The world price of oil has risen recently. For Australia (which is a net exporter of oil)

The world price of oil has risen recently. For 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.

The world price of oil has risen recently

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SECTION A

[This section contains five questions. Each question is worth 4 marks, with section total of 20 marks. For each question, explain whether the given statement is true, false or uncertain. Start your answer by selecting one of the options – “True”, “False” or “Uncertain” and then provide arguments to justify your selection (be brief and concise and present your arguments in 100 or less words). You need to ensure your assumptions are clear, reasonable, and explicit if making any.]

Question 1

The world price of oil has risen recently. For 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.

Answer

Question 2

Kylie started her new job as a junior legal assistant in prestigious law firm in 2018. She negotiated on a wage contract where for the next two years (till 2020), her salary was indexed to rise by 2% each year. In 2019, actual CPI inflation turned out to be lower than expected. This has negatively affected Kylie’s purchasing power and she was not able to afford the same standard of living as before.]

Answer

Question 3

[ Redistribution policies are aimed at addressing economic inequality. However, these redistribution policies may have the effect of suppressing economic efficiency and growth?]

Answer

Question 4

[Suppose government allocates more funding to universities for vaccine research. Assuming no change in government tax revenue (and any other factor in the economy), this policy is likely to have a positive effect on private investment in the economy. Note: Private investment refer to investment in physical capital by firms and residential investment by households. (Hint: think about the effect of this policy in Loanable Funds Market).]

Answer

Question 5

[The saving rate (gross domestic saving as a % of GDP) in Australia, a small open economy, was 15% in 2011 while the investment rate (domestic investment as a % of GDP) was 25%. Consequently, there was trade surplus (when receipts from exports exceed the expenditure on imports) for Australia in 2011.]

Answer

SECTION B

[This section contains three scenario-based questions. Each question is worth 10 marks, with a section total of 30 marks. All the questions have 3 subparts. All the questions are compulsory.]

Question 1

[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 the class that fiscal policy measures mainly work through aggregate demand side of the economy in the short run. Discuss two macroeconomic effects that can make the size of the shift in aggregate demand differ from the initial fiscal expansion. Explain in words (120 or less) and illustrate using a diagram (4 marks)]

Answer

b) [What is the main macroeconomic variable that can affect the size of the multiplier and how? (explain in 100 or less words). Suppose household saving rate (savings as % of GDP) has increased from 54% in 2019 to 55% in 2020. How would this affect the size of the multiplier effect (strengthen or weaken) and why? (2+2 = 4 marks)]

Answer

c) [Using information available in Part (b), calculate the value of multiplier (for 2020). Suppose the Singapore government had undertaken fiscal stimulus package (assume it as increase in government spending) worth $120 billion in 2020. Calculate your forecast of the overall impact of the government’s stimulus package once the full effects are circulated throughout the economy. Write a clear sentence explaining how to interpret this final number. (2 marks) ]

[You can use the value of multiplier rounded off to 2 decimal places, and present your final answer also rounded off to 2 decimal places. Be sure to show all your working.]

Answer

Question 2

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

a) [A nation’s prosperity is strongly aligned to the productivity of its labour. What are the main factors (or ingredients) that determine the productivity of the economy? Which of these factors pose limitations to growth? Explain (in 120 or less words for your explanation of all the possible factors in total) (2+2 marks)]

Answer

b) [We know from the lectures that technical progress (innovation, ideas, knowledge breakthroughs) can help in breaking the barriers to economic growth as discussed in part A). Illustrate the impact of innovation (or technological breakthrough) in the economy by using any two of the economic models discussed in the classes. No explanation required, provide only clearly labelled and self-explanatory diagrams. [Hint: you can choose among AD-AS Model, Production Function diagram and /or Business Cycle model] (2+2 = 4 marks)]

Answer

c) [List two public policy measures that can foster long term economic growth (No explanation required.) (2 marks)]

Answer:

Question 3

[Assume, corona virus pandemic has caused major disruption in global supply chain affecting the supply of critical inputs to production. This has affected the supply side of Singaporean economy on the large scale.]

a) [Illustrate the impact of corona virus induced supply side disruption of the Singaporean economy using AD-AS model. Carefully explain in 100 words or less highlighting any special feature of this situation. Assume, economy was initially in good shape, operating at its potential. (2 + 2 = 4 marks).]

Answer

b) [Following this shock to the economy (as described above), indicate the response of the central bank in each of the below referred scenarios, highlighting any trade-off of the central bank’s actions. (4 marks)

i. Central bank is concerned about inflation.

ii. Central bank is concerned about falling output and rising unemployment.

Explain policy action and associated trade-offs in each of the above scenarios (in 75 words or less for each). Diagrammatic illustration is not required.]

ANSWER

c) [Suppose there is no monetary policy intervention (or fiscal action) to address the fallout of the shock (as described in part a). In the absence of any policy intervention, what type of free market adjustment would need to occur for the economy to eventually return to Y*? (2 marks). (Hint: start from the scenario you illustrated in answer to part a).

Explain is 100 or less words. Diagrammatic illustration is not required.]

ANSWER

(End of assessment)