This is a paper that focuses on what are the costs to an economy on increase of unemployment rate. The paper also consists of two other questions to answer.
What are the costs to an economy on increase of unemployment rate
Answer all Questions below:
Q1. Firstly, consider the statement, “In March, the OECD was expecting unemployment to start edging down. It has now lifted its forecasts, tipping unemployment to average 5.3 per cent in 2020.” If the unemployment rate increases, what are the costs to an economy? Also, how does it compare with the natural rate of unemployment? (4 marks)
Q 2. Secondly, consider the following statement, “The Morrison government this week announced $3.8 billion of infrastructure projects would be pulled forward or given additional funding over the next four years.”
(a) Show the effects of these changes using the aggregate expenditure (AE) model on real GDP in the short run. In your answer make sure to discuss the linkages in stimulating change and also the equilibrating process of moving to a new macroeconomic equilibrium output. (5 marks)
(b) Thirdly, consider the static AD-AS model and show the effects of the Morrison government’s recent announcement on macroeconomic equilibrium output and (un)employment. In your answer outline the assumptions you have made. (5 marks)
Q 3. Lastly, consider the following statement. “The Australian economy is “weak”, with households weighed down by slow wages growth and also higher taxes. The OECD has declared in a report that backs lower interest rates, calls for more government spending…”. Use the dynamic AD-AS model to describe a longer run scenario where the government is trying to pursue higher economic growth using higher government spending. But were incorrect in their estimation of the major parameters governing long run full employment equilibrium. In your analysis discuss the implications of an incorrect scenario predicted by the government when effecting their stimulus policy on equilibrium output and (un)employment. Make sure to outline the assumptions you have made to reach your conclusion.