Econ Workbook Uvvu

BUSINESS
(ENTERPRISE)
STUDENT
WORKBOOK
Diploma of Business (Enterprise) WDBE
ECONOMICS
WDB1004
SCHOOL OF BUSINESS SERVICES

FACULTY OF WORKFORCE DEVELOPMENT
December 2011
Acknowledgements
These learning resources were developed by Victoria University, Melbourne Australia.
Edition / Publication
Subject:
Subject code:
Third Edition
Economics
3113C0207U04
June 2011
Copyright 2011 by Victoria University

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Contents
Table of Contents
Writing Skills for Economics ..........................................................................................iii

Topic 1A: Economics ............................................................................................................ 2
Questions for Topic 1B: Economic Thoughts and Theories ................................................. 10
Multiple Choice Questions Topic 1A & 1B ................................................................... 13
Problems questions for Topic 1 ................................................................................... 16
Cartoon Activity 1B ...................................................................................................... 18
Case study: Scarcity and abundance-Is lunch ever free? ............................................ 19
Language Focus: Economics ...................................................................................... 21
Notes........................................................................................................................... 22
Topic 2A: Market Forces: Demand and Supply ................................................................... 24
Multiple Choice Topic 2A: Market Forces: Demand and Supply .......................................... 33
Topic 2B: Elasticity of Demand and Supply ......................................................................... 37
Multiple Choice Questions Topic 2B: Elasticity of Demand and Supply ....................... 42
Case Study 1: Banana prices to double after crop devastation 21/3/06 .................... 45
Case Study 2: Banana Prices Likely to Start Downward Bend - 8/8/06........................ 46
Case Study 3: Queensland producers lose millions from storm damage ..................... 47
Cartoon case study ..................................................................................................... 48
Topic 3: Perfect competition ................................................................................................ 52
Topic 3: Monopoly ....................................................................................................... 55
Topic 3: Monopolistic Competition and Oligopoly ........................................................ 57
Case Study: THE OPEC CARTEL............................................................................... 60
Multiple Choice Questions Topic 3: Market Structures ................................................ 62
Critical Thinking and Discussion: Is Google a Monopoly?............................................ 68
Topic 4A: Economic Growth ................................................................................................ 70
Topic 4B: Business Cycle and Unemployment .................................................................... 72
Multiple Choice Questions Topic 4A ............................................................................ 78
Problem Questions ...................................................................................................... 80
Topic 5: Inflation.................................................................................................................. 86
Multiple Choice Questions Topic 5: Inflation ................................................................ 90
Cartoon Case Study: Inflation ...................................................................................... 92
Case Study: Inflation moderating................................................................................ 93
Language Focus: Inflation ........................................................................................... 95
Topic 6: Keynesian Model: Aggregate Expenditure and Real GDP ..................................... 98
NotesMultiple Choice Questions Topic 6: Keynesian Model: Aggregate Expenditure and
Real GDP .................................................................................................................. 104
Multiple Choice Questions Topic 6: Keynesian Model: Aggregate Expenditure and Real
GDP .......................................................................................................................... 105
Case Study: Australia's costly drought..................................................................... 109
Cartoon Case study................................................................................................... 111
Topic 7A: International Trade ............................................................................................ 115
Multiple Choice Topic 7A: International Trade ........................................................... 118
Problem solving activity ............................................................................................. 122
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Contents
Case study: Free trade pact with India could lift GDP by $45bn ............................... 123
Cartoon case study ................................................................................................... 124
Topic 7B: Foreign Exchange Rate..................................................................................... 125
Multiple Choice Questions Topic 7B: Foreign Exchange Rate ................................... 131
Case study: Aussie exchange rates best for decades................................................ 134
Case study: Inflation eases rate-rise fears ................................................................. 136
Cartoon case study ................................................................................................... 137
Topic 8: Money and Monetary Policy ................................................................................ 139
Multiple Choice Questions Topic 8: Money and Monetary Policy ............................... 146
Case Study: Interest rate hikes put brakes on economic growth................................ 149
Cartoon case study 8.1.............................................................................................. 150
Cartoon Case Study 8.2 ............................................................................................ 151
Topic 9A: Fiscal Policy ...................................................................................................... 153
Multiple Choice Questions Topic 9A: Fiscal Policy .................................................... 160
Cartoon Case study................................................................................................... 165
A government budget deficit should help an economic recovery when there is a
recession: but how can large budget deficits each year threaten the economy in the
future? Explain. ......................................................................................................... 165
Topic 9B: Microeconomic Reform ..................................................................................... 166
Multiple Choice Questions Topic 9B: Microeconomic Reform .................................... 168
Case Study: Reforms are micro more than macro ..................................................... 171
Topic 10: Market Failure and Government Regulation ...................................................... 175
Conversation in English. ............................................................................................ 175
Multiple Choice Questions Topic 10: Market Failure and Government Regulation ..... 180
Case Study: Market Failure: Global Warming ............................................................ 185
Case Study Essay Question ...................................................................................... 186
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Writing Skills
Writing Skills for Economics

Many of the questions in this workbook require writing in the appropriate style for
Economics. Make sure you understand what the question requires: read the key words
carefully and follow the DIRECTIVES these are words such as explain, outline, calculate,
identify, list. Three of the most common are explained below with examples.
Identify
You should recognise the required information when you read or hear it.
Explain
When you read the word scarcity, for example, you should
explain the term and how it is applied.
You should make an idea, situation, or problem clear by describing it in

more detail or revealing relevant facts or ideas about it.
When you are asked to explain something, you should write about
its features, characteristics, causes and processes. You need to go
into some detail so that your reader has the full picture of what it is.
For example, when you explain MARKET FAILURE you need to
describes the theory AND give examples.
Outline
You should write about the main features and general principles of a
subject, leaving out minor details, but emphasising its structures and
relationships in the larger context.
Analyse
For example, when you outline causes of inflation, you would

give a detailed description of all causes and show how they
contribute to inflation in general.
Your main focus should be on the 'why' of a particular issue, or on the

'how' with the aim of clarifying reasons, causes and effects. You are being
tested on your capacity to think critically.
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Writing Skills
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Topic1A
Economics
Topic 1B
Economics Thoughts &
Theories
2011
School of Business Services
Faculty of Workforce Development
Questions for Topic 1A & 1B
Topic 1A: Economics

1. Match the key term with the best explanation. Write the letter of the explanation in the
column provided.
KEY TERMS
ANSWER
EXPLANATION
Scarcity
A Goods produced by people which are

used to produce other goods
Choice
B A good so plentiful that it does not have a price

and everyone can use it
Factors of Production
C Resources used in the production

process
Consumer goods
D What goods to produce, how to

produce them and for whom to produce
Capital goods
Economic problem
F A scarce good that has a price
Economic good
G The selection of one good in preference

to another
Free good
H Goods bought and used by households

to satisfy a want
Land
Resources and goods and services are

insufficient to satisfy our unlimited
wants
Labour
Skill of a person who takes the risk to

set up a business and combine resources
Entrepreneurship
K Natural resources/raw materials
Human effort and skill
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2. Explain the differences between micro and macroeconomics?

Before you write...
When writing for Economics, it is important to organize your ideas. Economists often
organize their writing by using simplified models; such as supply and demand, cause and
effect, cost/benefit analysis (advantages and disadvantages) and comparison. It is a
good idea to practise these styles whenever you have the opportunity.
The first step when writing an answer to a question is to decide what type of
answer is necessary.
For question (2) above, you need to show DIFFERENCES. So your answer will need to a)
briefly say what macro economics is, b) briefly say what micro economics is and then c)
comment on the main difference/s between these.
The second step is to write you answer using the language for showing
difference:
For question (3) below, you need to show REASONS. When you see the word WHY, you
usually need to give reasons. So your answer will need to a) state that it is important to
study Economics, and b) you need to list the reasons. See below for some language tips.
Write here:
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3. Why is it important to study economics? Give 7 reasons.
Giving Reasons
Because + reason
Because of + noun
Due to + noun / -ing verb
Since
The reason ... + is that..
4. Define scarcity and explain how it leads to opportunity cost?
Scarcity
Economic Problem of Scarcity
5. What are the big economic questions? Give examples. The first sentence is given.
Economics seek to understand how societies solve five big questions.

(What)
(How)
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(Who)
(Where)
(When)
6. List the factors of production.
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7. What is the difference between positive and normative analysis?
8. What is the meaning of ceteris paribus; and why do economists use this term?
Graph 1
Questions 9 to 13
Production Possibilities Frontier

a
15
b
Unattainable
c
10
d
Attainable
e
z
f
0
2
3
4
Computers (millions)
5
37
Question 9: Which points in the diagram are attainable?
Question 10: Can more than 5m computers be produced?
..
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Question 11: Can we produce beyond the production possibility curve?
Question 12: If 10m mobile phones are produced, how many computers are produced?
Question 13: Explain the situation at point Z.
Graph 2
Questions 14 to 18
The Efficient Use of Resource:

on the PPF
Too many mobile
phones
Point of allocative
efficiency
15
A
Too many computers

B
10
PPF
1.5
2.5
3.5
5
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Question 14: What does Point B represent?
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Question 15: What does Point C represent?
..
Question 16: What does Point A represent?
Question 17: Define allocative efficiency.
..
Question 18: Define productive efficiency.
..
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Graph 3
Questions 19 to 22
The Efficient Use of Resources:

Marginal benefit equals marginal cost
5
Benefits exceeds cost

produce more
mobile phones
Cost exceeds Benefits

produce less mobile phones
MC
A
Equilibrium
Marginal benefit = marginal Cost
efficient quantity of mobile phones
3
2
MB
1.5
2.5
3.5
53
Question 19: Define MB.
Question 20: Define MC.
..
Question 21: Define equilibrium.
Question 22: Demonstrate in the diagram, when equilibrium is achieved.
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Questions for Topic 1B: Economic Thoughts and Theories

1. Define an Economic System.
..
2. Define a market economy.
3. Define a command economy.
..
4. Define a mixed economy.
5. Explain the advantages and disadvantages of a Market Economy.
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6. Explain the advantages and disadvantages of a Command Economy.
7. Complete the following table:
Characteristic
Market Economy
Command Economy
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8. Identify the various schools of thought in economics. In your answer, give an outline of
the key principles of each school of thought.
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Multiple Choice Questions Topic 1A & 1B

Introduction & Economic Thoughts and Theories
Question 1
The study of economics helps us understand:
a) How we allocate scarce resources to satisfy All our want
b) How we allocate scarce resources among competing uses
c) How income can be reallocated to satisfy human wants
d) Why our wants are greater than our resources we have to satisfy them
Question 2
Which of the following statements is correct?
a) Economics is the social science that studies the choices that society make
b) Economics is the social science that directs the choices that society makes
c) Economic lacks realism because they are not based on facts
d) Economics teaches us where to invest to always earn a profit in the stock market
Question 3
Economics is divided into:
a) Two main branches: Microeconomics and Macroeconomics
b) One main branch: Economics
c) Three main branches: Microeconomics, Macroeconomics and Economics
d) Two main branches: microeconomic reform and labour markets
Question 4
Microeconomics is the study of:
a) The performance of national economy
b) The study of international trade
c) How households and firm make choices, how they interact in markets and how the
government attempts to influence their choices
d) National Economic performance
Question 5
Macroeconomics is the study of:
a) Global economy
b) The performance of national economy and the global economy
c) Capital markets
d) How households and firm make choices, how they interact in markets and how the
government attempts to influence their choices
Question 6
Which of the following will be considered a microeconomic issue?
a) Why did unemployment fall last year?
b) Why has Americas economy stagnated?
c) Can the Reserve Bank bring prosperity by keeping interest rates low?
d) What factors determine the quantity demanded for public transport?
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Question 7
The circular-flow is a model that illustrates:
a) How participants in the markets are linked and demonstrate the flow of spending and
money in the economy
b) How participants allocate their limited resources
c) Microeconomic issues
d) How to achieve efficiency in the economy
Question 8
Scarcity exists:
a) When people consume beyond their means
b) Only in rich nations
c) In all countries of the world
d) Only in poor nations
Question 9
The combined existence of scarce resources and unlimited wants forces us to
a) Have a low rate of economic growth
b) Have a low standard of living
c) Produce inefficiently
d) Choose among alternatives
Question 10
The opportunity cost of buying a new DVD player is:
a) The price of the new DVD player
b) The money paid to workers who made the player
c) The factors of production used in the making of the DVD player
d) The purchases that the buyer must give up to buy the new DVD player
Question 11
An economy can produce outside its production possibility frontier when
a) New technology is developed
b) People limit their choices
c) Distribution systems are improved
d) Never
Question 12
A market economic system is regarded as:
a) An economy, where all economic decisions are planned and managed by a central
planning authority
b) An economy where resources are allocated and goods and services distributed with
minimal control and regulation
c) An economy where resources are allocated and goods and services are distributed
by government
d) An economy, where all economic decisions are planned and managed by the private
sectors
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Question 13
You own a DVD of the film The Lord of the Rings. The opportunity cost of watching
the film
a) Is the value of the alternative use of the time you spent watching the DVD
b) cannot be calculated
c) Is one half the cost of the DVD, since this is the second time you have watched it
d) Is zero
Question 14
Assuming you have a test tomorrow morning, and a friend comes over your house
and invites you to go out to the movies, your opportunity cost will be:
a) The 50% extra in marks you could have gained if you studied all night
b) The cost of the movie tickets
c) The cost of popcorn and coca cola
d) None of the above
Question 15
Which of the following is NOT considered a school of thought in economics?
a) Classical and Keynesian Macroeconomics model
b) Monetarist model and the real business cycle model
c) The new classical model
d) The financial model
Question 16
Economists distinguish between positive statements (What is) and normative
statements (What ought to be). Which of the following statements is considered a
positive statement?
a) A reduction in taxation rates will lead to an increase in spending
b) The government should reduce tax rates
c) The governments should increase government expenditure
d) The Australian economy should not be in a recession
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Problems questions for Topic 1

How to Answer Problem Questions in Economics.
Answering Problem Questions requires you to show how a concept works
in real life. When answering these questions, you need to show how the
case or example supports the theory. Only the explanation of the concept
and the example together will answer the question. The simplest way to do
this is to define and explain the concept, then, using LINKING language,
show that the case is an example of how theory works.
For example, in the question below, you would use this process of writing:
Concept Introduced: Opportunity Costs (define)
Application Context: Australian University Course
(describe and identify costs)
Outcome of the Example: what your experiences show
about opportunity costs (explain)
Question 1
You have made a decision to study in a particular course at university level in
Australia. Based on your experience, respond to the following:
(a) What opportunity costs have you incurred by studying at university level?
(b) What are the opportunity costs of studying in Australia?
..
..
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Question 2
An Australian firm deciding to build a factory in China is an example of a marginal
decision. Explain how such a large investment could be described as marginal.
..
..
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Cartoon Activity 1B
Interpret and explain the economic point (s) made in the cartoon.
......................
.......................
....................
....................
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Case study: Scarcity and abundance-Is lunch ever free?

The central economic problem is scarcity. But are all goods and services scarce? Is
anything we desire truly abundant?
First, what do we mean by abundance? In the economic sense we mean something where
supply exceeds demand at a zero price. In other words, even if it is free, there is no
shortage. What is more, there must be no opportunity cost in supplying it. For example, if
the government supplies health care free to the sick, it is still scarce in the economic sense
because there is a cost to the government (and hence the taxpayer). Two things that might
seem to be abundant are air and water. In one sense air is abundant. There is no shortage
of air to breathe for most people for most of the time. But if we define air as clean,
unpolluted air, then in some parts of the world it is scarce. In these cases, resources have
to be used to make clean air available. If there is pollution in cities or near industrial plants,
it will cost money to clean it up. The citizen may not pay directly - the cleaned-up air may be
free to the 'consumer' - but the taxpayer or industry (and hence its customers) will have to
pay.
Another example is when extractor fans have to be installed to freshen up air in buildings.
Even if you live in a non-polluted part of the country, you may well have spent money
moving there to escape the pollution. Again there is an opportunity cost to obtain the clean
air. Whether water is abundant depends again on where you live. It also depends on what
the water is used for. Water for growing crops in a country with plentiful rain is abundant. In
drier countries, resources have to be spent on irrigation. Water for drinking is not abundant.
Reservoirs have to be built. The water has to be piped, purified and pumped.
1. There is a saying in economics, 'There's no such thing as a free lunch' (hence the
sub-title for this case study). What does this mean? Give examples from the case.
....................
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2. Are any other (desirable) goods or services truly abundant? Explain your answer.
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Language Focus: Topic 1A & 1B
Language Focus: Economics

View the table below. This table has information on the topic of Market and Planned
economies. It is similar to the type of table that you see in university textbooks or that you
might take in a lecture. How can you use this for your own writing, or for exam preparation?
Create four (4) comparative sentences from the following table. They will show the
differences. You will need to use linking words for comparison: whereas, in contrast.
1. A comparative advantage of Market over Planned economy is in the provision of
incentives for economic production and growth.
2. .............................................................................................................................................
...................................................................................................................................................
3. .............................................................................................................................................
...................................................................................................................................................
4. .............................................................................................................................................
...................................................................................................................................................
Market Economy
Advantages
1. better provision of
incentives
2. better uses of local

information and
conveys global
information more
cheaply (in prices)
Disadvantages
1. the market satisfies
demand but might not
meet needs
2. public goods not

automatically supplied
Planned Economy
Advantages
1. successful at rapid
industrialization and
structural change
2. tend to have less

income and wealth
inequality and higher
levels of literacy and
basic health care
Disadvantages
1. enterprises tended
to be oriented toward
increasing quantity of
output but not quality
2. economies as a
whole were not
technologically
dynamic
3. market power
monopolies, cartels,
etc.
3. despite high saving

rate, growth was
slowed by low
productivity of capital
4. structural changes
might be difficult
4. output mix lopsided

producer goods vs.
consumer goods and
agriculture
5. political
repression
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Language Focus: Topic 1A & 1B
Notes
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Topic 2A
Market Forces Demand &
Supply
Topic 2B
Elasticity of Demand &
Supply
2011

Questions Topic 2A & 2B
Topic 2A: Market Forces: Demand and Supply

1. (a) Explain what is meant by the law of demand?
(b) Explain the Demand schedule.
2. Explain what effect you think it will have on the demand or the supply of a good. The first
one has been done for you as an example.
Factor
Effect
Income will affect demand. If people are paid more then they
Income
are likely to increase demand for a good or service. If their

income falls, then they will be likely to reduce their demand for
goods and services.
Climate
Age of the people
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Factor
Effect
Technology
Price of substitutes
Expectations of
producers
Advertising
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3. Define substitutes and complements. Provide examples.
Substitute
.
Complement
4. Distinguish between a movement along the demand curve and a shift in the demand
curve.
5. Explain what is meant by the law of supply.
6. List the main factors that bring changes to supply.
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7. Draw a diagram of the concept of market equilibrium and explain it.
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8. Complete the following table
Change in
Demand Only
Demand
Supply
Price
Quantity
Diagram
Demand
increases =
demand curve
shifts to the
right
D1D2
Demand
decreases =
demand curve
shifts to the left
D1D2
9. (a) List the factors that can cause the demand curve to shift.
...............................................
(b) List the factors that bring changes in demand: (shift the demand curve)
...............................................
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Complete the following table
Change in
Supply Only
Demand
Supply
Price
Quantity
Diagram
Supply
decreases =
supply curve
shifts to the
right
S1S2
Supply
increases =
supply curve
shifts to the
right
S1S2
1)
(a) List the factors that can cause the Supply curve to shift.
(b) List the factors that bring changes to supply (shift the supply curve).
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2)
Complete the following table
Both Demand
and Supply
change in same
Demand
Supply
Price
Quantity
Diagram
direction
Demand
increases
Supply
Increases at the
same time
D1D2
S1S2
Demand
decreases
Supply
decreases at the
same time
D1D2
S1S2
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3)
Most of the coffee in the world is grown in Brazil. Because of a severe frost, 90% of the
Brazilian coffee crop, soon to be harvested, is destroyed. Analyse the effect of the
Brazilian frost on the world coffee market.
Price
D
Quantity
Q
Analyse the possible effects of the Brazilian frost on the world tea market.
Price
D
Quantity
Q
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Assume that the price of air travel between Australia and China has been reduced by 25%.
Describe the outcome in terms of demand and supply.
Price
D
Quantity
Q
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Multiple Choice Topic 2A: Market Forces: Demand and Supply

Question 1
The law of demand means:
a) Other things remaining the same, the higher the price of a good/service, the
smaller is the quantity demanded
b) Other things remaining the same, the higher the price of a good/service, the
larger the quantity demanded
c) Other things remaining the same the higher the price of a good or service the
higher the quantity supplied
d) Other things remaining the same, people will always consume
Question 2
The law of demand results from:
a) Only substitute effect
b) Only income effect
c) Only supply effect
d) Both substitution effect and income effect
Question 3
The demand curve shows the:
a) The negative relationship between the quantity supply and the price, when all
other influences on consumers planned purchases remain the same
b) The negative relationship between the quantity demanded and the price, when all
c) The positive relationship between the quantity demanded and the price, when all
d) How much producers will supply at a given period
Question 4
A change in price will result in:
a) Demand remains the same
b) A shift in the demand curve to the left
c) A movement along the demand curve
d) A shift of the demand curve to the right
Question 5
Which of the following factors will NOT cause a shift in the demand curve?
a) Prices of related goods
b) Change in price
c) Expected future prices
d) Expected future income
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Question 6
Which of the following factors will cause a shift in the demand curve to the
right?
a) Population increase
b) Prices of a complement increases
c) Change in price
d) decrease in income
Question 7
Which of the following factors will cause a shift in the demand curve to the
left?
a) Population increase
b) Change in price
c) Increase in income
d) Prices are expected to decrease
Question 8
A new marketing campaign is introduced to educate people on the negative
side effects of smoking, if the campaign is effective it will cause:
a) The demand curve will shift to the left.
b) The demand curve will shift to the right
c) No change in the demand curve
d) A movement along the demand curve
Question 9
Which of the following factors would cause a shift in the demand curve to
the right (an increase in demand)
a) A decrease in the price of the good
b) An increase of a government subsidy to that industry
c) A reduction in the price of the substitute good
d) A decrease in rates of personal income tax
Question 10
Market equilibrium occurs when:
a) The level of demand exceeds supply
b) Supply and demand both decrease
c) Demand and supply are equal
d) The price of a good or service equals its production cost
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Question 11
Butter is a close substitute for margarine. If due to a rise in its production
cost, the price of butter rises, which of the following is the most likely
outcome for margarine?
a) An increase in demand
b) A reduced demand to its lower price
c) A reduced supply due to its higher price
d) A greater supply due to its higher price
Question 12
Coca Cola is a close substitute for Pepsi Cola. If due to a rise in its
production cost, the price of Coca Cola rises, which of the following is the
most likely outcome for commodity Pepsi Cola?
a) A reduced supply due to its higher price
b) A reduced demand to its lower price
c) An increase in demand
d) A greater supply due to its higher price
Question 13
Equilibrium is the condition that exists when:
a) The demand curve intersects the quantity axis
b) There is no government intervention in a market
c) The demand curve intersects the price axis
d) Quantity demanded equals quantity supplied
Question 14
A severe drought (no water) and crop failure would cause a decrease in the
supply of tea. This would result in
a) An increase in the equilibrium price and quantity of tea
b) No change in quantity but an increase in price
c) A shift to the left in the demand curve for coffee
d) An increase in price and a decrease in quantity of tea
Question 15
When the price of bananas is above equilibrium, the following will occur in
the market for bananas
a) The price will increase because of excess supply
b) The price will decrease because of excess demand
c) The price will decrease because of excess supply
d) The price will increase because of excess demand
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Question 16
If the quantity demanded for bread is greater than the quantity supplied for
bread then:
a) The supply of bread will increase and the price will fall
b) The resulting surplus of bread will cause the price to rise
c) The demand will increase and the price will fall
d) The resulting shortage of bread will cause the price to rise
Question 17
During a particular season, orange prices fell significantly. A possible
reason for this would be
a) Huge increase in orange supply due to good weather
b) A general increase in incomes
c) Increased exports of oranges to overseas markets
d) An increase in demand for orange juice
Question 18
The law of demand states that
a) As prices fall, demand decreases
b) As prices rise, demand increases
c) As prices fall, quantity demanded increases
d) As prices rise, quantity demanded increases
Question 19
The quantity demanded for Pepsi Cola has decreased. This is most likely
because:
a) Pepsi advertising is more effective as it was before
b) Coca Cola prices have gone up
c) Pepsi prices have gone up
d) Pepsi consumers have more income
Question 20
The introduction of new technology will cause supply curve to:
a) Shift to the right, prices fall and quantity will increase
b) Shift to the left, prices fall and quantity will increase
c) Shift to the right, price increases and quantity will increase
d) Shift to the left, prices fall and quantity decreases
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Topic 2B: Elasticity of Demand and Supply

1) Define Elasticity and the different types of elasticity tests that can be conducted.
2) Define price elasticity of demand. What useful information does it provide?
3) Calculate price elasticity of demand, if price increases by 15% and quantity demanded
decrease by 30%.
Method 1
Calculating Elasticity ( d ):
% Qd
% P
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4) Calculate price elasticity of demand, if price increases by 10% and quantity

demanded decrease by 10%.
Method 1
% Qd
% P
5) Calculate price elasticity of demand, if price increases by 5% and quantity demanded

remains the same.
Method 1
% Qd
% P
6) If the price falls from $5 to $2, the quantity demanded increases from 0 to 10 soft
drinks an hour.
7) If the price rises from $100 to $110, the quantity demanded decreases from 50 to 45
sunglasses a week.
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8) If the price falls from $20 to $10, the quantity demanded increases from 10 to 12 soft
drinks an hour.
9) Explain what is meant by elasticity of supply.
10) Calculate price elasticity of supply if, the price increases by 10% and the quantity of
supply increases by 20%.
Method 1:
Elasticity of Supply ( s ) =
% change in Qs
% change in P
Method 1:
% change in Qs
% change in P
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Method 1:
% change in Qs
% change in P
13) Calculate the elasticity of supply, if the price of a product rises from $100 to $150,
and quantity supply increases from 1000 to 2000.
Case study: Elasticity of supply and demand for wine
In 2006 drought has had a severe impact on the supply of grapes in Australia. At the
same time demand for Australian wine was rising rapidly for the UK and USA as a result
of the quality of the wine and effective marketing and promotion.
Adapted from Fraser & Gionea, 2005, Economics for Business, page 78 McGraw-Hill
,
(a)`Describe the effect of the drought on the supply of wine in Australia.
(b) How would you describe the elasticity of supply of wine?
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(c) Describe the impact of rising overseas demand for Australian wine.
(d) What effect might this have on Australian consumers of wine?
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Multiple Choice Questions Topic 2B: Elasticity of Demand and Supply

Question 1
Elasticity means:
a) Responsiveness of one variable to another
b) The negative relationship between variables
c) The positive relationship between many variables
d) Responsiveness of one variable to many other variables
Question 2
Which of the following cannot be calculated?
a) Price Elasticity of Demand and Supply
b) Cross Elasticity of Demand
c) Income Elasticity of Demand
d) Import Elasticity of Demand
Question 3
Price Elasticity of demand measures:
a) The responsiveness of the quantity demanded to a change in quantity (all other
influences on buyers plans remain the same)
b) The responsiveness of the quantity demanded to a change in price (all other
influences on buyers plans remain the same)
c) The responsiveness of the quantity supplied of a good to a change in its price, other
things remaining the same
d) The responsiveness of the price supplied of a good to a change in its price, taking
into account all things
Question 4
Price Elasticity of Supply is calculated by:
a) % Qs/ % P
b) % Qs/ % Qd
c) % P/ % Qs
d) % Qd/ P
Question 5
The elasticity of supply of a product is dependent on
a) the ability to hold stocks of the product in a warehouse
b) the availability of substitutes
c) The demand for the product
d) the price of the product
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Question 6
The price of apples falls by 5% and the quantity demanded increases by
10%.
This means that the price elasticity of demand for apples is:
a) Perfectly elastic
b) Elastic
c) Inelastic
d) Perfectly inelastic
Question 7
If a 5% reduction (fall) in the price of the good produces a 3% increase in the
quantity demanded, the price elasticity of demand is
a) elastic
b) perfectly elastic
c) inelastic
d) perfectly inelastic
Question 8
Price Elasticity of Demand is calculated by:
a) % Qd/ % P
b) % Qd/ % Qd
c) % P/ % Qd
d) % Qd/ P
Question 9
Calculate price elasticity of supply if, the price increases by 10% and
quantity supply increases by 20%?
a) 2 (Inelastic)
b) 2 (Elastic)
c) 1 (Elastic)
d) 0 (Inelastic
Question 10
Calculate price elasticity of demand, if price increases by 15% and quantity
demanded decrease by 30%?
a) 2 (Elastic)
b) 2 (Inelastic)
c) 1 (Elastic)
d) 0 (Inelastic)
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Question 11
Income Elasticity of Demand is:
a) The responsiveness of demand to a change in income, other things remaining the
same
b) The responsiveness of demand to a change in supply, other things remaining the
same
c) The responsiveness of demand to a change the price of a complement, other things
remaining the same
d) The responsiveness of demand to a change the price of a substitute, other things
remaining the same
Question 12
Cross Elasticity of Demand is:
a) The responsiveness of the demand for a good to the change in income, other things
remaining the same
b) It is calculated as the percentage change in the quantity demanded divided by the
percentage change in income
c) The responsiveness of the demand for a good to the price of a substitute or
complement, other things remaining the same
d) The responsiveness of demand to a change the price in price, other things remaining
the same
Question 13
At the midpoint of the demand curves:
a) Demand is elastic
b) Demand is unit elastic
c) Demand is inelastic
d) Equal to zero
Question 14
Unit Elastic of Demand is:
a) Greater than 1
b) Equal to zero
c) Equal to 1
d) Less than 1
Question 15
Perfect Inelastic Demand:
a) Greater than 1
b) Equal to zero
c) Equal to 1
d) Less than 1
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Case Study 2A & 2B
Case Study 1: Banana prices to double after crop devastation 21/3/06

Banana prices are expected to double after Cyclone Larry wiped out 80 per cent of
Australia's crop. Growers have already begun laying off workers, with job losses in north
Queensland expected to be as high as 4,000.
The devastated industry warned today that prices could hit $6 a kilogram in shops - double
the current top retail price of about $3. Cyclone Larry ploughed through Australia's biggest
growing region yesterday morning, wrecking plantations and destroying more than 200,000
tonnes of fruit worth $300 million.
The Australian Banana Growers Council said the bulk of the industry's production would be
in ruins for about a year, and shoppers could be paying hefty prices as the fruit becomes
scarce.
"They're certainly going to go up and go up dramatically, I'd suggest," council chief executive
Tony Heidrich said.
Australia now faces a nationwide shortage of bananas, with 95 per cent of the fruit grown in
Queensland and nearly all of that produced in the state's north.
Australia does not import bananas, due to concerns about biosecurity.
Most growers won't be coming back into production for 12 months," he said.
"Then probably another 12 months on top of that before all farms are back into full
production."
Australia's other banana growing districts would not be able to meet demand.
The cyclone had destroyed as much as 230,000 tonnes of fruit, and the infrastructure
damage bill would also be high.
Source: The Age newspaper March 21, 2006
(a) Explain the reasons for the rise in the price of bananas in terms of demand and
supply.
(b) What does this article suggest about the elasticity of supply of bananas?
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Case Study 2A & 2B
Case Study 2: Banana Prices Likely to Start Downward Bend - 8/8/06

BANANA prices are expected to begin falling in coming weeks as the north Queensland crop
starts to ripen and more fruit is brought to market. For consumers who have been paying up
to $15 a kilogram after supplies of the fruit were hit by Cyclone Larry, the fall in price will a
relief.
In March, the category-five Larry decimated the north Queensland banana industry, which
produces about 90 per cent of the Australian crop, and the price of the fruit rocketed.
Bananas, which used to cost about $3/kg, are now selling for about five times as much in
most supermarkets. The price of the fruit and rising fuel costs were blamed for last month's
official rise in interest rates.
Having lost his entire crop when Cyclone Larry tore through the region, Queensland banana
grower Mr Mayers fears the price of bananas will plummet when growers return to full
production.
He expects banana prices to drop to less than $10 a carton for growers by November, giving
consumers much-needed relief from the record high prices, but not necessarily benefiting
the farmers.
To overcome a price crash later this year, the banana farmers will stagger the timing of the
release of their crops. Growers say it is necessary to prevent an exodus of farmers from the
industry and guarantee a consistent supply to consumers.
"If we let it all come in, we'll have fruit for the next four months and then be back in the
situation we have now," Mr Mayers said. "If we don't stagger it, we won't have the production
to carry us through and take us off that cycle."
Source:The Age newspaper March 21, 2006
(a) Explain why banana prices are expected to fall?

.
.
.
..
(b) Explain why farmers want to stagger the timing of the release of the banana crop to the
market?
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Case Study 2A & 2B
Case Study 3: Queensland producers lose millions from storm damage

Producers in southern Queensland are bracing for more storms in the next few hours after
last night's weather caused tens of millions of dollars damage.
Fruit growers near Stanthorpe say they lost about a quarter of their apple crop, worth about
$20 million.
The severe hail storms have decimated vegetable crops in the Lockyer Valley, west of
Brisbane. Barry Stefan's farm near Gatton was one of those badly hit. "We've had about 60
acres of pumpkins and watermelons just totally demolished," he said.
Large hail stones pelted citrus crops near Gayndah in the north Burnett for the second time
in four days. Ian Shepherd, from the local Packers Co-operative, says some growers have
lost 60 per cent of their crops.
"It's a natural thing, we all know that and you've got to take your chances," he said. "But it's
just very heartbreaking."
Vegetable wholesalers say the price for some produce could now double.
Source: ABC News Online 25/10/0
(a) Explain the effects of the storm on demand, supply and price of fruit and vegetables.
(b) What does the article imply about the elasticity of demand and supply for fruit and
vegetables?
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Case Study 2A & 2B
Cartoon case study
Explain the meaning of this cartoon as it relates to supply and demand.
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L 2A & 2B
Language Building: Supply and Demand
Put the words into the gaps in the text.

Chocoholics of the world had (1) ____________ start stocking up on their
favourite chocolate bars, if we are to believe experts who say the world is
(2) ____________ a chocolate drought. They warn that the world's supply
of sustainable cocoa could run (3) ____________ by 2014. Political
greatly
out
unrest in the Ivory Coast has (4) ____________ these fears. Many cocoa
better
farmers have fled to neighbouring countries because of (5)
reach
____________ for their security. This has (6) ____________ reduced the
fears
number of growers. The West African country grows 40 per cent of the
worlds cocoa beans and fears of another civil war have sent the price of
cocoa up. Prices have (7) ____________ by 10 per cent in this month
facing
jumped
prompted
alone and are set to (8) ____________ their highest levels for 30 years.
Angus Kennedy, a (9) ____________ British chocolatier and editor of a

trade (10) ____________, told Britains Daily Mail newspaper: Chocolate
producers are facing one of the biggest challenges to (11) ____________
go
the industry in recent history. Supplies of sustainable cocoa are set to run
left
out, it's that (12) ____________." He commented on the political situation,
journal
saying: The Ivory Coast is a complete no-(13) ____________ area for

cocoa traders as it's too dangerous, so training new farmers and trying to
cut problems in the region is now, (14) ____________ impossible. On
nasty
hit
leading
reports of record price increases, he said: Prices can't go up as it's
mostly
reported because there basically isn't enough certified cocoa (15)
simple
____________ to sell. He added that: Things could get (16)

____________ now as producers start to fight over the last stocks.
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L 2A & 2B
Chocoholics of the world (1) ____ better start stocking up on their favourite chocolate bars, if
we are to believe experts who say the world is facing a chocolate drought. They warn that
the world's (2) ____ of sustainable cocoa could run out by 2014. Political unrest in the Ivory
Coast has (3) ____ these fears. Many cocoa farmers have fled to neighbouring countries
because of fears (4) ____ their security. This has greatly reduced the number of growers.
The West African country grows 40 per cent of the worlds cocoa beans and fears (5) ____
another civil war have sent the price of cocoa up. Prices have jumped by 10 per cent in this
month (6) ____ and are set to reach their highest levels for 30 years.
Angus Kennedy, a (7) ____ British chocolatier and editor of a trade journal, told Britains
Daily Mail newspaper: Chocolate producers are facing one of the biggest challenges to (8)
____ the industry in recent history. Supplies of sustainable cocoa are (9) ____ to run out, it's
that simple." He commented on the political situation, saying: The Ivory Coast is a complete
(10) ____ area for cocoa traders as it's too dangerous, so training new farmers and trying to
cut problems in the region is now, mostly impossible. On reports of record price increases,
he said: Prices can't go up (11) ____ it's reported because there basically isn't enough
certified cocoa left to sell. He added that: Things could get (12) ____ now as producers
start to fight over the last stocks.
Put the correct words from the table below in the above article.
1.
(a)
should
(b) would
(c)
had
(d)
could
2.
(a)
supplied
(b) supply
(c)
supple
(d)
suppliers
3.
(a)
prompted
(b) prompt
(c)
prompting
(d)
prompts
4.
(a)
from
(b) by
(c)
at
(d)
for
5.
(a)
at
(b) by
(c)
of
(d)
with
6.
(a)
lonely
(b) lone
(c)
alone
(d)
lonesome
7.
(a)
leader
(b) leading
(c)
leaded
(d)
leads
8.
(a)
hit
(b) smack
(c)
punch
(d)
slap
9.
(a)
bet
(b) set
(c)
get
(d)
let
10.
(a)
no-go
(b) no-no
(c)
no joy
(d)
no-brainer
11.
(a)
has
(b) was
(c)
is
(d)
as
12.
(a)
nastily
(b) nasties
(c)
nastiness
(d)
nasty
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Topic 3
Market Structures
2011

Questions for Topic 3
Topic 3: Perfect competition

1) Define the conditions necessary for perfect competition to exist as a market structure.
2) Explain why firms are price takers?
3) Explain why P=MR=AR for a firm in a perfect market?
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4. Complete the following Table and draw a demand curve demonstrating P = AR=MR
TR
AR
MR
(P x Q)
(TR/Q)
(TR/Q)
20
20
20
20
20
5. Define normal profit, and use diagrams to show when a firm will experience normal
profit, economic profit and economic loss?
In the short run, a PC firm can make a:
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Normal profit
Price = ATC
Break-even
MC
ATC
100
P=MR=AR=D
Economic profit
Price > ATC
100
90
MC
ATC
P=MR=AR=D
Economic loss
Price < ATC
MC
ATC
110
100
P=MR=AR=D
6. Explain, with the use of a diagram, why a firm in a perfectly competitive market may
make economic profit/loss in the short run but is very unlikely to do so in the long run.
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Topic 3: Monopoly
1) Explain the conditions necessary for a market to be defined as a monopoly.
Barriers to entry
Legal barriers to entry
Natural barriers to entry
2) Why is a monopoly considered to be a price maker?
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3) Why does a profit-maximising monopolist charge a price that is higher than marginal
cost?
4) Can monopoly profits achieve economic profits in the long run? Explain your answer.
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Topic 3: Monopolistic Competition and Oligopoly

1. Identify and explain the key characteristics of Monopolistic Competition.
Characteristics of MC:
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2. Discuss the trade-off between efficiency (excess capacity) and product variety.
Excess capacity
Mark-up
3. List the conditions necessary for a market to be defined as an oligopoly.

Characteristics of Oligopoly:
4. How does game theory explain the cycles of price wars and collusion that occur in many
oligopolistic industries?
5. Can a firm in monopolistic competition achieve economic profit in the long run? Explain.
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6. Advertising play a significant role in monopolistically competitive and oligopolistic

markets. Is advertising a complete waste of societys resources? Explain.
Complete the following table:
Characteristics
Perfect
Competition
Monopolistic
competition
Oligopoly
Monopoly
Number of firms
Products
Barriers to entry
Firm's control
over price
Concentration
ratio (0 to 100)
Examples
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Case Study: THE OPEC CARTEL
The Organisation of Petroleum Exporting Countries (OPEC) was formed in the 1970s to
coordinate the production of crude oil. It is a cartel that includes government representatives
of the worlds largest oil producers including Middle Eastern countries, Indonesia, Venezuela
and Nigeria. Each member has agreed to produce a certain amount of oil each day. OPEC
have a target rate for the price of oil and because they control the output they can affect the
price of oil. Restrict supply and the price must go up according the demand and supply
analysis.
In 2006 when the price of oil has risen to $70 a barrel and demand started to fall, Saudi
Arabia called for an increase in total production from OPEC to rise in order for prices to fall
and to maintain demand. However as the price of oil began to fall, there have been calls to
reduce output of oil in order to maintain high prices. The main customers of OPEC are the
global oil refining companies like shell and Exxon-Mobil.
Adapted from: Fraser & Gionea, 2005, Economics for Business, page 93 McGraw-Hill)
(a) Describe the market structure for global oil. Describe its characteristics.
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(b) Is this market structure different to the market for petrol in our cities? Explain your
answer.
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Multiple Choice Questions Topic 3: Market Structures

Question 1
Which of the following is NOT a characteristic of perfect competition?
a) Many buyers and seller
b) Firms are price makers
c) All firms selling identical products
d) No barriers to new firms entering the market
Question 2
Under perfect competition, the demand curve is horizontal because:
a) Firms are price takers
b) Firms are price makers
c) Both price takers and makers
d) Prices do not change
Question 3
Under perfect competition, the demand curve is equal to:
a) Demand = Price = Quantity = Demand
b) Demand = Price = Average Revenue = Marginal Cost
c) Demand = Price = Average Revenue = Marginal Revenue
d) Demand = Price = Average Price = Marginal Revenue
Question 4
Average Revenue is equal to:
a) AR = TR / Q
b) AR = TR / Q
c) AR = TR / Q
d) AR = TR * Q
Question 5
Marginal Revenue is equal to:
a) MR = TR / Q
b) MR = TR * Q
c) MR = P / Q
d) MR = TR / Q
Question 6
Marginal Cost is equal to:
a) MC = TC * Q
b) MC = TC / Q
c) MC = TC / Q
d) MC = TC / TR
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Question 7
Average Variable Cost is equal to:
a) AVC = TVC * Q
b) AVC = TC / Q
c) AVC = TVC / Q
d) AVC = VC / TR
Question 8
In perfect competition, profit maximization occurs when the firm produces a quantity
where:
a) The gap between TR and TC is the greatest
b) The gap between MR and MC is the greatest
c) The gap between TR and TC is the smallest
d) TR equals TC
Question 9
Which following statement is incorrect for a firm in perfectly competitive markets?
a) Profit maximization is achieved when; the gap between TR and TC is the greatest
b) Profit maximization is achieved when, MR equals MC
c) Firms are price makers and consumers price takers
d) Normal profit is achieved when P equals ATC
Perfect Competitive Firm

(Profit maximisation)
Price
MC
110
100
P=MR=AR=D
90
10
Quantity
Question 10
Using the above diagram, what will be the profit maximising output?
a) Q = 9
b) Q = 8
c) Q = 10
d) Q > 9
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Question 11
Using the above diagram, what will be the profit maximising Price?
a) P = $100
b) P = $90
c) P = $110
d) P > $100
Question 12
Monopoly is where:
a) The government legislates to maintain competition
b) There are a variety of brands available
c) There are a lot of sellers
d) One firm can determine the price
Question 13
The main feature of monopolistic competition is:
a) One large seller with control over price
b) Few producers sharing market power
c) Homogeneous products produced at a high price
d) Many sellers with similar types of products, lots of advertising
Question 14
Perfect competition is where:
a) The government legislates to maintain competition
b) There are a variety of brands available
c) There are a few main sellers
d) No one person can affect the price
Question 15
The main feature of an oligopoly is:
a) One large seller with control over price
b) Few producers sharing market power
c) Homogeneous products produced at a high price
d) An inelastic demand curve that is vertical.
Question 16
A characteristic of Oligopoly is:
a) No barriers to entry
b) Products homogeneous
c) One producer
d) Few number of firms
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Question 17
A large number of firms with product differentiation is a description of:
a) Oligopolies
b) Telecommunications industries
c) Monopolistic competition
d) A market system
Question 18
Product differentiation refers to:
a) The variety of goods and services produced within an economy
b) The price difference of a product in different markets
c) The characteristics or qualities of a product which make it different from its
Substitutes
d) The different ways a product can be used
Question 19
Which of the following statement is incorrect for a Monopolist?
a) Profit is maximised when MR = MC
b) Price > MR
c) Profit is maximises when AR = MC
d) Faces two distinct curves, AR = P = D and the MR curve
Price
Profit Maximising Monopoly
MC
100
90
AR = D
MR
Q(000)
8 9 10
Question 21
Using the above diagram, what will be the profit maximising output?
a) Q = 8
b) Q = 10
c) Q = 9
d) Q > 9
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Question 22
Using the above diagram, what will be the profit maximising Price?
a) P = $4
b) P = $6
c) P = $5
d) P > 5
Question 23
A firm in perfect competition:
a) Is a price taker
b) Must advertise to stay in business
c) Is faced with inelastic demand curves
d) Is unable to move across industries
Question 24
An industry with many small sellers, a differentiated product and easy entry would
best be described by which of the following:
a) An oligopoly
b) Monopolistic competition
c) Perfect competition
d) A monopoly
Question 25
Excess capacity:
a) Occurs when firms produce at a higher unit cost than minimum MC
b) Occurs when firms produce at a lower unit cost than minimum ATC at equilibrium
c) Occurs when firms produce at a higher unit cost than minimum ATC at equilibrium
d) Occurs when firms produce at profit maximising output
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Cartoon case study
1. What market structure is this cartoon referring to?
2. Explain why both businesses have the same price for a similar product.
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Critical Thinking and Discussion: Is Google a Monopoly?

The world's largest software maker, Microsoft, has filed its first ever complaint to antitrust
regulators, claiming Google thwarts Internet search competition.
The Redmond-Wash. based company, which itself was prosecuted by the United States in
the '90s and later by the EU for antitrust practices, is now turning its aim at the largest
Internet Company.
Google controls over 90 percent of the Internet search advertising market in Europe, well
ahead of Microsoft's Bing. And Web browsers such as Firefox and Google's Chrome have
eaten away at the market lead by Microsoft's Internet Explorer. Microsoft chief counsel Brad
Smith cited several examples of what his company claims are Google's unfair business
practices in a official company blog.
The most damaging of these claims is that Google uses its ownership of YouTube to
disadvantage competitors' search results. Microsoft says that Google has put in place
technical measures that restrict Bing search and other rivals, from "properly accessing"
YouTube for their search results. It claims Google uses that otherwise restricted data to
index YouTube videos in its own search results.
Google is already under investigation by the European Commission after other complaints
arose, one of them owned by Microsoft. Google indicated it was not overly concerned by the
complaint.
"We're not surprised that Microsoft has done this, since one of their subsidiaries was one of
the original complainants," a Google spokesman told Reuters.
"For our part, we continue to discuss the case with the European Commission and we're
happy to explain to anyone how our business works."
Apply what you have learnt in Topic 3: Monopolies to the Google Microsoft
issue.
Use the features of monopolies to define Google or Microsoft.
Discuss and debate the article.
Source: Business and Law, 2011, Microsoft calls Google a Monopoly, viewed 12/4/11,
<http://www.ibtimes.com/articles/129378/20110401/microsoft-calls-google-a-monopoly.htm#ixzz1JPDIcqz4
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Topic 4A
Economic Growth
Topic 4B
Business Cycle &
Unemployment
2011

Questions for Topic 4A and 4B
Topic 4A: Economic Growth

1. Define Gross Domestic Product.
2. List the three approaches to measure GDP.
3. Explain the income approach method.
4. Explain the expenditure approach.
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5. Explain the difference between nominal GDP and real GDP.
6. How is Real GDP measured?
7. Explain how economic growth is measured.
8. How can a nation ensure continuous economic growth?
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Topic 4B: Business Cycle and Unemployment

1. Define the business cycle and identify the phases.
2. Describe what would be the level of economic activity, GDP and unemployment at each
stage of the business cycle (see table below).
Peak
Contraction
Trough
Expansion
3. Occasionally the Australian economy goes into a recession. Explain what recession is.
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4. Explain the different theories explaining fluctuations in the level of economic activity?
Innovation
Political events
Random events
Predominantly monetary phenomenon
Aggregate expenditure
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5.
How is the unemployment rate measured in Australia?
6. What impact do discouraged workers have in the determination of the unemployment

rate?
7. List the other limitations of the method used by the Australian Bureau of Statistics to
determine the unemployment rate?
Limitations of the method of unemployment
Discourage workers (Discuss in previous Question)
Under employment
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Underutilisation of skills
Other limitations
8. Complete the following table:

Summary Table: Labour Market indicators
Calculation
Explanation
Unemployment Rate
The participation Rate
Employment to Population Rate
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9. Outline the four (4) different types of Unemployment. Study the sample of writing given.
Start a sentence with the
definition of the concept
Frictional Unemployment
Frictional unemployment is a constant yet healthy factor in a dynamic economy. This
type of unemployment arises from normal labour market turnover: when jobs are
completed or finish, workers search for new jobs or now jobs are created. But there are
increases and decreases in frictional unemployment, such as when a larger number of
young people enter the labour force, or when there is an increase in unemployment
benefit payments.
Second sentence: this explains the
concept in greater detail
Give examples to show the

application of this concept
Structural Unemployment
Cyclical Unemployment
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Seasonal Unemployment
10. Define Potential GDP.
11. Define Full employment.
12. Define Natural unemployment rate.
13. At full employment, what would be the level of cyclical unemployment?
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Multiple Choice Questions Topic 4A

Question 1
Economic Growth causes:
a) An inward shift of the production possibilities frontier
b) An outward shift of the production possibilities frontier
c) An upward movement along the production possibilities frontier
d) A downward movement along the production possibilities frontier
Question 2
The income side of the GDP accounts:
a) Include mixed incomes and consumption expenditure
b) Include mixed incomes but not gross operating surpluses
c) Include mixed incomes and gross operating surpluses
d) Does not include compensation of employees
Question 3
Real GDP is measured by:
a) (Price Index / Nominal GDP) X 100
b) Nominal GDP X Inflation rate
c) ( Nominal GDP / Price Index) X 100
d) none of the above
Question 4
GDP measures:
a) Composition and distribution of output
b) Market value of final goods and services produced
c) Social welfare
Question 5
Which of the following is considered an investment by an economist?
a) Dividends on a BHP share
b) All final purchases of machinery, building and construction
c) Resale of existing assets
d) The purchase of 100 BHP shares
Question 6
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The Labour Force includes:

a) Unemployed and employed workers
b) Discouraged workers and employed workers
c) Only employed workers
Question 7
At the economys natural rate of unemployment:
a) The economy achieves its potential output
b) Only cyclical unemployment exists
c) The official ABS unemployment rate is zero
d) Total unemployment is equal to frictional unemployment plus cyclical
unemployment
Question 8
Who of the following would be considered to be structurally unemployed:
a) A builder who is laid off as a consequence of bad weather
b) A person who has left full time study and is looking for a job
c) A worker who has been displaced because of the introduction of new technology
d) A person who has given up looking for work because job prospects are poor
Question 9
The unemployment rate is defined as:
a) U / (E+U) X 100
b) E / (E+U) X 100
c) (E + U) / POP X100
d) (E+U) / U X 100
Question 10
When unemployment is above the natural rate:
a) Frictional unemployment is zero
b) Structural unemployment is zero
c) Cyclical unemployment is zero
Question 11
Frictional unemployment refers to unemployment associated with:
a) Industry restructuring
b) Fluctuations in the level of economic activity
c) People changing jobs
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Problem Questions
In which of the following cases is a worker counted as unemployed? Explain your
answer using factors of unemployment.
a) Rosa, an older worker who has been laid off and who gave up looking for work
months ago.
b) Anthony, a school teacher who is not working during his three-month summer break.
c) Grace, an investment banker who has been laid off and is currently searching for
another position.
d) Fred, a classically trained musician who can only find work by playing for local
parties.
e) Natasha, a graduate student who went back to school because jobs were scarce.
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Cartoon case study
Explain the meaning of this cartoon in terms of the effects of unemployment.
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Language Focus: Unemployment

Put the words into the gaps in the text.
WOULD YOU GET ANGRY IF YOU GOT E-MAILS WITH LOTS OF
CAPITAL LETTERS? A New Zealand ____________ saw red after one of
his employees used block capitals in e-mails to ____________. Vicki
Walker, an accountant in Auckland, was ____________ after her coworkers complained about her ____________ of caps. Members of staff
at ProCare Health were angry with Ms. Walker for constantly filling her
mails with sentences in capital letters, ____________ and red text. They
said they found the e-mails confrontational. Bosses at ProCare
dismissed Ms Walker for ____________ disharmony in the workplace.
Walker took the company to court and ____________ for unfair dismissal.
She won the case and ProCare had to pay her US$11,500 in
____________ and lost pay.
According to the New Zealand Herald newspaper, Ms Walker is

____________ not happy. She plans to ____________ for further
compensation. She also wants to speak out for greater protection for
office workers when they are in ____________ with big companies.
Walker said too many white-collar workers feel ____________ when large
employers fire them. She says many people are not prepared to fight their
bosses because of the financial and mental ____________ involved. She
used her own ____________ as an example, saying: "I am a single
woman with a mortgage, and I had to re-mortgage my home and
____________ moneyto make it through. They nearly ruined my life."
Walkers case ____________ a widespread uncertainty regarding
netiquette and e-mails.
bold
fired
sued
boss
use
damages
colleagues
causing
experience
disputes
borrow
helpless
still
highlights
appeal
stresses
1. TRUE / FALSE: Read the headline. Guess if a-h below are true (T) or false (F).
a. A woman in New Zealand lost her job for speaking in capital letters.
T/F
b. The womans co-workers complained about her many hats.
T/F
c. Her colleagues said her e-mail style wasnt good for office harmony.
T/F
d. The woman lost a court case when she sued her company.
T/F
e. The woman is planning on taking further court action.
T/F
f.
T/F
She thinks office workers should be stronger against big companies.
g. The woman had to refinance her housing loan because she was fired.
T/F
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2. SYNONYM MATCH: Match the following synonyms from the article.

1.
saw red
a.
protested
fired
b.
destroyed
3.
constantly
c.
salary
4.
complained
d.
arguments
5.
pay
e.
got angry
6.
appeal
f.
dismissed
7.
further
g.
housing loan
8.
disputes
h.
call
9.
mortgage
i.
Always
3. PHRASE MATCH: (Sometimes more than one choice is possible.)

1.
A New Zealand boss saw
a.
for unfair dismissal
her co-workers complained about
b.
my life
3.
filling her mails with sentences
c.
further compensation
4.
took the company to court and sued
d.
and e-mails
5.
pay her US$11,500 in damages
e.
red
6.
She plans to appeal for
f.
her use of caps
7.
too many white-collar
g.
stresses
8.
financial and mental
h.
and lost pay
9.
They nearly ruined
i.
workers feel helpless
j.
in capital letters
10. widespread uncertainty regarding netiquette
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Notes
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Topic 5
Inflation
2011

Topic 5: Inflation
1. Define inflation and explain the difference between anticipated and unanticipated
inflation.
For comparison of things, use language

such as:
Whereas;
whilst;
on the one hand... on the other hand;
however;
by contrast;
on the contrary;
conversely;
instead;
2. What is meant by the terms hyperinflation, deflation and stagflation?

Deflation
Hyperinflation
Stagflation
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3. Describe how inflation rate is measured.
4. Explain the three reasons why potential GDP can decline if anticipated inflation is high.
5. Calculate real interest, if inflation is running at 10% p/a and nominal interest are 15%.
6. (a) Calculate real interest, if inflation is running at 5% p/a and nominal interest are 7%.
(b) What is the level of nominal interest, if real interest rates are 3% and inflation is 5%.
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7. Who loses from inflation and who wins from inflation?

Redistribution of Income
(a) Is inflation always a problem?
(b) Explain the problems associated with underestimating the inflation rate.
Underestimating the inflation rate leads to:
8. Explain the problems associated with overestimating the inflation rate.

Overestimating the inflation rate leads to:
9. Explain Demand-pull Inflation and draw a diagram to illustrate what happens to prices
and output.
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11. Explain Cost-Push Inflation and draw a diagram to illustrate what happens to prices and
output?
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Multiple Choice Questions Topic 5: Inflation

Question 1
Demand-Pull Inflation is associated with:
a) Rising output and falling prices
b) Rising prices and rising output
c) Left shift in the demand curve
d) Rising prices and declining output
Question 2
Cost-Push inflation involves:
a) A shift to the left in the aggregate supply curve
b) A shift to the right in the aggregate supply curve
c) A shift to the right in the aggregate demand curve
d) Both a shift to the right in the aggregate supply curve and a shift to the right in the
aggregate demand curve
Question 3
Which of the following could result in cost-push inflation?
a) A decrease in wage rates
b) An increase in raw material and oil prices
c) A reduction in transport costs
Question 4
The real interest rate is:
a) The nominal interest rate plus the rate of inflation
b) The nominal interest rate minus the rate of inflation
c) The rate of inflation minus the nominal interest rate
d) Not related to the nominal rate in any way at all
Question 5
Calculate real interest, if inflation is running at 10% p/a and nominal interest are 15%?
a) Real interest is 15%
b) Real interest is 105%
c) Real interest is 5%
d) Real interest is 25%
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Question 6
Inflation is:
a) A process of rising prices
b) A process of falling prices
c) Both a rise and fall in prices
d) Constant
Question 7
Which of the following is worse?
a) Anticipated inflation
b) Unanticipated inflation
c) No inflation
d) Inflation
Question 8
Underestimating the inflation rate leads to:
a) More real incomes for workers:
b) Employers lay off workers
c) Unemployment rate increases
d) Less real incomes for workers
Question 9
Hyperinflation is:
a) The extremely rapid falling in the general price level
b) The extremely rapid increase in unemployment
c) An extremely rapid rise in the general price level
d) Anticipated inflation
Question 10
Overestimating the inflation rate leads to:
a) More real incomes for workers
b) Less real income for workers
c) Employees begin to quit
d) Firms incur labour turnover costs
Question 11
Deflation is a process of:
a) Rising prices- positive inflation
b) Inflation at high levels
c) Falling prices a negative inflation
d) Real GDP falls and inflation rises
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Question 12
Which of the following statement is true?
a) Deflation causes real GDP to rise
b) Deflation is worse than inflation, because monetary policy becomes ineffective
c) Deflation is worse than inflation, prices will reach higher levels
d) Deflation and inflation are the same
Cartoon Case Study: Inflation
1. Explain the event or issue that the cartoon is referring to.
..
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2. Explain the economic point (s) made in the cartoon.
............
.................
Case Study: Inflation moderating

Federal Treasurer Wayne Swan says the latest consumer price index figures show inflation
is continuing to moderate. Australia's CPI rose 0.7 per cent in the September quarter, for an
annual rate of 2.8 per cent, the Australian Bureau of Statistics (ABS) said on Wednesday.
The figures were less than economists had predicted. "Today's inflation figures show that
CPI inflation and inflation in Australia have continued to moderate," Mr Swan told reporters
in Canberra. Mr Swan said inflation - at 2.8 per cent - had returned to around the middle of
the Reserve Bank's preferred target band. "This is the lowest inflation rate in five years," he
said. Mr Swan said there were challenges ahead for the economy which was why the
government was moving to build capacity by investing in infrastructure and cutting business
taxes. The rising Australian dollar was helping to moderate price pressures which would be
more fully reflected in subsequent inflation data. "The higher dollar does make it harder for
some businesses in trade-exposed sectors," Mr Swan said. "It also does mean lower prices
for consumers and cheaper capital equipment for businesses."
The Age October 27, 2010
1. Define inflation.
2. Which groups in the economy would be hurt by rising price levels?
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3. Which groups in the economy gain from the rising prices? Explain how.
4. How will investment in capacity & cutting taxes lower inflation?
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Language Focus: Inflation

The official inflation rate in Zimbabwe has __________ to 2.2 million
percent. This is 13 times __________ than the last official figure, which
the government released in February. Unofficial figures put the rate as
worth
__________ as 15 million percent, and rising. To cope with the large
high
__________ of zeros, the central bank recently issued a 500-million
pace
Zimbabwe dollar bank note, which was __________ US$2. People living
in Zimbabwe now have to be very good at __________ arithmetic to do
escalated
shelves
simple things like buy a loaf of bread, that is if they can find any bread on
mental
Zimbabwes empty store __________. The cost of a loaf of bread is now
higher
at one-third of a teacher's monthly salary. Zimbabweans are suffering with
numbers
80 per cent unemployment and salaries that cannot keep up with the
__________ of daily price rises.
Zimbabwe used to be one of the __________ countries in Africa. It was

called the breadbasket of Africa because it grew __________ food for
itself and for export to other countries. Today, the countrys farming has
__________ and people cannot find enough food in the shops.
International economists __________ the policies of President Robert
Mugabe, that have created internal chaos and __________ in the country.
Mugabe says he has had little to do with the wrecked economy. He
blames all of Zimbabwes economic __________ on international trade
sanctions. There is a serious cash __________ because the government
cannot print bank notes fast enough to __________ up with spiralling
blame
keep
enough
shortage
poverty
richest
woes
collapsed
prices. People can only take out 100 million Zimbabwe dollars a day from
their banks. Thats less than one US dollar.
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Topic 6
Keynesian Model
Aggregate Expenditure &
Real GDP
2011

Topic 6: Keynesian Model: Aggregate Expenditure and Real GDP

1. Draw a diagram to explain what is meant by consumption function. Write the explanation
below.
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Define Investment and distinguish between autonomous and induced investment.
Investment
Autonomous investment
Induced Investment
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Using a diagram, explain and demonstrate equilibrium and disequilibrium in a closed

economy.
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2. Explain the meanings of marginal propensity to consume (MPC) and marginal propensity
to save (MPS).
Marginal Propensity to Consume (MPC)
Marginal Propensity to Save (MPS)
3. Explain why the multiplier is always greater than 1?
4. How is a change in GDP calculated?
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.
5. Calculate MPC and MPS?
Year
Disposable
Income
Consumption
Saving
2008
1000
1000
2009
1250
1200
50
Marginal Propensity to Consume & Save
in consumption
in saving
MPC =
MPS =
in income
in income
50
200
MPC =
MPS =
= 0.80
= 0.20
250
250
Marginal Propensity to Consume (MPC)
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Marginal Propensity to Save (MPS)
6. Calculate the change in GDP, Assuming that:

MPC = 0.8
If Government Expenditure increases by 100 million

MPC = 0.8

MPC = 0.75
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Notes
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Multiple Choice Questions Topic 6: Keynesian Model: Aggregate

Expenditure and Real GDP
Questions 1 to 3 refer to the table below.
DISPOSABLE INCOME
SAVING ($)
(Y) ($)
0
-100
500
1000
100
1500
200
2000
300
Question 1
Calculate the marginal propensity to consume, when Income rises from 1,000 to 1,500:
a) 0.1
b) 0.2
c) 0.6
d) 0.8
Question 2
Consumption equals disposable income when disposable income equals:
a) $500
b) $1000
c) $1500
d) $2000
Question 3
At the $1000 level of disposable income, the average propensity to save is:
a) 0.1
b) 0.2
c) 0.6
d) 0.8
Question 4
The MPC plus MPS are:
a) Equal to one
b) Greater than one
c) Less than one
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Question 5
The multiplier process occurs because a persons:
a) Saving becomes another persons investment
b) Saving becomes another persons income
c) Expenditure becomes another persons savings
d) Expenditure becomes another persons income
Question 6
If the marginal propensity to save is 0.2 in a private closed economy, a $20 billion rise in
investment spending will increase:
a) GDP by $20 billion
b) GDP by $40 billion
c) GDP by $60 billion
d) GDP by $100 billion
Question 7
Equilibrium occurs when:
a) AE = Real GDP
b) AE Real GDP
c) AE * Real GDP
Question 8
Investment is defined as:
a) The purchase of shares in a company
b) Final purchases of machinery, equipment and tools, All building and construction and
Changes in stocks (or inventories)
c) Final purchases of machinery, equipment and tools, but not building and construction
and Changes in stocks (or inventories)
d) Changes in stocks (or inventories)
Question 9
Autonomous Investment is defined as:
a) The level of investment induced by the current level of income
b) The desired level of investment based upon long term profit expectations
c) The desired level of investment based upon short term profit expectations
d) The level of investment induced by the current level of income and short term profit
expectations
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Question 10
The multiplier is defined as:
a) The chain-reaction that results from changes in the level of expenditure
b) The chain-reaction that results from changes in consumption patterns
c) The chain-reaction that results from changes in expectations
d) Total consumption from changes in the level of expenditure
Use the diagram to Answer questions 11 to 15
AE
450
AE
b
AE
a
c
Y1Y1
Ye
Y2
Y (GDP)
Question 11
Point (a) represents
a) Unintended fall in inventories
b) Equilibrium
c) Unintended rise in inventories
d) The economy is below full employment
Question 12
Point (b) represents
a) Unintended rise in inventories
b) Unintended fall in inventories
c) Equilibrium
Question 13
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Point (c) represents

a) Unintended rise in inventories
b) Unintended fall in inventories
c) Equilibrium
Question 14
Aggregate expenditure is equal to:
a) Consumptions+ Investment + Government expenditure
b) Consumption + taxes + Investment + Savings
c) Total consumption Taxes
d) Consumptions- Investment + Government expenditure
Question 15
Unintended rise in inventory is shown by point:
a) (a)
b) (b)
c) (c)
d) (45O)
Question 16
The multiplier is always:
a) Equal to 1
b) Equal to 0.
c) Greater than 1
d) Less than 1
Question 17
NX is equal:
a) Exports Imports
b) Exports + Imports
c) Net Exports
d) Net exports + Net Imports
Question 18
Change in GDP is equal to:
a) Multiplier * C or I or G
b) Multiplier / C or I or G
c) C or / Multiplier
d) Multiplier + C or I
Question 19
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AE in an open economy is equal:

e) C + I + G + NX
f) C + I + G
g) C + I + G NX
h) C + I + G * NX
Question 20
Calculate the change in GDP, Assuming that: MPC = 0.8
If Government Expenditure increases by 250 millions
a) 1000
b) 500
c) 1250
d) 750
Case Study: Australia's costly drought

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Australia's former Prime Minister, John Howard, had announced that irrigation supply to the
Murray-Darling basin (eastern Australia's main water resource) will be cut off if the droughtafflicted region does not receive heavy rainfall over the next two months.
Given that the region is Australia's most important agricultural area, accounting for around
two-thirds of farm output by value, such a decision would not only add to the woes of
Australia's extremely weak agricultural sector. It could also have wider economic
repercussions by boosting food-price inflation and hurting agricultural exports.
Economic implications
If it occurs, the suspension of irrigation in the Murray-Darling basin would have a devastating
effect on Australian agriculture, creating a ripple effect throughout the economy.
The failure of crops grown in the regionwhich accounts for around 85% of Australia's
irrigated landcould cause the price of food products ranging from dairy to fruit and
vegetables to rise sharply. (The price of meat, however, would be likely to fall as lack of feed
and water forced farmers to slaughter livestock for early sale.)
In turn, there would be some danger that higher food prices would push up overall inflation,
which is already uncomfortably high (inflation climbed to 3.5% in 2006). Higher inflation
could then prompt the central bank to raise interest rates.
A sharp drop in agricultural output, which accounts for 3.6% of Australian GDP, would
inevitably slow the growth of the economy. In March 2007, before the announcement that
irrigation supplies may be cut off, the Australian Bureau of Statistics was already estimating
that drought conditions would result in a 23% drop in agricultural output in the 2006/07 fiscal
year, which in turn would cut 0.6 percentage points from GDP growth. This estimate would
be raised considerably if irrigation were suspended and further widespread crop failures
occurred as a result.
Australia's trade deficit would also widen, given that agriculture accounts for more than
20% of merchandise exports. Although agricultural exports would fall less sharply than
output, as sales are made from built-up stocks, there would still be some impact.
Other factors are also likely to exacerbate the external trade position. While the farm
sector is weakening, buoyant consumer spending, strong business investment and a
robust housing market continue to fuel non-farm imports. Meanwhile, the strength of the
Australian dollar is further weakening exports and bolstering imports. The seriousness of
the economic and political fallout from the drought crisis will ultimately depend on the
weather.
Source: The Economist Intelligence Unit Views Wire Apr 24th 2007
Define the underlined terms and outline how these terms will be affected by the drought
and the proposed solution.
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Cartoon Case study
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3. What is your view about the issue raised in the cartoon? Explain your answer.
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Notes
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Topic 7A
International Trade
Topic 7B
Foreign Exchange Rate
2011

Questions for Topic7A & 7B
Topic 7A: International Trade

1. Define absolute advantage and comparative advantage, and explain how each country
can gain from trade.
Absolute Advantage: Specialisation as the basis for trade
..........................
Comparative advantage: Specialisation as the basis for trade
............................
2. Outline the arguments in favour of restricting trade.
.........................
..........................
3. Comment on the following statement: we should protect our industries from being
undercut by imports produced using cheap labour.
...........................
...................
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4. List and explain the arguments against trade protection.
..
5. Explain how two countries can be better off as a result of trade.
6. Explain why it is important for a nation to export.

Benefits of exporting goods and services for nations:
7. Explain why it is important for a nation to import.

Benefits of importing goods and services for nations:
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8. List the methods of protection that are employed by government in order to restrict trade.
9. Explain the difference between free trade areas, customs union and common markets.
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Multiple Choice Topic 7A: International Trade
Question 1
A country is said to have Absolute advantage when?
a) the production of a good if it can produce it at a lower opportunity cost
b) the production of a good if it can produce it with fewer resources than the other
country.
c) the production of a good if it can produce it at a greater opportunity cost
d) the production of a good if it can produce it with more resources than the other
country.
Question 2
A country is said to have comparative advantage when?
a) the production of a good if it can produce it at a greater opportunity cost
b) the production of a good if it can produce it with more resources than the other
country.
c) the production of a good if it can produce it at a lower opportunity cost
d) the production of a good if it can produce it with fewer resources than the other
country.
Answer question 3 using the following table
Absolute Advantage
Wheat (bushels/man-hour)
Coth (yards/man-hour
AUS
12
8
US
2
10
Question 3
a) Australia is less efficient than or has the an absolute advantage over US in the
production of wheat
b) Australia is more efficient than or has the absolute advantage over US in the
production of wheat
c) US is more efficient than or has an absolute advantage over production of wheat
d) Australia is more efficient than or can produce more coth
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Answer question 4 using the following table
Comparative Advantage
Wheat (bushels/man-hour)
Coth (yards/man-hour
AUS
12
8
US
2
4
Question 4
a) Australia has an absolute advantage in producing both goods, (wheat and cloth)
b) US has an absolute advantage in producing both goods, (wheat and cloth)
c) Australia and the US have absolute advantage in producing both goods, (wheat and
cloth)
d) US has an absolute advantage in producing (wheat)
Question 5
The infant industry argument is based on the assumption that?
a) An infant industry cannot become efficient
b) Would gain too much market share
c) An infant industry has the potential to become efficient
d) It will always be an infant industry
Question 6
Which of the following is NOT an argument that supports protection?
a) Infant industry argument
b) To prevent dumping and increase supply
c) To prevent the establishment of a foreign-based monopoly
d) To reduce the influence of a trade on consumers tastes
Question 7
A tariff is:
a) A tax that is imposed by the exporting country when a good crosses an international
boundary. A tariff is a price-based constraint
b) A tax that is imposed by the importing country when a good crosses an international
boundary. A tariff is a quantity constraint
c) A tax that is imposed by the importing country when they export goods overseas
d) A tax that is imposed by the importing country when a good crosses an international
boundary. A tariff is a price-based constraint
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Question 8
A subsidy is:
a) A cost-reducing privilege offered by the government to domestic firms to stimulate
their competitiveness so that they may be more successful against imports
b) A tariff privilege offered by the government to domestic firms to stimulate their
competitiveness so that they may be more successful against imports
c) A quota imposed by the government to domestic firms to stimulate their
competitiveness so that they may be more successful against imports
d) A cost-reducing privilege offered by the government to domestic firms to stimulate
their competitiveness so that they can charge higher prices
Question 9
A Quota is considered to be?
a) Non-tariff barriers
b) Tariff barriers
c) Both non-tariff and tariff barrier
d) Cartel
Question 10
The European Union is an example of?
a) Customs Union
b) Common Market
c) No trade Zone
d) Trade Zone
Question 11
An embargo is
a) The particular type of quota that sets the limit at zero imports
b) The particular type of quota that sets the limit at 100 imports
c) The particular type tariff
d) The particular type subsidy
Question 12
Protection is said to:
a) Allow firms to remain inefficient
b) Motivate firms to become efficient
c) Essential to achieve efficiency
d) Benefit consumers
Question 13
Nations gain the most by:
a) Only exporting
b) Only importing
c) Importing and exporting
d) Having high trade barriers
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Question 14
Free trade areas:
a) Is where member countries have tariffs and quotas between themselves,
b) Is where member countries have tariffs and quotas between themselves, the same
as non-member countries
c) Is where member countries more tariffs and quotas between themselves, but retain
whatever restrictions each member chooses with non-member countries
d) Is where member countries remove tariffs and quotas between themselves, but retain
whatever restrictions each member chooses with non-member countries
Question 15
Which of the following is NOT a characteristic of a common market?
a) Common systems of laws and regulations governing production, employment and
trade
b) Common system of taxation
c) Barriers of labour, capital, materials and goods, and service between countries
members
d) Fixed exchange rate between members countries currencies
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Problem solving activity

1. Suppose Australia were to increase the tariff on cars imported from Germany and other
foreign countries. What would be the effects of the tariff-rate increase? Complete the
table.
Effect on
The price of cars in Australia
Effect (increase or decrease)
The total numbers of cars sold in Australia in

a year
The number of cars produced by and
employment in the German car making
industry.
Production and employment in the Australian
car industry
German income obtained by selling cars in

Australia
The German demand for goods produced in

Australia
The production of and employment on those
US industries that now export goods to
Germany
The standards of living in Australia and

Germany
The allocation of resources in the American

economy
The allocation of resources in the world

economy
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Case study: Free trade pact with India could lift GDP by $45bn
A FREE trade agreement between Australia and India could increase Australia's GDP by
$45 billion in the next 20 years, a feasibility study by the two countries has found. The twoyear feasibility study said a trade agreement between the two countries would lead to a
substantial increase in the trade of goods and create potential for more trade in services and
investment. Modelling done for the study by the Centre for International Economics showed
an FTA could result in a net increase to Australia's GDP of up to $45.5 billion and India's
GDP by up to $48.3 billion over 20 years. Government consultations with Australian
businesses also revealed broad support for a trade pact with India. India is already
Australia's fastest-growing large trading partner and its fourth-biggest export market. Twoway trade grew by 55 per cent in 2008-9 to nearly $22 billion. In the past four years two-way
trade has averaged 25 per cent growth.
The Age May 5, 2010
Question 1
What is a free trade agreement?
Question 2
How is a free trade agreement different from the WTO or the EU?
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Question 3
How could a free trade agreement increase GDP?
Cartoon case study
Explain what this cartoon is trying to say about free trade. Do you agree or disagree?
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Topic 7B: Foreign Exchange Rate

1. Explain what is meant by the exchange rate?
2. Using a diagram explain the concept of the law of demand in relation to the exchange
rate?
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3. List the factors that determine the demand in the foreign exchange market.
Demand in the Foreign Exchange Market
4. Which factor will cause a movement along the demand curve?
5. List the factors that will cause the demand curve to shift to the left or right.
6. Explain what would happen to the level of Australian exports, when the A$ depreciates.
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7. Explain what would happen to tourism in Australia, when the A$ depreciates?
8. If the levels of interest rates in Australia decrease relative to other countries, will it cause
the appreciation or depreciation of the Australian dollar?
A decrease in interest rates
9. Using a diagram explain the concept of the Law of Supply in relation to the exchange
rate?
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The Law of Supply of Foreign Exchange
10. List the factors that will cause a movement along the Supply curve for Australian
dollar and the factors that will cause a shift.
Will cause a movement along the supply curve:
Will cause a shift of the supply curve:
11. Using a diagram explain equilibrium in the foreign exchange market.
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12. Who gains and who loses form a depreciation of the Australian dollar?
Winners:
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Losers
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Multiple Choice Questions Topic 7B: Foreign Exchange Rate

Question1
The Law of Demand for Foreign Exchange means that:
a) Other things remaining the same, the lower the exchange rate, the smaller is the
quantity of Australian dollars demanded in the foreign exchange market
b) Other things remaining the same, the higher the exchange rate, the greater is the
c) Other things remaining the same, the higher the exchange rate, the smaller is the
d) Taking into account other things, the higher the exchange rate, the smaller is the
Question 2
A shift in the demand curve will NOT be caused by:
a)
b)
c)
d)
The exchange rate

World demand for Australian exports
Interest rates in Australia and other countries
The expected future exchange rate
Question 3
A factor that usually causes a decrease in demand for exports is:
a)
b)
c)
d)
An increase in inflation
An appreciation of the Australian dollar
A world recession
An increase in energy costs
Question 4
A movement along the demand curve will be due to:
a)
b)
c)
d)
The exchange rate

Question 5
An increase in Interest rates in Australia relative to other countries will:
a)
b)
c)
d)
A movement along the demand curve

A movement along and shift of the demand curve
Cause a shift of the demand curve to the right
Cause a shift of the demand curve to the left
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Question 6
An appreciation of the Australian dollar against the Chinese Yuan will:
a)
b)
c)
d)
Make Australian products more expensive

Make Australian products cheaper
Have not impact on trade
Chinese products will be more expensive for Australians
Question 7
An increase in demand for Australian dollars will:
a)
b)
c)
d)
A movement along the demand curve

A movement along and shift of the demand curve
Cause a shift of the demand curve to the right
Cause a shift of the demand curve to the left
Question 8
An increase in Interest rates in Australia relative to other countries will:
a)
b)
c)
d)
Increase capital inflow

Decrease capital inflow
Will have no impact
Balance capital inflow with capital outflow
Question 9
When the Australian dollar depreciates, the winners will be:
a)
b)
c)
d)
Tourist coming to Australia

Australians going overseas
Australian importers
Speculators that were hoping to gain from the sale of Australian currency
Question 10
When the Australian dollar depreciates, the winners will be:
a) Australian importers, because of the depreciation of
become cheaper
b) Australian exporters, because of the depreciation of
become cheaper, therefore Australia will export less
c) Australian exporters, because of the depreciation of
become cheaper, therefore Australia will export more
d) Australian importers, because of the depreciation of
more expensive
the Australian dollar imports

the Australian dollar exports
the Australian dollar exports
the Australian dollar imports
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Question 11
Speculators will benefit from the:
a)
b)
c)
d)
Appreciation of the Australian dollar

Depreciation of the Australian dollar
A decrease in interest rates
Inflation
Question 12
The Law of Supply of Foreign Exchange means that:
a) Other things remaining the same, the higher the exchange rate, the smaller is the
quantity of dollars supplied in the foreign exchange market
b) Other things changing, the higher the exchange rate, the greater is the quantity of
dollars supplied in the foreign exchange market
c) Other things remaining the same, the higher the exchange rate, the greater is the
d) Other things remaining the same, the lower the exchange rate, the greater is the
Question 13
Demand in the Foreign Exchange Market is NOT determined by:
a)
b)
c)
d)
The exchange rate

World demand for imports
Question 14
Supply in the Foreign Exchange Market is NOT determined by:
a)
b)
c)
d)
The exchange rate

Question 15
When the Australian Dollar depreciates:
a) Tourism will increase, as it is cheaper for foreigners to come to Australia for a holiday
b) Tourism will decrease, as it is dearer for foreigners to come to Australia for a holiday
c) Tourism will decrease, as it is cheaper for foreigners to come to Australia for a
holiday
d) Tourism will remain the same, as the exchange rate has no impact
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Case study: Aussie exchange rates best for decades

Europe just got cheaper. If low airfares haven't tempted you to book a ticket to Europe, then
the record purchasing power of the Australian dollar just might. The Australian dollar this
week was toppling records that have been held for decades. And analysts predict the
strength of the Australian dollar to continue."Clearly it's one of the best times to be
travelling," Australia's economic and trade links with a strengthening Asia had played a large
part in the continued appreciation of the local currency. The strength of the Australian dollar
has also been assisted by the nation's comparatively high interest rates, while recent
concerns surrounding sovereign risk in Greece had undermined the euro. However
Australia's large need to fund itself from international capital markets meant the local
currency could fall rapidly if funding sources dried up. In the travel industry, Australia's
steady economic recovery contrasts greatly with a slow recovery in Europe and the USA.
Airfares had dropped in line with weaker demand in the wake of the financial crisis, Tourists
who want to lock in a high exchange rate before setting off overseas can now purchase
travel cards and load them up with selected currencies. By doing this you're locking in an
exchange rate. You're buying your money before you leave and you know exactly how
much of that currency you have to spend, so you won't be subject to exchange rate
fluctuations.
Source: The Age May 5, 2010
1. Explain why visiting Europe is going to be popular.
2. Why has the Australian dollar been rising?
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3. Why might the $A fall if funding sources for the Australian capital market dry up?
4. Why is locking in a high exchange rate before setting off overseas a good thing?
5. What problem could arise if you do this?
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Case study: Inflation eases rate-rise fears
Todays inflation figures show that CPI inflation in Australia has continued to moderate,''
Treasurer Mr Wayne Swan told reporters in Canberra. Mr Swan singled out the rising dollar
- which gained about 13 per cent in the September quarter against the US dollar - as
helping to keep prices in check. The dollar's effect is likely to show up in subsequent
quarters, he said.'' The higher dollar does make it harder for some businesses in tradeexposed sectors, Mr Swan said. ''It also does mean lower prices for consumers and
cheaper capital equipment for businesses.
Source: The Age October 27 2010
1. Explain how the rising Australian dollar has affected the inflation rate.
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2. Explain the connection between the inflation rate and interest rates.
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Cartoon case study
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Topic 8
Money
&
Monetary Policy
2011

Topic 8: Money and Monetary Policy

1. List the objectives of monetary policy.
2. Complete the following Monetary Policy Terminology table:
RBA
RITS
ESA
CASH RATE
OPEN
MARKET
OPERATIONS
(OMO)
3. Explain the two reasons for an Inflation target?
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4.
Using a diagram, define and explain what is meant by a recessionary gap.
Recessionary Gap
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5. Using a diagram, define and explain what is meant by an inflationary gap?
Inflationary Gap
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6. Explain how the reserve bank can use monetary policy to prevent a recessionary gap. In
your answer, clearly highlight how changes in the interest rate will affect aggregate
expenditure.
Easy Monetary Policy
Aim:
How:
Effect:
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7. Explain how the reserve bank can use monetary policy to prevent an inflationary gap. In
your answer, clearly highlight how changes in the interest rate will affect aggregate
expenditure.
Tight Monetary Policy

Aim:
How:
Effect:
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8. What are the strengths and the weaknesses of monetary policy in Australia?
Cyclical Asymmetry:
Cost-push inflation:
Sensitivity of investment:
Time Lags in the Adjustment Process:
Speed and flexibility:
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Complete the following table: Monetary Policy Summary
Monetary
Easy Monetary Policy
Tight Monetary Policy
Policy
Aim
When?
How?
Effect?
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Multiple Choice Questions Topic 8: Money and Monetary Policy

Question 1
Open market operations refer to the:
a) Practice where countries trade with one another
b) Mergers of multinational companies
c) Ability of firms to take risk and increase profits
d) Buying and selling of government bonds by the Reserve Bank of Australia
Question 2
Tight monetary policy is generally:
a) Just as effective as easy monetary policy
b) More effective than easy monetary policy
c) Less effective than easy monetary policy
d) Less effective in the short term than easy monetary policy
Question 3
An increase in the cash rate demonstrates the RBA is conducting:
a) Tight monetary policy, to reduce the recessionary gap
b) Easy monetary, to reduce the recessionary gap
c) Tight monetary policy, to reduce the inflationary gap
d) Easy monetary, to reduce the inflationary gap
Question 4
Which of the following is an instrument of monetary policy?
a) The cash rate
b) The price of credit
c) The price of the Australian dollar
d) The level of private investment
Question 5
Which of the following conditions would force the reserve Bank to increase
interest rates and restrict the availability of credit?
a) Rising inflation and slowing economic growth
b) Rising inflation and falling unemployment
c) Falling inflation and rising unemployment
d) Falling inflation and rising employment
Question 6
The effects of higher interest rates include:
a) More borrowing and more investment
b) Less borrowing and less investment
c) More consumer spending and greater confidence
d) More spending on expensive imported goods
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Question 7
Higher interest rates can lead to:
a) Increase in investment and consumption
b) Increased investment decrease in investments
c) Decrease in investment and consumption.
d) Increased employment growth
Question 8
The implementation of an easy monetary policy results in:
a) Increase in AE, increase of GDP and reduction in the recessionary gap
b) Decrease in AE, increase of GDP and reduction in the recessionary gap
c) Increase in AE, decrease of GDP and reduction in the inflationary gap
d) Increase in AE, increase of GDP and reduction in the inflationary gap
Question 9
The use of an easy monetary policy to reduce the rate of unemployment will
most likely:
a) Increase the level of investment
b) Increase the government budget deficit
c) Increase the rate of interest
d) Decrease the rate of inflation
Question 10
Open Market Operations are:
a) The purchase of government assets
b) Is the purchase or sale of Commonwealth government securities by the RBA in the
open market
c) Only the sale of Commonwealth government securities by the RBA in the open
market
d) Only the purchase of commonwealth government securities by the RBA in the open
market
Question 11
The cash rate is:
a) The interbank debt
b) The interest rate charged on overnight loans
c) The balance on the overnight loans
d) The cash banks hold
Question 12
The Exchange Settlement Account is:
a) The account held by commercial banks with the RBA.
b) Loans settlement accounts
c) customers settlement accounts
d) The balance on the overnight loans
e) The accounts held by foreign banks
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Question 13
A Recessionary Gap is:
a) The difference between long-run real GDP and actual GDP, when actual GDP equals
its long run level
b) The equal to the long-run real GDP and actual GDP
c) The difference between long-run real GDP and actual GDP, when actual GDP is
above its long run level
d) The difference between long-run real GDP and actual GDP, when actual GDP is
below its long run level
Question 14
Which of the following statements does not represent a recessionary gap?
a) Economys production not at potential GDP
b) Real GDP > potential GDP
c) Cyclical unemployment exists
d) Unemployment Rate > Natural Rate of Unemployment
Question 15
When the RBA implements easy monetary policy, the:
a) RBA will buy bonds rise ESA Cash rate decrease increase credit availability
decrease interest rates
b) RBA will sell bonds rise ESA Cash rate decrease decrease credit availability
c) RBA will buy bonds rise ESA Cash rate increase decrease Credit availability
d) RBA will sell bonds ESA fall Cash rate increase decrease in credit
availability increase interest rates
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Case Study: Interest rate hikes put brakes on economic growth

The pace of growth in the Australian economy slowed in the first quarter on the back of
higher interest rates but it was slightly faster than market expectations. The economy grew
at 0.5 per cent quarter-on-quarter Economists predicted growth of 0.4 per cent. For the year
to March 31, the economy grew at 2.7 per cent, beating analysts estimates of a rise 2.4 per
cent. The domestic economy has benefited from Chinas insatiable demand for minerals to
feed its booming economy. Coal and iron ore are Australias two biggest exports. The
Reserve Bank of Australia began lifting official interest rates in October 2009, from
emergency levels reached during the depths of the global financial crisis. Interest rates now
stand at 4.5 per cent after increases in April and May. Yesterday, the RBA kept rates steady
but it warned the setting for monetary policy was appropriate only for the near term,
suggesting a further rate rise in August after quarterly inflation data is released. RBA
governor Glenn Stevens said that the high level of Australias terms of trade - the ratio of
export prices to import prices - would add to incomes and demand.
Source: The Australian June 2 2010.
1. Explain how the raising of interest rates will affect economic growth.
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2. Why might interest rates rise if the inflation rate is higher?

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3. Explain the connection between the terms of trade and interest rates.
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Cartoon case study 8.1
1. Explain the issue that the cartoon is referring to.
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Cartoon Case Study 8.2
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.
3. What is your view about the issue raised in the cartoon? Explain your answer.
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Topic 9A
Fiscal Policy
Topic 9B
Microeconomic Reform
2011

Topic 9A: Fiscal Policy

1. List the main items in the budget.
Sources of Revenues
Categories of expenses:
The Commonwealth Budget balance = Revenue Expenditures
Budget Surplus
Budget Deficit:
Balanced Budget
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2. What is fiscal policy? Discuss the difference between automatic and discretionary fiscal
policy?
Fiscal Policy
Discretionary fiscal policy
Automatic stabilisers or (non-discretionary) fiscal policy
As the economy expands GDP (increases)
In a recession GDP (decreases)
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Can we rely on the automatic elements of fiscal policy to regulate the economy
satisfactorily?
Built-in Stabilisers
3. Distinguish between contractionary and expansionary fiscal policy.
Fiscal Policy
Contractionary FP
Expansionary FP
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4. Explain, with the use of diagrams, how fiscal policy can be used to reduce a
recessionary gap?
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5. Explain, with the use of diagrams, how fiscal policy can be used to reduce an inflationary
gap.
Contractionary Fiscal Policy

Aim
When
Inflationary Gap
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How
....................
Effect
....................
6. During the Great Depression, many governments reduced their spending in order to
ensure their budgets stayed balanced. The spending reduction arose because
government tax revenue was declining with growing unemployment. Was the focus on
balancing the budget a wise macroeconomic decision of government at that time?
Fiscal Policy
During the great depression:
Government Response:
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Was it a wise decision?
Expansionary fiscal policy would have been a more effective policy, because:
7. Complete the following Fiscal Policy Summary Table:

Fiscal
Policy
Expansionary Fiscal Policy
Contractionary Fiscal Policy
Aim
When?
How
Effect
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Multiple Choice Questions Topic 9A: Fiscal Policy

Question 1
Government expenditure is
a) A leakage and autonomous
b) An injection and autonomous
c) A stock and dependent on GDP
d) Used only for consumption
Question 2
Fiscal policy refers to the:
a) Manipulation of government spending and taxes for the purpose of influencing
domestic output, employment, and the price level
b) Manipulation of government spending and taxes for the purpose of achieving greater
equality in the distribution of income
c) Altering of the interest rate to change aggregate spending
d) Fact that equal increases in government spending and taxation will be contractionary
Question 3
Automatic stabilisers:
a) Can correct an inflationary gap but not a recessionary gap
b) Can correct a recessionary gap but not an inflationary gap
c) Will not correct either the recessionary or inflationary gap
d) Can correct both inflationary and recessionary gap
Question 4
An increase in the size of a budget deficit would be evidence that government:
a) Expanding the economy
b) Contracting the economy
c) Raising taxes
d) Losing control of the economy
Question 5
The government can increase demand in the economy by:
a) Budgeting for a surplus
b) Increasing government expenditure
c) Provide foreign aid
d) Increase both direct and indirect taxes
Question 6
A budget surplus occurs when:
a) Occurs when Revenue exceeds Expenditures
b) Occurs when Expenditures exceed Revenue
c) Occurs when Expenditure equals Revenue
d) Taxes increase and revenue increases
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Question 7
Fiscal policy is:
a) The governments attempt to change interest rates
b) The governments attempt to vary purchases of goods and services and its taxes to
smooth the fluctuations in aggregate expenditure
c) The governments attempt to increase competition to encourage efficiency
d) The government attempt to vary purchases of goods and services and its interest
rates to influence aggregate expenditure
Question 8
Build-in stabilizers are:
a) Automatic tax and spending changes that occur over the course of the business
cycle that tends to reduce the extent of fluctuations in real GDP
b) Additional government spending changes that occur over the course of the business
cycle that tend to reduce the extent of fluctuations in real GDP
c) Automatic tax and spending changes that occur only in periods of inflation
d) Automatic tax and spending changes that occur over the course of the business
cycle stimulate economic activity
Question 9
The deliberate manipulation of taxes and spending by government for the purpose of
altering real GDP and employment, controlling inflation and stimulating economic
growth is considered:
a) Build-in Stabilize.
b) Monetary policy
c) Non-Discretionary Fiscal Policy
d) Discretionary Fiscal Policy
Question 10
The government can decrease demand in the economy by:
a) Budgeting for a surplus
b) Decreasing government expenditure
c) Provide foreign aid
d) Increase both direct and indirect taxes
Question 11
If a budget deficit results and the government borrows from the money market, it will
result in:
a) The government will achieve its full objective
b) It will be able to implement expansionary fiscal policy
c) The crowding out problem can occur and reduce the impact of expansionary FP
d) The crowding out problem can occur and achieve contractionary FP
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Question 12
Crowding out effect means that:
a) Government borrowing increases money demand which in turn decreases interest
rates and when interest rates increase, it will result in the reduction of investments
b) Government borrowing decreases money demand which in turn increases interest
c) Government borrowing increases money demand which in turn increases interest
d) Government borrowing increases money demand which in turn increases interest
rates and when interest rates increase, it will result in the increase in investments
Question 13
Expansionary fiscal policy is implemented when?
a) A recessionary gap exists
b) An inflationary gap exists
c) In periods of high inflation
d) In both situation in recessionary and inflationary periods
Question 14
When in a recession, a contractionary government budget to reduce the current
account deficit will also tend to
a) Increase the rate of unemployment
b) Increase the rate of interest
c) Increase the rate of inflation
d) Increase in capital inflow
Question 15
Contractionary fiscal policy is implemented when?
a) A recessionary gap exists
b) An inflationary gap exists
c) In periods of high inflation
d) In both situation in recessionary and inflationary periods
Question 16
Contractionary fiscal policy is government action to influence aggregate demand and
the level of GDP through
a) Expanding the money supply
b) Encouraging business to expand investment
c) Regulating net exports
d) Decreasing government spending or increasing taxes
Question 17
To tighten fiscal policy the government would:
a) Privatise government assets
b) Raise interest rates
c) Increase the size of the budget deficit
d) Lower government spending
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Question 18
An Increase in government expenditure and reduction in taxes means the government
is conducting:
a) Contractionary fiscal policy
b) Tight monetary policy
c) Expansionary fiscal policy
d) Easy monetary policy
Question 19
The aim of expansionary fiscal policy is to:
a) Slow the economy down and reduce inflation
b) Provide an economic stimulus and return economy to full employment
c) Stimulate the economy and increase tax revenue
d) Provide an economic stimulus and reduce government deficits
Question 20
Expansionary fiscal policy will:
a) Increases aggregate expenditure (AE = C + I + G + NX).
b) Decrease aggregate expenditure (AE = C + I + G + NX).
c) Results in budget surplus if budget was balanced
d) Reduce the inflationary gap
Question 21
Discretionary fiscal policy is seriously hampered by three time lags:
a) Recognition lag (identification), Law-making lag (implementation), Impact lag (impact)
b) Readiness lag, Law-making lag (implementation), Impact lag (impact)
c) Recognition lag (identification), Law-making lag (implementation), Uncertainty lag
d) Recognition lag (identification), Forecasting lag, Impact lag (impact)
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Case study: The federal government's return to a budget surplus in 2012/13 will
require considerable effort and a lot of discipline.
Dr Henry, the secretary of the treasury was asked what his department meant in its advice to
government that returning the budget to surplus was a key but difficult priority. He said it
involved a reduction in the budget deficit of 4.5 per cent of gross domestic product over three
years. "That is quite demanding when revenue is not growing as strongly as revenue was
growing through the period 2003/04 through to 2007/08." "There are always spending
programs before government which are very difficult not to make some upward adjustment
for a variety of reasons." He described the current stance of fiscal policy as "accommodative
but tightening". Dr Henry was asked whether there was a trade-off between fiscal policy and
monetary policy. "In an economy close to full capacity, a tightening of fiscal policy would
mean that there is less work left to be done by monetary policy, and that would mean, other
things being equal, that interest rates would be somewhat lower," Dr Henry replied.
Source: The Australian October 21 2010
1. Explain why returning to a budget surplus might be difficult.

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2. Why might spending programs need upward adjustment?
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Cartoon Case study
A government budget deficit should help an economic recovery when there is a

recession: but how can large budget deficits each year threaten the economy in the
future? Explain.
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Topic 9B: Microeconomic Reform

1. Explain what is meant by Microeconomic Reform.
2. List the three major objectives of microeconomic reform.

The three major objectives of microeconomic reform:
1.
..
3. Explain how tariff reforms leads to efficiency in the market.
.
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4. Explain the expectations of deregulation of the financial system.
5. List the some areas that microeconomic reform has taken place. The first sentence is
given.
Microeconomic reform in Australia has been taking place in a wide range of areas.
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Multiple Choice Questions Topic 9B: Microeconomic Reform

Question 1
Which of the following is an objective of microeconomic reform?
a) To raise the supply potential of the economy
b) To reduce the supply potential of the economy
c) To reduce competition
d) Increase consumer demand
Question 2
The raising of domestic industry efficiency and competitiveness under micro
economic reform will contribute to:
a) an outflow of investment abroad
b) an increase in demand for imports
c) an improvement in the current account deficit
d) a fall in the total money supply
Question 3
Which of the following is not an example of microeconomic reform in Australia?
a) Taxation reform
b) Financial market reform
c) Strengthening of competition policy
d) Electoral reform
Question 4
As part of the microeconomic reform process, the government attempts to
a) Encourage greater competition in the market
b) Maintain greater tariff protection for domestic industries
c) Achieve a more equitable distribution of income
d) Control management and work practices in the private sector
Question 5
Which of the following is not a feature of micro economic policies?
a) Improving resource allocation in the long run
b) Improving productivity levels
c) Increasing international competitiveness
d) Increasing inflation levels
Question 6
Microeconomic policy can best be described as:
a) The structural reform process occurring in the balance of payments
b) The reform activities of government business enterprises
c) Government actions encouraging increased efficiency
d) The government regulation of competition between business enterprises
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Question 7
Microeconomic Reform is
a) The attempt to increase output from given of labour, capital and materials by making
markets works more efficiently.
b) The attempt to increase cost by making markets more efficient
c) The attempt to decrease the output given by labour
d) The attempt to reduce competition
Question 8
Deregulation of the Australian Financial System was aimed at:
a) Achieving allocative, operational and dynamic efficiency
b) Reducing competition
c) Reducing competition to help banks increase profits
d) Reducing international competitiveness
Question 9
Regulation Involves the:
a) Creation of international rules of conduct
b) The removal of rules for the conduct of business
c) Creation of rules for the conduct of business activities under the umbrella of
legislation
d) Creation of tariff barriers
Question 10
Prudential Regulation means the:
a) Deregulation to compel managers of financial institutions to make prudent decisions
so as to prevent institutional failures and to protect depositors
b) Regulation to compel managers of financial institutions to make increase profits of
financial institutions
c) Regulation to compel managers of financial institutions to make prudent decisions so
as to prevent institutional failures and to protect depositors
d) Regulation of trade barriers
Question 11
Microeconomic reform aims to:
a) Raise the supply potential of the economy and thereby, increasing GDP
b) Reduce the supply of the economy and thereby increasing GDP
c) Reduce the domestic supply of the economy
d) Raise the supply potential of the economy and thereby, decreasing GDP
Question 12
Tariff reform aims to:
a) Increase taxes to reduce aggregate expenditure
b) Reduce tariffs to increase competition and force local firms to become more
competitive
c) Increase tariffs to help local producers to remain competitive
d) Reduce tariffs to increase competition and force local produce more
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Question 13
Dynamic Efficiency occurs:
a) When new technologies and innovations are adopted over time
b) When firms reduce costs over time
c) When firms achieve increases in productions and reduce prices
d) When new innovations are exported
Question 14
Productive (technical) efficiency refers to:
a) Productivity or technical efficiency, the situation in which a good or service is
produced using the least amount of resources
b) The situation that occurs when no resources are wasted when no one can be made
better off without making someone else worse off
c) Occurs when new technologies and innovations are adopted over time
d) The situation that occurs only with new technology - when no resources are wasted
when no one can be made better off without making someone else worse off
Question 15
The situation that occurs when no resources are wasted when no one can be made
better off without making someone else worse off, refers to?
a) Dynamic efficiency
b) Information efficiency
c) Allocative efficiency
d) Operational efficiency
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Case Study: Reforms are micro more than macro

Australia has navigated its way through the global financial crisis better than any other
comparable nation. We now face a more insidious threat: complacency. If Australia is to
emerge as a more competitive, resilient and vibrant economy, improving our productivity
performance is absolutely paramount. The productivity reforms of the 1980s and 90s
involved big, bold, sweeping decisions, such as floating the dollar, slashing tariffs and
introducing enterprise bargaining. Today's world is different. With one notable exception, the
government's productivity reform agenda is more incremental, yet it is no less important.
The central elements of this agenda are infrastructure, skills, innovation and deregulation.
The government has committed many billions of dollars to long-term infrastructure
investment. Capacity constraints inhibited Australia's most recent surge in economic growth.
We are also expanding Australia's commitment to education and training. Without productive
workers there will be no productivity improvement. In tandem with these efforts is a renewed
commitment to innovation. In the 2009 budget, the government committed to a reformed
research and development tax credit, now accessible for newer companies not yet making
profits, and a major boost to innovation funding across a number of delivery mechanisms.
The government has introduced important new funding opportunities for elite researchers,
such as fellowships for key postdoctoral research leaders.
The modern world of micro-economic reform is all about detail. Significant reforms have
already been achieved. Simple, short product disclosure statement requirements are in
place for some financial products, with more to come. Medibank Private now pays dividends
and taxes like its main competitors, and is driving serious change in private health insurance.
Excessively bureaucratic processes regarding property purchases by foreigners have been
streamlined. Rules governing pathology businesses are being reformed, to give consumers
more choice and remove restrictions on the number of collection centres a pathology
provider can operate. Australia's wheat export sector has been deregulated. The most farreaching and challenging micro-economic reform process that's under way is of course in
telecommunications. The government's national broadband network project is half of a wider
reform agenda in telecommunications. The other half is regulatory reform. The government
inherited a terrible stalemate in telecommunications: a private company that completely
dominates the sector through its control of monopoly infrastructure; a complex regulatory
regime that encourages gaming and discourages innovation and investment; and broadband
outcomes well behind most comparable nations.
Regulatory reform and infrastructure investment are inextricably connected. The government
is committed to ensuring Australia has world-class infrastructure that is accessible to all
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market participants on equal terms. The hard grind of improving Australia's productivity
performance is at the heart of our economic strategy. There is hardly a sector anywhere in
the Australian economy that is not touched by the government's micro-economic reform
agenda.
Source: The Australian November 5 2009 by Lindsay Tanner Government finance minister
1. Why is microeconomic reform an important policy area for the government?

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2.
List the micro economic reforms which have recently taken place as well as those
reforms undertaken in the 1980s and 1990s.

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4. What current areas of reform is the government trying to achieve?

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Topic 10
Market Failure
&
Government Regulation
2011

Topic 10: Market Failure and Government Regulation

Conversation in English.
STUDENT A QUESTIONS to ask student B.
Why is the world in a financial crisis?
What is happening that makes the situation a crisis?
How badly hit is your country by the crisis?
Are you affected by the global financial crisis?
How much worse do you think things will get?
What is the best way out of a crisis?
STUDENT B: QUESTIONS to ask student A.

Did you like following the news on the global financial crisis?
What does the crisis say about capitalism?
Will the crisis have a knock-on effect for other countries?
Do you think America will lose power because of this crisis?
What questions would you like to ask the worlds economists?
What will happen if the world economy goes into a depression?
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1. Explain what is meant by market failure?
2. Distinguish between public goods and private goods?

Private goods and services:
Divisible:
Exclusion Principle:
Public goods and services
Indivisible:
Not subject to the exclusion principle:
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3. Give an example where an economist will call it a free rider problem.
4. Externalities can be positive or negative: provide two examples of each.

An example of negative externalities can be:
On the other hand, examples of a positive externality can be:
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5. Define marginal private cost, marginal external cost and marginal social cost.
Marginal private cost:
Marginal external cost:
Marginal social cost
6. When do negative externalities occur and how can they be eliminated?
7. Define marginal private benefit, marginal external benefit and marginal social benefit?
a)
Marginal private benefit
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b)
Marginal external benefit
c)
Marginal social benefit
8. When do positive externalities occur and how can they be eliminated?
9. Explain the methods that the government can use to ensure positive externalities are
realised?
Governments can ensure positive externalities are realized by
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Multiple Choice Questions Topic 10: Market Failure and Government

Regulation
Question 1
Goods and services that are produced through the market system are:
a) Private goods and services
b) Public goods and services
c) Foreign goods and services
d) Local goods and services
Question 2
Which of the following goods is not a private goods?
a) Street lighting
b) computers
c) Clothing
d) Food and beverages
Question 3
When people can receive benefits from the consumption of a good or service without
contributing directly to its costs. It leads to:
a) Negative externality
b) Free rider problem
c) Higher prices for everyone else
d) Positive externality
Question 4
Market failure refers to:
a) Too much competition, forcing firms to shutdown
b) The inability of an unregulated market to achieve allocative efficiency in all
circumstances
c) The inability of an unregulated market to achieve exports to other countries
d) The inability to enter other markets to achieve greater profits
Question 5
The production or consumption that provides an external benefit is considered to be:
a) A positive externality
b) A negative externality
c) A commercial transaction
d) A public transaction
Question 6
Marginal Social Cost
a) Benefit the firm receives when an additional unit is produced
b) Cost to the firm of producing an additional unit
c) Cost to society when an additional unit is produced
d) Benefit society receives when an additional unit is produced
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Question 7
Externality is the:
a) Effect of consumption or production
b) Effect of production
c) Effect of consumption
d) Effect of expenditure and production
Question 8
Which of the following can be considered an example of a positive externality:
a) Smoking
b) Education
c) Pollution
d) Toxic waste
Question 9
Marginal Social Cost (MSC) is equal to:
a) MSC = Marginal External Cost
b) MSC = Marginal Cost
c) MSC = MC + Marginal External Cost
d) MSC = Total Marginal Cost
Question 10
Marginal Social Benefit (MSB) is equal to:
a) MSB = MB -Marginal External Benefit
b) MSB = MB + Marginal External Benefit
c) MSB = Marginal Benefit
d) MSB = Total Marginal Benefit
Question 11
Positive externalities occur when:
a) Marginal social benefit < Marginal private benefit
b) Marginal social benefit > Marginal private benefit
c) Marginal social benefit = Marginal private benefit
d) Marginal social benefit + Marginal private benefit
Question 12
Negative externalities occur when:
a) Marginal social cost > Marginal private cost
b) Marginal social cost < Marginal private cost
c) Marginal social cost = Marginal private cost
d) Marginal social cost + Marginal private cost
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Question 13
a)
b)
c)
d)
Positive externalities are realized by taxing consumers

Positive externalities cannot be are realized by subsidizing production
Negative externalities are eliminated by subsidizing production
Positive externalities are realized by subsidizing production
Education
Positive Externality (Subsidy)
Price
SB
C1
P*
P1
Q*
Marginal Private Cost
Marginal Social Benefit
D=Marginal Private Benefit
Q1
Quantity
Question 14
What will be the level of production and at what prices is there is no government
intervention?
a) Quantity = Q1 and Price = P*
b) Quantity = Q* and Price = P*
c) Quantity = Q1 and Price = P1
d) Quantity = Q1 and Price = C1
Question 15
What will be the level of production and at what prices is there is with government
intervention?
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Question 16
A subsidy ensures that:
a) Firms pay a fee or proportion of the cost of production
b) Government assist producers by paying a fee or proportion of the cost of production
c) Government assist producers by charging a fee or proportion of the cost of
production
d) Government provides loans to producers to cover the cost of production
Negative Externality
Price
Marginal Social Cost
SC
P1
P*
C1
Q1
C1
= Cost to Produce
Marginal Private Cost
D=Marginal Private Benefit
Q*
Quantity
Q1
SC = Social Cost
16
Question 17
What will be the level of production and at what prices is there is no government
intervention?
Question 18
What will be the level of production and at what prices is there is with government
intervention?
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Question 19
Tax is equal to:
a) Tax = p1 + c1
b) Tax = p1 - P*
c) Tax = p1 - c1
d) Tax = p* - P1
Question 20
Which following statement is incorrect?
a) Negative externalities can be eliminated
b) Tax raises marginal private cost (MPC)
c) Government intervention reduces pollution
d) Tax reduces marginal private cost (MPC)
Question 21
Which of the following statement is NOT a method used by the government to
eliminate a negative externality?
a) Taxes
b) Emission charges
c) Marketable permits
d) Subsidies
Question 22
Educational services are a form of:
a) Public subsidy
b) Public provision
c) Licences
d) Private provision
Question 23
Which following statement is NOT a method used by the government to eliminate a
positive externality?
a) Private subsidy
b) Patent and copy rights
c) Taxes
d) Public provision
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Case Study: Market Failure: Global Warming
A just-released report from the Congressional Budget Office takes on global warming. CBO
points to a negative externality from carbon emissions and a positive externality from
research. An excerpt:
The possibility of climate change involves two distinct market failures that prevent
unregulated markets from achieving the appropriate balance between fossil fuel use and
changes in climate. One market failure involves the external effects of emissions from the
combustion of fossil fuelsthat is, the costs that are imposed on society by the use of fossil
fuels but that are not reflected in the prices paid for them.
The other market failure is a general under-investment in research and development (R&D)
that occurs because investments in innovation may yield spillover benefits to society, which
do not translate into profits for the innovating firm. The first market failure yields inefficiently
high use of fossil fuels; the second yields inefficiently low R&D.
Because there are two separate market failures, an efficient response is likely to involve two
separate types of policies:
One type of policy would reduce carbon emissions by increasing the costs of emitting
carbon, both in the near term and in the future, to reflect the damages that those emissions
are expected to cause.
The other type of policy would increase federal support for R&D on various technologies that
could help restrain the growth of carbon emissions and would create spillover benefits.
Policymakers could increase the cost of emitting carbon by setting a price on those
emissions. That could be accomplished by taxing fossil fuels in proportion to their carbon
content (which is released when the fuels are burned) or by establishing a cap-and-trade
program under which policymakers would set an overall cap on emissions but allow fossil
fuel suppliers to trade rights (called allowances) to those limited emissions. Either a tax or a
cap-and-trade program would cause the prices of goods and services to rise to reflect the
amount of carbon emitted as a result of their consumption. To the extent that a carbon tax or
allowance price reflected the present value of expected damages, such policies would
encourage users of fossil fuels to account for the costs they impose on others through their
emissions of greenhouse gases.
Source: Congressional Budget office cbo Wednesday, September 20, 2006
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Case Study Essay Question

Describe the market failures and proposed solutions in the case study.
Writing Focus: Case Study Structure (suggested)
Introduce: context and Ideas

Define: Key Terms
Describe: Context of situation
Market Failures
MF 1: external effects of emissions
MF 2: general under-investment in
research
Solutions to Problems of Failures

Policy ONE: show EFFECTS of solution
on the problem (see case reading)
Policy TWO: show EFFECTS of solution

on the problem (see case reading)
Conclusion: How Policy is a solution to market failure

Who makes policy and how it is used impacts on the market
Start writing your response here.

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BUSINESS

Diploma of Business (Enterprise) WDBE

SCHOOL OF BUSINESS SERVICES

Copyright 2011 by Victoria University

Writing Skills for Economics ..........................................................................................iii

Writing Skills for Economics

You should make an idea, situation, or problem clear by describing it in

For example, when you outline causes of inflation, you would

Your main focus should be on the 'why' of a particular issue, or on the

Questions for Topic 1A & 1B

Topic 1A: Economics

A Goods produced by people which are

B A good so plentiful that it does not have a price

C Resources used in the production

D What goods to produce, how to

F A scarce good that has a price

G The selection of one good in preference

H Goods bought and used by households

Resources and goods and services are

Skill of a person who takes the risk to

K Natural resources/raw materials

Human effort and skill

Questions for Topic 1A & 1B

2. Explain the differences between micro and macroeconomics?

Questions for Topic 1A & 1B

3. Why is it important to study economics? Give 7 reasons.

4. Define scarcity and explain how it leads to opportunity cost?

Economic Problem of Scarcity

Economics seek to understand how societies solve five big questions.

Questions for Topic 1A & 1B

6. List the factors of production.

Questions for Topic 1A & 1B

7. What is the difference between positive and normative analysis?

Production Possibilities Frontier

Question 9: Which points in the diagram are attainable?

Question 10: Can more than 5m computers be produced?

Questions for Topic 1A & 1B

Question 11: Can we produce beyond the production possibility curve?

Question 13: Explain the situation at point Z.

The Efficient Use of Resource:

Too many computers

Question 14: What does Point B represent?

Questions for Topic 1A & 1B

Question 15: What does Point C represent?

Question 16: What does Point A represent?

Question 17: Define allocative efficiency.

Questions for Topic 1A & 1B

The Efficient Use of Resources:

Benefits exceeds cost

Cost exceeds Benefits

Question 19: Define MB.

Question 20: Define MC.

Question 21: Define equilibrium.

Question 22: Demonstrate in the diagram, when equilibrium is achieved.

Questions for Topic 1A & 1B

Questions for Topic 1B: Economic Thoughts and Theories

2. Define a market economy.

3. Define a command economy.

4. Define a mixed economy.

5. Explain the advantages and disadvantages of a Market Economy.

Questions for Topic 1A & 1B

6. Explain the advantages and disadvantages of a Command Economy.

7. Complete the following table: