate supply curve also increases from SRAS0 to SRAS1. In this new equilibrium, the economy again starts to produce same amount of output at comparatively higher price level. Hence, based on static AD-AS model, the economy is actually experiencing stagflation where economy actually cannot grow further though the price level increases due to increase in aggregate demand. To maintain this inflation where further production is not possible, the economy needs to increase its interest rate. If the Reserve bank of Australia (RBA) cannot increase this interest rate then the price level even increases further with no economic growth (Leduc and Liu 2016). Thus, according to analysts, job boom in Australian market may pressurise the RBA to increase its interest rate. However, economists suggest that RBA is not increasing its cash rate up to 2020.

Answer to question 4:

  In dynamic Ad-AS model, economic growth occurs. Consequently, the long-run supply curve shifts rightward. Moreover, the aggregate demand also grows due to economic growth through increasing economic expenditure and investment. In long-run, firms also produce more output and this in turn increases short-run aggregate supply curve (Jiménez, Ongena, Peydró and Saurina 2017). Thus, in dynamic model, product and aggregate demand increases due to economic growth. In this model, both recession and inflation takes place. To reduce this, the government can take proper monetary as well as fiscal policy. In the following figure, dynamic AD-AS model will represent the scenario of Australian economy, where inflation takes place. The central bank allows monetary policy to adjust its interest rates due to change in output or inflation.

The dynamic aggregate supply curve will shift to the right, as the Australian economy is going to produce more goods and services. In addition to this, aggregate demand curve also increases. Thus, the economy is producing its output and consequently aggregate demand curve shifts from AD0 to AD1. However, due to increase in long-run aggregate supply curve, the economy may perform at recession (Michaillat and Saez 2015). Hence, to obtain equilibrium again, the Australian government needs to increase its aggregate demand up to AD3. To do so, the government can take effective monetary or fiscal policy (Hubbard et al. 2014). However, the aggregate price level will also increase and this further can cause inflation. Thus, to reduce this situation, the RBA may increase its cash rate.

 

References:

Adelino, M., Ma, S. and Robinson, D., 2017. Firm age, investment opportunities, and job creation. The Journal of Finance, 72(3), pp.999-1038.

Azevedo, E.M. and Leshno, J.D., 2016. A supply and demand framework for two-sided matching markets. Journal of Political Economy, 124(5), pp.1235-1268.

Beveridge, W.H., 2014. Full Employment in a Free Society (Works of William H. Beveridge): A Report. Routledge.

Cavoli, T. and Wilson, J.K., 2015. Corruption, central bank (in) dependence and optimal monetary policy in a simple model. Journal of Policy Modeling, 37(3), pp.501-509.

DiMasi, J.A., Grabowski, H.G. and Hansen, R.W., 2016. Innovation in the pharmaceutical industry: new estimates of R&D costs. Journal of health economics, 47, pp.20-33.

Elsby, M.W., Hobijn, B. and ?ahin, A., 2015. On the importance of the participation margin for labor market fluctuations. Journal of Monetary Economics, 72, pp.64-82.

Frey, C.B. and Osborne, M.A., 2017. The future of employment: how susceptible are jobs to computerisation?. Technological forecasting and social change, 114, pp.254-280.

Hsing, Y., 2017. Is Currency Depreciation or More Government Debt Expansionary? The Case of Thailand. Journal of Advances in Economics and Finance, 2(4), p.237.

Hubbard, G., Garnett, A., Lewis, P. and O’Brien, A., 2014. Essentials of Economics. Pearson Australia Pty Ltd

Jiménez, G., Ongena, S., Peydró, J.L. and Saurina, J., 2017. Macroprudential policy, countercyclical bank capital buffers, and credit supply: evidence from the Spanish dynamic provisioning experiments. Journal of Political Economy, 125(6), pp.2126-2177.

Leduc, S. and Liu, Z., 2016. Uncertainty shocks are aggregate demand shocks. Journal of Monetary Economics, 82, pp.20-35.

Michaillat, P. and Saez, E., 2015. Aggregate demand, idle time, and unemployment. The Quarterly Journal of Economics, 130(2), pp.507-569.

Mokyr, J., Vickers, C. and Ziebarth, N.L., 2015. The history of technological anxiety and the future of economic growth: Is this time different?. Journal of Economic Perspectives, 29(3), pp.31-50.

Rodríguez, S.P., 2018. The dynamic effects of public expenditure shocks in the United States. Journal of Macroeconomics, 56, pp.340-360.

Rudebusch, G.D. and Williams, J.C., 2016. A wedge in the dual mandate: monetary policy and long-term unemployment. Journal of Macroeconomics, 47, pp.5-18.

Theut Riis, P., Thorlacius, L., Knudsen List, E. and Jemec, G.B.E., 2017. A pilot study of unemployment in patients with hidradenitis suppurativa in Denmark. British Journal of Dermatology, 176(4), pp.1083-1085.

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