1. Consider two groups of goods, A and B. Group A consists of Toyota cars and Westinghouse refrigerators. Group B consists of Huggies nappies and McDonald’s Big Macs. Briefly explain whether the sale of the goods in group A or B will fluctuate more during the business cycle relative to real GDP.
Given the information in the above article, explain, in economic terms and using the AD/AS framework, how Australia avoided negative economic growth during the global financial crises
Read the following excerpt and answer questions 4 and 5.
Interest rates: RBA pressured to flag more cutsThe Reserve Bank will come under pressure this week to flag further interest rate cuts to bolster Australia’s sluggish economy in the wake of sharp falls in global equity markets and a deteriorating outlook for world growth.The RBA board will meet for the first time this year tomorrow against a backdrop of mounting deflationary fears as the global oil price wallows at 13-year lows, and weakening growth prospects in the US, Japan and China, Australia’s biggest three trade partners…….The ABS last week said Australia’s underlying inflation rate was 2 per cent in 2015, a little stronger than economists had expected but still affording the RBA plenty of scope to cut further.Author: Adam Creighton; Economics correspondent, The Australian – February 1, 2016.
4. Based on the article what is the key concern of the RBA which may result in it decreasing interest rates? Use the AD/AS framework to describe the situation.
5. What are the factors that determine whether such a policy will be successful?
6. Starting from long-run equilibrium, use the basic (static) aggregate demand and aggregate supply diagram to show what happens in both the short run and the long run when there is a crash in property market (property prices fall by a large amount). Explain your diagram.