Unit Name: The Global Economy

Answer all the questions below.

Question 1 (this question has three parts, (a), (b) & (c))

• The following Table gives the quantities of phones and computers countries A and B can produce. [Assume the phone’s price is equal to the computer’s price].

(i) Can you tell which country has a comparative advantage in producing phones and which country has a comparative advantage in producing computers? Explain your reasoning.

ii) Assume that country A is currently producing 500 phones and 200 computers while country B is currently producing 400 phones and 300 computers. Show that both can be better off if they specialise in producing one good and then engage in trade. How much gain will they receive from trading, respectively?

iii) If country B invented a new technology and can produce 1000 phones and 0 computer, or 500 phones and 300 computers [all other numbers do not change], then do you think country B should trade with country A? Why, or why not?

                                                                                                    [3+2+2 marks]

• The following table contains information about prices and quantities in a hypothetical economy for three years. Using this information, calculate the economic growth rate between 2020 and 2019.

                                                                                                            [6 marks]

• The following table contains information about a hypothetical economy for the year 2020. i) Calculate the unemployment rate and labour force participation rate; ii) What will happen to unemployment rate if 20% of full-time university students graduated and started to look for jobs in 2020? iii) What would happen to the unemployment rate if coronavirus suddenly disappeared and explain why the unemployment rate would change? iv) Suppose that among these 0.8 million unemployed workers, 40% of unemployment is due to cyclical factors. Then, how much is the natural rate of unemployment?    

                                                                                                [2+2+1+2 marks]

Question 2 (this question has three parts, (a), (b), and (c))

• JobKeeper Payment was a subsidy scheme designated to help businesses affected by the COVID-19 pandemic. Use the supply and demand of loanable funds to discuss how the JobKeeper scheme could affect the equilibrium interest rate. Assuming that Australia is a closed economy, how could the JobKeeper scheme affect private, public and national savings while assuming national income and household consumption remain constant?

[2+4 marks]

• The Commonwealth government budget will be in deficit due to the JobKeeper Payment scheme. This may reduce government spending on infrastructure and cause government to increase personal income tax and business tax in the near future. Suppose that Australia is a closed economy, use the dynamic AD, SRAS and LRAS framework to analyse and demonstrate the impact of the JobKeeper Payment scheme on the level of output (or real GDP), unemployment, and inflation.

                                                                                                         [4+4 marks]

•  Suppose that Australia is an open economy. The US Federal Reserve injected more than $1.5 trillion into the markets in 2020. How do you think this could affect your results in (b)?
  
  

[3+3 marks]

Question 3 (this question has two parts, (a) & (b))

• Suppose the following table describes the expenditure components of real GDP, potential GDP, and the price level for the Australian economy in 2019 and 2020:

The government wants to use fiscal policy to combat the fall in real GDP in 2020 in the short run. What should the value of government expenditures be (show your calculations) to bring the economy back to potential GDP? Illustrate the effect of this policy in the static AD, SRAS, and LRAS framework.
                                                                                                                    [7+3 marks]

• In response to the COVID-19 pandemic, on the 18^th of December 2020 the European Union passed the NextGeneration EU stimulus package of 1.8trillion euros. To finance the NextGeneration EU, the European Commission will borrow on behalf of the European Union. Using a graph of demand and supply of dollars for euros, explain how this will affect the exchange rate between the Australian dollar and the Euro. How would the result change if private savings in Australia decrease?

                                                                                                      [5+5 marks]

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