EFB223 Final Exam Paper PDF

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The final questions for exam for 2020 and 2021...

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Examination Paper SEMESTER: FIRST SEMESTER EXAMINATIONS 2020 UNIT: EFB223 ECONOMICS 2 - THEORY 1 DURATION OF EXAMINATION:

2 HOURS 30 MINUTES

EXAMINATION MATERIAL SUPPLIED BY THE UNIVERSITY: EXAMINATION PAPER

INSTRUCTIONS TO STUDENTS: This is an open-book examination. Students are prohibited from communicating with anyone (either verbal or written) during the examination. Answers are to be saved in a word document and submitted online (via blackboard portal)

SECTION A - FIVE (5) QUESTIONS ONLY ARE TO BE ATTEMPTED SECTION B - THREE (3) QUESTIONS ONLY ARE TO BE ATTEMPTED MARKS FOR EACH QUESTION ARE AS INDICATED THIS EXAMINATION PAPER IS WORTH A TOTAL OF 40 MARKS THIS EXAMINATION PAPER MUST NOT BE SAVED OR PRINTED OUT AND ITS FILE MUST BE DELETED AFTER THE EXAMINATION HAS CONCLUDED

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Total marks: 40; Please present all analysis and calculations!

SECTION A

Attempt 5 out of 6 questions in this section. This section is worth 25 marks. QUESTION 1

Below is a table which shows a firm’s cost structure.

Output 0 1 2 2.5 3

Labour 0 1 2 3 4

Total cost ($) 100 150 200 250 300

(a) Is the firm facing a short-run or long-run condition? Explain. t (2.5 marks) This firm is facing a short-run condition, this is because there are fixed costs which are fixed throughout all varying levels of output and labour. In a long-run condition however, the quantities and costs associated with the recourses vary. (b) Does the firm exhibit labour specialisation? Explain. (2.5 marks) This firm does exhibit labour specialisation as it can be seen that overall labour increases as the output begins to increase, and labour specialisation is evident when marginal productivity rises as output increases. (Total for Question 1 = 5 marks)

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QUESTION 2

Explain the rationale for markets to emulate conditions of perfect competition. (5 marks) Perfect competition exists in a market when there are many firms, each selling an identical product; with many buyers; no barriers to the entry of new firms into the industry; no advantage to established firms; and buyers and sellers are well informed about prices. Markets tend to try and emulate the conditions of perfect competition because at the point, there is no information failure, meaning that information is shared evenly between all firms in the market. Also, due to the perfect competition in the market companies would be selling products at similar prices, meaning that the demand would remain constant and these companies would be selling the maximum they can. (Total for Question 2 = 5 marks)

QUESTION 3

Consider the following payoff matrix for each pair of choices that the two players make:

(a) If you were player 1, do you have a dominant strategy? How would you play this game? (1.5 marks) (b) If you were player 2, do you have a dominant strategy? How would you play this game? (1.5 marks) (c) Is there a Nash Equilibrium in this game? Briefly explain. (2 marks) EFB223T1.220

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(Total for Question 3 = 5 marks)

QUESTION 4

Explain how each of the following would affect Australia’s aggregate demand, the short run and/or long run aggregate supply in the first round? (a) A rise in foreign incomes. (2.5 marks) An increase to a countries foreign income increases a country’s net exports and aggregate demand, whilst a slump in foreign incomes reduces net exports and aggregate demand (b) A fall in consumer confidence on the economy. (2.5 marks) A fall in consumer confidence in the economy means that the consumer would tend to save their money which means there would be a decrease in overall expenditures, meaning that this will cause the aggregate demand to increase. (Total for Question 4 = 5 marks)

QUESTION 5

Interest rates fell three times in 2019 as the Reserve Bank of Australia (RBA) tried to kickstart an already sluggish Australian economy that was in the midst of a housing downturn, with residential construction tumbling after a record building boom. In March 2020, the RBA again cut the official cash rate down to 0.25 percent to counter the economic downturn caused by the coronavirus pandemic. Discuss the effectiveness of RBA’s monetary policy in 2020. (5 marks) The Reserve Bank of Australia introduced a monetary policy in an attempt to drop interest rates in order to encourage spending and encourage more people to purchase houses. Monetary policies affect interest rates and the available quantity of loanable funds, which influences several factors within the aggregate demand. More specifically, by introducing a loose or expansionary monetary policy, one that decreases interest rates, the aggregate demand will increase as the business investment increases as so would consumer borrowing. This would mean that theoretically the monetary policy introduced by the RBA to combat the crashing aggregate demand due to the fallout of covid should be effective as this loose monetary policy should encourage spending and encourage more people to buy houses. (Total for Question 5 = 5 marks) EFB223T1.220

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QUESTION 6

Assume that Australia is currently in a recession and the government has asked you to recommend a fiscal policy tool to combat the recession. Discuss the pros and cons of your recommended fiscal policy tool. (5 marks) When countries go into recession, many governments introduce a fiscal policy in order to try and generate spending to try and revive the market. In order to generate spending once again, the overall aggregate demand must be increased. During a recession, a government would often introduce an expansionary fiscal policy, or a policy designed to expand and increase the money supply within the economy. Thus, the government should try and introduce a policy that issues tax stimulus rebates to increase aggregate demand and fuel economic growth. With people having to pay lower taxes, they should have more money to spend, which fuels higher demand – which leads to firms to a decrease in unemployment and an increase in competition. Although, an expansionary policy may also have some downsides. More specifically, many economists believe that mounting deficits could have a negative impact on economic growth in the future, arguing that the government spending too easily crowds out investment by the private sector. Furthermore, these expansionary policies could also lead to inflation and asset bubbles beginning to form, which could also badly damage the economy in the future. for Question 6 = 5 marks)

End of Section A

SECTION B EFB223T1.220

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Attempt 3 out of 4 questions in this section. This section is worth 15 marks.

QUESTION 7

The graph below shows Adam’s indifference curves and his budget line of two goods: X and Y, for an income of $120 per week.

60 Quantity of Y

A

Z I 2 I 1 14

30

Quantity of X

(a) Find the price of X, the price of Y, and the value of A. (3 marks) (b) What is the marginal rate of substitution of X for Y at point Z? (1 mark) (c) “If Adam’s income is increased, his consumption of both goods X and Y will always go up”. Is this statement true or false? Explain. (1 mark)

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QUESTION 8 The table below gives the total cost (TC in $) of producing watches at different levels of output for a firm in a perfectly competitive market.

Output TC MC

0

1

2

3

4

5

6

7

8

9

10

50

100 50

134 34

158 24

177 19

200 23

230 30

268 38

316 48

375 59

450 75

-

(a) What is the fixed cost of this firm?

(0.5 mark)

50 (b) Complete the last row of the table (i.e., calculating the marginal cost (MC) of the 1st to the 10th watch). (2 marks) Output

0

1

2

3

4

5

6

7

8

9

10

TC

50

100 50

134 34

158 24

177 19

200 23

230 30

268 38

316 48

375 59

450 75

MC

-

MC = change in cost/change in quantity (c) If the market price of watch is $75, what would be the profit maximizing output? (1 marks) If the market price of the watch is at $75, then the profit maximising output would be that of an output at 10 (d) If the market price of watch falls to $25, how much would you recommend the firm to produce? Explain your answer. (1.5 marks) Have an output level of around 5 in order to be able to make a significant profit whilst not losing on the product itself. (Total for Question 8= 5 marks)

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QUESTION 9

Consider an economy with the following characteristics (all variables measured in billions of dollars). C = 80 + 0.4Yd t = 0.25 I = 15 G = 20 X=5 M = 0.1Y where Yd is disposable income and t is the income tax rate. (i)

Find the equilibrium GDP. (1.5 marks)

E=C+I+G+X–M E = 80 + 0.4Yd + 15 +20 + 5 - 0.1Y E = 0.3Yd + 120 (ii) At the equilibrium GDP, calculate the fiscal balance. (1 mark)

(iii)

If the full employment GDP is $80 billion, is the economy experiencing a recessionary or inflationary gap? Explain your answer. (1 mark)

(iv)

If the government wants to close the gap, should government expenditure (G) be increased or decreased? By how much? (1.5 marks) Expenditure should be decreased (Total for Question 9 = 5 marks)

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1 0

QUESTION 10

Study the balance of payments data of a fictitious country presented in the following table. (in $billion) 800 300 0 0 200 500

Exports (X) Imports (M) Net Income (NI) Net transfers (NTR) Taxes (T) Government Purchase (G) Saving (S) Investment (I)

100

Using the above table, (a) Calculate the current account balance. (1.5 marks) CAB = (X-M) + (NI +NTR) CAB = (800-300) + (0+0) CAB = 500 (b) Calculate the household saving (S). (1.5 marks) S=C+I+G S = 200 + 100 +500 S = 800 (d) Is capital inflow greater than or less than capital outflow? Explain. (2 marks) In this situation the capital inflow is greater than that of capital outflow, this is because there a foreign investors are buying the physical assets of the country. (Total for Question 10 = 5 marks)

End of Section B END OF PAPER

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