Government Macroeconomic Policy | My Assignment Tutor

13/12/20201Diploma of BusinessWUCB162/DSSC108 – Economics and SocietyWeek 9Government Macroeconomic Policy1Emailing your Lecturers/Tutors• In the subject line always include:• Your full name (and English name)• Student number• Subject code2Assessment scheduleTask Date Due Weighting• Class Test 1 Wk 6 20%• Class Test 2 Wk 11 20%• Tutorial Preparation Weeks 1-10 10%• Final Assessment Task Wk 13 50%(Note: The tutorial preparation mark will be based on theparticipation and completion of tutorial exercises)31 2 313/12/20202Remember…• The lecture slides provide a summary• You need to• take your own notes in lectures• attempt tutorial questions• take your own notes in tutorials• To gain all the knowledge you need for thissubject you must listen, add your ownnotes, and apply by attempting thetutorials questions4Graphing the Macroeconomy• Aggregate demand, AD• The quantity of total output (GDP) demanded(purchased)• At alternative average price levels• Represents the purchase of GDP• Downward-sloping© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 5Graphing the Macroeconomy• Aggregate supply, AS• The quantity of total output (GDP) supplied(produced)• At alternative average price levels• Represents the production of GDP• Upward-sloping© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 64 5 613/12/20203© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 7The macroeconomyIn the graph of the macroeconomy, P represents the average price level, GDP is total output,AD is aggregate demand, and AS is aggregate supply. At equilibrium E, the average price levelis equal to P0, and GDP is equal to GDP0.Gross Domestic Product• Gross domestic product (GDP)• The market value• Of all final goods and services• Produced IN the economy• In a given time period (usually one year)• Market price• The retail price of a product including any salesand/or excise taxes paid by the consumer• Only value added at intermediate stages ofproduction included (to get final value)© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 8Gross Domestic Product• Gross domestic product (GDP)• GDP measures the market value, being thespending on all goods and services in thenation in a year.• Spending equals production, because you canbuy only what has been produced.• Therefore, when you add up all of thesetransactions GDP measures an economy basedon its production.© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 97 8 913/12/20204Gross National Product• Gross national product (GNP)• The market value• Of all final goods and services• Produced by the economy• In a given time period (usually one year)• GDP vs. GNP• GDP: things produced within the borders (of aneconomy (usually country))• GNP: things produced by the citizens (businessowners, workers, etc (possibly in other countries)© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 10© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 11Gross domestic product (GDP) of the top 10 countries inthe world, 2013aGross Domestic Product• Real GDP• GDP calculated at constant prices• Constant prices• Prices that exist in a base year• Nominal GDP• GDP calculated at current prices© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 1210111213/12/20205Gross Domestic Product• Flaws of GDP• Ignores nonmarket activities• Goods and services produced but not marketed(e.g. caring for your children, cooking, homerepairs, etc)• Unpaid volunteer work• The underground economy• Unrecorded activity• Gambling, prostitution, drug trade, etc (illegal)• Cash payments not declared (tax evasion)© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 13Gross Domestic Product• Flaws of GDP• Composition of GDP• Goods and services of which GDP consists• As important as the total value of GDP• Distribution of income/GDP• How national income is distributed within aneconomy• As important as the total value of GDP• I.e., income inequality© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 14Aggregate Demand and Supply• AD = GDP = C + I + G + (X – M) when total purchases are measuredOr (because GDP measures production in an economy)• AD = GDP = C + I + G + X when only purchases of local production is measured• Sectors represented by aggregate demand1. Consumers2. Businesses3. Government4. Foreign purchasers (of exports)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 1513141513/12/20206Aggregate Demand and Supply1. Consumer purchases• Of locally made goods and services• Imports are not part of AD• Consumers increase purchases when• Income increases• Wealth increases• Improved expectations of the future• Interest rates© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 16Aggregate Demand and Supply2. Investment purchasesBusiness purchases of:• Equipment – machinery, tools, computers• Structures• Factories, office buildings, retail outlets, etc• Inventories – unsold goods and materials• Influenced by• Expectations of the future• Interest rates© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 17Aggregate Demand and Supply3. GovernmentGovernment purchases• Expenditure for government administrators,departments, and services, including: health,education, crime prevention, govt agencies• Includes personnel: police officers, firefighters,military, public teachers, and many others• Transfer payments to the aged, disabled,unemployed, etc is government spending but notincluded in GDP because they are not payments forgoods or services© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 1816171813/12/20207Aggregate Demand and Supply4. Net Exports (X – M) when total purchases are measured in C+I+Gor just X when only purchases of local production is measured in C+I+G• Exports are foreigners purchasing local GDP• Individual people, businesses, andgovernments of other countries• Exports of goods and services as a % of GDP(2014 World Bank national accounts)• U.S.: 13.4% of GDP• China: 22.6%• Australia: 20.9%© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 19Aggregate Demand and Supply• Aggregate demand• Will increase whenever any sectors of theeconomy increase their purchases• Shifts in aggregate demand• An increase in aggregate demand caused by:• Consumers• Businesses• Government• Foreigners• Can be affected by government policies© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 20© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 21An increase in aggregate demandWhen aggregate demand increases, it shifts forward from AD to AD’.19202113/12/20208Aggregate Demand and Supply• Shifts in aggregate supply• An increase in aggregate supply would occur if• Costs of production decrease• Technological advance• Good weather for agricultural production• Increase in AS• AS shift forward to the right© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 22© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 23An increase in aggregate supplyWhen aggregate supply increases, it shifts forward from AS to AS’.Causes of Inflation• Demand-pull inflation• Caused by an increase in aggregate demand• AD shifts forward• Cost-push inflation• Caused by an increase in the costs of production• Backward-shift in AS• Profit-push inflation• Output is deliberately restricted to drive upprices and profits• Backward-shift in AS© 2016 Cengage or pos ted to a publicly acces s ible Web s ite, in whole or in part. 2422232413/12/20209© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 25Demand-pull inflationAn increase in aggregate demand from AD to AD’ results in a higher average price level (P’)and a higher level of gross domestic product (GDP’).© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 26Cost-push and profit-push inflationA decrease in aggregate supply from AS to AS’ results in a higher average price level (P’)and a lower level of gross domestic product (GDP’).Economic Growth• Economi c Growth• An increase in real GDP (output)• Usually measured in quarterly and annually andexpressed as a percentage change• Recession• Negative economic growth – a decline in GDPAssociated with a rise in unemployment• Technically, a decline in real GDP for at least twoconsecutive quarters© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 2725262713/12/202010Why is Economic Growth Important?• GDP equals national income• Living standards are assessed by the ability of acountry to produce goods and services, and this ismostly measured using GDP per capita.• Note that increased income per capita may notnecessarily equal higher living standards. Forexample, where there is unequal distribution ofwealth in the economy.• Growth in population, participation in the labourforce, and productivity can increase economicgrowth over the medium to long-term.© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 28Government Macro Policy• Fis cal policy• The use of government spending and taxpolicy to shift the aggregate demand curve.• Could be government purchases or policy thatimpacts on other components of AD.• There is a multiplier effect associated withincreased government spending – an injectionof new demand (spending) creates revenueand income, leading to more spending, whichcreates more income, and so on.© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 29Government Macro Policy• Expansionary fiscal policy• Fiscal policy that increases aggregate demand,thereby expanding the economy• Contractionary fiscal policy• Fiscal policy that decreases aggregate demand,thereby contracting the economy• Automatic or discretionary• Automatic stabilisers is government spending islinked to the business cycle – increases duringrecessionary periods and decreases duringexpansionary periods© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 3028293013/12/202011Government Macro Policy• Expansionary fiscal policy—uses one or more:1. An increase in government purchases of goodsand services2. A reduction in government taxes (higher aftertax income)3. An increase in government income transfers(higher consumer incomes)• Contractionary fiscal policy—uses one or more:1. A decrease in government purchases of goodsand services2. An increase in government taxes3. A decrease in government income transfers© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 31© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 32Expansionary Fiscal PolicyExpansionary fiscal policy shifts the aggregate demand curve forward (AD1). Multiplier effectcreates around round (AD2), resulting in greater quantity equilibrium GDP.Multiplier effect results in a much greater final impact on GDP than the initial extra spending.AD2AD1Government Macro Policy• Monetary policy• Changes made in the nation’s money supplyto shift the aggregate demand curve• Implemented by central bank (RBA)• Expressed a target for the official cash rate• Contractionary monetary policy• Monetary policy that decreases aggregatedemand, thereby contracting GDP• Reduction in the nation’s money supply• Increase in interest rates• Discourage consumer and business purchases© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 3331323313/12/202012Government Macro Policy• Expansionary monetary policy• Monetary policy that increases aggregatedemand, thereby expanding GDP• Increase in the nation’s money supply• Decrease in interest rates• Encourage consumer and business purchases• Australian monetary policy position?http://www.rba.gov.au/statistics/cash-rate/© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 34Government Macro Policy• Trade-off between unemployment and inflation• Increase in aggregate demand• Increase in GDP and employment• Creates inflation• Decrease in aggregate demand• Reduces the problem of inflation• Creates recession• Recession creates unemployment© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 35Government Macro Policy• Supply-side economics• Conservative economic policies can be used toincrease aggregate supply• Supply-side policy• Use of various tools to improve the incentivesfor workers and businesses to produce more• Increasing aggregate supply• Increasing GDP and employment• Falling average price level© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 3634353613/12/202013Supply Side Economics• Supply-side policy• The use of various tools to improve the incentive forworkers and businesses to produce more output,thereby increasing aggregate supply and GDP• Tools of supply-side policy• Income tax cuts (company and personal) – moreincentive to earn• Cuts in government transfer programs – forcing morepeople to work (more labouravailable)• Government deregulation© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 37© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 38Supply-side policyThe aggregate supply curve is upward sloping, indicating that the quantity of GDP suppliedincreases as the average price level increases. If supply-side policy is effective, it will shiftthe aggregate supply curve forward, enabling an increase in GDP without an attendantincrease in the average price level.Effectiveness of Supply Side Economics• There are arguments that supply-side economicpolicy is not effective• Income tax cuts (company and personal) – can workerseasily work more if they want to? Some people use thetax cut as the opportunity to work less (and still receivethe same take-home pay amount)• Cuts in government transfer programs – are people justlazy? Do people receiving government transfer paymentshave the skills and education for the jobs available?• Government deregulation – can be negative for workersand environment© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 3937383913/12/202014© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 40An aggregate supply curve with three distinct rangesThe flat region (Range A) represents low output and employment, the upward-sloping region(Range B) represents a moderate level of output and employment, and the vertical region(Range C) represents high output and full employment.© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 41Shifting aggregate demand in the three ranges of theaggregate supply curveAn increase in aggregate supply causes an increase in just GDP in Range A of the aggregatesupply curve, an increase in GDP and the average price level in Range B, and an increase in justthe average price level in Range C.Slope of the Aggregate Supply Curve• Flat range (Range A)• Keynesian range• Low output and employment, excess capacity• Increase in AD• Increase output• Increase employment• No inflation© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 4240414213/12/202015Slope of the Aggregate Supply Curve• Upward-sloping range (Range B)• Normal state of the economy• Increase in AD• Trade-off between unemployment andinflation© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 43Slope of the Aggregate Supply Curve• Vertical range (Range C)• Range of high GDP & a fully employedeconomy (no cyclical unemployment – i.e.only frictional and structural unemployment)• Increase in AD• Creates inflation• Without creating any additional output oremployment© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 44Tutorials• It is essential to complete the requiredproblems and reading before your tutorial sothat you can participate fully in the discussion.• Please type and upload your tutorial workthrough the relevant Turnitin submission boxon Moodle.• Please note the submission box on Moodlecloses at 12:25pm on Wednesday for allstudents.© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 45434445

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