Assignment topic: Economic Assessment
ASSIGNMENT TOPIC
Assignment 2 Written assignment
Weighting: 25%
references and all text)
Topic Read the news article below and answer all questions.
Job upswing shows RBA on target: board member
Greber, Jacob. The Australian Financial Review; Melbourne 17 June 2017
The nation’s labour market is close to the point when workers, who are keen for jobs or more
work, are absorbed into a strengthening economy, stoking the wage inflation that is a key
precondition for future interest rate hikes, said Reserve Bank of Australia board member Ian
Harper. While there is still no need to “rush” the normalisation of monetary policy towards
higher official interest rates, Professor Harper expressed growing confidence the economy was
“on a steady track towards a recovery” forecast by the central bank and Treasury.
Professor Harper described this week’s jobs numbers – which showed the jobless rate had fallen
to a four-year-low of 5.5 per cent – as a sign that the labour market’s “excess capacity is
beginning to wear off”. Even though many workers still feel underemployed and are
disappointed by low wages growth, the falling jobless rate and strong growth in full-time work
is a “strong indicator that the cyclical component of what we’re experience has been gradually
recovering”, he said.
The remarks reflect growing confidence within the Reserve Bank that the economy is on an
improving pathway boosted by rising business investment and strong export growth not yet
fully captured in conventional gross domestic product figures, which were weak in the first
quarter. Strengthening labour market indicators, as well as upbeat business sentiment surveys,
have contrasted with signs of a still depressed household sector, a key reason the Reserve Bank
hasn’t felt the need to deliver additional monetary policy stimulus.
3 Econ1007 Macroeconomics Assignment SP5 2017
“But the strengthening in full-time employment is much more indicative than earlier indicators
that excess capacity is beginning to wear off.”
If it continues, the gradual improvement this year in the labour market – which has seen more
than 100,000 full-time jobs created in the first five months of 2017 – will fuel speculation that
the Reserve Bank’s first rate hike since 2011 would happen within 12 months. That said,
financial markets continue to see almost no change this year and through early 2018 in the
official cash rate, which was cut to a record-low 1.5 per cent last August.
4 Econ1007 Macroeconomics Assignment SP5 2017
Answer all Questions below:
Qu. 1(a) Use the aggregate expenditure (AE) model to describe the impact of, “ the economy
is on an improving pathway boosted by rising business investment and strong export growth”
on equilibrium output.
In your answer make sure to discuss the equilibrating process of moving to the new
macroeconomic equilibrium output.(4 marks)
Qu. 1(b) With reference to the official definition for measuring unemployment and the concept
of full-employment, clarify what is meant by the following statement “But the strengthening
in full-time employment is much more indicative than earlier indicators that excess capacity is
beginning to wear off”.(4 marks)
Qu. 2 Use the static AD-AS model to describe the circumstances under which the Reserve
Bank will be prompted to raise interests as depicted by the following statement:
“The nation’s labour market is close to the point when workers, are absorbed into a
strengthening economy, stoking the wage inflation that is a key precondition for future interest
rate hikes”. In your answer make sure to also describe the long run implications if the Reserve
Bank fails to raise interest rates under such circumstances.[6 marks]
Qu. 3 Referring to the final comment “…will fuel speculation that the Reserve Bank’s first rate
hike since 2011 would happen within 12 months” use the dynamic AD-AS model(s) to explain
the circumstances under which the Reserve Bank will raise interest rates sometime in the future,
and contrast this to the circumstances where it might lower interest rates.[8 marks]
Overall Presentation [3 marks]
Answer preview:
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