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Questions:
1. The Government is contemplating a tax cut of $20 billion to boost the economy which is experiencing some recessionary pressure. Use the aggregate expenditure model to analyse what will happen to the equilibrium GDP. If the marginal propensity to save is 0.2, how  uch would it influence the equilibrium GDP? Explain your answer.
 
2. Starting from an initial long-run equilibrium, use the dynamic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in investment expenditure. What policy action would the central bank take in such circumstance?  
Answer:

Nominal GDP of nation represents the monetary values of all goods and services produced in a year where goods are valued in terms of current market price. Real GDP on the other hand in price adjusted measure of total output in a nation. A fixed base year is used to compute real GDP of the nation. An increase in nominal GDP tend to increases the value of real GDP given the price level is fairly stable (Goodwin et al. 2015). For Australia, the seasonally adjusted real GDP and nominal GDP constitutes a similar upward rising trend. The real GDP lies above the nominal GDP implying a decline in the price level. So far as the growth rate is concerned, similar trend in observed in percentage change in real and nominal GDP. The nominal GDP growth thus has a positive influence on real GDP.

Table 1: Inflation, unemployment, gross capital formation and expense in Australia

Australia

Year

Inflation

Unemployment

Gross capital formation

Expense

1991

3.222679913

9.579999924

24.22299997

23.1593187

1992

0.985915493

10.72999954

22.3441433

24.42396422

1993

1.813110181

10.86999989

23.59408776

24.94978282

1994

1.894977169

9.720000267

24.25033711

25.06025128

1995

4.638135783

8.470000267

25.93691424

25.37035171

1996

2.6124197

8.510000229

24.77917213

24.53408057

1997

0.250417362

8.359999657

24.7971273

23.78070009

1998

0.853455454

7.679999828

25.46564777

21.32156079

1999

1.465428277

6.869999886

26.09806763

24.53381643

2000

4.475183076

6.28000021

26.27650167

24.07095833

2001

4.380841121

6.739999771

23.42282754

26.3303033

2002

3.00317105

6.369999886

24.39965103

26.44611444

2003

2.770735241

5.929999828

25.9254454

25.8340018

2004

2.343612335

5.389999866

27.06087433

25.67329182

2005

2.668732782

5.03000021

27.4254073

25.61578597

2006

3.538487339

4.78000021

27.65794856

24.92062761

2007

2.332361516

4.380000114

27.84585816

24.47849996

2008

4.352643242

4.230000019

29.12600769

24.31734064

2009

1.82011224

5.559999943

27.90602567

26.482355

2010

2.845225682

5.210000038

27.5528937

26.77540331

2011

3.303850156

5.079999924

27.11341551

25.96923518

2012

1.762780156

5.21999979

28.32663311

26.24604405

2013

2.449888641

5.659999847

28.44050751

25.98320556

2014

2.487922705

6.070000172

27.20492597

26.40565053

2015

1.508366722

6.059999943

26.73764514

26.86225739

2016

1.276990945

5.71999979

25.53702298

27.03986551

 

 

 

 

 

(Source: data.worldbank.org)

Table 2: Inflation, unemployment, gross capital formation and expense in China

China

Year

Inflation

Unemployment

Gross capital formation

Expense

1991

3.556686

4.889999866

35.8658256

 

1992

6.353981

4.389999866

39.83722181

 

1993

14.61008

4.329999924

44.24292895

 

1994

24.25734

4.340000153

40.94850525

 

1995

16.78945

4.550000191

39.68463866

 

1996

8.312847

4.590000153

38.37235534

 

1997

2.787113

4.599999905

36.33715573

 

1998

-0.84954

4.730000019

35.67868627

 

1999

-1.35851

4.699999809

34.96477981

 

2000

0.256518

4.53000021

34.42965254

 

2001

0.719808

4.53000021

36.42225471

 

2002

-0.76672

4.409999847

37.07754181

 

2003

1.164518

4.300000191

40.63154952

 

2004

3.888816

4.300000191

42.89449013

 

2005

1.813995

4.139999866

41.3912114

 

2006

1.466078

4

40.93327269

 

2007

4.767211

3.75999999

41.46315155

 

2008

5.843024

4.360000134

43.26637446

 

2009

-0.70063

4.288000107

46.44130408

 

2010

3.325775

4.199999809

47.61226023

 

2011

5.410918

4.340000153

47.68586754

 

2012

2.643052

4.46999979

47.23453111

 

2013

2.628086

4.539999962

47.38775199

12.03064

2014

2.000345

4.592999935

47.00771662

16.22836

2015

1.437025

4.605000019

45.40088041

16.42522

2016

2

4.649000168

44.31060661

 

 

 

 

 

 

(Source: data.worldbank.org)

Table 3: Inflation, unemployment, gross capital formation and expense in South Korea

South Korea

Year

Inflation

Unemployment

Gross capital formation

Expense

1991

9.3

2.410000086

41.37406165

13.3792593

1992

6.306306

2.50999999

38.48519801

13.62914127

1993

4.745763

2.880000114

37.47954115

13.33489425

1994

6.256742

2.480000019

38.5391289

13.41987061

1995

4.479695

2.059999943

39.0032945

13.29596568

1996

4.923429

2.049999952

39.68096241

13.51745684

1997

4.446869

2.609999895

37.42467905

13.33786873

1998

7.51208

6.960000038

27.76189528

15.64550787

1999

0.811448

6.340000153

30.91629559

15.22116193

2000

2.265333

4.420000076

32.9417149

15.78950954

2001

4.06642

4

31.55958695

16.77824298

2002

2.762511

3.279999971

30.93958059

15.90158752

2003

3.514879

3.559999943

32.01490957

17.86543884

2004

3.590591

3.670000076

32.11707412

17.80394405

2005

2.75409

3.730000019

32.16306462

18.54888028

2006

2.241847

3.450000048

32.70068793

19.31135155

2007

2.534847

3.230000019

32.57953116

18.82266703

2008

4.673796

3.160000086

33.01850389

19.14187425

2009

2.756686

3.640000105

28.4656577

20.20127708

2010

2.939181

3.720000029

32.02287506

18.42542179

2011

4.025846

3.410000086

32.95883261

18.90133685

2012

2.187221

3.220000029

31.00122857

25.75391299

2013

1.301377

3.119999886

29.10221685

25.23258321

2014

1.2748

3.529999971

29.27691005

24.84029804

2015

0.706963

3.630000114

28.91811192

24.89953205

2016

0.97

3.710000038

29.20956543

24.98822488

(Source: data.worldbank.org)

Table 4: Inflation, unemployment, gross capital formation and expense in Japan

Japan

Year

Inflation

Unemployment

Gross capital formation

Expense

1991

3.29806

2.09

33.93257

 

1992

1.707359

2.16

32.16449

 

1993

1.267416

2.51

30.7764

 

1994

0.68794

2.89

29.54486

15.23929

1995

-0.12348

3.15

29.88286

15.22473

1996

0.131872

3.35

30.86515

15.1676

1997

1.761462

3.39

29.951

14.63257

1998

0.663269

4.11

28.51517

20.39496

1999

-0.32945

4.68

27.11881

17.542

2000

-0.65302

4.73

27.30713

17.34241

2001

-0.74006

5.04

26.56051

16.46877

2002

-0.92349

5.37

24.6555

16.36226

2003

-0.25654

5.25

24.39723

15.97741

2004

-0.00857

4.71

24.34862

15.34087

2005

-0.28295

4.42

24.74947

15.31547

2006

0.249355

4.13

24.74863

15.07756

2007

0.060039

3.85

24.48345

14.17419

2008

1.380079

3.98

24.54785

15.46619

2009

-1.35284

5.08

21.32367

18.40497

2010

-0.71998

5.07

21.29749

17.39946

2011

-0.26763

4.55

22.1033

18.8211

2012

-0.05194

4.35

22.65442

18.33817

2013

0.34644

4.03

23.19091

18.34244

2014

2.761954

3.58

23.9161

17.77248

2015

0.789518

3.33

24.0053

17.14929

2016

-0.11667

3.13

23.56428

16.93938

(Source: data.worldbank.org)

Table 5: Inflation, unemployment, gross capital formation and expense in United Kingdom

United Kingdom

Year

Inflation

Unemployment

Gross capital formation

Expense

1991

7.532649

8.55

19.59018

34.78408

1992

4.261548

9.78

18.83031

37.64063

1993

2.5065

10.35

18.37509

37.36898

1994

1.97849

9.65

19.37552

37.07977

1995

2.656452

8.69

18.63725

35.24609

1996

2.481101

8.19

18.84126

34.02947

1997

1.777946

7.07

18.01168

32.9629

1998

1.588924

6.2

18.62629

32.36898

1999

1.335407

6.04

18.0644

32.16804

2000

0.785269

5.56

18.46573

32.54879

2001

1.235895

4.7

17.8566

33.12253

2002

1.256192

5.04

17.76296

34.23308

2003

1.362922

4.81

17.38414

35.58366

2004

1.344596

4.59

17.02408

36.16253

2005

2.049668

4.75

17.21945

36.6333

2006

2.333528

5.35

17.59422

36.70877

2007

2.321036

5.26

18.11053

36.92255

2008

3.613499

5.62

16.99368

39.87988

2009

2.166231

7.54

14.42836

42.31741

2010

3.285714

7.79

15.67951

43.10665

2011

4.48424

8.04

15.55917

41.83205

2012

2.82171

7.89

15.75748

42.46923

2013

2.554547

7.53

16.35796

40.15876

2014

1.460192

6.11

17.11075

39.28458

2015

0.050021

5.3

16.97235

38.41641

2016

0.641613

4.81

16.96858

37.29929

(Source: data.worldbank.org)

Different macroeconomic variables are generally interrelated such that change in one variable has influence on other indicators as well. An increases in government expense, if made in favor of physical assets then capital formation rises (Agénor and Montiel 2015). An expansion in capital base in turn creates more employment opportunity and hence reduces unemployment.

In Australia, government expenditure remains at a stable state.  The gross capital formation in the economy an economy shows an upward trend. Gaining support from government expense and capital formation Australia has accounted a steady decline in unemployment rate.  In China, the gross capital formation remain at a fairly stable state which helps to stabilize the unemployment rate. In South Korea, unemployment rate picked during 1998. During this time, the gross capital formation declines as well.  In this nation, the gross capital formation has an overall declining trend. Government expense though increases but the trend shows the expenditure is not in favor of capital investment.  Consequently, unemployment has a slow but increasing trend. In Japan, the decline in expense and capital formation unemployment rises. However in recent year, because of an increase in capital formation an expense unemployment records a slight decline. UK has recorded a steady decline in unemployment rate. The high government expense and stable capital formation contributes to a decline in unemployment.

The relative value of currency plays an important role in determining trade balance of a nation. An increasing value of currency by raising price of exported goods adversely affect trade balance. In times of currency depreciation on the other hand helps to improve trade balance by increasing export (Bernanke, Antonovics and Frank 2015). This relationship between exchange rate and trade balance is evident for Australia’s trade relation with all the three nations. 

In the aggregate expenditure model, fiscal policy tool is used to influence real GDP. Government adjusts taxes or government purchase to counter recession or other economic shocks.

A decline in taxes lead to an increase in government expenditure by raising purchasing power of people. At the initial phase, the increases in consumption following a tax cut is less than the proportion of tax change , the aggregate expenditure shifts by a magnitude less than the changes in tax (Heijdra 2017). The government propose contemplating a cut in tax rate by $20 billion. Given the marginal propensity to consume is 0.2, there will be a rightward shifts of the aggregate expenditure curve by ($20 *0.2) = 4 billion.

AE curve represents the initial aggregate expenditure. The 450 line shows the planned expenditure A cut in tax rate of $20 bn shifts the AE curve up by autonomous taxes of $20 bn times the marginal propensity to consume 0.2. The new aggregate expenditure curve is AE1. The difference between AE and AE1 are $4bn. The equilibrium determined at the intersection of actual expenditure and planned expenditure shifts from E to E1. Corresponding to new equilibrium, the real GDP increases from Y* to Y1.

The state of macroeconomic equilibrium is determined from the position of aggregate demand and aggregate supply curve. Corresponding to the equilibrium, the real GDP and price level in the economy (Johnson 2017).  The long run aggregate supply curve differs from the short run aggregate supply curve and hence, the adjustment process is different.

Long-run equilibrium adjustment

There is no difference in the shape of aggregate demand curve in the short run and that in the long run. The downward sloping curve AD represents the long run aggregate demand curve.  In the long run as the economy already reached to the potential level, the aggregate supply curve become vertical (Mankiw 2014). Now, with a decline in investment expenditure the AD curve shifts inward from AD to AD1. There will be no change in real GDP which stays at Y*. The price level decreases from P* to P1 as the economy moves from B to A.

In the short run, the low price discourages suppliers in the economy due to the direct relation between price and supply. The short run supply curve in upward rising. The decline in price, causes a leftward shift of the supply curve from SRAS to SRAS1. The real GDP contracted from Y1 to Y2. This helps to recover the price level from P1 to P2. In the second run the high price leads to an increases in real GDP gradually which gradually approaches to the long run potential level. 

 
Short run equilibrium adjustment

In the short run aggregate supply curve rises upward.  With a positively sloped supply curve a decline in investment expenditure causes a decline in aggregate demand (Johnson 2017).  At the new equilibrium both real GDP and price level declines.

Introduction 

Over the years, economics has developed considerably as a separate discipline, with the number of prospects and scopes of exploration increasing consistently with opening of new areas for the economists. Being an economic graduate, I, therefore have many options to explore and choose from in my professional life. As a macroeconomist, I have been specifically interested in the areas of banking, finance and financial analytics for the purpose of building future career and professional prospects. The booming commercial, investment and finance activities and the expansion of the global banking sector as well the banking sector of Australia have increased my attraction towards the same even more and I want to work professionally in this area. I personally desire to work for the National Australia Bank, owing to its reputation, performance and employee satisfaction.

Job Role Desired 

The job role which most intrigues me in the banking and financial sector of the National Australia Bank, both in terms of job responsibilities as well as in terms of monetary and career prospects is that of the role of policy analyst. I desire to serve the role of policy analyst in the concerned bank as it is expected to bestow upon me the following responsibilities:

  • The duty of exploring the market and policy frameworks existing in the domestic as well as global scenario and finding the pros and cons of those policies
  • The responsibility to explore and analyse the prospects and problems in the tie-ups and client-relations of the banks
  • To solve the problems arising in the operational framework of the banks in the aspects of their relation with the clients
  • To predict the prospects of different schemes designed and implemented by the banks and rectifying the problems in such strategies and schemes
  • To recommend the legal pathways for addressing the problems related to the different existing and future policies

For performing these responsibilities, I need to develop my explorative, understanding as well as persuasive skills and expand my domain of knowledge. My writing skills and researching abilities are also important, especially for the purpose of predicting and forecasting the policy implications on the operational framework of the concerned bank.

Why I chose the role of a policy analyst? 

In the role of a policy analyst, especially in a reputed bank like that of the National Australia Bank, there are huge knowledge building scopes as well as scope of increasing the domain of expertise and I will also get the freedom to use by researching and analysing ability and think out of the box to provide assistance in crucial times.

Values- I can work in flexible shifts and can contribute to the company in many aspects.

Interests- I personally remain intrigued and interested in working with statistical data and in analysing and predicting the trends.  

Personality- I can work in a team as well as an individual and can work in many flexible situations.

Skills- I perceive that I have researching and analysing skills and I also like exploring new facts and I can also perceive the trends of the numerical data as well as the trends and results of implementation of the different policies and can also provide insight for better outcomes in future.

My personality is creative and I can work in any kind of situations can also provide insights for different aspects and statistical trends, which may make me suitable for my desired job roles.

Video Interpretation 

In the concerned video, Jeff Hole emphasizes on the role of the subject of economics in the contemporary period and also highlights the parts which can be played by the economists in such scenarios. The video also provides several useful suggestions for future economists in the aspects of career building. As per Jeff, in the contemporary world economists have plenty of opportunities but there also exists huge confusion among them regarding which opportunity to explore and what is the cost of leaving other alternatives.

Keeping this into consideration, Jeff also advices the future economists to acquire professional skills along with their academic degrees as according to him this may be useful for the purpose of building careers. However, the video lacks in suggesting the organizations or educational as well as commercial enterprises from where the students can acquire their necessary skills.

Plan of Action 

I have already researched a lot about my desired job role and the criteria to be met for the same. I have also begun to search for the pathways to reach to my desired job role efficiently. However, I still lack professional assistance and guidance regarding the places from where I can get professional experience which in turn may help me in getting by desired job in the organization of my dream.  

 
References

Abs.gov.au. (2018). 5368.0 - International Trade in Goods and Services, Australia, Jan 2018. [online] Available at: https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5368.0Jan%202018?OpenDocument [Accessed 29 Apr. 2018].

Abs.gov.au. (2018). Australian Bureau of Statistics, Australian Government. [online] Available at: https://www.abs.gov.au/ [Accessed 29 Apr. 2018].

Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University Press.

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Data.worldbank.org. (2018). Indicators | Data. [online] Available at: https://data.worldbank.org/indicator [Accessed 29 Apr. 2018].

Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in context. Routledge.

Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.

Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Reserve Bank of Australia. (2018). Historical Data | RBA. [online] Available at: https://www.rba.gov.au/statistics/historical-data.html#exchange-rates [Accessed 29 Apr. 2018

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