This is an individualassignment. Youmayworkingroupsbutmust write up your own answer to submit the assignment, including equations, diagrams.

Assignment must be submitted by 4pm, 3rd February (Melbourne time) via LMS. The submission link will  be available from Wednesday, 1  February until the due date.  Submit your assignment electronically using the Turnitin application accessible via Canvas page under the “Assignment” module. Late assignments will not be accepted,  please apply for  Special Consideration if for some documented reason you cannot submit by the due deadline.

Grading criteria: The tutors will grade the assignment according to the following criteria:

•   Ability to use material  discussed  in lectures,  tutorials,  and  in the textbook to  answer the assignment questions in a logical and coherent fashion (90 per cent weight).

•   Overall presentation of the assignment.  This includes spelling, grammar, correct construction  of diagrams, etc. (10 per cent weight).

•   The maximum assignment length is 2000 words. Up to 10% over the word limit can be allowed. Graphs, equations will not be counted towards word count.

•   Please note that the University and the teaching stafftake academic integrity seriously. Please be aware that plagiarism and collusion are unacceptable. Further details can be found in the subject guide.

Assignment Questions:

Q1. a) Why do we need to calculate real GDP? How are the methods of calculating real GDP using fixed base index and chain volume index different? (1 mark)

b) Using data from Australian Bureau of Statistics (ABS)  [https://www.abs.gov.au//] Discuss the changes in Australian real GDP, inflation and unemployment rate in the last two years? (1 marks)

c) Imagine a closed economy where the total level of real output produced (Y) depends upon the total amounts of the inputs of labour (L) and capital (K) in use such that: Y = AKαL1−α

Assume that all individual units of labour receive the same the real wage and that this is equal to the marginal product of labour. Assume also that all individual units of capital receive the same reward as real rental rate or real interest rate and that this is equal to the marginal product of capital. Show  that if this is true (ie that both factors of production are ‘rewarded’ according to their marginal         products) and we add together the total value of real income to all units of labour and the total value of real income to all units of capital, that sum will be exactly equal to the total level of real output in this economy. (2 marks)

Q2. Due to the recent recovery from the  COVID19 pandemic, the global economy is facing the challenge  of  higher  demand  for  goods  and  services.  Leading  economists  in  Australia  have expressed concern that even though there is positive growth in the economy, fiscal policymakers still need to be cautious about their spending.

a)  Using the basic Keynesian model, provide a detailed analysis of the likely impact of the changes described above for Australia’s real GDP and rate of unemployment. (2 marks)

b)  Analyse what type of the Australian government’s response is required in the current situation what you have outlined in part (a). What would the government be trying to achieve? Explain using the budget constrain how this might impact on the stock of public debt. (2 marks)

Q3. a) Suppose the level of output in the Australian economy currently lies above the level of potential output. Using our model of the AD-AS model, explain how in the long run the Australian economy would adjust assuming there is no intervention by fiscal or monetary policy makers. Be sure to provide the economic intuition for this result. (3 marks)

b) Currently the interest rate that the Reserve Bank of Australia (RBA) targets is very different from a year ago. Using AD-AS model Explain the rationale for RBA of this change of policy. What are the likely consequences for the economy in the short run and in the long run? (3 marks)

Q4. (a) Suppose an economy is initially in ‘steady state’ equilibrium and the level of institutional set up changes so that it is now more improved than it was before. Will this lead to a rise in the equilibrium level of y/l and k/l and a rise in the growth rate of y/l and k/l at the steady state? If so, explain how this occurs (be sure to identify what economic processes or ‘mechanisms’ are involved). If not, explain why not.  (2 marks)

b)  (i) What is growth accounting? Assuming a production function, Y = A f (k, l), provide an intuitive explanation for the following equation. Define all terms.

 =  +   +

(ii) Consider the following statement, made by a leading economic commentator about Australia.

‘Where once our economic growth was determined solely by the number of our machines, today it is determined by our ability to generate new ideas and develop new ways of producing output. ’

Using the growth accounting equation in part (i) explain the main contributing factor(s) ofrecent growth in Australia.  (2 marks)