ECF1200 MACROECONOMICS, INDIVIDUAL ASSIGNMENT

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ECF1200 – Macroeconomics

Semester 1, 2021 Individual Assignment

Instructions (please read all carefully)

Due date:

▻ Friday 14th May @5pm (Melbourne Time)

▻ Late submissions incur a penalty of 1 mark per day.
Submission:

▻ Your assignment is submitted online at via Moodle. A link will be provided (more
details will be announced on this). Online submission will be made to your Tutor

(who will be marking it).

▻ Once you have uploaded your assignment into the submission portal, this is final.

▻ This is an individual assignment. We have Plagiarism detection software which
cross-compares all submitted assignments.

Word limit:

▻ The word limit for Questions 1, 2, and 3 is 600 words (not inclusive of the diagram
and re-writing out the questions).

▻ The word limit for Question 4 is 100 words.

▻ Thus, the maximum word length in total for the entire assignment is 700 words,
strictly. Exceeding this limit entails penalties resulting in loss of marks.

Page limit:

▻ Max. 8 pages.

▻ Exceeding this limit entails penalties resulting in loss of marks.

Formatting:

▻ In addition to explaining your answers, you are required to illustrate your answers
with graphs. Make sure to fully label all axis, curves, and movements from point

to point (Fig. 1 below is a prime example of how the figure should be formatted).

Incorrect formatting entails penalties resulting in loss of marks.

▻ Its preferable to have the figures drawn in word using the “line” functions.
However, you can hand-draw your illustrations, take a photo/scan them, and then

insert them into the relevant questions. When taking photos, make sure the

image(s) are of sufficient quality/resolution. If we cant make out the explanations

in the images, we cant appropriately mark them, resulting in a loss of marks. The

responsibility is on you.

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▻ If you are referencing, then make sure to include references at the end of the
assignment and use the APA-referencing style.

▻ Submit as Word or PDF (But be careful. There has been occasions where
Word/PDF can mess up the formatting. You MSUT double check before you

upload your assignment into Moodle. Incorrect formatting will incur a penalty – so

the responsibility is on you to verify your final version).

Preliminary

In our analysis of Ch.10, we studied the aggregate demand (AD) and aggregate supply

(AS) model in the context of recessions, expansions and supply shocks on economic

activity. In addition, in Ch.12, we discussed the role of monetary policy on economic

activity. As a result, the different type of ‘shocks’ that affect economic activity bare

consequences on the level of inflation and output. Central banks, such as the RBA, can

simultaneously pursue “stabilising prices” (i.e., maintaining a targeted level of inflation)

and “stabilising economic activity” (i.e., economic activity remaining at its potential level).

However, not all shocks to the economy are equal. In response to this,

economists/policymakers can either achieve price stability or economic stability, but not

both. This trade-off ultimately poses a dilemma for central banks with dual mandates such

as price stability and economic activity. On the other hand, New-Keynesian theory

suggests that there is no trade-off between price stability and maintaining economic

activity – something called the “divine coincidence”. Recall the long-run potential

macroeconomic equilibrium condition:

Fig. 1 – Macro-equilibrium price and output in the long-run.

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where the economy is at long-run macroeconomic equilibrium (point 1); output (or real

GDP) is at its potential level at 𝑌𝑃; and inflation (or the price level) is at its target rate (set

by the central bank) at 𝜋𝑇.

Questions

Question 1 [3 marks total]. While evidence shows that the Global Financial Crisis (GFC)

impacted firms (small to large), it is generally accepted (and shown by empirical studies)

that the GFC predominantly impacted on households/consumer spending (i.e., on

aggregate demand). Assume this is the case. Also assume that there is no fiscal policy

response from the government.

a. Explain and illustrate the short-run effect of the GFC on macroeconomic equilibrium

using the AD-AS model. [0.5 marks]

b. Explain and illustrate the adjustment process to back to long-run equilibrium based

on the following

i. Self-correcting mechanism (i.e., with no policy response). [1 mark]

ii. Active stabilisation response (i.e., with policy response). [1.5 marks]

Question 2 [3 marks total]. The last several decades has seen a significant amount of

human capital entering Australia from foreign nations ranging from low-skilled to high

skilled labour and seen as an important factor of the rate of invention and innovation within

an economy. Imposing restrictions on skilled immigration policy may deteriorate the overall

level of human capital given it is an integral part of production, and hence output. COVID-

19 has also shown the restrictive effects of the movement of human capital across

countries. Assume there is no fiscal policy response from the government for the following

questions.

a. Explain and illustrate the short-run effect of the Australian Government imposing a

strict ban on human capital entering Australia, by significantly reducing the number of

skilled immigrants entering the nation over the next 20 years on macroeconomic

equilibrium using the AD-AS model. [0.5 marks]

b. Explain and illustrate the adjustment process to back to long-run equilibrium based on

the following:

i. Self-correcting mechanism (i.e., with no policy response). [1 mark]

ii. Active stabilisation response (i.e., with policy response). [1.5 marks]

Question 3 [3 marks total]. Oil price shocks have been a reoccurring phenomenon over

the last fifty years, causing significant fluctuations in the price of oil. Examples of oil price

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shocks include the early 1970s caused by the OPEC oil embargo, the early 1990s caused

by the Gulf War, and the Arab Spring during the early 2010s. Oil-importing nations like

Australia are significantly affected by rising oil prices. Nonetheless, evidence has shown

that oil price shocks are a temporary phenomenon and eventually, prices decline. Assume

that there is no fiscal policy response from the government in relation to an oil price shock.

a. Explain and illustrate the short-run effect of a temporary oil price shock on

macroeconomic equilibrium using the AD-AS model. [0.5 marks]

b. Explain and illustrate the adjustment process to back to long-run equilibrium based

on the following:

i. Self-correcting mechanism (i.e., with no policy response). [1 mark]

ii. Active stabilisation response (i.e., with policy response). [Hint: there could be two

active stabilisation polices here]. [1.5 marks]

Question 4 [1 Mark total].

Based on your answers in part (b) for Q1, Q2, and Q3, does the ‘divine coincidence’ hold?

[1 mark]