Task 3 (12 marks, each part is worth 3 marks)

a. A firm owner Liam meets his banker Mary in mid-2021 and they sign a one-year loan contract. Explain their thinking and all the relevant terms, such as the nominal and real interest rate. How does unexpected inflation experienced in early 2022 affect the desirability of their contract for each party?

b. Using the following labour market data Adult Population 140 Not in the Labour Force 20 Unemployed 30 Derive the labour force, the rate of unemployment and labour-force participation rate, showing your calculations and explaining what each of these terms means.

c. How would you expect these statistics to change during a pandemic, and why? Make sure you also mention the possibility of discouraged workers, and their effect on the above labour market statistics.

d. If you were the policymaker, how would YOU design and implement labour market policies during a pandemic? (for example, would you have done anything differently from what Australian policymakers did in 2020-2021?)

Task 4 (15 marks, each part is worth 3 marks)

a. Consider a negative short-run aggregate supply shock hitting the economy. Give two examples of such a shock and carefully explain its short-run effects and the underlying reasoning (do NOT provide a diagram).

b. Assuming policymakers ignore this shock, explain step by step what happens in the economy in the longer-term (do NOT provide a diagram).

c. How should the central bank and/or the government respond to this shock? Carefully explain (do NOT provide a diagram).

d. Now consider a different shock, namely a pandemic hitting a country. Show this shock in the AS/AD diagram and describe the short-term outcomes. Show optimal responses of monetary and fiscal policies to the pandemic in the diagram and explain them in words, including the resulting outcomes.

a. Now consider a different shock yet again. Researchers find a cure for all diseases, so all people get healthier, retire at a later age and die at the age of 110. Do NOT provide a diagram, just carefully explain your arguments about what would happen in the diagram. (Note that there may be more than one correct answer; this question is trying to make you think outside the box and we are looking at the quality of your arguments).

Task 5 (9 marks, each part is worth 3 marks) Suppose an open economy such as Australia moves from a balanced budget to a budget surplus. Answer the following questions and show them all in one big diagram, capturing jointly all relevant markets.

a. What are the effects in the market for loanable funds? Carefully explain the reasoning with reference to your diagram.

b. What is the effect on net foreign investment? What is the effect on the exchange rate? What is the effect on imports, exports and net exports? Explain the reasoning with reference to your diagram.

c. Briefly explain the effects of imposing import tariffs in the open economy model. Is such policy desirable? Discuss YOUR views on this (and other) restrictions for free trade