Economics and the World around You - Assignment Example

Micro and Macro Economics Name Number Course Tutor Date Chapter 1 – Economics and the World around You Multiple choice questions 1. e 2. e 3. e 5. a 7. d 8. d 9. d 12. e 14. e Chapter 2 – Markets and the market process 1. e 4. e 7. c 8. d 9. e Chapter 3 – Application of Demand and Supply 1. e 2. a 6. b 7. a 10. a 20. e 24. d 25. a Chapter 4 – The firm and the consumer 1. b 2. c 3. c 7. c 10. d Chapter 5 – Costs and Profit Maximization 1. a 2. c 3. b 4. d 58. d 62. a Chapter 6 – Competition 1. a 4. d 7. b 8. c Chapter 7 – Business, Society and the Government 1. a 2. d 3. d 4. e 5. a 12. c Chapter 8 – Government Intervention versus Free Markets 3. b 4. b 5. b 6. a Chapter 10 – Macroeconomic Measures 1. c 2. a 5. e 6. c Chapter 11 – Unemployment, Inflation, and Business Cycles 1. e 2. d 3. d 4. b 5. c 6. d 7. a 8. b 9. e 10. e 11. a 12. b 26. e 35. b 36. a 37. b 38. a Chapter 14 – Money and Banking 1. c 2. e 3. c 10. b 11. c Chapter 17 – Issues in International Trade and Finance 1. e 2. e 3. b Chapter 18 – Globilization 1. e 2. e 4. c 5. d 9. b 10. c Section: Short Essay 1. The diagram below illustrates the 5-sector circular flow of income. Figure 1 Typically, increase in exports subsequently leads to the increase in the national income of a country. In addition, the increase in exports will also lead to improved balance of trade in the country. Generally, an increase in the level of exports indicates that more goods are being produced, which would require more labour. Therefore, increased level of exports implies that there have emerged more employment opportunities reducing the level of unemployment. For instance, an increase in the export of sugar would indicate that there is more production of sugarcane which implies that more land or more farmers have ventured into sugarcane farming. This means that employment opportunities have been created in these additional production units. On the other hand, an increase in taxation also affects the economy. For example if Income tax is increased on the taxable income, then an individual’s net income will decrease as a result of the increased taxation on income. This would subsequently lead to consumers spending less as a result of the reduced income after tax deductions. 2. The recent big increases in the oil prices will definitely affect some industries in Australia. Typically, a rise in oil price would subsequently lead to increased production cost for industries operating in oil importing countries like Australia. As a result the inflation rate in Australia will increase as producers increase prices of goods due to increased production costs. In addition, the level of production in industries will decline. The decreased level of output and production may lead to some companies laying-off some workers due to the increased cost of production. This also leads to increased level of unemployment. Therefore, increased oil prices causes cost push inflation. This is illustrated in the diagram below; Figure 2 3. Government fiscal policies include the measures formulated and implemented by the government to influence the economic conditions in a country. Using fiscal policies, the government attempts to regulate and control the economy with the aim of reducing unemployment rate, influencing interest rates to control the economy, controlling inflation and stabilizing business cycles. Therefore, through fiscal policies governments can change the economic performance by controlling government spending and regulating tax rates. For instance, during the recession period, the government could lower the tax rates on the taxable income of individuals. This would mean that the consumers would have more money to invest or spend. Subsequently, the increased investment and consumer spending would lead to improved economic growth. 4. The housing market has economic interactions with several other industries in an economy. Therefore, changes in the housing market will generally affect the economy. When there is a slowdown in the housing market, the consumer spending decreases as a result of the decreased demand of housing. The other industries in the economy such as the cement manufacturing industries will also be negatively affected by a slowdown in the housing market. As a result there will be decreased national income due to the slowdown in the housing market. This is illustrated in the demand curve in figure 3 below, where a slowdown in the housing market can subsequently lead to the reduction of nation income from Y1 to Y2. However, when interest rates are reduced, the demand for housing will generally tend to increase thus improving the housing sales. As a result of increased consumer spending on housing, the national income will subsequently increase, leading to improved economic conditions. Figure 4 below illustrates how reduced interest rates will improve housing sales leading to the increase in the national income from Y1 to Y2. Figure 3: slowdown in the housing market Figure 4: Effect of reduced interest rates on the housing sales and the economy 5. Three advantages of international trade include; a) Utilization of surplus production: Through international trade the surplus produce in a country can be utilize by exporting to other countries which require such produce. This in turn also enables the country to earn foreign exchange from the export of goods. b) Reduces trade fluctuation: Typically, international trade usually increases the market size for goods and services. With the larger market for goods and services, trade fluctuations are reduced, subsequently leading to more stable prices of goods and services. c) Benefit to consumers: International trade enables the consumers in a particular country to buy products that are not produce in their country. This enables the consumers to have a wide variety of products to choose from, including products which are produced in other countries. Despite the benefits of international trade, some governments are usually afraid of international trade. Two reasons why these governments fear international trade include a) Importation of harmful goods: International trade may lead to the importation of harmful goods like drugs. This may in turn negatively affect the health of the consumers thus affecting their productivity. b) It may lead to war: Countries may compete to find new markets for their produce as well as find sources of raw material required to produce certain goods. This may lead to conflicts between countries as they compete for markets and scarce resources, which may eventually lead to war. Two ways in which governments restrict imports in their countries include; a) Trade tariffs: This is the tax levied by the importing country on goods as they cross the international borders. It is mostly used to protect the local industries as well as raise revenue for the government. b) Currency restrictions: These include the rules and regulation set by a country’s monetary authorities to regulate the flow and use of various currencies within the country. It is one way that the government uses to control international trade with some countries. 6. Table 1 below shows the demand and supply schedule for bread; Price ($) Quantity demanded D (,000) Quantity supplied S (,000) 3.00 20 50 2.50 25 40 2.00 30 30 1.50 35 20 1.00 40 10 0.50 45 0 a) In a free market the equilibrium price will be $ 2. This is the price at which the quantity demanded equals the quantity supplied. b) The price elasticity of demand between $ 2 and $2.5 as price increase is given as follows; Price elasticity of demand = % change in quantity demanded / % change in price Price elasticity of demand = - 16.67% / 25% Price elasticity of demand = - 0.67 Case Study Question 2 Lower cost to get high a) As a result of the increased production of Marijuana, the supply of Marijuana in the market has also subsequently increased. Therefore, the Marijuana supply curve shifts to the right from S1 to S2 as illustrated in figure 5 below. As a result, there has been a surplus of Marijuana in the market, since the supply of Marijuana exceeds its demand. Consequently, the prices of Marijuana has decreased from (PE1) to a new equilibrium price (PE2). Figure 5 b) The price elasticity of demand for Marijuana is relatively inelastic. This is because the percentage change in quantity demanded is less than the percentage change in price, when the Marijuana is illegal. c) When marijuana is decriminalized the demand for marijuana will tend to subsequently increase. As a result, the demand curve shifts to the right from D1 to D2, as indicated in figure 6 below. With the increase in demand for marijuana, there would be a shortage of marijuana in the market if the price of marijuana remains at the original equilibrium price (point A). This is because the demand of marijuana would be more than its supply. Therefore, the price of marijuana would subsequently have to increase to the new equilibrium price at point B as a result of the marijuana shortage in the market. Figure 6: Effect of decriminalizing Marijuana References Ball, M. K., & Seidman, D. (2011). Supply and demand, The Rosen Publishing Group. Brigham, E. F., & Ehrhardt, M. C. (2008). Financial Management: Theory and Practice, Cengage Learning. 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