Question

Question 2

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 use of short-run AD/AS curves. In your response clearly state your assumptions and illustrate your answers with diagrams.

(a) India has placed a 30% tariff on chickpea exports from Australia,
(b) The demand for Australian wine in China has substantially increased,
(c) The federal government plans to spend approximately $5 billion on Snowy Hydro 2.0 to generate more electricity power capacity,
(d) The price of oil, a product Australia primarily imports, fall substantially,
(e) An increase in the immigration intake substantially increases the Australian labour force.

Answer 1

a)

The equilibrium in the economy occurs where demand for real GDP equals supply for real GDP. That is where the demand curve intersects the supply curve. There are two supply curve in the economy they are short run aggregate supply and long run aggregate supply curve. The short run aggregate supply is the upward rising curve given different quantity supplied at different prices. The long run aggregate supply is a vertical line giving the full employment level of real GDP whatever is the price level. Thus there are two equilibriums in the economy; one is short run equilibrium and other is long run equilibrium.

As India placed a tariff on Australian export, then the export of Australia decreases. This decreases aggregtae demand for australia. the AD shifts to left at AD2. The output and price will fall in new equilibrium.

b)

As demand for domestic good inforeign rises, the export of the country rises. This increases the aggregate demand for the economy. The AD curve shifts to the right and the economy moves along SRAS curve. Thus the price and output both increases in the short run.

c)

As the government expenditure increases, the aggregate expenditure in the economy rises. This increases the aggregate demand for the economy. The AD curve shifts to the right and the economy moves along SRAS curve. Thus the price and output both increases in the short run.

d)

The price of oil falls, the price of imports falls. This increases imports in the economy. The aggregate demand falls in the economy. The price of oil falls , as this is a mejor input in production, the fall in oil prices increases output. As a result the price of the economy fall. The effect on the output is ambiguous. This depends on the relative strength of aggregate demand and supply.

e)

The increase in labor force makes labor cheaper, this decreases cost of production. The fall in production price prompt the firm to produce more and the aggregate supply rises. The SRAS shift to right. The quantity increases and price falls.