Revision

Question 1

Causes of Shifts in Demand

Answer 1

IPC CN
1. Income- dependant
2. Price of related goods- dependant
3. Consumer preferences- positive correlation
4. Consumer Expectations- for future income OR the future price of the good
5. Number of Buyers- positive correlation

Question 2

Causes of Shifts in Supply

Answer 2

ITSN
1. Input prices- negative correlation, e.g. steel for car manufacturing (higher steel prices reduce car supply)

2. Technology- positive correlation, e.g. automation in manufacturing of cars (robots replace labour)
3. Supplier Expectations- If suppliers expect prices to rise, they are likely to store some of the good and supply less to the market today
   - e.g. Oil prices- during COVID-19, OPEC expected global demand for oil to fall significantly thus, OPED decided to cut oil production to prevent a price collapse
4. Number of Sellers- positive correlation- e.g. New smartphone companies entered the market causing increased supply of smartphones, shifting the supply curve to the right

Question 3

Tax on Sellers

Answer 3

Shifts supply UP by amount equal to the tax

Question 4

Tax on Buyers

Answer 4

Shifts demand DOWN by amount equal to tax

Question 5

Subsidy to Sellers

Answer 5

Mutually Beneficial
Shifts the supply curve down by the amount of the subsidy
Buyers pay less and sellers receive more

Question 6

Negative Externality on Consumption

Answer 6

-ve: DWL ALWAYS ON RIGHT
Government intervenes by imposing taxes to make the price higher and attempt to decrease demand
e.g. cigarettes and alcohol

Question 7

Positive Externality on Consumption

Answer 7

+ve: DWL ALWAYS ON LEFT
Government intervenes by providing subsidies
e.g. vaccinations and education

Question 8

Negative Externalities on Production

Answer 8

-ve: DWL ALWAYS ON RIGHT
Governments intervene by:
1. imposing taxes (Pigovian Taxes)
2. implementing taxable pollution permits (Cap-and-Trade Policies)
3. Regulations and Laws
4. Subsidising cleaner alternatives
e.g. pollution

Question 9

Positive Externalities on Production

Answer 9

+ve: DWL ALWAYS ON LEFT
Government intervenes by providing subsidies to encourage production or consumption
e.g. Public infrastructure

Question 10

Coase Theorem

Answer 10

If private parties can bargain, without cost, over resource allocation, no government intervention is necessary
- dependent the owner of the legal right

Question 11

Issue of Private Solns

Answer 11

1. Transaction costs can make the price of bargaining too high and unfeasible
2. Large no. of people make it harder to reach an common agreement/decision

Question 12

If PED is…

Answer 12

Greater than 1: Demand is inelastic
Equal to 1: Unitary elastic
Less than 1: Demand is elastic

Question 13

Determinants of PED

Answer 13

C*NT
1. Close substitutes: positive correlation
2. Necessities vs. Luxuries: higher for luxuries
3. Narrow markets: positive correlation ‘apples’ vs. ‘food’
4. Time period: positive correlation (LR)

Question 14

If PES is…

Answer 14

price elasticity of supply is ei
Greater than 1: elastic
Equal to 1: Unitary elastic
Less than 1: inelastic

Question 15

Determinants of PES

Answer 15

1. Time period: positive correlation
2. Ability for supplier to change price

Question 16

Unemployment Rate

Answer 16

= No. of unemployed/Labour Force X 100

Question 17

Participation Rate

Answer 17

= Labour Force/Adult Pop X 100

Question 18

Factors that Shift AD

Answer 18

1. Change is consumer confidence or income: positive correlation
2. Interest rates and monetary policy: negative correlation
3. Changes in fiscal policy outlook: positive correlation
4. Exchange rates and foreign demand: depreciation cause increased AD

Question 19

Transmission Mechanism- AD

Answer 19

1. Wealth Effect: P rises -> depreciation of AUD -> real wealth falls -> C falls -> AD falls
2. IR Effect: P rises -> depreciation of AUD -> increased borrowing -> increased demand for borrowing -> rise in IR’s -> discourages investment spending -> AD falls
3. Exchange Rate Effect: P rises -> higher IR’s -> attracts foreign investment -> NX fall -> AD falls

Question 20

AD Shifts

Answer 20

1. Consumption
2. Investment
3. Government Spending
4. Net Exports

Question 21

LRAS Shifts

Answer 21

1. Changes in Natural Rate of UE
2. Changes in Natural Rate of Output
3. Changes in physical/human capital
4. Changes in natural resources
5. Changes in tec

Question 22

Sticky Wage Theory

Answer 22

Fixed wages based on Pe -> Actual P greater than Pe -> real wages fall -> labour gets cheaper -> firms hire more -> output (Y) rises

Question 23

Sticky Price Theory

Answer 23

Prices set by Pe -> MS increases -> Actual P rises -> firms w/o menu costs increase P immediately -> firms w/ menu cost keep P low temporarily -> their goods are cheaper -> demand for their goods rise -> increase output and workers

Question 24

Misperception Theory

Answer 24

Actual P rise above Pe -> firms mistakenly think their P rise due to rise in demand -> they increase output -> rise in employment

Question 25

Contractionary MP

Answer 25

Contractionary MP -> RBA sells government bonds to banks -> less MS on STMM -> increases demand for money -> competition b/w banks to access limited funds rises -> cost of borrowing becomes more expensive (as banks charge each other higher IR’s) -> increased cash rate -> increased IR’s -> greater attraction from foreign investors -> foreign investors must convert their money into AUD -> appreciated AUD -> import inflation falls -> less import prices + greater export prices -> less inflation + less eco growth

Question 26

Contractionary FP

Answer 26

Contractionary FP -> rise in taxes/fall in govt. spending -> decreased AD from decreased disposable income/decreased govt. demand for g/s -> decreased firm production + hiring -> fall in inflation, fall in GDP and rise in UE

Question 27

The Crowding-Out Effect

Answer 27

Fiscal Expansion -> raises IR’s -> reduce investment -> reduces the net increase in aggregate demand -> size of AD shift may be smaller than the initial fiscal expansion

Question 28

The Multiplier Effect

Answer 28

Govt. Spending -> income rising -> rise in consumption -> income of of sellers to rise -> more spending

Question 29

Risks of Expansionary FP

Answer 29

Risks: Increased budget deficit Resign govt. debt Possible inflation if economy is already near full capacity