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Assume a closed economy initially has a constant population growth (n) and depreciation (d). We also assume that there is no government sector and no foreign trade or capital flows. The savings are a constant fraction (s) of income. Suppose the economy is initially operating at a steady-state level. Using a graph illustrate and discuss the effects of an increase in the rate of population growth, based on the neoclassical growth theory in the absence of technological progress. Label the graph properly.

Question 3

‘If investment is very interest-inelastic, then most of an income tax rate cut will be crowded out; therefore the RBA should always supplement a tax cut with an increase in money supply.’ Comment on this statement with the help of an IS–LM diagram and explain the adjustment process.

Question 4

Explain why a cut in government spending has a larger effect under a fixed exchange rate system and perfect capital mobility than in a closed economy model.

Long answer (extended response) question (references needed)

Question 5

Choose one of the topics listed below to write an essay in your own words. The discussion should be based on the macroeconomic theories you have learned from this course.

Topic 1

Identify the possible obstacles to Australia’s economic growth in the long run. What policies can be designed to increase Australia’s long run economic growth?

Topic 2

Discuss the potential benefits and costs to Greece if it were to abandon the Euro and adopt its own currency. The effectiveness of fiscal and monetary policy should be considered in your discussion.