BUECO 5903 Trine University Business Economics Questions

Question 1: Consider a macroeconomy was initially at equilibrium. Using an aggregate demand and aggregate supply diagram model of the economy, graphically illustrate and discuss the short-run and long-run effects of the following events upon the economy: (a) The imposition of a carbon tax upon local big polluting companies. (b) An appreciation in the foreign exchange rate value of the economy’s currency. (c) The European economies all fall into recession (d) The country’s main exports fall in price while the goods the country imports from abroad rise in price (2 marks)

Question 2: 2a. State the difference (IN YOUR OWN WORDS) between: -absolute advantage and comparative advantage. -between the terms of trade and the exchange rate – between a demand side shock and a supply side shock -between a trade surplus and a budget surplus (2.5 marks each) OR 2b. State the difference between: (2.5 mark per question) -uncertainty and risk. -between the interest rate and the exchange rate – between a supply side shock and a demand side shock -between a trade deficit and net foreign debt (2 marks)

Question 3 Use the Australian Bureau of Statistics website and perhaps the Reserve Bank of Australia website to answer the following questions: What are the current levels of the following economic indicators in the Australian economy? (Remember these should be expressed in annual terms) Inflation Unemployment Economic growth rate The cash rate The Australian dollar exchange rate (2 marks each)

Question 4 Use the aggregate demand- aggregate supply diagram model to explain the consequences in terms of price level and real GDP of a decline in aggregate demand as shown by: (a) Classical economics (b) Keynesian economics Why did the classical economists believe the economy would always find equilibrium at full employment and the Keynesians did not?

Question 5 Assume an economy operates on the middle part of its aggregate supply curve. State the direction of effect on aggregate demand or aggregate supply for each of the following changes in conditions. What is the effect on the price level, real GDP and employment? Use diagrams in your answer. (a) The price of crude oil rises significantly (b)Spending on welfare and aged pensions doubles (c) The value of the currency falls on the foreign exchange market. i.e the currency depreciates (d) The Government halves the goods and services tax (GST) on all consumer goods (e) The Government announces rises in company tax. (2 marks per part)

Question 6 If you wanted to increase aggregate demand how would you do it for the following: Consumption demand Investment demand Net exports Which of the three components also has an impact upon the Aggregate supply side of the economy?

Question 7 Consider a macroeconomy was initially at equilibrium level of real GDP. Using an aggregate demand and aggregate supply diagram or model of the economy, graphically illustrate and discuss the short-run consequences of the following events upon an economy: (a) The Central Bank within the economy lifts interest rates. (b) There is an increase in private domestic investment spending. (c) An increase in the good and services tax (GST) (d) An appreciation or rise in the foreign exchange rate value of the economy’s currency. (e) A fall in real estate prices in the capital cities of the country (hint: think of the effect upon people’s wealth level) (2 marks each)

Question 8 Why are quarterly movements in a country‘s GDP measure so important? What is it called when a country has two successive negative quarters of economic growth? When the economy is heading into a recession what economic policy instruments can the government and the central bank use to prevent this from occurring? Will these instruments work to prevent the onset of recession?

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