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Paper Topic:

Economics Research Assignment

Introduction

The Aggregate Demand (AD )-Aggregate Supply (AS ) model is used to represent the macro economic elements of a market economy . The objective of the present endeavour is to represent the present features of the Australian economy in terms of this framework to argue that it is presently in an almost full employment equilibrium status . In the following section we shall present the model briefly to explain the full employment equilibrium situation . Then we shall proceed to look at the states of the relevant macro economic variables and analyse them to see

br whether we can actually validate the claim that Australia has achieved a near full employment equilibrium . We shall briefly go through the implications of our findings for the economy before concluding the discussion

The AD /AS Model

Figure 1 : Full employment equilibrium in the AD-AS model

The diagram above represents the full employment equilibrium in terms of the AD-AS framework . AD here represents the aggregate demand curve which is a representation of the level of planned expenditure on real national output for each price level . The AS represents the aggregate supply curve which captures the planned real national output that corresponds to each price level (Mankiw , 2000 . Note that Yf represents the full employment level of output here implying that it is the amount of output the economy can produce utilising fully its present endowment of resources including labour . This is evident in the curvature of the AS curve which is upward rising up to Yf implying until Yf is reached the economy will produce larger amounts of output corresponding to the rising price level , but once it reaches Yf , the supply becomes perfectly unresponsive to changes in the price level . Here , the AD and AS intersect at the latter 's perfectly inelastic portion implying the equilibrium level of planned real output to be Yf . Pf is the corresponding price level

The Australian Economy

The Australian economy has been performing remarkably well since the early 1990s .This has been a period of fast and stable expansion for the country . The last recession faced by the Australian economy was back in 1991 and unlike most countries it did not face a recession in 2001

GDP growth

In the period 1993 to 2005 , real GDP per capita has risen by about 36 per cent . As shown in the diagram below , the average growth rate of Australia has hovered around 3 .25 since 1990 which puts it quite high on the list of the high growers among the OECD countries . Another point to note is that the fluctuations in GDP growth have been moderated over time and have stably approximated around 3 in recent years . Recent ABS data shows that the expansion continued into the December quarter of 2007 . The growth rate picked up to around 2 .8 and the 3 .5 growth in non-farm output is said to have contributed heavily to the overall growth rate climb . However one must note the fact that although the GDP has been growing...

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