Question 1

a) China is one of the fastest growing economies in the world and is one of Australia’s major trading partners.  Discuss the implications for the Australian economy of a weaker  than expected Chinese economy in 2016. Illustrate your arguments with the AS-AD model.
b) Using an appropriate model, explain how a weakening Chinese economy might affect the value of the Australian dollar.  Note that Australia has a flexible exchange rate system.

Question 2.

Assume that another drought in Australia this summer sharply reduces Australia’s exports of wheat and other agricultural commodities and causes a recession.
a) Could government expenditures with taxes held constant, eliminate the recession? Use the Aggregate Expenditure model to illustrate your arguments.
b) Explain why such government intervention may be necessary, at least in the short term.

Question 3

a) Assume that Australia’s inflation rate is above normal range (i.e. 2-3%). Is this cause for concern? Critically evaluate the actions that the Reserve Bank of Australia can take to reduce inflation back to its normal range.
b) Discuss the impact of an open market operations on liquidity in the monetary sector of the economy