Business Economics Questions and Answers 2023

Running head: BUSINESS ECONOMICS
Business Economics
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Name of the University
Course ID

1BUSINESS ECONOMICS
Table of Contents
Question 2........................................................................................................................................2
Absolute advantage and comparative advantage.........................................................................2
Terms of trade and exchange rate................................................................................................2
A demand side shock and a supply side shock............................................................................2
A trade surplus and a budget surplus...........................................................................................2
Question 3........................................................................................................................................3
Current state of Australian economy...........................................................................................3
Question 4........................................................................................................................................7
Question 5........................................................................................................................................9
Question a....................................................................................................................................9
Question b..................................................................................................................................10
Question c..................................................................................................................................10
Question d..................................................................................................................................11
Question e..................................................................................................................................12
Question 7......................................................................................................................................12
Question a..................................................................................................................................12
Question b..................................................................................................................................13
Question c..................................................................................................................................14
Question d..................................................................................................................................14
Question e..................................................................................................................................15
References......................................................................................................................................16

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Question 2
Absolute advantage and comparative advantage
The international trade theory defines absolute advantage as one country’s capacity to
produce specific good at a lesser absolute cost compared to other nation. In contrast, comparative
advantage is related to opportunity cost rather than absolute cost. It is one country’s capacity to
produce a good with a relatively lesser opportunity cost.
Terms of trade and exchange rate
Terms of trade stands to signify price of export relative to price of import and presented
as ratio of price of exported goods to the price of imported goods. Exchange rate defines value of
domestic currency presented in terms of foreign currency (Uribe & Schmitt-Grohe, 2017). It is
the ratio of value of one currency to other.
A demand side shock and a supply side shock
A demand side shock is the sudden event that leads to an expansion or contraction of
demand causing prices to increase or decrease. Supply side shock in contrast refers to the
phenomenon that results in an expansion or contraction of supply. Depending on movement of
supply prices move accordingly.
A trade surplus and a budget surplus
Trade surplus is a representative measure of positive trade balance signifying a situation
where export of a nation is more than its import. Budget surplus is the situation of having income
higher than expenses in a specific time period like a fiscal year or a financial quarter (Agenor &
Montiel, 2015).

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Question 3
Current state of Australian economy
Inflation
2015 2016 2017 2018 2019
1.5
1.55
1.6
1.65
1.7
1.75
1.8
1.85
1.9
1.95
1.7
1.5
1.9
1.8
1.6
Inflation
Year
Rate of inflation
Figure 1: Trend in inflation rate
(Source: Abs.gov.au, 2019)
The annual inflation rate in Australian economy in June quarter increased to 1.6 percent
from accounted inflation rate of 1.3 percent in May quarter. The food inflation hits the highest
along with an increase in transport prices.

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Unemployment
2015 2016 2017 2018 2019
4.80
5.00
5.20
5.40
5.60
5.80
6.00
5.73 5.76
5.59
4.98
5.25
Unemployment
Year
Rate of Unemployment
Figure 2: Trend in unemployment rate
(Source: Abs.gov.au, 2019)
Unemployment rate in recent year has increased to 5.3 percent which is higher than the
market expectation rate. Number of unemployed person rose by 4100 while employment
increased to 34700.

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Economic growth rate
2015 2016 2017 2018 2019
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
0.6
2.3
1.1
1.3 1.4
Economic growth
Year
Growth rate
Figure 3: Trend in economic growth rate
(Source: Abs.gov.au, 2019)
The latest growth figures suggested that economy grew at a rate of 1.4 percent. This is
below the average growth rate for factors such as China’s slow growth, low wage growth and
decline in consumption expenditure.

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Cash rate
2015 2016 2017 2018 2019
0.00
0.50
1.00
1.50
2.00
2.50
2.00
1.50 1.50 1.50
0.75
Cash Rate
Year
Cash rate
Figure 4: Trend in cash rate
(Source: Rba.gov.au, 2019)
Realizing a slower growth in the economy, RBA has recently dropped the cash rate to
0.75 percent from the earlier rate of 1.50 percent.

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Australian dollar exchange rate
2015 2016 2017 2018 2019
0.65
0.67
0.69
0.71
0.73
0.75
0.77
0.79
0.73 0.72
0.78
0.71
0.67
Exchange rate
Year
AUD/USD
Figure 5: Trend in Australian dollar exchange rate
(Source: Rba.gov.au, 2019)
The last accounted exchange rate between Australia dollar and USD is 0.67. This is lower
than previously recorded rate of 0.71 meaning a depreciation of Australian dollar.
Question 4
The main difference between Classical and Keynesian aggregate demand and aggregate
supply model is the shape of aggregate supply curve. In the classical model, the aggregate supply
curve is vertical because of the assumption that the economy always functions at the level of full
employment (Heijdra, 2017). The aggregate supply curve in the Keynesian model however is
horizontal following the assumption that the economy produces below its capacity.

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Figure 6: Classical model
In the classical model, a decline in aggregate demand represented by a leftward
movement of aggregate demand curve changes equilibrium downward from E to E1. Since, the
economy already operates at its potential level, there is no change in real GDP that remains at
Y*. Price level drops from P* to P1.
Figure 7: Keynesian model

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In case of Keynesian model, decline in aggregate demand lowers aggregate output from
Y* to Y1. The price level remains constant at P*.
Classical economists believed that the economy always operate according to Say’s law
stating “supply creates its own demand”. They assumed that employment and output in the
economy are determined by the working of individual market (goods market, labor market and
money market). As each of the markets has an in built mechanism to attain equilibrium full
employment is automatically restored (Johnson, 2017). Keynes on the other hand found that full
employment is a special situation. In reality, supply is larger than demand leading to involuntary
unemployment.
Question 5
Question a
Crude oil is one main input used in many industries. If crude of price escalates,
production cost in the economy increases. This lowers aggregate supply moving the AS curve
left. Price level increases, real GDP and employment falls.
Figure 8: Increase in crude oil price

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Question b
If government doubles the spending on welfare and aged pensions, this will increase
disposable income of household. As a result of increased income consumption increases. This
raises aggregate demand and shifts the demand curve rightward (Guilmi, Gallegati & Landini,
2017). Consequently, price level, real GDP and employment increases.
Figure 9: Increased in spending on welfare and aged pension
Question c
Depreciation of currency increases export of an economy resulting in an increase in net
export. Followed by an increase in net export, aggregate demand increases and demand curve
shifts outward. Finally, there is an increase in real GDP, employment and price level.

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Figure 10: Effect of currency depreciation
Question d
When government halves goods and services tax on all consumer goods, there is an
increase in after tax income to household. This can be used to increase consumption expenditure
(Brown & Narasimhan, 2019). As consumption grows, aggregate demand rises and the demand
curve shifts rightward. there is an increase in real GDP, employment and price level.
Figure 11: Impact of a decline in goods and service tax

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Question e
Rise in company taxes lowers profitability of business. This causes a decline in business
investment. As a result, aggregate demand declines moving aggregate demand curve left.
Contraction of aggregate demand lowers real GDP, price level and employment.
Figure 12: Rise in company tax
Question 7
Question a
If central bank lifts interest rate within the economy, cost of borrowing increases. This
reduces private investment inflicting decrease in aggregate demand. As demand contracts, real
GDP decreases resulting in a decrease in employment and price level.

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Figure 13: Effect of an increase in interest rate
Question b
Increase in private domestic spending expands aggregate demand. Expansion of demand
causes demand curve to move to right (Stiglitz & Guzman, 2016). When aggregate demand
increase there is an expansion of overall economic activity causing an expansion in real GDP and
inflation.
Figure 14: Increase in private domestic investment spending

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Question c
Increase in goods and service tax reduces disposable income of household. Consequently,
consumption expenditure decreases making a tightening of aggregate demand. With a tight
aggregate demand condition, economic activity contracts. This results in a deterioration in real
GDP and aggregate price level.
Figure 15: Increase in goods and service tax
Question d
When currency appreciates, there is increase in price of exported goods in the
international market. This reduces aggregate demand of the economy. With decrease in
aggregate demand, the demand curve shifts to left. Consequently, real GDP contracts and price
level declines.

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Figure 16: Impact of appreciation of currency
Question e
A fall in real estate price reduces wealth level of household. As wealth level decline
households are less confident resulting in a fall in consumption expenditure and aggregate
demand (Minford & Peel, 2019). With decline in aggregate demand real GDP, price level and
employment fall.
Figure 17: Impact of a decline in real estate price

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References
Abs.gov.au (2019) Browse Statistics. Abs.gov.au. Retrieved 2 October 2019, from
https://www.abs.gov.au/browse?opendocument&ref=topBar
Agenor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University
Press.
Brown, C., & Narasimhan, S. (2019). Principles of Macroeconomics. Economics, 2020, 300.
Guilmi, C. D., Gallegati, M., & Landini, S. (2017). Interactive Macroeconomics. Cambridge
Books.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Johnson, H. G. (2017). Macroeconomics and monetary theory. Routledge.
Minford, P., & Peel, D. (2019). Advanced macroeconomics: a primer. Edward Elgar Publishing.
Rba.gov.au (2019) Cash Rate. Reserve Bank of Australia. Retrieved 2 October 2019, from
https://www.rba.gov.au/statistics/cash-rate/
Rba.gov.au (2019) Historical Data. Reserve Bank of Australia. Retrieved 2 October 2019, from
https://www.rba.gov.au/statistics/historical-data.html#exchange-rates
Stiglitz, J. E., & Guzman, M. (Eds.). (2016). Contemporary issues in macroeconomics: lessons
from the crisis and beyond. Springer.
Uribe, M., & Schmitt-Grohé, S. (2017). Open economy macroeconomics. Princeton University
Press.

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