Answer to Question #77115 in Macroeconomics for Tom Wagner

Question

The ABS System of National Accounts data shows the components of GDP (see Table 2). http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5204.02016-17?OpenDocument
Using this information, we can calculate the value of net exports, from which we can see that net exports have been negative since June 2005 (the data has been updated from the numbers used to create the Topic 7 charts). Use an AS-AD diagram to help explain how has likely impacted output and inflation in Australia.

a) Suppose that Australia starts off in long-run equilibrium with all workers working full-time at 37.5 hours per week. Show this long-run equilibrium on an AS-AD diagram of the macroeconomy. (1 mark)

b) Now suppose that the government mandates a work-week of 30 hours and that, for now, there are no other changes to productivity or anything else at all. Use your diagram to show what is likely to happen to the SRAS curve and explain what this is likely to do to output and inflation in the short-run. (3 marks)

Answer 1

a) In the long-run LRAS curve is vertical at full employment level.
b) If the government mandates a work-week of 30 hours, then SRAS curve will shift to the left, so inflation level and output will decrease.