Question 1
1.1
Figure 1 (Data from database: World Development Indicators)
Figure 2 (Data from database: World Development Indicators)
Figure 3 (Data from database: World Development Indicators)
1.2
Figure 4 (Data from database: World Development Indicators)
Figure 4 reveals the GDP (gross domestic production) growth rate of Australia, Greece and UK. Overall the Greek economy has proven to be the most unstable economy in which from 2008 till 2013 instead of growth there was a decrease in GDP. In 2009 the growth went in negative to as low as -9%. Even UK went to negative growth during 2008 and 2009, while only the Australian economy has shown consistency and performed its best at almost 4% in 2012 and was stable otherwise. The reason why UK and Greece were hit with economic recessions was the great recession referring to the economic downturn from 2008 till 2013 as a result of Global credit crunch in 2007/8 (Pettinger, 2017). Greece, however took longer to recover due to strict austerity measures and the risk of defaulting on its debt. In 2009 in Greece the 15% budget deficit and the risk of default decreased the level of confidence of people in the economy. The situation was normalised for Greece when different European and private investor lend Greece as much as 294.7 billion euros to help Greece exit the crisis which explains the recovery after 2014 (Amadeo, 2018). Australian economy survived the recession wave as the Australian government wasn’t in vulnerable position. The finance minister on sensing the recession reassured its people and as a result government’s financial position strengthened its investors, business class and financial institutes thereby, reducing chances of economic downturn (Alexander, 2013).
Figure 5 (Data from database: World Development Indicators)
Figure 5 shows the unemployment in UK, Greece and Australia, overall, during 2013 the unemployment was proven to be highest for all economies. Greece had the highest unemployment over the decade probably due to falling GDP (see figure 4) and the Greece financial crisis discussed above. With falling GDP, unemployment rises as there is less production due to falling aggregate demand and the labour has derived demand thus as a result there is less need to employ labours for production. Australia again has been the most stable with an average of a 5% unemployment overall. While, UK did have its unemployment rising from 2008 till 2013 probably due to the great recession, however thereafter after the end of recession the unemployment for UK started falling.
Figure 6 (Data from database: World Development Indicators)
The inflation chart in Figure 6 reveals that Greece is the most unstable in terms of its prices, before 2013 it had mild inflation while from 2013 till 2016 Greece went under deflation. Deflation for any economy is highly unfavourable and this can probably be due to extremely low demands during that period due to loss of income with lower GDP (see figure 4) and high unemployment which was rising (see figure 5). UK and Australia overall had mild inflation (i.e. below 5%), only in 2015, UK showed almost 0 inflation at 0.2% which was recorded as lowest over half century and this was due to the fall in oil prices which didn’t put pressure on manufactures to raise price or utilities bills to raise (Cadman, 2016).
Question 2
2.1
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.
2.2
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.
2.3
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.
2.4
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.
2.5
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.
2.6
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)
2.7
The main reasons why many poor countries have not been able to achieve economic growth is that the productivity of the labour is very low due as the labour force largely consist of low skilled labours. 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
3.1
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.
3.2
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.
3.3
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.
3.4
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.
i↓ → borrowing↑ → investment ↑→ production and output↑
When interest rate falls borrowing rises and saving falls and as a result investment raises leading to rise in production. Labour has derived demand towards output and this leads to a rise in level employment in the economy as labour demand rises.
i↓ → borrowing↑ /saving ↓ → investment ↑→ AS↑ → employment ↑
The increase in money supply and fall in interest rate increase borrowings and decreases savings as a result overall demand rises and this may put pressure on prices if supply does not rise simultaneously as supply may take some time to rise (as production process requires time)
i↓ → borrowing↑ → AD↑ → AS (if AS doesn’t rise as much) → price level↑
3.5
The AD curve will shift upwards from AD0 to AD1 due to RBA’s expansionary monetary policy. AD consists of consumption and consumption rises due to availability of money and increased income due to job creation. Investment rises as returns are more compared to savings and borrowing rises as cost of borrowing is high. And export may also rise if investment is high resulting into excess production as compared to domestic demand and surplus is exported.
3.6
If the desired impact is achieved by RBA through the expansionary monetary policy then the Australian Economy will operate in point c in short run as supply level stays the same and AD moves from AD0 to AD1. Along with this in the long run too the Australian economy operates in point c as in the long run the LRAS of the economy is at equilibrium with the demand (AD1) at point c thus the economy of Australia operates at point c in long run as well if the desired impact is achieved.
Bibliography
Alexander, D. (2013, augast 28). The Gaurdian. Retrieved january 7, 2019, from www.theguardian.com: https://www.theguardian.com/commentisfree/2013/aug/28/australia-global-economic-crisis
Amadeo, K. (2018, november 8). the balance . Retrieved january 7, 2019, from www.thebalance.com: https://www.thebalance.com/what-is-the-greece-debt-crisis-3305525
Cadman, E. (2016, january 19). Financial Times. Retrieved january 7, 2019, from www.ft.com: https://www.ft.com/content/b278bffc-be90-11e5-9fdb-87b8d15baec2
Morley, J. (2015, june 22). The Conversation. Retrieved january 7, 2019, from www.theconversation.com: https://theconversation.com/economic-theories-that-have-changed-us-endogenous-growth-42249
Pettinger, T. (2017, july 15). Economics help. Retrieved january 7, 2019, from www.economicshelp.org: https://www.economicshelp.org/blog/7501/economics/the-great-recession/
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