ECON5014 Economics For Managers Assignment

Part A Multiple Choice Questions (10 Marks) – Choose the best answer to the question.

1. If a firm has an incentive to increase supply now and decrease supply in the future, the firm expects that the
   1. price of its product will be lower in the future than it is today.
   2. price of its product will be higher in the future than it is today.
   3. price of inputs will be lower in the future than they are today.
   4. demand for the product will be lower in the future than it is today.
2. A decrease in the demand for soft drinks due to changes in consumer tastes, accompanied by an increase in the supply of soft drinks because of reductions in input prices, will result in
   1. a decrease in the equilibrium quantity of soft drinks and no change in the equilibrium price.
   2. a decrease in the equilibrium price of soft drinks and no change in the equilibrium quantity.
   3. an increase in the equilibrium quantity of soft drinks; the equilibrium price may increase or decrease.
   4. a decrease in the equilibrium price of soft drinks; the equilibrium quantity may increase or decrease.
3. The government proposes a tax on imported champagne. Buyers will bear the entire burden of the tax if the _________.
   1. supply curve for imported champagne is vertical.
   2. demand curve for imported champagne is vertical.
   3. demand curve for imported champagne is horizontal.
   4. demand curve is downward sloping, and the supply curve is upward sloping.
4. Which of the following is a true statement about real and nominal GDP?
   1. If nominal GDP increases from one year to the next, we know that production of goods and services has risen.
   2. Nominal GDP is a better measure than real GDP in comparing changes in the production of goods and service year-after-year.
   3. Increases in average prices do not affect the calculation of nominal GDP.
   4. If real GDP increases from one year to the next, we know that production of goods and services has risen. ECON5014 Economics for Managers
5. Minimum wage laws cause unemployment because the legal minimum wage is set ________.
   1. above the market wage, causing labour demand to be less than labour supply
   2. below the market wage, causing labour demand to be less than labour Supply
   3. above the market wage, causing labour demand to be greater than labour supply
   4. below the market wage, causing labour demand to be greater than labour supply
6. After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and ________ the unemployment rate as they return to their original levels.
   1. increases; increases
   2. increases; decreases
   3. decreases; increases
   4. decreases; decreases
7. Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
   1. Output will increase.
   2. Prices will decline.
   3. Unemployment will decline.
   4. Aggregate supply will shift to the left.
8. Match the examples of government policy given to the appropriate approach (each is worth 0.25 point):

   A.Cutting the rate of income tax

   • Expansionary fiscal policy
   • Contractionary fiscal policy
   • Expansionary monetary policy
   • Contractionary monetary policy
    

   B.Increasing interest rates

   • Expansionary fiscal policy
   • Contractionary fiscal policy
   • Expansionary monetary policy
   • Contractionary monetary policyECON5014 Economics for Managers
    

   C.Increasing the rate of indirect tax

   • Expansionary fiscal policy
   • Contractionary fiscal policy
   • Expansionary monetary policy
   • Contractionary monetary policy
    

   D. Imposing controls on the amount of credit financial institutions are allowed to create

   • Expansionary fiscal policy
   • Contractionary fiscal policy
   • Expansionary monetary policy
   • Contractionary monetary policy
9. .According to the exchange rate market model, what happens to the US Dollar/Australian Dollar exchange rate when the interest rate in Australia increases?
   1. Australian financial assets become more attractive relative to US assets. As a result, the demand for Australian dollars increases, and the Australian dollar appreciates.
   2. Australian financial assets become more attractive relative to US assets. As a result, the supply for Australian dollars increases, and the Australian dollar appreciates.
   3. Australian financial assets become more attractive relative to US assets. As a result, the demand for Australian dollars increases, and the Australian dollar depreciates.
   4. Australian financial assets become more attractive relative to US assets. As a result, the supply of US dollars increases, and the Australian dollar depreciates.
10. In the case of a positive externality that is generated in a good production process, the main issue will be:
    1. That consumers will be negatively affected.
    2. That there will be too much production of it.
    3. That there will not be enough production of it.
    4. That there will be no policy solution to it.

    Part B Answer the question below (compulsory) worth five (5) marks. Limit your answer to a maximum of 1 page including diagrams (using 12pt font size).

    Use the dynamic aggregate demand and aggregate supply model to illustrate a supply shock that causes an increase in the price level and a decline in real GDP. Assume that potential GDP continues to grow due to other factors, and that the aggregate demand curve does not change. Discuss what is happening in the economy. (5 marks)

    Part C Answer any two (2) of the following questions below. Each question is worth five (5) marks. Limit your answer to a maximum of 2 pages including diagrams (using 12pt font size) per question. Use proper referencing, where necessary.

    Question 1

    “South Asia is home to 9 of the world’s 10 cities with the worst air pollution, which causes an estimated 2 million premature deaths across the region each year and incurs significant economic costs. Large industries, powerplants and vehicles are dominant sources of air pollution around the world, but in South Asia, other sources make substantial additional contributions. These include combustion of solid fuels for cooking and heating, emissions from small industries such as brick kilns, burning of municipal and agricultural waste, and cremation.”

    Using concepts we have studied in class, analyse its economic impact and how this needs to be addressed. Illustrate why, from a social perspective, there is a case for government intervention. What intervention/s are these? Is there anything the Australian government can do to assist South Asian countries? Further analyse the impact of Australia’s actions on its economy. (5 marks)

    Question 2

    Outline the trends or movements in the Australian dollar (from Jan 2020 onwards).

    Discuss possible reasons behind the fluctuations and give examples as to how this might have affected or can affect other economic indicators such as unemployment, inflation, net exports and ultimately the GDP of the economy. (5 marks)

    Question 3

    Between 2019 and 2021, Central Banks around the world have responded to the pandemic by using expansionary monetary policy. They will probably need to aim for ahigher level of inflation, as advanced capitalist economies attempt to recover from the negative shock, according to these articles:
    https://www.abc.net.au/news/2020-08-28/us-central-bank-fed-landmark-policy-shift-on inflation/12602362 https://theconversation.com/keating-is-right-the-reserve-bank-should-do-more-it needs-to-aim-for-more-inflation-146393

    How effective are reductions of nominal interest rates at stimulating domestic aggregate demand in a recession? In your answer, discuss the limitations of monetary policy and compare it with fiscal policy, (5 marks)

    Question 4

    In Australia, as in most developed countries, the housing market is often characterized by cycles. That is, prices tend to rise, then plateau, and even fall over time, only to rise again in the next stage of the cycle. While cycles in Australia have historically lasted between 7 to 10 years, in the long run (over many decades) housing prices have trended upwards. Show the effects on the housing market of:

    1. a growing population, and
    2. a shortage of rental vacancies. (5 marks)

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