Final Exam Workshop: November

Final Exam Workshop
• BH2-09 10am to 11am on Tuesday 6th

November
• BH2-09 5pm to 6pm on Tuesday 6th

November
Copyright © 2012 McGraw-Hill Australia Pty Ltd

PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada 6- 1
Slides prepared by George Bredon
Macroeconomic role for
Government
• Fiscal Policy (Ch. 10)

• Monetary Policy (Ch. 11)

6- 2
10-2
PowerPoint presentation to accompany Economic Principles 3e, by Jackson, McIver, Wilson & Bajada
Federal Government Finance
• Federal expenditures
– large expenditure on social security and
welfare
– specific purpose grants
• Federal revenues
– personal income tax
– company income tax
 Double taxation a highly controversial problem
– Indirect and other taxes
 sales tax
 excise tax.

6- 3
10-3
Discretionary Fiscal Policy
• The deliberate manipulation of taxes and

spending by government for the purpose of
altering real GDP and employment, controlling
inflation and stimulating economic growth.
• Not all fiscal policy is deliberate.

6- 4
10-4
Slide 16
Expansionary Fiscal Policy
• The use of increased government spending

and/or lower taxes, thereby increasing the
government budget deficit, to stimulate
economic activity and the move the economy
out of recession or depression.
• Appropriate in Range 1 (e.g. ‘stimulus
package’)

6- 5
10-5
Contractionary Fiscal Policy
Slide 17
• The use of reductions in government spending

and/or higher taxes, thereby reducing the
deficit or increasing the surplus in the
government’s budget, to control demand-pull
inflation.
• Relevant for Ranges 2 and 3

6- 6
10-6
Non-Discretionary Fiscal
Policy
• Built-in stabilisers that operate without
requiring explicit action by policy-makers.
• During recessions: Tend to increase
government deficits (or reduce surplus). Lower
GDP implies lower tax
• During inflationary periods: Tend to increase
government surpluses (or reduce deficits).
Higher GDP implies higher tax

6- 7
10-7
Problems with Fiscal Policy in
Practice
• Problems of timing
– recognition lag
– administrative lag
– operational lag
• Political problems
– other economic goals: not just stability
– expansionary bias
– a political business cycle.
• Crowding-out effect
– When an expansionary fiscal policy tends to
increase the interest rate, thus reducing
interest-sensitive private spending, especially
investment.

6- 8
10-8
Objectives of Monetary Policy
• Monetary policy
– influencing interest rates and credit availability to
stabilise real GDP, employment and the price level
• Fundamental objectives
– full employment
– non-inflationary level of total output
• The Reserve Bank of Australia has
responsibility for managing monetary policy.

6- 9
11-9
Cause-Effect Chain of
Monetary Policy
• Cash rate
– interest rate charged by the RBA for exchange
settlement account funds
• Other short-term interest rates
– the cash rate sets the cost of short-term funds for
banks
– influences the rate at which banks are willing to lend
Aggregate demand
• Availability of bank credit, which impacts on
interest-sensitive spending (and therefore
output, employment and prices), is impacted
through monetary policy.
6- 10
11-10
Monetary Policy and Investment
• Increases in interest rate reduce the viability of

many investments and the quantity of
investment spending falls.
• Increases in interest rate make the purchase
of financial assets more attractive, in
preference to making investment
expenditures.

6- 11
11-11
Monetary Policy and Aggregate
Demand
• Easy monetary policy
– RBA reduces the cash rate, lowering the cost and
increasing the availability of bank credit, to expand
spending and real GDP.
• Tight monetary policy
– RBA increases the cash rate, increasing the cost of
credit, reducing the availability of credit, to reduce
spending in the economy and reduce inflationary
pressures.

6- 12
11-12
Easy Monetary Policy
• Implemented when the economy is faced with

the prospects of substantial unemployment or
deflationary pressure.
• RBA announces its intention to reduce the
cash rate.
• RBA acts to bring the ESA funds market into
balance.

6- 13
11-13
Tight Monetary Policy
• Enacted when the economy is facing

significant inflationary pressures.
• RBA announces its intention to increase the
target cash rate.
• ESA funds are brought into balance at this
new target cash rate.

6- 14
11-14
Revision

6- 15
Slide 15
Examination
Exam has 3 sections

Section A: 50 MCQs; do all in 80 mins
Section B: 4 T/F Qs; do all in 40 mins
Section C: 3 short answer Qs; do any 3 out of 5 in
50 mins
Last 10 mins: a quick go through the answersheet

6- 16
8-16
Lectures 1 and 2
• The nature, meaning & methodology of

economics
• Scarcity, choices & resource allocation
– Meaning of efficiency
– Opportunity Costs
– Production possibilities curve
• Reading: Chapter 1 particularly pages 3-5,
9-17.

6- 17
Slide 17
Lecture 3: Demand & supply
• Characteristics of purely competitive markets
• Demand & supply
– Definitions
– Meaning of laws of DD & SS and understanding of
graphical depiction of DD & SS
– Distinction between movement along and shift of DD

and SS curves

6- 18
Slide 18
DD & SS continued
• Non-price determinants of DD & SS
– How each shifts the market DD curve
– How each shifts the market SS curve

6- 19
Slide 19
Lecture 4: Market equilibrium
• Market equilibrium
– Meaning
– Meaning of excess DD & SS
 Depiction on graph
 Shortages and Surpluses
• Price ceilings and floors
– Meaning
– Graphical depiction
– Resource allocation implications due to price
changes brought on by demand and supply curve
shifts
• Introduction to elasticity of
demand

6- 20
Slide 20
Lecture 5: Elasticity
• Price Elasticity
– Meaning of price elasticity of demand & supply
(knowledge of formula expected)
– Distinguish between elastic, inelastic, unit elastic,

zero elasticity & infinite elasticity
– Determinants of Ed

6- 21
Slide 21
Lecture 5 continued
• Area under curve

– Revenue = P x Q
– Total Revenue test (Changes in TR depends on
elasticity of demand)

6- 22
Slide 22
Other elasticities
• Price elasticity of supply
• Income elasticity
– Normal goods Ey>0
– Inferior goods Ey<0
• Cross price elasticity of demand
– Complementary goods Exy<0
– Substitutes Exy>0
– Independent goods Exy=0
• Incidence of tax
– Importance of relative elasticities
– Sharing of burden of Tax between producers and
consumers

6- 23
Slide 23
Lecture 6: Production and costs
• Economic vs accounting definitions

– Explicit & implicit costs
– Normal and economic profits
• Production
– SR vs LR
– Total average and marginal product
– Law of diminishing returns in SR

6- 24
Slide 24
Costs continued
• Short – run costs
– Links to production & productivity
– Definitions: Fixed, variable & total plus associated

averages (AC, AVC & ATC) as well as marginal cost
– Cost curves: must understand U-shaped average cost

curves and MC (Text Figure 4.4 on page 93)

6- 25
Slide 25
Costs continued
• Long-run costs
– Definition of long run

– Economies and diseconomies of scale
 Constant, increasing & decreasing RTS

6- 26
Slide 26
Lecture 7: Pure competition
• Characteristics of firm in perfect competition (PC) in
short - run
– Too small to influence market
– Free entry & exit
– Homogeneous product
– Price taker → P = AR = MR
• Assume profit maximisation
– Condition given for all firms as MR = MC which uniquely
translates into P = AR = MR = MC for PC
• Concentrate on understanding Figures 5.3, 5.4 &
5.5 on pages 116, 118 and 119, respectively.

6- 27
Slide 27
Pure competition in long - run
• Assumptions
– Free entry & exit
– All firms have identical costs
– Consider only constant cost industry
• Concentrate on Figures 5.7 & 5.8 on pages
122 and 123, respectively.
• Discuss efficiency outcomes associated with
PC

6- 28
Slide 28
Lecture 8: Monopoly
• Characteristics of and rationale for existence of
monopoly
• Concentrate on understanding Figures 5.12, 5.13 &

5.14 on pages 132, 134 and 136, respectively.
• Discuss efficiency outcomes associated with

monopoly
• Price discrimination & regulated monopoly

6- 29
Slide 29
Lecture 9: Monopolistic
competition & oligopoly
• Differentiate between different market characteristics.
• Concentrate on understanding Figures 6.2 for

monopolistic competition on page 157.
• Game theoretic approach in Oligopoly (understanding

Figures 6.4 on page 164)
• Concentrate on 6.5 & 6.6 for oligopoly on pages 168 and

170, respectively.
• Discuss efficiency outcomes associated with these

market forms
6- 30
Slide 30
Lecture 10: Market failure & public
goods
• Meaning of market failure
– Spillover costs and benefits
– Public goods
• Solutions to market failure

– Correcting for spillovers
– Resource allocation for Public goods
• The problem of pollution

6- 31
Slide 31
Lecture 11: Macroeconomics 1
• GDP as measure of macroeconomic activity

• Expenditure and income methods of
measuring GDP
– Components of spending
– Equivalence to income
• Nominal vs real GDP

– Use of Implicit Price Deflator to remove inflation

6- 32
Slide 32
Lecture 12: Macroeconomics 2
• Business cycles and growth
– Distinguish between LR growth & cycles
– Distinguish between phases of cycle
– Define different types of unemployment
 Define full employment
 Economic and social cost of unemployment
– Inflation measured & causes of inflation
 Why is inflation a problem?

6- 33
Slide 33
Spending over the Business Cycle
• C+I+G+NX changes at different stages of the
business cycle
• Fiscal policy
– Discretionary vs Non-discretionary policies
– Deficit and surplus budgets
– Expansionary & contractionary policies
• Monetary policies
– Easy & Tight monetary policies

6- 34
Slide 34
Exam General tips
• Multiple choice – do easy ones first & return to
difficult ones– follow time guidelines
• Give definitions where needed.
• Try to use examples where needed.
• Be clear about what is being asked. Read
questions again and again.
• Focus on the writing: good academic (English)
writing expected
• Highlight the key sentences.
• Describe and label your diagrams properly.
Explain your analysis based on the graphs, where
required.
Copyright © 2012 McGraw-Hill Australia Pty Ltd Slide 35

That’s all folks!
Good luck!
Copyright © 2012 McGraw-Hill Australia Pty Ltd Slide 36

END OF SYLLABUS
NEXT WEEK: Exam workshop

6- 37
Slide 37

Final Exam Workshop: November

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Final Exam Workshop

• BH2-09 10am to 11am on Tuesday 6th

• BH2-09 5pm to 6pm on Tuesday 6th

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Fiscal Policy (Ch. 10)

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• The deliberate manipulation of taxes and

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• The use of increased government spending

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• The use of reductions in government spending

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Increases in interest rate reduce the viability of

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Implemented when the economy is faced with

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Enacted when the economy is facing

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Exam has 3 sections

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• The nature, meaning & methodology of

Copyright © 2012 McGraw-Hill Australia Pty Ltd

– Distinction between movement along and shift of DD

Copyright © 2012 McGraw-Hill Australia Pty Ltd

– How each shifts the market DD curve

– How each shifts the market SS curve

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

– Distinguish between elastic, inelastic, unit elastic,

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Area under curve

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Economic vs accounting definitions

Copyright © 2012 McGraw-Hill Australia Pty Ltd

– Links to production & productivity

– Definitions: Fixed, variable & total plus associated

– Cost curves: must understand U-shaped average cost

Copyright © 2012 McGraw-Hill Australia Pty Ltd

– Definition of long run

 Constant, increasing & decreasing RTS

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Concentrate on understanding Figures 5.12, 5.13 &

• Discuss efficiency outcomes associated with

• Price discrimination & regulated monopoly

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• Concentrate on understanding Figures 6.2 for

• Game theoretic approach in Oligopoly (understanding

• Concentrate on 6.5 & 6.6 for oligopoly on pages 168 and

• Discuss efficiency outcomes associated with these

• Solutions to market failure

• The problem of pollution

Copyright © 2012 McGraw-Hill Australia Pty Ltd

• GDP as measure of macroeconomic activity

• Nominal vs real GDP