ECON101 Business Economics Assignment Answer

 

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Assessment Brief:

  • Referencing Styles: APA
  • Words: 4000
  • Course Code: ECON101
  • Course Title: Business Economics
  • University: Saylor Academy
  • Country: AU

 

 

1.  Explain how the equilibrium exchange rate is determined in a flexible exchange rate regime.

 

2.  Australian operates a flexible exchange rate regime, and the value of the dollar is determined in the foreign exchange market. Use the flexible exchange rate diagram to analyse the impact of changes in the relative values of the following economic variables on the exchange rate, ceteris paribus:

 

A.  Relative inflation rates: Increase in US rate of inflation relative to Australia Effect for Australian residents US imports more expensive, decreasing demand for these goods; reducing the supply of AUD Effect for US residents some US demand for goods and services will switch to Australian goods and services, increasing demand for AUD to pay for them. Overall, the Australian dollar would appreciate it.

 

B.  Relative national income growth rates: Australian income growth rates rise relative to the US. Australian demand for imports increases, increasing the supply of AUD, which causes the AUD to depreciate. Another effect could be an increase in foreign investment in Australia, increasing the demand for AUD, causing the AUD to appreciate Net effect depends on which effect is greater.

 

C.  Relative interest rates: Australian interest rates rise relative to the US Effect for US residents. US residents and companies may redirect some of their cash into Australian interest-bearing instruments, increasing the demand for the AUD Effect for Australian residents. Australian investors and businesses are more likely to keep their surplus funds invested in Australia, causing a decrease in the supply of the AUD Net effect is that AUD will appreciate Suppose the Australian economy is in recession.

 

(i). What monetary policy action would the Reserve Bank of Australia take to overcome the recession? The RBA would ease monetary policy by decreasing the cash rate.

 

(ii). How would the nominal exchange rate be affected? Illustrate your answer with the flexible exchange rate diagram. Would Australia’s international competitiveness improve or worsen, ceteris paribus? Decrease in return on Australian financial assets relative to overseas’; Demand for Australian dollar would decrease, and supply would increase; Nominal exchange rate would depreciate. International competitiveness would improve: Real exchange rate would depreciate, holding domestic and foreign price levels constant.

 

(iii). How would the policy affect real GDP, inflation and the unemployment rate? Use the AS-AD model to illustrate your answer: aggregate demand increases, and the AD curve shifts to the right as output increases. The inflation rate would increase, and the unemployment rate would decrease.

 

QUESTIONS

 

4.  How would equilibrium quantity and price, and market efficiency be affected in the following scenarios? Illustrate your answer with the demand and supply diagram.

 

A.  The government pays a subsidy to potato farmers. How would the elasticity of the supply curve affect your answer?

B.  The government issues $10 to families to reduce the cost of restaurant meals purchased. How would the elasticity of the demand curve affect your answer?

 

5.  Use the AS-AD model to analyse the short-run impact of the following shocks on real GDP, inflation rate, and unemployment rate. Assume that the economy was operating at the long-run equilibrium before each shock.

 

A.  Unexpected increase in wages.

B.  Unexpected increase in the price of oil.

 

6.  What type of fiscal policy would the government implement to overcome the short-run impacts of the shocks you identified in question 5?

 

What would be the long-run impact on those variables after the government’s fiscal policy?

 

7.  Suppose the economy is in recession. What type of monetary policy would the RBA implement to overcome the recession? Explain the monetary policy transmission process and how the policy would affect the economy.