Economics for Managers: Solved Assignment

This assignment delves into key economic concepts relevant to managers. It explores the impact of taxation and subsidies on unhealthy food consumption, using elasticity calculations to demonstrate the effects. Furthermore, it analyzes Keynesian economics and its application in recessionary periods, including automatic and discretionary fiscal stabilizers. The assignment also examines the role of monetary policy in stimulating economic growth and considers the limitations of fiscal stimulus in an economy heavily reliant on external borrowing.

Running head: ECONOMICS FOR MANAGERS
Economics for Managers
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer a......................................................................................................................................3
Answer b......................................................................................................................................4
Answer c......................................................................................................................................4
Answer d......................................................................................................................................5
References........................................................................................................................................6

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Answer 1
The unhealthy food habits increases government expenditure on health and services. To
address this use the tools of subsidy and tax should be used in combination (theconversation.com
2017). Subsidy and taxes though both has distortionary effect but both can alters buying habit by
changing prices paid by the consumers and that received by the sellers. First, consider the effect
of taxation on unhealthy food like sweet and sweet beverages.
Figure 1: effect of tax on unhealthy food
The own price elasticity estimate for sweet and sugar snacks are -0.270 and -0.295 for high and
low calorie sweet and sugar snacks respectively. Therefore, the demand is inelastic in nature and
hence, the demand curve is steeper. Before the imposition of tax P* and Q* denotes the

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respective equilibrium price and quantity. Imposition of tax raises price paid by the consumer to
P1 and the price received by the producer is P2. Because of inelastic demand, the consumers bear a
greater tax burden.
Figure 2: effect of subsidy on healthy food
High calorie food and vegetables have a price elasticity of -1.128 and low calorie dairy
products have elasticity of -1.972. When a subsidy is given then price paid the consumers
decreases while that received by the producer increases. A subsidy on these products will
increases demand of these foods by a proportion greater than the price decrease.

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Answer 2
Answer a
Keynes suggested government intervention is needed in an economy to stand up shocks.
The Keynesian view received great appeal in times of Great Recession. In times of recession, the
economy face a depressed demand because of a reduced consumption spending. Spending is an
important component of aggregate demand. The idea is to give private spending a boost through
an increase in government spending. The assistance provided by government either directly or
indirectly increases spending of household and private expenditure and therefore results in a
increases in aggregate demand. The fiscal reliance was given priority as then no monetary
authority or central bank to design monetary policy was at existence.
Answer b
In time of recession the economy contracts. Automatic fiscal stabilizers are those works
without active intervention by the policymakers. As the income reduces, people pay less tax.
Which shrinking employment opportunities, government needs to pay more transfer payment.
The changes in tax revenue earned and government expenditure bring automated change in
budget.
The discretionary changes on the other hand take place in the form of change in tax rates
or government expenditure. In times of recession government increase their spending and
reduces tax rates. The overall government spending in OECD region during economic downturn
has increased from 25 percent in 1960 to 40 percent today (cis.org.au 2017).
Answer c
Fiscal contraction taken place in the form of reducing wasteful expenditure improves
economic performance. In times of fiscal contraction, a crowd in effect in investment in realized

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because of the operation in the money market. The money market instrument that works in force
is the interest rate. Because of fiscal contraction, interest rate prevailing in the money market
reduces (cis.org.au 2017). This stimulate real investment by reducing borrowing cost. Investment
being a component of aggregate demand or national income results in an increases in economic
activity. This also strengthens the external position of the by strengthening exchange rate and
fosters net export and national income.
Answer d
Monetary policy gives stimulus to the economy by boosting investment and aggregate
demand. Under expansionary monetary policy, there is a reduction in interest rate through
increasing money supply. The reduced interest rate increases investment in the economy because
of a reduced borrowing cost. When interest rate reduces, then there is a depreciation of currency
(cis.org.au 2017). With currency depreciation, export becomes cheaper and therefore fosters
export. With improvement in net export national income increases and the economy expands.
The stimulus given from the fiscal policy does not consider the fact that the economy of
Australia largely dependent on external borrowing. The foreign borrowing enters through the
channel of banking sector where interest rate plays an important role.

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References
Cis.org.au. (2017). Fiscal Fallacies : The Failure of Activist Fiscal Policy. [online] Available at:
https://www.cis.org.au/publications/policy-forum/fiscal-fallacies-the-failure-of-activist-fiscal-
policy/ [Accessed 24 Oct. 2017].
The Conversation. (2017). Why the government should tax unhealthy foods and subsidise
nutritious ones. [online] Available at: https://theconversation.com/why-the-government-should-
tax-unhealthy-foods-and-subsidise-nutritious-ones-72790 [Accessed 24 Oct. 2017].