Introductory Macroeconomics, ECON10003

Semester 2, 2020

This is a group assignment. You may work in groups of up to three people although students may
choose to work and submit their assignments on their own. All group members must come from
the same tutorial. The assignment is due by 4pm on 16 October.

The submission process will have two steps. The first step is for group registration and the second
step is for submission of the assignment. The group registration link will be available from the
Assignment 2 Module on Canvas and students must register in a group by 9 October. If you choose
to do the assignment on your own you do not have to register as a group of one. Finally the
submission link will be available from 14 October until 4pm on the 16 October. Submit your
assignment electronically using the link accessible via the Canvas under the Assignment 2
Module. Late assignments will not be accepted; please apply for Special Consideration if for some
documented reason you cannot submit by the due deadline.

Grading criteria: The tutors will grade the assignment according to the following criteria:

• Ability to use material discussed in lectures, tutorials, and in the textbook to answer the
assignment questions in a logical and coherent fashion (90 per cent weight).
• Overall presentation of the assignment. This includes spelling, grammar, correct construction
of diagrams, etc. (10 per cent weight).
• The maximum assignment length is 1000 words.
• Please note that the University and the teaching staff take academic integrity seriously. Please
be aware that plagiarism and collusion are unacceptable. Further details can be found in the
subject guide.

1. Covid-19 and the Macroeconomy

In Tutorial 4 we discussed what impact Covid-19 would have upon output in a simple Key-
nesian model. In this question, we extend this analysis by examining the impactof Covid-19
in the context of the AD-AS model.

a) Suppose Covid-19 reduces the exogenous component of consumption (C̄), planned invest-
ment, I P and exports X. What impact will this have upon the position of our AD and
AS curves. Explain your reasoning by using a diagram. (1 marks)
b) Explain how the macroeconomy would adjust to the Covid-19 shock (as described above)
in the long run if there was no change in the monetary policy reaction function or fiscal
policy in response to the pandemic. Explain your reasoning using a diagram. (2 marks)
c) In response to the pandemic, the government has pursued a policy of increasing payments
to unemployed individuals (ie. Jobkeeper). In addition, it has foreshadowed a reduction
in taxes in the October budget update. Explain what impact these policies will have
upon the macroeconomy with reference to the AD-AS model. (2 marks)

1
2. The Solow-Swan Model

a) Consider an economy that is initially in a steady state equilibrium. Assume that in this
equilibrium it has a saving rate of 50 per cent and a depreciation rate of 2 per cent.
Further assume

that the population is constant and that the level of output produced can be represented
by the following production function:

Y = AK α L1−α
where A = 1 and α = 0.5. Use the Solow-Swan model to determine the level of capital
per worker and output per worker in this economy. (1 mark)

b) Now suppose the government introduces a set of policies to increase domestic savings. As
a result, the saving rate increases to 60 per cent. What is the new steady state level of
capital per worker and output per worker. (1 mark)
c) Use a Solow-Swan diagram to show the qualitative effects of this increase in total fac-
tor productivity upon steady state output per worker and capital per worker. Briefly
describe the intuition behind this result. (2 marks)
d) Economists typically argue that welfare within society is determined by the level of
consumption rather than the level of output. How does consumption per worker change
in the above example when the saving rate increases from 50 to 60 per cent? Are higher
levels of GDP per capita necessarily a sign of higher consumption in the Solow-Swan
model? (1 mark)