(Chapter 28, 26&27)
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This assignment covers the following topics:

  • Unemployment (Chapter 28)
  • Productivity and Growth (Chapter 26)
  • Saving, Investment and Financial System (Chapter 27)


  1. This assignment contributes to 20% of the overall marks for the course.
  2. Only a single submission permitted (hence, please ensure to attach the file version of the assignment)
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  7. Explain your answers, but be succinct.
  8. Label each axis and explain the diagram that you use carefully (if any).
  9. Show all of your working in order to get partial credits.
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  14. http://www1.rmit.edu.au/browse;ID=sg4yfqzod48g1

Short Answer Questions:

  1. Compute various indicators of the state of the labour market using the following information. Please show all of your working. If you do not, you will receive zero marks for the question(s).
Demographic Group Number of Residents
Full-time workers 7,000
Part-time workers 2,000
Unemployed and looking for work 600
Unemployed and not looking for work due to 500
   discouragement over job prospects  
Not working due to disability 300
Not working due to retirement 900
Under the age of 15 3,000
Total Population 14,300


  1. (1 mark) What is the size of the labour force in this economy?

Size of labour force = Unemployed and looking for work + Part – time workers + Full-time workers

  • 600 + 2,000 + 7,000 = 9,600
  1. (1 mark) Calculate the Labour Force Participation Rate for this economy. Report as a percentage to two decimal places.

Labour force participation rate = (full-time workers + part-time workers)/ Labour force => (7,000 + 2,000)/ 9,600

  • 9375 ≈ 93.75%
  1. (1 mark) Calculate the Unemployment Rate for this economy. Report as a percentage to two decimal places.

Unemployment rate = Number of unemployed and actively looking for work/ Total labour force

  • 600/9600
  • 0625 ≈ 6.25%
  1. (1 mark) Suppose that the natural rate of unemployment is considered to be 5%. What is the rate of cyclical unemployment? Report as a percentage to two decimal places.

Cyclical unemployment rate = Actual unemployment rate – Natural unemployment rate

  • 25% – 5.0% = 1.25%
  1. Analyse the effects of the following events using the loanable fund market diagram where we have (real) interest rate on the vertical axis and the quantity of loanable fund on the horizontal axis. Please ensure to explain what happens to saving, investment and (real) interest rate.
  2. Consumers decide to save more to prepare themselves for the future (at any given interest rate). Assume the government budget balance is zero. (3 marks).

Answer here (Tips: to create new lines, simply copy the existing curves and move to the new location)

Real Interest Rate (r)

The increase in savings implies that consumers have limited amount of disposable income to spend on consumption and investment. Increased saving increases quantity of loanable funds implying that supply becomes high. Increased supply causes a shift in the supply curve to the right and downward resulting in fall of real interest rates.
Equilibrium is attained at point E2 and real interest rates reduces from r1 to r2 to accommodate the increased supply of loanable funds that are experiencing low demand.

  1. A reduction of income tax rate by noting that the source of the supply of loanable funds coming from both private as well as public saving (3 marks)

Answer here (Tips: to create new lines, simply copy the existing curves and move to the new location)

Real Interest Rate (r)

Reduced tax rate encourages borrowing. This contributes to increased demand for loanable funds putting pressure on supply. As a result, demand curve shifts outwards to the right. Interest rates increases in attempt to maintain demand and supply equilibrium. The following changes are exhibited in the curve
New demand level is created at E2 following an increase in real interest rate from r1 to r2.

  1. Watch the 10 minute video at gapminder.org/videos/what-stops-population-growth

Summarize the video in minimum of 5 sentences (Not in the bullet points, please!). What were the most interesting or surprising facts you learned? (3 marks)
The video is about Hans Rosling talk on what stops population growth. He argues that besides the fact that death is the major factor that stops growth of population, other factors such as low fertility rate reduces growth. One surprising thing is his talk on a country with fertility rate of 5 – 8, which is actually a staggering rate. Further, baby boomers in most of developing countries have drastically reduced implying that these countries are tending to rely on skilled immigrants to provide labour to the economy. This is a consequence of reduced growth of population.

  1. Over the next 100 years real GDP per capita in Neverland is expected to grow at an average annual rate of 2.0%. Gotham (yes, where Batman lives!) is expected to grow at an average annual rate of 1.5%. If both have a real GDP per capita today of $20,000, compare their real GDP per-capita in 100 years. Please show all of your working. If you do not, you will receive zero marks for the question(s). (2 marks)
Neverland Gotham
Annual real GDP per capita = 2.0%
Expected real GDP per capita in 100 years
= 100*2.0%
= 200%
Annual real GDP per capita = 1.5%
Expected real GDP per capita in 100 years
= 100*1.5%
= 150%

For the next 100 years, Neverland expects an average annual growth rate of real GDP per capita of 200% while Gotham anticipates an annual growth rate of 150% real GDP per capita.

  1. The level of government debt is a growing concern for the current Australian Treasurer who has the responsibility of managing the government budget. Summarise the key arguments on the debate around Australian government debt and deficit for the Turnbull government. Your summary must address the following; what is the major concern of running government deficits, what is the economic reasoning to have a balanced budget and when might a budget deficit/surplus be ok? Conclude by briefly discussing what policies you would suggest to Scott Morrison implements in order to balance the budget and why. The summary should be at least half a page in length (again, please do not write in the form of the bullet points). No need to list the reference, but please do not copy and paste from whatever you found on the web. We can easily detect this in our system! (5 marks)

Overspending in the government compared to the amount of tax revenues collected, there will be a budget deficit. In this case, a government is at stake as there is no money available to pay expenditures. Major issues that should be addressed during the budget deficit include increased strain on the growth of economy resulting from the economic imbalances. This is likely to cause a crippled economy. Another issue is the crowding out effect which results from borrowing of loans to help support government expenditures, for example, through the sale of bonds to investors at a favourable interest rates. As a result, private investors are crowded out as they seek to provide financial support to the government. Another issue is inflation as large deficits discourages foreign investment. Financing borrowed funds becomes expensive that may tempt the government to print more funds, thereby resulting to inflation. Therefore, there is need for a balanced budget in the Australia economy to encourage a stable economic condition.