Question 1 (15 Marks)
a) Discuss what you think economics is concerned with addressing.
b) Imagine that two countries, A and B, can produce just two goods, widgets and somethings. Assume that for a given amount of land and capital, the output of these two products requires the following constant amounts of labour:
Production Country A Labour Country B Labour
1 of Widget 4 5
60 of Something 5 10
Assume that each country has 30 million workers.
(i) If there is no trade, and in each country 20 million workers produce widgets and 10 million workers produce something, how many widgets and how many something will each country produce? What will be the total production of each product?
(ii) What is the opportunity cost of a widget in: (i) Country A; (ii) Country B?
(iii) What is the opportunity cost of 60 something in: (i) Country A; (ii) Country B
(iv) Which country has a comparative advantage in which product?
(v) Explain the principle of increasing opportunity cost and does this example illustrate the principle of increasing opportunity cost.
(vi) What change might shift both countries production possibilities frontier outwards.
Question 2 (10 Marks)
Consider the market for wheat. For each of the cases below state with a reason whether demand and/or supply would change and what would happen to the equilibrium price and quantity of wheat as a result. Fully explain your decision including any assumptions you make. You do NOT need to draw diagrams for this question but fully explain your answers
1. A fall in the price of corn
2. A fall in the price of sugar
3. An expected lowering in the price of wheat in the future due to ongoing excellent global growing conditions
4. The creation of wheat specific fertiliser.
5. Explain the possible non-price determinants involved in a change
in both the demand and supply for wheat and a substitute grain.
Question 3 (10 Marks)
a) The government is currently considering setting a maximum price (price ceiling) for basic goods to ensure that people can get access to these goods at this current time. Fully explain your answer and also use a single diagram to demonstrate the likely outcomes of this policy if the maximum price is set:
1. Below the current free market price
2. Above the current free market price
3. At the current free market price
b) The Australian government has implemented a number of microeconomic reforms over the past 40 years including deregulation of banking. Do you think banking deregulation has been beneficial or not? Explain your answer. Describe what you think may be the difficulties with microeconomic reform in Australia and highlight an area that you think currently requires microeconomic reform. Justify your answer.
Question 4 (10 Marks)
a) Concerned for the current state of the Australian economy the Reserve Bank of Australia (RBA) has decided to reduce interest rates. Describe the mechanism that the RBA will undertake to achieve this outcome.
b) Explain how this reduced interest rate will transmit through the economy.
c) What do you think would be the impact on the economy of this policy if the velocity component of the quantity theory of money equation M*V=P*Q was much slower than anticipated?
d) What would be the likely affect if the RBA misjudged the state of the economy and it was closer to full employment than anticipated? A diagram would assist your answer here and attract more marks.
Question 5 (10 Marks)
a) At the same time as the RBA is reducing interest rates the Australian Government will be running a budget deficit in 2020. How this will affect aggregate demand? A diagram would assist your answer here and attract further marks
b) How will the size of the marginal propensity to consume affect the size of the multiplier and how will this impact on this fiscal policy initiative?
c) If consumers decide to increase their rate of savings due to increasing uncertainty about the future, explain how this will affect the fiscal policy initiative.
d) Discuss whether this fiscal policy initiative aligns with the RBA’s decision to reduce interest rates.
Question 6 (10 Marks)
a) Rent Seekers in the domestic Shirt industry have requested that the government place a $2.00 per item Tariff on imported Shirts. Describe and explain the winners and losers from this action. A diagram would assist your answer here and attract further marks.
b) In general why would Governments place Tariffs on any items? What could be the impact of such Tariff actions by Governments?
c) How might a Tariff on a large volume high value imported item affect the supply and demand for Australian dollars? A diagram would assist your answer here and attract further marks.