MAE203 Global Economy Assignment Help
MAE203 Global Economy Trimester 3
Question 2
The graph based on production function mention in the question, shows a relationship between increases in capital per hour worked (Y/L) and increase in real GDP per hour worked (K/L) in short run. The state of technology is held constant in this production function.
As per the production function graph an increase in capital per hour worked causes a movement along the production function line as shown in graph where capital per hour worked increases from $40,000 to $60,000 and there is movement from point A to point B.
when the state of technology increases or decreases then the production function shifts as seen in the graph where production function shifts from point B to point C due to increase in state of technology.
In the long run the key to ensure economic growth and sustainability is the improving state of technology. The production function reveals there is diminishing return even if capital per hour worked increases. However, only with increased state of technology the returns can be higher even under a constant level of capital per hour worked as seen in graph where state of technology increases and at a constant level of $60,000 per hour worked the GDP per worker moves from $675 to $775.
According to Romer’s New Growth Theory countries productivity depends on its capital stock and population. Opposing to Solows model of production function, Romer includes level of knowledge as a part of firm’s capital stock and believes population growth will bring in more intelligent minds and ideas contributing positively towards productivity and growth. The key determinant in Romer’s theory is knowledge as knowledge as per the theory will bring in brilliant ideas helping to increase productivity. The main aspects to knowledge is population growth as more minds may bring more idea and secondly more investment in knowledge and education to enhance the knowledge level.
Government may increase the size of this key determinant by investing more on knowledge and education to increase the knowledge and help that helps in innovation. Secondly, government may promote child birth. As conventional as it may seem, it was argued by James Morley (2015) that China’s one child policy was a mistake as it deprived world of millions of brilliant minds. Moreover, government may promote Research and development to increase the knowledge base. (Morley, 2015)
The main reasons why many poor countries have not been able to achieve economic growth is that the productivity of the labor is very low due as the labor force largely consist of low skilled labors. Then secondly the state of technology in poor country does not increase or even worse fell down leading to slow economic growth so even if capital increase there is diminishing returns as per Solow’s theory (production function) and the economic growth is low. Moreover, if Romer’s New Growth theory is revisited then there is emphasis on the argument that knowledge is the key element of productivity and with lack of knowledge poor economies have their economic growth slowed down.
Question 3
At point D the economy is not in in long term equilibrium as there is potential to increase supply. At this point the economy is in recession as the actual supply is lower than potential supply and the economy is not at full-employment level.
Reserve Bank of Australia (RBA) should use expansionary monetary policy where the interest rate is lowered and money supply rises. Lower interest rate will encourage borrowing due to lower costs of borrowing and increase investment as people wouldn’t save due to lower returns and rather invest. Low interest will also discourage saving while spending will rise pushing the AD (aggregate demand) upwards and this will rise.
The expansionary policy aims at increasing spending and investment by decreasing interest rate so that borrowing rises so people could use it as spending and investment and saving falls as it is substituted with investment as returns are higher in investment. The money supply is also increased through open market operations where government will purchase securities and treasury bills from banks so that banks have more money to use for credit creation by lending and investments.
The interest rate fall may discourage saving and instead people may invest also as cost of borrowing falls then business may borrow more to invest this may increase production and output and overall GDP in the economy.
