1
i. Briefly describe the major measures of the price level.
ii. Which measure is used most frequently in Australia to measure changes in the
cost of living?
iii. Explain the difference and the link between the price level and the rate of
inflation.
iv. What potential biases exist in calculating the consumer price index? What steps
has the Australian Bureau of Statistics taken to reduce the size of the biases?
v. What is the difference between the consumer price index and the producer
price index?
2.
a. The following table shows the average percentage rises in full-time adult
ordinary time earnings during the years 2014/2015 and 2015/2016, and also
the CPI for these years (as at June) (Australian Bureau of Statistics, 2016).iv
Use these data to discuss what happened to wages negotiations and wages
growth over the period 2014/2015 to 2015/2016.
ANNUAL WAGE RISE, % 2014/15 2015/16
All sectors 1.99% 2.22%
Private sector 2.01% 1.97%
Public sector 1.71% 3.41%
CPI 106.8 108.2
SOURCE: Australian Bureau of Statistics (2016), Average Weekly Earnings, Australia & Consumer Price Index,
Australia, Time Series Workbook.
b How can inflation affect the distribution of income?
3.
a. Distinguish between demand-pull inflation and cost-push inflation, and give an
example of a factor that might cause each to occur.
b. If consumer spending in Australia continued to increase even though the
Australian economy was close to or at full employment, what type of inflation
might occur? Briefly explain.
4
10
a. If the price of electricity rises because of a carbon tax, why might this lead to
inflation? What type of inflation would this be?
b. At various times, much of Australia’s fruit crops in Queensland have been
destroyed due to cyclones and associated floods. The scale of destruction has
been sufficient to cause increases in the rate of inflation. Explain what type of
inflation this would be classified as. Do you think the inflation rates at such times
are entirely accurate? Briefly explain.
WEEK 8 AE & OUTPUT
Multichoice activity 2 (MCA2) due online this week by Friday
11.59pm
- Suppose you read that business inventories increased dramatically last month.
What does this tell you about the state of the economy? Would your answer be
affected by whether the increase in inventories was taking place at the end of a
contraction or recession or the end of an expansion? Briefly explain.
2.
a. How would the demand forecast for a major Australian furniture manufacturer be
affected by each of the following?
i. A decrease in consumer spending in the economy
i. An increase in real interest rates
ii. An increase in the value of the Australian dollar relative to other currencies
iii. A decrease in planned investment spending in the economy
b Draw the consumption function and label each axis. Show the effect of an
increase in income on consumption spending. Does the change in income
cause a movement along the consumption function or a shift of the consumption
function? How would an increase in expected future income or an increase in
household wealth affect the consumption function? Would these increases
cause a movement along the consumption function or a shift of the consumption
function?
3.
a. Unemployed workers receive unemployment benefits from the government.
Does the existence of unemployment benefits make it likely that consumption
will fluctuate more or fluctuate less over the business cycle than it would in
the absence of unemployment benefits? Briefly explain.
b. Fill in the blanks in the following table. Assume for simplicity that taxes are
zero. The numbers are in billions of dollars.
11
4
a. What is the meaning of the 45° line in the 45° line diagram? Use a 45°line
diagram to illustrate macroeconomic equilibrium. Make sure that your
diagram shows the aggregate expenditure function and the level of
equilibrium real GDP and that your axes are properly labelled. What does the
slope of the aggregate expenditure line equal? How is the slope of the
aggregate expenditure line related to the slope of the consumption function?
b. Is it possible for the economy to be in macroeconomic equilibrium at a level
of real GDP that is greater than the potential level of GDP? Illustrate using a
45° line diagram. Briefly discuss the multiplier effect and use a 45° line
diagram to illustrate the multiplier effect of a decrease in government
purchases.
Sample Solution
