Macroeconomic Principles 6 Running Head

Running Head: Macroeconomic Principles
Macroeconomic Principles
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Macroeconomic Principles 2
Macroeconomic Principles
Question 1
Part a
Fig: Unit tax
Price of St
carbon
S1
Pt x S
P d b
P1 a
Demand
Qt Q Quantity (tonnes)
The rise in the unit tax for carbon effectively reduce the market externality. Initially, Q
tonnes of carbon were produced at a price P; the introduction of unit tax raised the costs of
producing carbon and thus the suppliers were forced to cut their production from Q to Qt; this
was from a shift in supply curve from S to S1. Hannam (2014) supported this argument by noting
that the carbon tax was successful in lowering carbon emissions. The result was a price rise for
carbon which discourage the consumption by the households; consequently the level of carbon
emissions fell (Twomey, 2014). However, this resulted in a loss of efficiency in the carbon
market. The social optimal level of carbon production was Q at a price P. The demand for energy
is inelastic to price and thus the consumers suffer when price rises. A deadweight area abx was
recorded after the price rose to Pt.
Part b
The 15 billion compensation would add up to the household’s income and thus they will
be able to demand extra units of carbon. The additional demand for carbon will stimulate the
carbon producers to raise their level of production so as to meet the rising demand. Demand laws
support the argument that price charged rises as demand rises over supply. The increased need to

Macroeconomic Principles 3
produce more will result in an increased employment since more labor will be a requisite. The
carbon price level will rise one again.
Question 2
The loss on consumer confidence means that they will lower their spending level. Thus,
the households’ consumption component of the aggregate demand will be reduced. According to
Uren (2017), the Australian economy is dragged down by the weak growth in consumer
spending. The increased living costs are affecting the consumers’ budgets and thus they are not
able to spend as much. For instance the housing and electricity prices have surged in the recent
years; these extra spending on such goods is leaving less income to be spent on other goods and
services and this explains the falling trend of Australian consumption expenditure growth. The
Keynesian cross model below is used to explain the impact of the weak spending on the
aggregate demand.
Graph: The Keynesian cross model
AD AD = Y
m AD* = C + I + G + (X – M)
AD = C + I + G + (X – M)
n
45o
Y Y* Real GDP
The equilibrium level between AD and Y is at point m; at this point, AD = Y. To the left
of AD = Y, the Aggregate demand is lower than real GDP and to the right, the AD is greater than
real GDP (Bénassy, 2011). The initial AD curve is AD* = C + I + G + (X – M). Since we have
noted that the weak consumer spending lowers the aggregate demand, the AD* curve will shift to
the right to AD curve. The shift to the right results in a new equilibrium point created at point n;
this is at a lower level of real GDP (Y).