## This assignment covers the following topics: • Inflation – Topic 5 • Labour Force and unemployment – Topic 6 • Foreign exchange rate market – Topic 7

This assignment covers the following topics:

• Inflation – Topic 5
• Labour Force and unemployment – Topic 6
• Foreign exchange rate market – Topic 7

READ THE FOLLOWING FIRST

• This assessment contributes 20% of the overall marks for the course.

Only a single attempt of submission is permitted.  Please ensure to attach the final version of the assessment.

• Attach your assignment to the Assignment cover sheet for the submission of work. The cover sheet is in the Assignment folder.  Submit your assignment using either word or PDF format.  The font size has to be at least 11.

• Explain your answers, but be succinct (brief and relevant). Label each axis and explain the diagram that you use carefully. Show all of your working in order to get partial credits.

• After the due date any late submission will be marked as ‘late’. A penalty of 10% of the allocated marks (i.e., 2 marks) per day will apply for late submissions.

SECTION A                                                                                                               14 marks

The economy of Euphoria has the following economic data.

 Year 2015 2016 2017 Nominal Gross Domestic Product (\$ billions) 470 485 545 Real Gross Domestic Product (\$ billions) 470 480 505 % change in real Consumption spending 3.00 1.25 1.00 % change in real Investment spending 2.00 -10.00 5.00 Net exports (\$ billions) –  23,000 –  52,000 –  5,000 Unemployment rate (%) 5.3 5.8 6 Natural rate of unemployment 4.8 4.8 5.4 Index of production costs (2015 = 100) 100 105 107 Productivity index (2015 = 100) 100 101 103

Examine the data relating to the economy of Euphoria above and answer the following questions.

Q1  a. Calculate the real growth rate for 2016 and 2017 to two decimal places.

1. Calculate the inflation rate for 2016 and 2017 to two decimal places.
2. What phase of the business cycle was the economy in 2016 and 2017? Briefly give two reasons for your answer.

(1 + 1 + 2 = 4 marks)

Q2. What was the likely cause of the change in the unemployment rate in 2017?  What type of unemployment is likely to exist in Euphoria in 2017?  Explain your answer.

(3 marks)

Q3.  Identify and explain the likely cause of inflation in 2017?

(4 marks)

Q4. Read the article ‘Venezuela Cuts to Fight Inflation (Zeros from Its Currency. That Is)’

1. Identify and briefly explain the two causes of hyperinflation in Venezuela.
2. Illustrate these using the AD-AS diagram clearly showing the increase in the inflation rate.

(3 marks)

SECTION B                                                                                                               6 marks

Q1

Graph the demand for and supply of Australian dollars for US dollars.  Label each axis.

From Australia’s perspective, show graphically and explain the effect on the Australian dollar of the following.

Australia’s major trading partners (China, Japan, USA and East Asia) experience lower RGDP and income growth resulting in a decrease in the price of Australian exported commodities (e.g. coal, iron-ore).

As a result there is increased speculation of the AUD (Australian dollar) based on speculators expectations of its future value.

(4 marks)

 Illustrate – exchange rate market                                 Explanation: __________________________________________________________________________________________________________________ _________________________________________________________ __________________________________________________________________________________________________________________ _________________________________________________________

Q2.      Explain the impact that the change in the exchange ratein (a) above will have on Australia’s net exports, real GDP and the price level.                                     (2 marks)

Explanation:

Net exports.

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RGDP and the price level.

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