Explain how an increase in population and labour supply changes labour productivity. Why do diminishing returns arise? Provide an example of diminishing returns. Use graphs of the production function and labour market to illustrate your answer.

An increase in population and labour supply shifts the labour supply curve rightward from LS0 to LS1 in figure 8.2 (a). The equilibrium real wage rate falls and the equilibrium quantity of labour increases. In figure 8.2(b), the increase in the equilibrium quantity of labour creates a movement up along the production function from point A to point B. The increase in population decreases potential GDP per person because of diminishing returns. Diminishing returns arise because the quantity of capital is kixed, so additional workers have less capital with which to work For example, adding more textile workers to a fixed stock of machinery increase output at a diminishing rate because the workers have to share the machinery

Explain how an increase in human capital changes labour productivity. Use a graph to illustrate your answer.

Human capital is the accumulated skill and knowledge of human beings. It is the fundamental source of labour productivity growth. Increases in human capital give workers new and better ways of doing things. Labour productivity increases, The increase in labour productivity increases the demand for labour produticity increase the demand for labour and the equilibrium quantity of labour increases. The increase in labour productivity shifts the production function upward from PF0 to PF1. There is also an increase in the full-employment quantity of labour from 20 billion hours to 24 billion hours. Potential GDP increases for two reasons: labour is more productive and more labour is employed.

Distinguish among the three types of unemployment: frictional, structural and cyclical. Provide an example of each type of unemployment in Australia today.

Frictional unemployment is unemployment that arises from normal labour turnover - from people entering and leaving the labour force and from the ongoing creation and destruction of jobs. Structural unemployment is unemployment that arises when changes in technology or international compettion change the skills needed to perform jobs or the locations of jobs. And cyclical uneployment is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion

Describe the relationship between the unemployment rate and the natural unemployment rate as the output gap fluctuates between being positive and being negative.

When real GDP is less than potential GDP so that the output is negative, the unemployment rate is above the natural unemployment rate. When real GDP is greater than potential GDP so that output is positive, the unemployemnt rat is below the natural unemployment rate. And, when real GDP equals potential GDP so that the output gap is zero, the unemployment rate equals the natural unemployment rate.

The U.S. economy added 312,000 jobs in November, and the unemployment rate rose 0.2%. But recent economic growth is pulling previously disengaged workers back into the labour force. Explain how the new jobs change the labour force and the unemployment rate

the news clip states that previously disengaged worker are entering back into the labour force. So as the U.S economy adds new jobs, some of the newly employed were previously not in the labour force and now are entering into the labour force. The labour force increase. Some of the previously disengaged workers are encouraged by the increase in the number of jobs. They are entering th labour force and becoming unemployed. The new clip states that the unemployment rate is increasing.

The U.S. economy added 250,000 jobs in December, and the unemployment rate rose 0.1%. But recent economic growth is pulling previously disengaged workers back into the labour force. Explain how the new jobs change the labour force and the unemployment rate

The news clip states that previously disengaged workers are entering back into the labour force. So as the U.S economy adds new jobs, some of the newly employed were previously not in the labour force and now are entering into the labour force. The labour force increases. Some of the previously disengaged workers are encouraged by the increase in the number of jobs. They are entering the labour force and becoming unemployed. The news clip states that the unemployment rate is increasing.

The U.S. economy added 312,000 jobs in November, and the unemployment rate rose 0.2%. But recent economic growth is pulling previously disengaged workers back into the labour force. Explain why workers returning to the labour force raises the unemployment rate and why by more than new jobs lower it

When new jobs are created some of the unemployed take these jobs and become employed. Some workers return to the labour force and become employed. But other workers returns to the labour force and become unemployed. The workers returning to the labour force raise the unemployment rate more than new jobs lower it when the percentage increase in the number of unemployed exceeds the percentage increase in the labour force.

Tables 1 and 2 show the quantities of the goods that Suzie bought and the prices she paid during two consecutive weeks. Suzie’s CPI market basket contains the goods she bought in Week 1. Calculate the cost of Suzie’s CPI market basket in Week 1 and in Week 2. What percentage of the CPI market basket is petrol? Calculate the value of Suzie’s CPI in Week 2 and her inflation rate in Week 2.

Week1: $98.25. Week 2: $93.25. CPI in market basket is petrol 38.2%. CPI in Week 2: 94.9. inflation rate in Week 2: -5.1%

Week1: $98.25. Week 2: $188.25. CPI in market basket is petrol 38.2%. CPI in Week 2: 52.19 inflation rate in Week 2: -47.8%

The GDP deflator in the United States in 2010 was 96 and real GDP in 2010 was $15.6 trillion (2012 dollars). The GDP deflator in 2020 was 115, and real GDP in 2020 was $19.4 trillion (2012 dollars). Calculate nominal GDP in 2010 and in 2020 and the percentage increase in nominal GDP between 2010 and 2020.

$14.98 trillion, 48.9 per cent.

$22.31 trillion, 48.9 per cent.

Table 1 sets out an economy’s aggregate demand and aggregate supply schedules. What is the macroeconomic equilibrium? If potential GDP is $600 billion, what is the type of macroeconomic equilibrium? Explain how real GDP and the price level will adjust in the long run

The macroeconomic equilibrium occurs at real GDP of $800 billion and a price level of 110. This price level is the only price level at which the quantity of real GDP demanded equals the quantity of real GDP supplied. If potential GDP is $600 billion, real GDP exceeds potential GDP. There is an inflationary gap. In the long run, the money wage rate rises. As the money wage rate rises, aggregate supply decreases so that real GDP decreases and the price level rises. Eventually aggregate supply decreases enough so that real GDP equals potential GDP, at which point the adjustment stops.

Use Figure 1 to work parts (a) and (b). Initially, the economy is at point B.Some events change aggregate demand from AD0 to AD1. Describe two possible events. What is the new equilibrium point? If potential GDP is $1 trillion, describe the type of macroeconomic equilibrium.

aggregate demand increase when the aggregate demand curve shifts from AD0 to AD1. Aggregate demand increase if expected future income, xpected future inflation or expected future profit increases; if the government cuts taxes, increases its expenditure on goods and services or increases its transfer payments; if the Reserve Bank increases the quantity of money and lowers the interest rate; or if the Australian foreign exchange rate falls or foreign income increases. After the change in aggregate demand, equilibrium real GDP is $1.1 trillion and the equilibrium price level is 105 at point C. The economy has an inflationary gap.

Use Figure 1 to work parts (a) and (b). Initially, the economy is at point B. b) Some events change aggregate supply from AS0 to AS1. Describe two possible events. Starting at Point B, what is the new equilibrium point? If potential GDP is $1

Aggregate supply decreases when the aggregate supply curve shifts from AS0 to AS1. Aggregate supply decreases if potential GDP decreases; if the money wage rate rises; or if the money prices of other resources rise. After the change, equilibrium real GDP is $0.9 trillion and the equilibrium price level is 105 at point A. The economy has a recessionary gap.

Use Table 2 to work parts (a) and (b). Table 2 shows real GDP, Y, the components of planned expenditure and aggregate planned expenditure (in millions of dollars) in an economy in which taxes are constant. a) Find the value of Q, R, S, T, U and V

Q = 3.2; R = 1.75; S = 1.0; T = 1.25; U= 2.0; V = 10.8

Q = 4.2 ; R = 1.75; S = 1.0; T = 1.9 ; U= 2.0; V = 10.8

Q = 4.2; R = 1.0 ; S = 1.0; T = 1.25; U= 10.8 ; V = 2.8

Q = 3.2; R = 1.0 ; S = 1.75 ; T = 1.9 ; U= 2.0; V = 10.8

Calculate the marginal propensity to consume and the marginal propensity to import. What is equilibrium expenditure?

MPC = 0.6, m= 0.2, equailibrium expenditure = $10 million

MPC = 0.6, m= 0.3, equailibrium expenditure = $10 million

MPC = 0.4, m= 0.2, equailibrium expenditure = $10 million

MPC = 0.4, m= 0.2, equailibrium expenditure = $9.2 million

The Australian economy is in recession and has a large recessionary gap. Describe what automatic fiscal policy might occur.

In a recession, unemployment increases and incomes decrease. Automatic fiscal policy that occurs as a result of this change in unemployment and income is an increase in welfare spending and a decrease in induced taxes.

IMF Downgrades Outlook for Australian Economy on Trade Fears The IMF expects Australian economic growth to slow to 2.8% in 2019. That’s down from its earlier estimates of 2.9%. The U.S. and China trade war is the main reason given for the fall. Explain the effects of slower growth on the government’s budget balance

The 2019 economic growth rate is expected to fall to 2.8% from 2.9 %. The slower growth will result in lower tax revenues for the government budget and at the same time increase government expenses on unemployment benefits.

Supply-side economist Arthur Laffer warns that if policy makers adopt too strong a fiscal stimulus then long-term growth might be jeopardised. Explain what he means.

Mr. Laffer is concerned about the supply-side effects of fiscal stimulus. If the fiscal stimulus consists of government expenditure increase that are large and permanent, then government tax revenues would need to increase to keep the budget deficit from rising and crowding out investment. If investment decreases, then the economic growth rate slows.

Suppose that the government increases its expenditure on highways and bridges by $100 billion. Explain the effect that this expenditure would have on aggregate demand and real GDP

Government expenditure is autonomous expenditure, so the increase in government expenditure increases autonomous expenditure. As a result, aggregate demand increases. The multiplier effect means that aggergate demand increases by more than the $100 billion increase in government expenditure. In short run, real GDP increases. In the long run, the change in real GDP depends on whether the economy is in a below full-employment equilibrium, a full-employment equilibrium, or an above full-employment equilibrium.

Figure 1 shows the aggregate demand curve, AD, and the short-run aggregate supply curve, AS, in the economy of Artica. Potential GDP is $300 billion. a) What are the price level and real GDP? Does Artica have an unemployment problem or an inflation problem? Why?

Price level: 130. Real GDP: $200. Artica has an unemployment problem because real GDP is less than potential GDP.

Figure 1 shows the aggregate demand curve, AD, and the short-run aggregate supply curve, AS, in the economy of Artica. Potential GDP is $300 billion. What do you predict will happen if the central bank takes no monetary policy actions? What monetary policy action would you advise the central bank to take and what do you predict will be the effect of that action?

If the central bank takes no action, then in the long run the money wage rate falls. Aggregate supply increase so that the AS curve shifts rightward. In the long run, the economy returns to potential GDP of $300 billion and the price level falls to 120. If the central bank undertakes a policy action, the central bank lowers the cash rate and aggregate demand increase. If the central bank did so and was totally accurate, then real GDP would return to potential GDP of $300 billion and the price level would rise to 140.

Figure 1 shows the aggregate demand curve, AD, and the short-run aggregate supply curve, AS, in the economy of Artica. Potential GDP is $300 billion. Suppose that a drought decreases potential GDP in Artica to $250 billion. Explain what happens if the central bank lowers the cash rate. Do you recommend that the central bank lower the interest rate? Why?

The central bank should lower the interest rate. If the central bank lowers the cash rate, aggregate demand increases. The price level rises. Real GDP increases and moves closer to potential GDP.

Figure 1 shows the aggregate demand curve, AD, and the short-run aggregate supply curve, AS, in the economy of Freezone. Potential GDP is $300 billion. a) What are the price level and real GDP? Does Freezone have an unemployment problem or an inflation problem? Why?

The price level is 110 and real GDP is $400 billion. Freezone has an inflation problem because real GDP exceeds potential GDP and an inflationary gap exists.

Figure 1 shows the aggregate demand curve, AD, and the short-run aggregate supply curve, AS, in the economy of Freezone. Potential GDP is $300 billion. b) What do you predict will happen in Freezone if the central bank takes no monetary policy actions? What monetary policy action would you advise the central bank to take and what do you predict will be the effect of that action?

If the central bank takes no action, then in the long run the money wage rate rises. Aggregate supply decreases and the AS curve shifts leftward. In the long run, the economy retuens to potential GDP of $300 billion and price level rises to 120. If the central bank undertakes a monetary policy action, the central bank raises the cash rate and aggregate demand decreases. If the central bank did so and was totally accurate, then real GDP would return to potential GDP of $300 billion and the price level would fall to 100.

Figure 1 shows the aggregate demand curve, AD, and the short-run aggregate supply curve, AS, in the economy of Freezone. Potential GDP is $300 billion. What happens in Freezone if the central bank lowers the cash rate? Do you recommend that the central bank lower the interest rate? Why or why not?

If the central bank lowers the cash rate, aggregate demand increases. The price level rises. Real GDP increases and moves father away from potential GDP. Lowering the interest rate moves real GDP farther away from potential GDP and so is an incorrect policy to pursue.

Figure 1 shows the aggregate demand curve, AD, and the short-run aggregate supply curve, AS, in the economy of Freezone. Potential GDP is $300 billion. d) What happens in Freezone if the central bank conducts an open market sale of securities? How will the interest rate change? Do you recommend that the central bank conduct an open market sale of securities? Why or why not?

If the central bank conducts an open market sale of securities, the cash rate rises. With the rise in the cash rate, aggregate demand decreases. The price level falls. Real GDP decreases and moves closer to potential GDP and the inflationary gap becomes smaller. This is correct policy for central bank to pursue.

. Figure A shows Tom’s production possibilities and Figure B shows Abby’s pro- duction possibilities. Tom uses all his resources and produces 2 racquets and 20 balls an hour. Abby uses all her resources and produces 2 racquets and 40 balls an hour. What is Tom’s opportunity cost of producing a racquet? What is Abby’s opportunity cost of a racquet? Who has a comparative advantage in producing racquets? Who has a comparative advantage in producing balls?

Tom’s opportunity cost of producing a racquet is 10 balls Abby’s opportunity cost of a racquet is 20 balls Tom has the comparative advantage in producing racquets. Abby has the comparative advantage in producing balls.

Tom’s opportunity cost of producing a racquet is 30 balls Abby’s opportunity cost of a racquet is 20 balls Abby has the comparative advantage in producing racquets. Tom has the comparative advantage in producing balls.

Tom’s opportunity cost of producing a racquet is 10 balls Abby’s opportunity cost of a racquet is 20 balls Abby has the comparative advantage in producing racquets. Tom has the comparative advantage in producing balls.

Figure A shows Tom’s production possibilities and Figure B shows Abby’s pro- duction possibilities. Tom uses all his resources and produces 2 racquets and 20 balls an hour. Abby uses all her resources and produces 2 racquets and 40 balls an hour. If Tom and Abby specialise and trade 15 balls for 1 racquet, what are the gains from trade?

Tom and Abby gain 10 more balls than they had without specialisation and trade

Tom and Abby gain 30 more balls than they had without specialisation and trade

Tom and Abby gain 20 more balls than they had without specialisation and trade

Figure 1 and Figure 2 show the markets for shoes if there is no trade between Australia and Brazil. a) Which country has a comparative advantage in producing shoes? With international trade, explain which country would export shoes and how the price of shoes in the importing country and the quantity produced by the importing country would change. Explain which country gains from this trade.

Brazil has the comparative advantage in producing shoes because with no international trade, the price in Brazil is less than the price in Australia. With international trade, Brazil will export shoes to Australia. The price of shoes in Australia will fall and the quantity of shoes produced in the Australia will decrease. Both countries will gain from this trade. In Brazil producers of shoes gain (consumers of shoes lose, but the gain to producers exceeds the loss to consumers) and in Australia consumers of shoes gain (producers of shoes lose, but the gain to consumers exceeds the loss to producers).

Figure 1 and Figure 2 show the markets for shoes if there is no trade between Australia and Brazil. The world price of a pair of shoes is $20. Explain how consumers and producers in Australia gain or lose as a result of international trade. On the graph, show the change in Australian purchases, production and the price of a pair of shoes.

The price in Australia falls to $20 per pair of shoes. Australian purchases of running shoes increase from 6 million pairs per year to 8 million pairs per year and Australian production decrease from 6 million pairs per year to 4 million pairs per year. Consumers gain because they buy more shoes at a lower price and producers lose because their production decreases and the price they receive falls.

Figure 1 and Figure 2 show the markets for shoes if there is no trade between Australia and Brazil. The world price of a pair of shoes is $20. Explain how consumers and producers in Brazil gain or lose as a result of international trade. Show the change in Brazil’s purchases, production and the price of a pair of shoes

The price in Brazil rises to $20 per pair of shoes. Brazilian purchases of shoes decrease from 3 million pairs per years to 2 million pairs per year and Brazilian production increase form 3 million pairs per year to 4 million pairs per year. Consumers lose because they buy fewer pairs of shoes and the price rises, and producers gain because they produce more shoes and the price they receive for each pair of shoes increases.

EFB231

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

An economy produces only fun and food. Table 1 shows the prices and the quantities
of fun and food produced in 2013 and 2014. The base year is 2013. Calculate nominal GDP in 2013 and 2014?

Nominal GDP in 2013: $260/ Nominal GDP in 2014: $235

Nominal GDP in 2013: $293/ Nominal GDP in 2014: $223

Nominal GDP in 2013: $254/ Nominal GDP in 2014: $229

Nominal GDP in 2013: $273/ Nominal GDP in 2014: $235

Answer explanation

Nominal GDP in 2013 is equal to (40 units of fun × $2) + (60 units of food × $3) = $260.
Nominal GDP in 2014 is equal to (35 units of fun × $3) + (65 units of food × $2) = $235.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

An economy produces only fun and food. Table 1 shows the prices and the quantities of fun and food
produced in 2013 and 2014. The base year is 2013. Calculate the percentage increase in production in
2014?

1.9%

2.4%

2.3%

7.1%

Answer explanation

The percentage increase in production is equal to the percentage increase in real GDP. In the base year, real GDP equals nominal GDP, so real GDP in 2013 is $260.

Using prices from 2013, real GDP in 2013 is $260 and real GDP in 2014 is $265. Using 2013 prices, real GDP grew [($265 - $260)/$260] × 100, or 1.9 per cent

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

In current prices, retail sales rose 3.3 per cent in December 2014 compared with December 2013. In real volume terms, the trend estimate for Australian retail sales rose 0.9 per cent in the December quarter 2014. Which component of GDP changed and caused retail sales to increase?

Consumption expenditure

Investment

Government expenditure

Net exports of goods and services

Answer explanation

The increase in retail sales means that consumption expenditure on goods and
services increased.

FILL IN THE BLANK QUESTION

1 min • 1 pt

In current prices, retail sales rose 3.3 per cent in December 2014 compared with December 2013. In real volume terms, the trend estimate for Australian retail sales rose 0.9 per cent in the December quarter 2014. Explain how a rise in retail sales increases incomes to make aggregate expenditure equal to aggregate income.

FILL IN THE BLANK QUESTION

1 min • 1 pt

In current prices, retail sales rose 3.3 per cent in December 2014 compared with December 2013. In real volume terms, the trend estimate for Australian retail sales rose 0.9 per cent in the December quarter 2014. Which information in the ABS report tells us about a change that influences real GDP? Explain your answer.

FILL IN THE BLANK QUESTION

1 min • 1 pt

Where do new-home sales appear in the circular flow of expenditure and income? Explain how a fall in new home sales affects real GDP.

FILL IN THE BLANK QUESTION

1 min • 1 pt

Where do sales of previously owned homes appear in the circular flow of expenditure and income? Explain how a fall in sales of previously owned homes affects real GDP.

Answer explanation

A real estate commission paid to sell a used home, however, does add to GDP because it is a part
of current production.

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EFB231

An economy produces only fun and food. Table 1 shows the prices and the quantitiesof fun and food produced in 2013 and 2014. The base year is 2013. Calculate nominal GDP in 2013 and 2014?

Nominal GDP in 2013 is equal to (40 units of fun × $2) + (60 units of food × $3) = $260.Nominal GDP in 2014 is equal to (35 units of fun × $3) + (65 units of food × $2) = $235.

An economy produces only fun and food. Table 1 shows the prices and the quantities of fun and foodproduced in 2013 and 2014. The base year is 2013. Calculate the percentage increase in production in2014?

In current prices, retail sales rose 3.3 per cent in December 2014 compared with December 2013. In real volume terms, the trend estimate for Australian retail sales rose 0.9 per cent in the December quarter 2014. Which component of GDP changed and caused retail sales to increase?

The increase in retail sales means that consumption expenditure on goods andservices increased.

Where do new-home sales appear in the circular flow of expenditure and income? Explain how a fall in new home sales affects real GDP.

Where do sales of previously owned homes appear in the circular flow of expenditure and income? Explain how a fall in sales of previously owned homes affects real GDP.

A real estate commission paid to sell a used home, however, does add to GDP because it is a partof current production.

Explain how an increase in population and labour supply changes labour productivity. Why do diminishing returns arise? Provide an example of diminishing returns. Use graphs of the production function and labour market to illustrate your answer.

Explain how an increase in human capital changes labour productivity. Use a graph to illustrate your answer.

Distinguish among the three types of unemployment: frictional, structural and cyclical. Provide an example of each type of unemployment in Australia today.

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Discover more resources for Mathematics

An economy produces only fun and food. Table 1 shows the prices and the quantities
of fun and food produced in 2013 and 2014. The base year is 2013. Calculate nominal GDP in 2013 and 2014?

Nominal GDP in 2013 is equal to (40 units of fun × $2) + (60 units of food × $3) = $260.
Nominal GDP in 2014 is equal to (35 units of fun × $3) + (65 units of food × $2) = $235.

An economy produces only fun and food. Table 1 shows the prices and the quantities of fun and food
produced in 2013 and 2014. The base year is 2013. Calculate the percentage increase in production in
2014?

The increase in retail sales means that consumption expenditure on goods and
services increased.

A real estate commission paid to sell a used home, however, does add to GDP because it is a part
of current production.