BUECO1509 Principles of Economics

Choose any three questions from Part A (Microeconomics), plus any three questions from Part B (Macroeconomics):

Part A (Microeconomics):

Question 1:

(a) There is no such thing as a ‘free lunch’.  Illustrate and explain using a diagram, whether you agree or disagree with this statement?

(b) Identify the following goods as either public goods or private goods and explain why you think it is so.

(i) Economic data produced by a government agency that must be paid for before you access and use it;

(ii) Prescription reading glasses;

(iii) The Defence system;

(iv) Economic data produced by a government agency that is freely available;

(v) The quarantine system.

Question 2:

How will the following changes affect the market price of wheat flour (assuming that the market is initially in equilibrium)?  In each case, illustrate with a diagram what happens to the demand and/or supply curves and, as result, what happens to the equilibrium price and equilibrium quantity.

People consume more bread;

The discovery of a new cheaper way of milling flour;

The prices of other grains rise;

Rice and potatoes fall in price

Question 3:

(a) Illustrate and explain using a diagram, the difference between the ‘law of diminishing marginal returns’ and returns to scale within the concept of ‘economies of scale’.

(b) Illustrate and explain using diagrams why perfectly competitive firms are price takers.  Hint: one diagram for the firm and one diagram for the industry.

Question 4:

The following table gives the short-run costs for an imaginary firm.

 

 

(a) Fill in the figures for each of the columns. 

(b) At what output do diminishing marginal returns set in (assume constant factor prices)? 

(c) Draw AFC, AVC, AC and MC on  the same diagram.  Be careful to plot the MC figures mid-way between the figures for quantity (i.e. at 0.5, 1.5, 2.5, etc.). 

Question  5:

Illustrate and explain using numerical examples and the formulae,  the difference between the price elasticity of demand and the income elasticity of demand? 

What does the cross-price elasticity of demand measure and explain how it is interpreted using a numerical example?

Why should a firm or business know the difference between each of the three concepts? 

Question 6:

(a) Illustrate and explain using a diagram how a long-run average cost curve relates to a series (or several) short-run average cost curves. 

(b) Illustrate and explain using a diagram, the different phases in a long-run average cost curve. 

(c) Please provide at least two (2) reasons for two (2) of these three phases to exist. 

Part B (Macroeconomics):

Question 7:

(a) Illustrate and explain using a diagram the four (4) phases of the business cycle

(b) Explain how these phases come about (i.e. what influences cause the turning points to occur)

(c) Explain the different types of unemployment and how they come into existence 

(d) Illustrate and explain using a diagram how the money-market functions 

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, illustrate and explain using diagrams, how economic policy instruments can be used by the government and the central bank to prevent this from occurring?

Will these instruments work to prevent the onset of recession? 

Question 9:

(a) Illustrate and explain using two (2) diagrams, the difference between demand-pull and cost-push inflation;

(b) Provide two examples or causes of each type of inflation. 

(c) Illustrate and explain using a diagram, how these two forms of inflation interact with each other.

Question 10:

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) A major trading partner’s economy fall into recession;

(d) The country’s main exports fall in price while the goods the country imports from abroad rise in price

Question 11:

Consider a macroeconomy was initially at equilibrium level of real GDP.  

Using an aggregate demand and aggregate supply diagram or model of the economy, illustrate and explain  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 levels.

Question 12:

Assuming that banks choose to maintain a liquidity ratio of 20 per cent and assuming that new cash deposits of $100m are made in the banking system described in the table below:

 

(a) Complete the above displayed table which shows how credit is created. 

(b)How much credit will have been created after five rounds? 

(c)To what level will total deposits eventually increase?  

(d)Define the bank multiplier.  

(e)What is the bank multiplier in this case? 

(f)How is it related to the liquidity ratio?