Economics for Managers: Assignment 3 - Economic Policies and Analysis

This economics assignment analyzes key concepts including own price elasticity, demonstrating its application in understanding the demand for various food categories and the impact of taxes on consumer behavior and market efficiency. The assignment further explores the use of fiscal and monetary policies to combat economic recessions, focusing on the effects of government expenditure, interest rate adjustments, and automatic stabilizers. It differentiates between discretionary and automatic policies, highlighting fiscal contraction and its impact on government debt and economic growth. The analysis also compares fiscal and monetary policies, emphasizing the speed and effectiveness of monetary policy through interest rate adjustments. The assignment concludes with a list of relevant academic references supporting the economic principles discussed.

Running head: ECNOMICS FOR MANAGER: ASSIGNMENT
ECNOMICS FOR MANAGER: ASSIGNMENT
Name of Student:
Name of University:
Author Note:

1ECNOMICS FOR MANAGER: ASSIGNMENT
ANSWER-1:
a) The idea of own price elasticity Ed = % ΔQ
% Δ P , helps to detect the responsiveness of
quantity demanded to the changes in price and also makes us aware of whether the
demand is elastic (e>1), inelastic (e<1) or unitary elastic (e=1). The elasticity of different
food category clearly reveals that people crave for unhealthy foods like sweets and sugar
based snacks as they have lower elasticity reflecting inelastic demand. That is for one
unit change in price the amount change in demand would be less than one unit. The
demand for fruits, vegetables and milk are elastic in nature referring to greater fluctuation
in demand in response to price changes. The consumption of unhealthy goods leads to
increased heart diseases, diabetes and cancer which further pushes up the government
expenses on health Government in order to discourage the consumption of such
unhealthy goods, imposes tax on sugar based items.
DWL
Q
E0
S
D
10
9
8
P
S (with tax)
10080

2ECNOMICS FOR MANAGER: ASSIGNMENT
(Source: Author)
Suppose the price of cupcakes was $9 in the equilibrium and per unit tax of $ 2 have been
imposed. Now consumers have to pay $10 as $1 they pay as tax and sellers receive $8
contributing to the tax payment. The impact of tax shows that prices of cupcakes rise and that
discourages less consumption evident in falling quantity demanded. Government is able to earn
tax revenue. Part of consumer surplus and producer surplus will leak out of total surplus and
create deadweight loss symbolic of market inefficiency.
ANSWER-2:
a) The simple idea here refers to the fact that recessionary impact can be battled through
expanding the demand of the economy. The basic focus is on the demand side than
supply side. Demand can be expanded through two channels. One is increase in the
government expenditure and other is decrease in rate of interest. This indicates
expansionary fiscal and monetary policy that helps boost the depressed spending level in
economy. The Great Depression led to fall in economic output through a chronic
downturn in the economic activities. Increasing demand pushed for more production that
enhanced economic output in the short run. The impact is temporary because over time
the increase in the output and price level would also put upward pressure on rate of
interest. This would attract consumers to reduce consumption and save more.

3ECNOMICS FOR MANAGER: ASSIGNMENT
P
Q
AD
AS
b) Automatic stabilizer refers to market condition that responds and operates lying outside
the policymaker’s advise. For example, In time of recession since there is epidemic fall in
output so is the increase in unemployment, the tax revenue of government keeps falling.
This induces government to spend more on unemployment allowance. Inflation on the
other hand government can earn more tax revenue from employed people and have less
spending to make on allowance schemes. The change of strategy is based on the changes
in market condition than discretion of government that refers to strong policy action
taken up by government over existing policies in order to bring stabilization.
(Source: Author)
The discretionary policy reflects in two ways, increase in government expenditure and
fall in tax rate. While the former increases the employment opportunity, the later
increases disposable income hence consumption. Both of these shifts aggregate demand

4ECNOMICS FOR MANAGER: ASSIGNMENT
pushing up the price level as well as national output. This makes he country come out of
recession.
c) Fiscal contraction refers to cutting back public expenditure that government makes. It
focuses on reduction of the government expenses while increasing the revenue and pave
way toward budget surplus. The revenue is increases through increasing tax rates. Greater
tax revenue consolidate government’s source of income and makes it less dependent on
other sources of resources through borrowing. This reduces debt burden of the
government and increases national savings that can further be employed in research and
development of the nation. Moreover, fiscal contraction reduces possibility of hiked
interest rate and crowding out effect that reduces the expansion of consumption,
investment, net export affecting the aggregate demand as whole. This allows the nation to
achieve economic growth over long run.
d) The main component that gets determined by the monetary policy is the interest rate. The
changes in rate of interest determine the mode and extent of stimulus. When the interest
rate is low, the cost of borrowing isles and this induces more business expansionary
operation. Moreover the low interest rate encourage people to hold money in hand
through open market operation than save or invest. This indirectly increases consumption
demand, investment and net export through increased production boosting the AD as
whole,

5ECNOMICS FOR MANAGER: ASSIGNMENT
MS
MS1
MD
r
Q
(Source: Author)
Fiscal policy when expansionary can lead to budget deficit after a point of time
and can be politically influenced. There is time lag in order to make the fiscal policies
effective. Monetary policy is better since it can start acting independently and very
quickly through signals sent to market. The retail business are quick responsive to the
falling interest rate than reduced tax rates or increased government expenditure.

6ECNOMICS FOR MANAGER: ASSIGNMENT
REFERENCE
Afonso, A. and Sousa, R.M., 2012. The macroeconomic effects of fiscal policy. Applied
Economics, 44(34), pp.4439-4454.
Bibow, J., 2013. Keynes on monetary policy, finance and uncertainty: Liquidity preference
theory and the global financial crisis. Routledge.
DeLong, J.B. and Summers, L.H., 2012. Fiscal policy in a depressed economy. Brookings
Papers on Economic Activity, 2012(1), pp.233-297.
Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new
Keynesian framework and its applications. Princeton University Press.
Taylor, J.B., 2012. Monetary policy rules work and discretion doesn’t: A tale of two
eras. Journal of Money, Credit and Banking, 44(6), pp.1017-1032.
Vaona, A., 2012. Inflation and growth in the long run: A new Keynesian theory and further
semiparametric evidence. Macroeconomic Dynamics, 16(1), pp.94-132.