BUS702- Economics for Managers

Notes

(1) This is not a traditional exam but is a “take home exam” or assignment. Please read all instructions carefully.

(2) You should read the questions and the articles before setting aside time (probably on a different day) to write your answers.

(3) This exam is “open book” but “researched” answers are not required and, in fact, no research should be undertaken; that is, you should write from your own understanding without references. SafeAssign checks submitted files for plagiarism so be careful to write in your own words and complete this assignment individually. 

(4) Draw appropriate links to the economic theory you have learned in the course and do not offer unsubstantiated opinion.

(5) Use diagrams where appropriate. Hand-drawn ones are acceptable, being faster to draw, and may be scanned in (as pdfs, please – no other file formats!).

1.A tax on sugar intended to shift consumption towards a healthier diet has been suggested and even implemented in some countries. Some people think that individuals should make their own choices and, if they prefer unhealthy products, the government should not interfere. On the other hand, those who become ill from obesity will impose costs on the health service so that others argue that the government has a role to play.

2. Read the article Flawed Fiscal Fundamentalism by Tony Makin, pages 21 to 29 of the document Fiscal Fallacies, which can be downloaded from The Centre of Independent Studies

(a) “The simple idea that by pumping up total spending, government can supplement depressed private spending and temporarily boost economic activity has appealed to economists and governments since the Great Depression of the 1930s.” (Page 22)

Explain this “simple idea” due to J.M. Keynes.

(b) “Separating out the automatic changes in the fiscal position from the discretionary ones is difficult, and it is impossible to assess the counterfactual of how the economy would have performed had there been no fiscal response.” (Page 24)

During a recession, automatic changes take place in the fiscal position (budget deficit/surplus). Why? Also give some examples of discretionary changes in the face of a recession and their effect on the budget.

(c) “What has been ignored in current debate is that fiscal contraction that targets wasteful government programs improves macroeconomic performance.” (Page 25)

Explain by what process a fiscal contraction could possibly improve macroeconomic performance.

(d) “The key question is whether Australia really needs fiscal ‘stimulus’ in the form of budgetary outlays when monetary policy is best placed to influence short-run macroeconomic activity.” (Page 26)

In what way can monetary policy be used to create economic ‘stimulus’ and why, does Makin argue, is it more effective than fiscal policy?