Bueco5903 Business Economics For Fundamentals Assessment Answers

Answer:

1. The Australian Bureau of Statistics uses agreed standards in defining unemployment and the key indicators have been measured in a consistent way since 1966

The following three criteria’s to be classified as unemployed are:

• Not working more than one hour in a reference week
• Actively looking for work in previous 4 weeks
• Be able to start work in the reference week

The ABS make use of various measures in addition to unemployment rate to help the common public understand the extent of underutilized labour supply.

ABS is not treated as an accurate measure as it only provides a measure of employment and not the number of jobs. For example, a person might work 20 hours per week at a supermarket and 10 hours per week as an Uber driver. Employment is categorized only as per the main job, but ABS deems to count them as 1 person (working for less than 35 hours) in the retail segment)  

1. Frictional unemployment is inevitable in an economy because of the ever-changing economy. Some of the firms are shrinking while the others are expanding. For example, frictional unemployment occurs in a situation where the consumer prefers one brand over the other. The frictional unemployment can be reduced through government run agencies and public training programs.

• Structural unemployment is categorically something that should be considered heavily by macroeconomic policymakers as it affects the nation at large. Structural unemployment is a situation where many people are jobless because of the limited job opportunities. Promoting economic development can help overcome the underemployment of certain economy.

Cyclical unemployment on the other hand is associated with the downswing and depression phase of the business cycle. Cyclical unemployment is caused by a deficiency in aggregate demand.

The major difference between to two types of unemployment are:

• Structural unemployment takes place in underdeveloped economies while cyclical unemployment in developed capitalist economies
• Structural unemployment happens due to capital shortage, whereas cyclical unemployment takes place due to deficiency in aggregate demand

1. Monetarist economics is Milton Friedman’s direct criticism of Keynesian economics theory, originated by John Maynard. The difference between the two theories is that Monetarist economics involves the control of money in the economy while Keynesian involves government expenditures.

Keynesian believes in pull vs. push inflation, where high economic activity can result in a heated economy where demand exceeds and inflation occurs. Unlike monetarist they do not believe that increase in money supply inevitably creates inflation.

1. The supply-side macroeconomic debate between Keynesians and monetarists is ongoing throughout our post-modern time. The extreme Keynesian views about the shape of aggregate supply (AS) curve have been challenged as a result of the emergence of monetarist and moderate Keynesian thought. Most economists disagree with the extreme Keynesian view that the shape of AS curve is horizontal in the short run and vertical in the long run. This is a problem, because it would be beneficial for a government to know how the nature of AS affects the success of a chosen fiscal or monetary policy. There is no absolute certainty about the shape of the short run AS curves. Moderate thinkers have tried to adjust the extreme Keynesian model of AS curve into a more empirically accurate form whereas the monetarists have challenged the fundamentals of Keynesian model.

The factors that are responsible for an increase in money supply out of the listed options is Central Bank buying government securities.

 If the central bank buys government securities/ corporate bonds then there will be more outflow of money and people will have more money to spend.

Bank recognizes turning illiquid assets into liquid assets. Therefore, in certain circumstances this can lead to an increase in the money supply.  

• Following points has been illustrated to explain the difference between Demand Pull and Cost Pull Inflation: 

Real GDP

Causes of Demand Pull Inflation

Demand Pull Inflation is a situation when aggregate demand for goods and services exceeds aggregate supply (Tucker, 2015). 

• An increase in money supply
• A decrease in demand for money
• A decrease in aggregate supply of goods and services
• An increase in aggregate demand for goods and services
• A depreciation of the exchange rate increases the price of imports and reduces the price of country’s exports. This will result in exports to grow more
• Excessive Monetary Growth: If there is too much money in the system chasing too few goods the price of goodwill will increase(Tucker, 2016).

Below are the pointers explaining causes of Cost Push Inflation:

• Monopoly: Companies that achieve a monopoly over an industry creates cost push inflation
• Wage Inflation: Wage Inflation occurs when laborers have enough force through wage increase. Strong labour unions can influence inflation as they push for higher wages, this will result in increase in cost of production.
• Natural Disasters : It causes inflation by distorting the supply of cost
• Government Regulation and Taxation: An increase in Indirect Taxation i.e. VAT and Excise duties will lead to increase in price of goods.
• Exchange Rates

• In the modern economy most money takes the form of bank deposits. Whenever banks make a loan it simultaneously creates a matching deposit in the borrower banks account thereby creating money

The reality of how money is created today differs from the

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.

Lending is a platform to create money for commercial banks. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.

• The most important function of commercial banks is credit creation. Commercial banks cannot use the entire money for lending purpose deposited by common public. After keeping a specific amount as reserves rest can be used for lending purpose.

So, this inflow and outflow of money increases the money supply in the market

• Under the following example the Bank owns $1000 out of which 10% is the reserve ratio i.e. Rs 100 is maintained as required reserve. Total excess reserve will be ($1000 -$100) = $900

Bank Liabilities is also equal to $1000.

Assets in the form of required reserves increase by $100 (0.10 * $1000). This means excess reserves increase by $900 allowing the bank to make this amount of new loans.

Hence, we can conclude that it creates more money supply in the market

Bibliography

Amadeo, K., 2018. What is Demand Pull Inflation. [Online].

Keynesian, 2014. https://www.studymode.com/essays/Is-Structural-Unemployment-Something-Macroeconomic-Policymakers-56045691.html. [Online].

S, S., 2016. Difference between Demand Pull and Cost Push Inflation. [Online].

Tucker, I., 2015. Survey of Economics - Page 310. London: Springer Publications.

Tucker, I., 2016. Macroeconomics for Today - Page 279. London: Cengage Publications.