ECON10003 Introductory Macroeconomics 1

ECON10003
INTRODUCTORY MACROECONOMICS
SEMESTER 2, 2019

TUTORIAL 6
WEEK STARTING SEPTEMBER 9TH, 2019
PRE-TUTORIAL WORK

THE TUTORIAL
This week’s tutorial looks at monetary policy in Australia an introduction to aggregate
demand and supply.

Note that your tutor is under no obligation to go through the answers to the pre-
tutorial work in detail. The focus in the tutorial will be on the tutorial work itself - the
questions here are preparatory.

ASSESSMENT
Your preparation for Tutorial 6 will be taken into account when assessing your
tutorial participation (10% of your overall mark for this subject will be based on your
tutorial participation). You must be able to produce evidence in the form of written
answers or notes to this pre-tutorial work when requested by your tutor. If you are
unable to provide this evidence of preparation, you will receive half the participation
marks you would otherwise have received for this tutorial.

READING GUIDE
Review chapter 8 of BOF (4th edition) and chapter 11 of BOFAH (5th edition), or
chapter 10 and 11 of BOFAH (5th edition) as preparation for this tutorial. A pdf of
chapter 11 of BOFAH is available via the LMS.

You should also look carefully over your lectures notes for Week 6. You should also
read the speech by then RBA Governor Ian McFarlane entitled “Monetary Policy
Regimes: Past and Future”, link available from the LMS.

KEY CONCEPTS
Mechanics of monetary policy, RBA policy reaction function, Aggregate Demand

Pre Tutorial Work

ECON10003 Introductory Macroeconomics 2

PROBLEMS

1) During the second half of the 1970s, the Reserve Bank of Australia, and other
central banks around the world followed a process of monetary targeting. What is
monetary targeting and what was the rationale behind it? Explain what factors
caused central banks to abandon the process of monetary targeting?

2) What is the “policy reaction function”? If a central bank became more aggressive
in fighting inflation, how do you expect the policy reaction function to change? If
a central bank became more aggressive in fighting cyclical unemployment, how
would you expect the policy reaction function to change?

3) An economy is described by the following set of equations:

Cd = 2,600 + 0.8(Y – T) – 5,000r,
IP = 3,000 – 15,000r,
G = 800,
X = M = 0,
T = 1,000 + 0.3Y.
The real interest rate, expressed as a decimal, is 0.10 (that is, 10 percent).
a) Find a numerical equation relating planned aggregate expenditure to output.
b) Solve for short-run equilibrium output.
c) Suppose the flow of GDP consistent with full employment is 10,000. What
real interest rate would achieve full employment?
d) Qualitatively show your result graphically, using the 45-degree diagram and
explain how the change in the real interest rate identified in part c) has enabled
full employment to be achieved.

4) Why is the AD Curve downward sloping? Explain how the AD Curve would
move if there was:
a) A loss in business confidence
b) An increase in the size of the budget deficit
c) Growth in the world economy that increases the demand for our exports.

Pre Tutorial Work