Term Paper Essay
BUECO5903 BUSINESS ECONOMICS ASSIGNMENTS A and B Semester 1, 2013 Due dates for each section are provided in the Course Description.
Part B – Macroeconomics – Worth 10% of total assessment: Answer any five (5) of the following questions. Each question is worth 10 marks.
a) Which of the following are final goods and services and which are intermediate goods and services? Please explain why in your answer. (4 marks – 1 mark each)
i) A windscreen purchased by a motor vehicle spare parts supplier;
Intermediate – because its initial production value has been accounted for within the National accounts (i.e. GDP) and it is being resold at a depreciated value as a second hand goods.
ii) A new bulldozer to be used by a construction company;
Final goods – however , when a construction company buys and users a new bulldozer , it Subsequently become an intermediate good when it is used in the production of others
iii) A household cleaning service purchased by a family from a domestic cleaning service company;
Final goods – as the resale value of the business comprises value added (i.e. good will etc )which Has not previously been included within the national accounts
iv) Coking coal
Intermediation goods unless being sold by exporting as it is used as an ingredient into the Production of other good such as iron and steel , steam etc.
b) An economy produces final goods and services with a market value of $800 billion in a given year, but only $750 billion worth of goods and services is sold to domestic or foreign buyers. Is this nation’s GDP $800 billion or $750 billion? Explain your answer. (2 marks)
The nation’s GDP for the year is $800 billions .GDP includes the market value of final good and service
Produced, regardless of weather these products are sold . The unsold products are added to firm’s Inventories and included in gross national domestic investment .
c) Explain why a new truck sold for use by a transport company is a final good, even though it is a fixed investment (capital) used to produce other goods. (2 marks) Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP? (2 marks)
The new truck is a final good because it is a new product and produced for the ultimate users, The transport company and therefore it should be added to GDP
Note that this calculation is via the ‘ expenditure approach ‘ when a firm buys and uses the new truck, It subsequently becomes an intermediate good into the production (i.e. transport ) of other products in subsequent Periods.
(10 marks total – 2.5 marks each part)
a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for the diagram and 2.5 marks for the explanation);
Demand pull inflation is that which results from rapid increase in consumer demand causing rapid increase in aggregate demand and examples are :
1) The central bank cuts interest rate and the economy booms. This cut in interest rate would cause more spending , and more consumer and investment borrowing and less savings.
2) The government cut income tax rate and increases government expenditure at a time near full employment. Initially, the cut in income tax rate would cause household disposable income to increase which would cause aggregate demand to increase . The immediate increase in government expenditure would also cause aggregate demand to shift rightward
b) Provide (describe) two (2) causes of each type of inflation
(2.5 marks for 2 demand-pull causes and 2.5 marks for 2 cost-push causes
Cost- push inflation is mainly induced on the cost side say with factors of production and examples of this are :
1) If the government were to increase the Rte of GST this will increase the price of every factors of production and as this is cumulative the cost accumulates in production and the final retail value contains GST for every factors as well as the retail value and all of this is passes on to the consumer as a price increase . If initially , increase production costs or shift . AS1 As leftward direction to AS2 caring the issue Intel to increase from P1tp P2
2) Increased industrial concentration can lead to more oligopolistic collusion and non-competitive price increase which are passed on to the consumers.
a) Do you think that macroeconomic policy should be designed to achieve a
measured unemployment rate of zero? Why or why not should this be the case? (5 marks)
No, because in modern dynamic , market – based economics will always experience a certain percentage of frictional ,seasonal and structural unemployment Some people will always be changing jobs or be without a job due to change in demand, technological change or other changes in an economy’s composition The full-employment unemployment rate , or natural rate of unemployment , is equal to the total of the frictional , seasonal and the structural unemployment rate . Full employment does not means ‘ zero per-cent unemployment.
b) How did the classical economists interpret long-run unemployment? (2.5 marks)
Classical economists viewed anything over short – run unemployment as voluntary unemployment, This is because they agree with Say’s Law which states that “supply creats its own demand” indicating that production creates just the right amount of income in the economy to purchase all goods produced without layoffs. Also, the classical economists rejected the possibility of the under – consumption because they believed that flexible price , wages and interest rate would soon correct any imbalance between supply and demand .Hence, and unemployment is voluntary unemployment .
c) How does structural and cyclical unemployment differ and how concerned should policymakers be about these types of unemployment? (2.5 marks) Structural unemployment is long – term or permanent unemployment resulting from the non – existence of jobs for some unemployed people . It is caused by a mismatch of the skill of those workers who are out of work and skill required for existing job opportunities.
Change in the structure of the economy over time , resulting from changing tast and demand conditions or from changed production processes, create the following three case of structural unemployment ;
First, workers may face joblessness because they lack the education or the job – related skills to perform available jobs ( mainly teenagers and minority groups ); second , the consuming public may change preferences in favour of imported vehicles ; third, technological change may increase industry specific unemployment in a particular locality .
Alternatively, cyclical unemployment is that which is caused by movements in the natural business cycle . For example, workers may be laid off as the economy heads towards a downturn or recession in certain sectors .
A focus of macroeconomics policy is to moderate cyclical unemployment whereas retaining and redeployment programs are often implemented to assist unemployment generally and specifically structural unemployment.
(2.5 marks each part)
Using the aggregate demand – aggregate supply (AD-AS) diagram, show how the four economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event)
a) An improvement in the marketing and selling skills of firm managers;
This is a special example of improving the productivity of some of the economies workers .As a result the labour costs of producing outputs are reduced or more is produced and sold for a reduction in factor- input costs and this causes the firms to increase their outputs at every original price level
Originally if aggregate demand intersects aggregate supply in the intermediate range that the aggregate supply curve will shift to the right AS1 to AS2 . with the aggregate demand curve held constant ( no shift ) the equilibrium will subsequently change E1 to E2 and this will result in economy’s real GDP and permanent full employment equilibrium real GDP ( or natural rate of unemployment ) increasing (a shift to the right ) and a fall
in the equilibrium price level
However, if the shift takes place on the horizontal part of the aggregate supply curve then the price will remain the same but real GDP and the employment level will increase . Alternatively, if it takes place on the vertical (classical ) Pat or employment will increase
(b) An increase in personal income tax;
An increase in personal income tax will reduce take home disposable income and therefore causes less consumption expenditure hence the aggregate demand will shift to the left . It may also cause a reduction in the supply as some workers believe that the cost of the extra tax does not warrant the extra work efforts and hence the aggregate supply may shift leftwards. As we are not sure of the magnitude of each shift we can only state the equilibrium employment and full employment level of real GDP will decline . This price level may either increase or decrease depending of the relative magnitude of the shift and whether the shifts take place on the Keynesian, intermediate or classical portions of the aggregate supply function.
(c) An increase in exports;
Initially this will causes the aggregate demand curve to shift to the right whilst the aggregate supply curve remains stationary . If the original and the final equilibriums are on the intermediate range then the equilibrium and full employment level of real GDP will increase along with the price level If we on Keynesian range then equilibrium and full employment level of real GDP will increase while the rice level remains unchanged and alternative if we are on the classical range then the equilibrium and full employment level of real GDP will be unchanged whilst the price level increases.
(d) A significant destruction in an economy’s capital stock because of war;
A significant decrease in the economy’s capital stock is illustrated as a leftward shift in the aggregate supply curve . The aggregate demand curve may shift leftward or may move to the right depending upon the behaviour of the general population of which we are initially uncertain. Assuming initially , that there is no shift in the aggregate demand function and the aggregate demand function intersects the aggregate supply function in the intermediate range , then the new equilibrium will be determined at the original equilibrium where the left shifted aggregate supply curve intersect the unmoved aggregate demand curve . Consequently , the full employment real GDP level will also decline (shift to the left ) whilst the price level will increase . If both the Organisation and final equilibriums are on the Keynesian range of the aggregate supply function then the price level will and equilibrium employment level not change but the full employment level of real GDP will decline . In contrast, if the original and final equilibrium and full employment leel will declines whilst the price rises.
(a)The selling of government securities to banks;…………………………………………………….NO
(b) A fall in interest rates;……………………………………………………………………………Possibly
(c) An increase in government expenditure, financed by borrowing from the banking sector;
If the fall in intrest rate was in response to a rise in money supply , then the intrest rate fall has not caused money supplyt to rise .If , however, the Reserve Bank decided to reduce intrest rate , it would have to increase money supply by market operations to ensure that the lower interest rate was the equilibrium one….YES
(d) The purchase of government securities by the Central Bank from the banking sector; ……………….YES
(e) It is agreed by the Treasurer and the Governor of the Central Bank to reduce the target rate of inflation………………………………………………………………………..NO
This will result in the Reserve Bank raising the cash rate and using market operations (thereby reducing the money supply ) to back it up.