Question

Suppose, initially the Australian economy is at full employment (in other words the economy is at the potential GDP). Using AD-AS model, explain how would each of the following events affect the economy both in the immediate and in the long term.

1. a) A slowdown in China’s economic growth due to the sub-prime crisis in the US. (3.5 marks)

2. b) Union wage settlements push the wage rate up.

3. c) An increase in consumer confidence. (3.5 marks)

Answer 1

a) China is Australia's largest trading partner. In AS-AD Diagram long -run economic growth due to productivity increases over time will be represanted by a gradual shift to the right of aggregate suppy.However, productivity growth has picked up in australia. Some of this reflects the move from the investment to the production phase of the mining boom, which has seen a strong rise in output combined with the a reduction in employment in resource- related activity.

b) wage growth is a rise of wage adjusted for inflation, it expressed in percentage. wage growth is one of the main indications to measure economics growth for a long -term since it reflects the consumer's purchasing power and living standards of consumer in an economy. An increase in wage growth implies price inflation in the economy while a low wage wage growth indicates deflation. Wage growth can also be maximised through the development of industry factors by investing skilled workers in which decision made by businesses.

c) An increase in consumer confidence or business confidence can shift AD to right , fromAD0 to AD1. when AD shifts to the right, the new equilibrium (e1) will have a higher quantity of output and also a higher price level compared with the original equilibrium. If buyers find that they "like"a good more, then their demand increases.When consumer confidence is high , consumer make more purchases and its typically increases when the economy expands.