ECON1016 Macroeconomics 1 Assignment 3

Question 1

[Consider the effects of an increase in the global price of oil. For a country such as Australia, which is a net exporter of oil, this development will imply that the CPI will increase roughly by the same amount as the increase in the GDP deflator. (100 words) (4 marks)]

Your answer: [True/False/Uncertain and explain why]

Question 2

[Consider a scenario where you start new job as an economist in 2021. You successfully negotiate an employment contract with your employer where your salary is indexed to rise by 2% each year for the next two years, in line with inflation expectations at the time. In 2022, actual inflation turned out to be higher than expected. This has had the effect of increasing your purchasing power, meaning you are able to afford a higher standard of living than in previous years. (100 words) (4 marks)]

Your answer: [True/False/Uncertain and explain why]

Question 3

[Redistribution policies aim to address the problem of economic inequality, but there is a risk that these policies have the effect of suppressing economic efficiency and growth. (100 words) (4 marks)]

Your answer: [True/False/Uncertain and explain why]

Question 4

[Suppose that the government allocates more funding to universities for vaccine research. Assuming there is no change in government tax revenue, and holding constant all other factors in the economy, this policy is likely to have a positive effect on private investment in the economy. “Private investment” refers to investment in physical capital by firms and residential investment by households. (Hint: think about the effect of this policy in Loanable Funds Market). (100 words) (4 marks)]

Your answer: [True/False/Uncertain and explain why]

Question 5

[Consider a small open economy such as Australia. If Australia’s saving rate (gross domestic saving as a % of GDP) is 15% , while its investment rate (domestic investment as a % of GDP) is 25%, the economy will experience a trade surplus, meaning that receipts from exports exceed expenditure on imports. (100 words) (4 marks)]

Your answer: [True/False/Uncertain and explain why]

SECTION B

[This section is worth 30 marks. Provide a clear answer for each question, including a diagram or numerical calculation if requested. Be sure that your answers are based on the concepts that we have learnt in this course. Answer all questions.]

[Hint for diagrams: If asked to include a diagram, you may create your own diagram using the appropriate tools within your software package. Alternatively, you may paste a relevant already-made diagram into your document as an image, citing the source of your diagram.]

Question 1

[The Singapore Government has taken various fiscal policy measures to manage the economic impacts of the COVID-19 pandemic and support the economy through the pandemic-induced recession.]

(a) [We learnt in class that fiscal policy measures mainly work through the Aggregate Demand side of the economy in the short run. Discuss two macroeconomic effects that affect the size and the direction of the shift in Aggregate Demand (50 words total). Provide a diagram to illustrate these effects. (4 marks)]

Your answer:

(b) Suppose that a country’s household saving rate (savings as % of GDP) increased from 54% in 2019 to 55% in 2020. Explain whether this would strengthen or weaken the size of the economy’s fiscal policy multiplier or leave it unchanged, and the reasons why? (50 words total) Next, use these figures presented in (b) to calculate the value of multiplier for 2020. Present your calculation formula and all of your working. Write a clear sentence explaining how to interpret the final number. (4 marks)]

Your answer:

(c) [Suppose the Singapore Government implements a fiscal stimulus package, through an increase in government spending worth $120 billion in 2020. Using the information presented in part (b) of this question, calculate your forecast of the overall impact of the government’s stimulus package once the full effects are circulated throughout the economy. Be sure to show all your working and calculation formula. You can round off the value of the multiplier to 2 decimal places, and present your final answer rounded off to 2 decimal places. Write a clear sentence explaining how to interpret this final number. (2 marks) ]

Your answer:

Question 2

[We learnt in the classes that fiscal and monetary policy measures are mainly implemented to manage short-term economic fluctuations, known as business cycles. We also learnt that policymakers are interested in bolstering the country’s economic long-term productive capacity, which contributes towards stronger prosperity and wellbeing.]

(a) [A nation’s prosperity is strongly dependent on the productive capacity of its economy. What are the main factors (or “ingredients”) that determine a country’s productive capacity economy? Are there any limitations to these sources of growth and productivity? (100 words) (4 marks) ]

Your answer:

(b) We know from our lectures that technological progress (innovation, ideas, knowledge breakthroughs) can help overcome barriers to economic growth as discussed in part (a) of this question. Explain the impact of innovation and technological progress on the economy by using any two of the economic models discussed in the classes. For each model, provide a clearly labelled diagram illustrating the effects of an improvement in technological progress and innovation, accompanying by a brief explanation of the diagram (50 words for each of your choice of 2 models). [Hint: The macroeconomic models we have learnt in class include: the AD-AS model, Production Function model, and Business Cycle model] (4 marks)]

Your answer:

(c) Give two examples of public policy measures that can foster long term economic growth? (50 words total) (2 marks)]

Your answer:

Question 3

[Consider how the COVID-19 pandemic has caused major disruption in global supply chain affecting the supply of critical inputs to production. This has negatively affected the supply side of Singaporean economy on a large scale.]

(a) [Illustrate the impact of this supply-side disruption on the Singaporean economy using the AD-AS model. Assume that the economy was initially in good shape and operating at its potential represented by Y* (100 words) (4 marks).]

Your answer:

(b) [Following this shock to the economy, as described in part (a) of this question, indicate what would be the response of the Central Bank for each of the scenarios below. Highlight any trade-offs that the Central Bank must consider for each of these potential responses (100 words total) (4 marks)

Scenario (i) – Assume the Central Bank is most concerned about inflation.

Scenario (ii) – Assume the Central Bank is most concerned about unemployment.

Explain the policy action that the Central Bank would take under each assumption, and note the potential trade-off associated with each policy action (100 words maximum for each scenario). Include an AD-AS diagram for each to illustrate the effects on the economy.]

Your answer:

(c) [Suppose, instead of the policy actions described in part (b), that there is no policy intervention to address the fallout of the shock described in part (a). In the absence of any policy intervention (monetary or fiscal), what type of free market adjustment would need to occur for the economy to eventually return to Y*? Include an AD-AS diagram to illustrate (100 words) (4 marks). (Hint: Start with the scenario you illustrated in your answer to part (a).]

Your answer:

(End of assessment)