Page 1 Of 4ecf1200 Macroeconomicssemester 1 2021 Individual Assignm ✓ Solved

ECF1200 – Macroeconomics Semester 1, 2021 Individual Assignment Instructions (please read all carefully) Due date: â–» Friday 14th May @5pm (Melbourne Time) â–» Late submissions incur a penalty of 1 mark per day. Submission: â–» Your assignment is submitted online at via Moodle. A link will be provided (more details will be announced on this). Online submission will be made to your Tutor (who will be marking it). â–» Once you have uploaded your assignment into the submission portal, this is final. â–» This is an individual assignment. We have Plagiarism detection software which cross-compares all submitted assignments.

Word limit: â–» The word limit for Questions 1, 2, and 3 is 600 words (not inclusive of the diagram and re-writing out the questions). â–» The word limit for Question 4 is 100 words. â–» Thus, the maximum word length in total for the entire assignment is 700 words, strictly. Exceeding this limit entails penalties resulting in loss of marks. â–» Max. 8 pages. â–» Exceeding this limit entails penalties resulting in loss of marks. Formatting: â–» In addition to explaining your answers, you are required to illustrate your answers with graphs. Make sure to fully label all axis, curves, and movements from point to point (Fig.

1 below is a prime example of how the figure should be formatted). Incorrect formatting entails penalties resulting in loss of marks. â–» Its preferable to have the figures drawn in word using the “line†functions. However, you can hand-draw your illustrations, take a photo/scan them, and then insert them into the relevant questions. When taking photos, make sure the image(s) are of sufficient quality/resolution. If we cant make out the explanations in the images, we cant appropriately mark them, resulting in a loss of marks.

The responsibility is on you. â–» If you are referencing, then make sure to include references at the end of the assignment and use the APA-referencing style. â–» Submit as Word or PDF (But be careful. There has been occasions where Word/PDF can mess up the formatting. You MSUT double check before you upload your assignment into Moodle. Incorrect formatting will incur a penalty – so the responsibility is on you to verify your final version). Preliminary In our analysis of Ch.10, we studied the aggregate demand (AD) and aggregate supply (AS) model in the context of recessions, expansions and supply shocks on economic activity.

In addition, in Ch.12, we discussed the role of monetary policy on economic activity. As a result, the different type of ‘shocks’ that affect economic activity bare consequences on the level of inflation and output. Central banks, such as the RBA, can simultaneously pursue “stabilising prices†(i.e., maintaining a targeted level of inflation) and “stabilising economic activity†(i.e., economic activity remaining at its potential level). However, not all shocks to the economy are equal. In response to this, economists/policymakers can either achieve price stability or economic stability, but not both.

This trade-off ultimately poses a dilemma for central banks with dual mandates such as price stability and economic activity. On the other hand, New-Keynesian theory suggests that there is no trade-off between price stability and maintaining economic activity – something called the “divine coincidenceâ€. Recall the long-run potential macroeconomic equilibrium condition: Fig. 1 – Macro-equilibrium price and output in the long-run. where the economy is at long-run macroeconomic equilibrium (point 1); output (or real GDP) is at its potential level at ð‘Œð‘ƒ; and inflation (or the price level) is at its target rate (set by the central bank) at ðœ‹ð‘‡. Questions Question 1 [3 marks total].

While evidence shows that the Global Financial Crisis (GFC) impacted firms (small to large), it is generally accepted (and shown by empirical studies) that the GFC predominantly impacted on households/consumer spending (i.e., on aggregate demand). Assume this is the case. Also assume that there is no fiscal policy response from the government. a. Explain and illustrate the short-run effect of the GFC on macroeconomic equilibrium using the AD-AS model. [0.5 marks] b. Explain and illustrate the adjustment process to back to long-run equilibrium based on the following i.

Self-correcting mechanism (i.e., with no policy response). [1 mark] ii. Active stabilisation response (i.e., with policy response). [1.5 marks] Question 2 [3 marks total]. The last several decades has seen a significant amount of human capital entering Australia from foreign nations ranging from low-skilled to high skilled labour and seen as an important factor of the rate of invention and innovation within an economy. Imposing restrictions on skilled immigration policy may deteriorate the overall level of human capital given it is an integral part of production, and hence output. COVID- 19 has also shown the restrictive effects of the movement of human capital across countries.

Assume there is no fiscal policy response from the government for the following questions. a. Explain and illustrate the short-run effect of the Australian Government imposing a strict ban on human capital entering Australia, by significantly reducing the number of skilled immigrants entering the nation over the next 20 years on macroeconomic equilibrium using the AD-AS model. [0.5 marks] b. Explain and illustrate the adjustment process to back to long-run equilibrium based on the following: i. Self-correcting mechanism (i.e., with no policy response). [1 mark] ii. Active stabilisation response (i.e., with policy response). [1.5 marks] Question 3 [3 marks total].

Oil price shocks have been a reoccurring phenomenon over the last fifty years, causing significant fluctuations in the price of oil. Examples of oil price shocks include the early 1970s caused by the OPEC oil embargo, the early 1990s caused by the Gulf War, and the Arab Spring during the early 2010s. Oil-importing nations like Australia are significantly affected by rising oil prices. Nonetheless, evidence has shown that oil price shocks are a temporary phenomenon and eventually, prices decline. Assume that there is no fiscal policy response from the government in relation to an oil price shock. a.

Explain and illustrate the short-run effect of a temporary oil price shock on macroeconomic equilibrium using the AD-AS model. [0.5 marks] b. Explain and illustrate the adjustment process to back to long-run equilibrium based on the following: i. Self-correcting mechanism (i.e., with no policy response). [1 mark] ii. Active stabilisation response (i.e., with policy response). [Hint: there could be two active stabilisation polices here]. [1.5 marks] Question 4 [1 Mark total]. Based on your answers in part (b) for Q1, Q2, and Q3, does the ‘divine coincidence’ hold? [1 mark] EXAMPLE Student’s Name Theme: Competing Ethnic Mexican Worldviews in the U.S.-Mexico Borderlands, During the twentieth century several important economic and political shifts in the U.S.-Mexico borderlands caused ethnic Mexicans (Mexican nationals and U.S.-Mexicans) to rethink their position in the region, nation, and world.

Between the Mexican Revolution of 1910 and the Chicano Movement in the long decade of the 1960s, Mexican nationals and U.S.-Mexicans used cultural productions to articulate their sense of belonging. There were three competing worldviews during this time. Two of these were sponsored by centralizing states. The U.S. state and Mexican state were interested in securing the political and cultural allegiances of this transnational community. The other worldview tried to articulate a sense of political and cultural belonging outside of authoritative nationalisms.

1. Flaco Jimenez – “La Piedrera†(1928) Flaco Jimenez was an accordion player from San Antonio who popularized a regionally specific genre of music, the Texas-Mexican Conjunto. The conjunto paired the European accordion with the guitar and bass. This music became popular among the growing working-class ethnic Mexican population in the early twentieth century. Regardless of citizenship, both groups identified with the music, using it to establish political connections and establish community.

This type of music helped bridge cultural chasms that were emerging among the community by the 1920s. Increased migration from Mexico had augmented the numbers of Mexican nationals and there was an intra-community debate surrounding the construction of “Mexicanness†in the U.S. 2. Lalo Guerrero – “Los Chucos Suaves†(1942) Guerrero was born in Tucson, Arizona but eventually found his way to Los Angeles, California. Once there, Guerrero, in addition to musician Don Tosti, helped popularize the “Pachuco Boogie Woogie.†By the 1940s, Mexican-American nativity had dramatically increased since its nadir in the 1920s.

These youths were born in the U.S. and attended American schools. They were bilingual and bicultural. The song “Los Chucos Suaves†exemplifies the cultural changes of the Pachucas and Pachucos. The song does not have an accordion and it is not a traditional Latin American format. Instead, the song is inspired by American jazz, yet still retains a Latino flair.

The maracas, the bass line, and the use of Calà³, or the Pachuco slang illustrate the cultural fluidity of these Mexican-American youths who see themselves as both American and Mexican, but not solely one. The lyrics stress the bicultural reality of Mexican-American youth in the 1940s by stating Pachucas and Pachucos can dance a wide variety of dances—cumbia, rhumba, guarache—but also the boogie-woogie and jitter-bug. 3. Beto Villa – “El Primero†(1948) Villa’s band was emblematic of a new genre of music that began to develop in the Southwest in the middle of the twentieth century, the Mexican-American orquesta. While the conjunto was primarily working class music, the orquesta was the chosen style of a small but influential middle-class Mexican-American community.

This music was associated with groups like the League of Latin American Citizens and the American G.I. Forum. While these were early civil rights organizations, their members also subscribed a particular type of social conservatism that stressed assimilation, capitalism, patriotism, and conservative gender roles. The Mexican-American middle-class in the mid-twentieth century was conservative in political, social, and cultural outlook. They would have thought the Pachuco Boogie-Woogie scandalous and the conjunto low class.

Villa’s orchestration, his choice of American influenced rhythms, and his hiding, and in some cases eliminating, of the accordion shows the assimilationist bent of the Mexican-American orquesta. 4. Pedro Infante – “Dicen Que Soy Mujeriego†(1948) Infante was part of a larger shift in Mexican culture beginning after the institutionalization of the Mexican Revolution. After the subsidence of violence, the revolutionary state set out to create a new coherent Mexican nationalism, a project that had plagued the nation through the nineteenth century. Building on indigenous and socialist themes, the Mexican state believed they could create, as Jose Vasconcelos wrote, a “raza cosmica,†or a cosmic people.

In other words, integration not racial segregation would be the foundation for the new nation in the twentieth century. The combination of the indigenous past and the industrial future would help forge a new nation. In an effort to create this new nationalism, the Mexican state began to promote Mariachi music domestically and internationally. Mariachi music had previously been a regional music but started to transform into a national symbol. Through film and radio the Mexican state popularized the music because its themes reflected key tenets of Mexican political and social identity: bravery, virility, chivalry, humility.

Songs like “Dicen Que Soy Mujeriego†foreground men as central social and political actors. Their power was manifest in their sexual virility and their virtue in their chivalry. While in reality the charro was a mythical figure of the past, he was a national metonym, an example of what every Mexican man was supposed to be. These films and songs were promoted in the United States as well and were popular and influential. 5.

Carlos Santana – “Oye Como Va†(1970) By the mid-1960s, some Mexican-American youth began calling themselves Chicanas and Chicanos. The term, with a history rooted in a working-class migratory history of the twentieth century, was used as an affirmation of identity and culture and as a term of resistance to assimilation. Chicanas and Chicanos saw themselves as a community that had unique transnational and indigenous qualities that would allow them to fight back capitalist penetration and colonial conquest. Building upon a long history of cultural syncretism, they believed that cultural mestizaje was a crucial ingredient to social resistance. Santana’s music adopts these themes.

Santana combined American rock, Afro-Latino rhythms, and Mexican culture into a transnational ethnic Mexican music. For this generation, his music, along with others like El Chicano, was the soundtrack to the revolution. [You will write a concluding Paragraph]

Paper for above instructions

Question 1: Short-run Effects of the Global Financial Crisis (GFC)

a. Impact on Macroeconomic Equilibrium (0.5 marks)

The Global Financial Crisis (GFC) primarily affected consumer spending, significantly impacting aggregate demand. As households faced job losses, decreased income, and tighter credit conditions, their ability to spend diminished. This reduction in consumer spending can be illustrated using the Aggregate Demand and Aggregate Supply (AD-AS) model.
In Figure 1 below, the initial equilibrium is represented by point E1, where AD1 intersects with the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curve at a price level (P1) and output (Y1). The GFC shifts the aggregate demand curve from AD1 to AD2, due to declining consumer confidence and spending. This shift results in a new equilibrium at point E2, where output decreases to Y2 and the price level drops to P2.
Figure 1: Short-run Impact of the GFC on Macroeconomic Equilibrium
[Insert Diagram Here]

b. Adjustment Process to Long-run Equilibrium

i. Self-Correcting Mechanism (1 mark)

In the absence of government intervention, the economy relies on its self-correcting mechanisms to return to long-run equilibrium. Following the initial demand shock, the decrease in output (from Y1 to Y2) leads to reduced consumer expenditure, businesses laying off workers, and increased unemployment. Higher unemployment pushes wages down, which eventually results in a decline in production costs for firms.
As input prices fall, the short-run aggregate supply (SRAS) curve would gradually shift to the right from SRAS1 to SRAS2, restoring output back to its potential level at Y1. This would result in a new equilibrium at E3 with output back to Y1 and a decrease in the price level back to P3.

ii. Active Stabilisation Response (1.5 marks)

An active stabilization policy, such as monetary policy adjustments, could also mitigate the adverse effects of the GFC. The central bank, such as the Reserve Bank of Australia (RBA), could implement an expansionary monetary policy by lowering interest rates, making borrowing cheaper, and stimulating investment and consumption.
As shown in Figure 2, with the introduction of expansionary monetary policy, the AD curve shifts from AD2 back towards AD1, moving the economy towards output level Y1, while stabilizing prices. The final equilibrium at E4 achieves potential output with inflation maintained at target rates. Additionally, fiscal stimulus, through increased government spending could further enhance aggregate demand, reinforcing the positive moves back towards the long-run equilibrium.
Figure 2: Active Stabilisation Response
[Insert Diagram Here]

Question 2: Impact of Ban on Skilled Immigration

a. Short-run Effects of Immigration Ban (0.5 marks)

Imposing strict restrictions on skilled immigration can have detrimental short-run effects on the economy. The immediate consequence is the reduction in the supply of qualified labor, which adversely affects productivity and innovation, thus impacting aggregate supply. In the AD-AS model, this restriction shifts the LRAS curve leftward to LRAS2, causing a decrease in potential output, which can be represented in Figure 3.
The initial equilibrium at E1 represents output level Y1 and price level P1. After the immigration ban, the economy moves to a new equilibrium at E2, characterized by reduced output Y2 and increased price levels to P2 due to a decrease in supply.
Figure 3: Short-run Impact of Immigration Ban on Macroeconomic Equilibrium
[Insert Diagram Here]

b. Adjustment Process to Long-run Equilibrium

i. Self-Correcting Mechanism (1 mark)

In the absence of government intervention, the economy could still adjust over time. As labor becomes scarcer and wages rise due to the immigration ban, firms may become incentivized to invest in automation, technology, or other productivity-enhancing measures. Consequently, this could shift the SRAS curve outward over time from SRAS1 to SRAS2, resulting in regained output at Y1, albeit at a potentially higher price level.

ii. Active Stabilisation Response (1.5 marks)

Government intervention through revised immigration policies aimed at enticing skill-based workers back to the country could stimulate innovation and productivity. If effective, such policy may lead to a rightward shift in the LRAS to LRAS1, enhancing economic growth and stabilizing output at Y1. Additionally, targeted investments by the government in education and training for local workers could increase human capital, further mitigating the negative impacts of the initial restrictions.

Question 3: Oil Price Shocks

a. Short-run Effect of Oil Price Shock (0.5 marks)

Oil price shocks can quickly shift aggregate supply due to increased production costs. When oil prices rise, firms face higher operational costs, leading to a leftward shift of the SRAS curve from SRAS1 to SRAS2. As displayed in Figure 4, the new equilibrium at E2 occurs at a lower output level Y2, leading to higher price levels P2 associated with reduced economic activity.
Figure 4: Short-run Effect of Oil Price Shock
[Insert Diagram Here]

b. Adjustment Process to Long-run Equilibrium

i. Self-Correcting Mechanism (1 mark)

Without intervention, the self-correcting mechanisms can help the economy adjust back to long-run equilibrium. As firms adapt to increased costs, they will adjust prices and output strategies, leading to a potential decrease in demand for oil over time, eventually easing the pressure on production.

ii. Active Stabilisation Response (1.5 marks)

In an active stabilisation approach, the government and central bank could implement supply-side policies, such as investment in alternative energy sources or subsidies for sectors heavily reliant on oil. Additionally, reducing interest rates to spur investment can also help restore aggregate demand. This would shift the AD curve rightward towards AD2, moving the economy back towards the long-run equilibrium represented at E4.

Question 4: Does the “Divine Coincidence” Hold? (1 mark)

Based on the responses in part (b) for Questions 1, 2, and 3, the ‘divine coincidence’ does not entirely hold. While New-Keynesian economics suggests that price stability can enhance economic stability, the case studies illustrate significant trade-offs under varying circumstances. For instance, while addressing the short-run impacts of the GFC, immigration restrictions, and oil price shocks, it became evident that achieving both stability mandates simultaneously often resulted in economic strain—highlighting the complexities central banks face in attaining their dual mandates (Blanchard & Johnson, 2013; Woodford, 2003).

References

1. Blanchard, O., & Johnson, D. R. (2013). Macroeconomics (6th ed.). Pearson.
2. Mankiw, N. G. (2021). Principles of Macroeconomics (9th ed.). Cengage.
3. Romer, D. (2019). Advanced Macroeconomics (5th ed.). McGraw-Hill.
4. Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.
5. Bernanke, B. S. (2010). Monetary Policy and the Housing Bubble. Speech at the Annual Meeting of the American Economic Association.
6. Friedman, M. (1970). A Theoretical Framework for Monetary Analysis. Journal of Political Economy, 78(2), 193-238.
7. Blanchard, O., & Galí, J. (2010). Labor Markets and Monetary Policy: A New Keynesian Model. NBER Working Paper No. 15788.
8. DeLong, J. B., & Summer, L. H. (2012). Fiscal Policy in a Depressed Economy. Brookings Papers on Economic Activity, 2012(1), 233-298.
9. Eggertsson, G. B., & Woodford, M. (2003). The Zero Bound on Interest Rates and Optimal Monetary Policy. Brookings Papers on Economic Activity, 2003(1), 139-211.
10. Taylor, J. B. (2013). Principles of Economics. Pearson.
Note: Each reference must be verified and tailored to suit the format and guidelines provided by the institution.