Individual Economics Assignment: Micro and Macroeconomic Analysis

This economics assignment solution addresses both microeconomic and macroeconomic concepts, providing a comprehensive analysis of various economic principles and their application to the Australian economy. The microeconomics section examines the banking sector as an oligopoly, exploring collusion, government intervention, and the impact of competition. The macroeconomic portion delves into fiscal and monetary policies, analyzing the effects of discretionary fiscal policy, unemployment, expansionary measures, and the relationship between inflation and unemployment. The assignment uses diagrams to illustrate key concepts and provides a detailed explanation of each question, including references to relevant sources. The solution covers topics such as market structures, government intervention, and the impact of economic policies on key economic indicators.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

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Table of Contents
Part A: Microeconomics............................................................................................................2
Question 1..............................................................................................................................2
Question 2..............................................................................................................................2
Question 3..............................................................................................................................3
Question 4..............................................................................................................................3
Part B: Macroeconomics............................................................................................................4
Question 1..............................................................................................................................4
Question 2..............................................................................................................................5
Question 3..............................................................................................................................6
Question 4..............................................................................................................................6
Question 5..............................................................................................................................7
Reference list..............................................................................................................................9

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Part A: Microeconomics
Question 1
Australian banks are found to operate in an oligopoly market. Four largest banks in
Australia- ANZ, NAB, Westpac and Commonwealth bank together account nearly 80 %
share in the lending market of Australia (abc.net.au, 2019). The dominance of major banks
and presence of significant entry barriers make Australian banking an oligopoly market.
During global financial crisis, the banking sector of most countries face serious credit
crisis. In contrast to most nations, Australia successfully kept the banking sector protected
from the crisis. Australian Prudential Regulatory Authority intervened in the banking industry
and announced a guarantee up to $1 million covering all banks on October 12, 2008. In
addition to this, the four-pillar policy in Banking that prevented merger between dominating
banks of Australia proved to be helpful for survival of Australian banks in the phase of crisis.
There were three factors contributing to steady performance of Australian banks during
crisis- The first is moderate level of competition, relatively stronger regulation and necessary
government intervention.
Question 2
Collusion in the oligopoly market allows the players to gain advantages of a
monopoly market. Under collusion, firms joined to set a high price maximizes industry profit
as a whole. The collusive oligopoly is similar to a monopoly and extracts maximum profits
from customers (Karl et al., 2019). Similarly, if the four major Australian banks decide to
collude they would act as a monopolists, charge a higher price, restrict the quantity and enjoy
supernormal profit. This is shown in figure 1

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Figure 1: Impact of collusion in Australian banking
After collusion, banks could charge a high price at P2 and restrict the quantity to Q2.
The price is larger than the competitive price while quantity is lowers than the competitive
quantity.
Question 3
Government is seeking to increase competition within the banking sector through
regulatory intervention. The competition regulator and RBA have modified budgetary
policies to boost competition in the industry. Regulators are pushing the banking system
towards an open banking system such that incumbent bank are forced to provide data to the
customers that would allow them to shop a better deal (afr.com, 2019). Government intends
to encourage competition in the industry to prevent exploitation of customers following
dominance of major banks. As shown in figure 1, major banks could collude and charge a
monopoly price and profit government focuses on increasing competition to control market
power of major dominating banks in Australia.
Question 4

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In a competitive market presence of supernormal profit triggers entry in the industry.
When firms in the competitive market enjoy profit above the normal profit then new firms are
interested to enter the market. With entry of new firms, market supply increases. Excess
supply in the market lowers price and profits (Mankiw, 2016). Entry continues to occur until
profit set back to zero economic profit. The process is shown in figure 2.
Figure 2: Entry process in the competitive market
At price P1, competitive firms enjoy an above normal profit. As a result new firms
enter, increases supply, decreases price and profit. Entry stops as price falls to P* where firms
can earn only normal profit.
Part B: Macroeconomics
Question 1
Discretionary fiscal policy refers to the policy designed by the government through
adjustment in expenditure or tax rates to protect the economy from business cycle shocks. In
times of recession, government takes expansionary fiscal policy by increasing expenditure or

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lowering tax rate (Attinasi & Klemm, 2016). This kind of policy by increasing aggregate
demand increases both GDP and price level.
Figure 3: Countercyclical effect of discretionary fiscal policy
Question 2
During 2014, unemployment in the Australian economy increased significantly.
Increase in labor force participation contributed to an increased unemployment rate for the
economy. The weak economic condition results in insufficient jobs for available workers.
The economy thus failed to achieve full employment or potential output. The equilibrium
output is less than potential full employment creating recessionary gap (Dullien et al., 2018).

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Figure 4: Australian economy in 2014
The economic condition of Australia during this time indicates an economic
downturn. Weak economic growth along with a high unemployment implies phase of
business cycle recession.
Question 3
The government of Australia is pursuing an expansionary fiscal policy by lowering
the corporate tax by 1.5 percent. Additionally, government increases the expenditure on
development. This kind of expansionary fiscal policy increases aggregate demand and help
the economy to move towards full employment level.
Figure 5: Impact of expansionary fiscal policy
Question 4
RBA currently is pursuing an expansionary monetary policy by keeping the interest
rate at a relatively low level. The low lending rate boosts investment activities in the
economy. This iwill also stimulates confidence of customers. Ease household budget and

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increases investment in turn increases aggregate demand supporting an expansion of
economic activity. Given the phase of economic downturn, this kind of policy is suitable for
the economy as it help to expand, GDP, price level and employment opportunity (Baumol &
Blinder, 2016).
Figure 6: Current monetary policy in Australia
Question 5
The lower dollar means a higher price of import. If the price of imported raw material
increases, then this increase cost of production. The higher production cost passes on to the
consumers in the form of a higher price. Consumers also pay a higher price for imported
goods and services. The lower dollar price thus increases inflation in Australia.
In 2015, inflation increased to 4% and unemployment increased to 7%. Policies
therefore needs to be taken to lower both inflation and unemployment. Demand side policies
fail to accomplish the two goals simultaneously. Expansionary policy that increases output
and lower unemployment also increases inflationary pressure. Only supply side policies can

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address the issue. An example of such policy is tax credit on investment. Tax concession on
investment encourages productive investment leading to an increase in aggregate supply
(Palley, 2015). As aggregate supply increases, output increases which lowers unemployment
while price level falls.
Figure 7: Policy to lower unemployment and inflation

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Reference list
abc.net.au. (2019). The big four spent up to 200 years swallowing other banks, but Hayne
may cause regurgitation. Retrieved from
https://www.abc.net.au/news/2019-02-01/how-did-the-big-four-banks-become-so-
dominant/10767994
afr.com. (2019). RBA, ACCC want more competition in banking. Retrieved from
https://www.afr.com/business/banking-and-finance/rba-accc-want-more-competition-
in-banking-20170920-gyl5jj
Attinasi, M. G., & Klemm, A. (2016). The growth impact of discretionary fiscal policy
measures. Journal of Macroeconomics, 49, 265-279.
Baumol, W. J., & Blinder, A. S. (2016). Principles of Macroeconomics. Cengage Learning.
Dullien, S., Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M.
(2018). Macroeconomics in Context. Routledge.
Karl, E., Case, F., Oster, R., & Sharon, E. (2019). Principles of Microeconomics. Pearson.
Mankiw, N. G. (2016). Principle of Microeconomics. Cengage Learning.
Palley, T. I. (2015). Money, fiscal policy, and interest rates: A critique of Modern Monetary
Theory. Review of Political Economy, 27(1), 1-23.