The Principle of Microeconomics & Diesel Prices Case Study - Economics Assignment Help

Assignment Task

1- Question
Read the content below and answer the questions that follow:
Consider a closed economy that is described by the following model:
C = 250 + 0.75Y
I = 200
G = 350
t = 20%
Where:
C = consumption spending
I = investment spending
G = government spending
t = tax rate
Y = income

1.1 Calculate the multiplier for this economy. (3)
1.2 Calculate the total autonomous spending for this economy. (2)
1.3 Calculate the equilibrium income for this economy. (3)
1.4 Briefly explain the effect of an increase in the tax rate on the multiplier.
1.5 Briefly explain any two determinants of investment spending.

Question
Sharp hike in petrol, diesel prices announced
A rallying oil price, combined with a weaker rand, will result in a sharp hike in fuel prices on Wednesday this week. Petrol (both 93 and 95) will see an increase of R1.21 a litre, while the price of diesel (0.05% and 0.005% sulphur) will rise by 148.2c a litre. The wholesale price of illuminating paraffin will be hiked by R1.45 a litre, the department of mineral resources and energy (DMRE) announced in a statement. Local fuel prices are determined by international oil prices as well as the dollar rand value, as South Africa buys oil in dollars. The average Brent oil price increased from $75.50 in September to $83.40 per barrel in October, reaching its highest level in three years. "The key driver (of higher oil) is the higher global demand recovery, amid a weaker supply response from non-OPEC and other oil producers," the DMRE said. "The situation was exacerbated by the impact of the current gas challenges experienced by European countries (...) on the prices of energy commodities. The price of gas has more than quadrupled this year in some parts of Europe, as suppliers struggle to keep up with demand.

1 According to the case study, the fuel price increase is one of the main factors resulting in an increase in inflation. Use an AD-AS diagram to illustrate and explain the type of inflation implied by the fuel price increase. (10)
1.2 Mention and explain the type of policy that can be implemented to combat the type of inflation mentioned in 1.1.
1.3 Explain the effect of a weaker rand on South Africas external sector, ceteris paribus.
1.4 Briefly explain the five economic effects of inflation.

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