MACRO 2004 Final Exam - suggested approach to answers x

MACRO 2004 Final Exam - suggested approach to answers x -...

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Macroeconomics 1 – Final Exam, Session 2, 2004 – answer guide Note: This is a suggested answer guide only. Some of the answer are quite brief. All of the answers are in note form. IN THE FINAL EXAM YOU SHOULD WRITE IN COMPLETE SENTENCES. You will be rewarded for initiative. Question 1 Suppose the government of Ozland decides to increase its defence spending while decreasing its expenditure on education and health by an equal amount. (a) With the use of diagrams, explain the impact of this change in the composition of government expenditure on real GDP, unemployment and prices in the short run. 3 MARKS Use a correctly labelled AS-AD model to explain the impact of an increase in defence spending and the decrease in spending on health and education on AD, real GDP, the price level and unemployment. Must include discussion of multiplier. (May also use Aggregate Expenditure model as well). A good answer would take ‘defence’ and ‘education and health’ separately. Explain using the AS-AD model that in the short run, an increase in defence expenditure would lead to an increase in real GDP (via the multiplier), increased price level, and reduced unemployment. Then a decrease in education and health expenditure would reduce real GDP (via the multiplier), lower the price level and lead to an increase in unemployment. These effects would offset each other IF the multiplier were equal for these 3 types of government expenditure – you cannot assume this. (b) Using the labour market model and the aggregate production function, explain how this change in the composition of government expenditure will affect long run growth. 9 MARKS Describe and use correctly labelled labour market model to explain that reduction in expenditure on education and health will reduce human capital, reduce labour productivity, labour demand, shift demand for labour curve to the left, reduce equilibrium real wage and equilibrium labour hours. Describe and use correctly labeled aggregate production function model to show impact on potential real GDP – shift down of aggregate production function and lower equilibrium labour hours => fall in potential real GDP and long run growth. 1
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Suppose you are a policy adviser to the government of Ozland. Describe three economic policies you would advocate to improve Ozland’s long run growth potential. 3 MARKS Possible policies include: Policies to increase labour productivity Increase government spending on education and health => increase human capital. Incentives/encourage increased private investment expenditure => increase physical capital. Encourage research and development => improve technology. Policies to increase working population Immigration, increase birth rate, reduce mortality Encourage labour force participation of older workers, non working parents This is not a complete list – initiative will be rewarded. Use models introduced in part b. to explain how these policies could improve
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This note was uploaded on 01/31/2012 for the course ECON econ taught by Professor A during the Three '11 term at University of New South Wales.

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MACRO 2004 Final Exam - suggested approach to answers x -...

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