Section 1:
Question 1. Assume that, by using all its resources to produce X, nation A can produce 80 units of X; by devoting all its resources to Y, it can produce 40 units of Y. Comparable figures for nation B are 60 units of X and 60 units of Y.
(i) Assuming constant costs, in which product should each nation specialise? Why?
(ii) Indicate the limits of the terms of trade.
Question 2. Indicate whether each of the following creates a demand for, or a supply of, French francs in foreign exchange markets:
(i) An Australian importer purchases a shipload of French wine.
(ii) A French motor vehicle manufacturer decides to build an assembly plant in Sidney
(iii) An Australian university student decides to spend a year studying at a French university.
(iv) A French manufacturer exports machinery to Morocco on an Australian freighter.
(v) An Australian government bond held by a French citizen matures.
Question 3. The four people listed in table specialise in producing the commodities indicated and have surplus available for trade. Each is willing to trade in order to obtain some of another product they want.
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Commodity Produced
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Commodity Wanted
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Betty
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Eggs
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Potatoes
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Justin
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Milk
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Clothes
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Beatrice
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Clothes
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Eggs
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Michael
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Potatoes
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Milk
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(i) Identify the trading transactions that Michael would need to undertake in a barter economy in order to purchase milk.
(ii) If money could be used as a medium of exchange, identify the transactions that Michael would need to undertake in order to purchase milk.
Question 4. Consider a hypothetical market for gold. On a diagram show a market demand curve D1 and a market supply curve S1. Show on your diagram the market equilibrium price Pm and the quantity of gold produced qm.
Unfortunately gold mining pollutes the environment. The costs associated with the pollution is borne by the whole community.
(i) With reference to the diagram you have drawn, does the market supply curve S1 incorporate all the costs of mining gold? Explain.
(ii) Now assume that the government wishes to internalize the pollution costs associated with gold mining by imposing a constant per-ounce tax on all firms in the industry. Show the impact of such a tax on your diagram. What will happen to the equilibrium price and quantity?
(iii) What is the incidence of this tax on suppliers and buyers and on other parties who do not buy or sell gold? Use your diagram to illustrate your answer.
(iv) In general, what determines the incidence of tax on consumers and producers? Explain.
Section 2:
Question 1:
(a) Use the data contained in Table 1 on the economy of Australia to determine the following national income accounting aggregates
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$ Billion
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Gross operating surplus: dwellings
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44.40
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Social security payments
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76.80
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Exports
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88.05
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Wages, salaries and supplements
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274.50
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Government spending
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126.45
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Company income tax
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41.40
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Indirect taxes
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225.00
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Imports
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99.15
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Gross operating surplus: companies
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85.05
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Imputed bank service charge
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13.65
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Private final consumption spending
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324.45
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Income tax paid by households
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89.55
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Gross operating surplus: general government
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9.90
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Gross operating surplus: public enterprises
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22.20
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Subsidies
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160.50
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Statistical discrepancy
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7.05
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Gross private investment
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106.50
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Gross operating surplus: unincorporated enterprises
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65.40
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Gross operating surplus: financial enterprises
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1.05
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(i) Gross domestic product using the expenditure method
(ii) Gross domestic product using the income method
(iii) National turnover of goods and services
(iv) Gross domestic product at factor cost
(v) Gross national expenditure
(b)
(i) State the difference between gross private investment and net private investment.
(ii) Why is net private investment of great interest to governments and economists?
(iii) With respect to national income accounting, explain what is meant by the “statistical discrepancy” and why it is necessary.
(c) Table presents national income data for the Brownland economy. Use this data to calculate:
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$ Billion
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Gross private domestic investment
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69.0
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Disposable income
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285.0
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Exports
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13.5
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Personal saving
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15.0
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Government purchases of goods and services
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126.0
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Consumption of fixed capital
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78.0
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Dividends
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19.5
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Imports
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18.0
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Indirect business taxes
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57.0
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Social security payments
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34.5
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(i) Consumption spending
(ii) Net domestic product
(a) Explain: “Ms Smith diminishes the national income by marrying her cook”. In what ways is this true by definition of GDP? Is this one of the problems with the use of GDP as a measure of social welfare?
Question 2:
(a) Design an anti-recession stabilization policy, involving both fiscal and monetary policies which is consistent with:
(i) A relative decline in the public sector.
(ii) Greater income equality
(iii) A high rate of economic growth
(b) Using the aggregate demand- aggregate supply model, explain how discretionary fiscal policy can be used to reduce the effects of demand – pull inflation.
(c) Is the crowding- out effect likely to be larger during recession or when the economy is near full employment? Use the aggregate demand- aggregate supply model to substantiate your answer.
(d) Draw an aggregate demand- aggregate supply diagram where equilibrium occurs below full- emplotment level of output. Now show the impact of a leftward shift in the aggregate supply curve. What developments might cause such a shift?.