Economics for Manager: Homework Assignment Solution, Semester 1

This economics assignment explores the impact of government policies on economic activities. The solution examines the effects of taxing unhealthy foods and subsidizing healthy alternatives, considering demand elasticity. It further delves into fiscal policy during recessions, including government expenditure, tax changes, and the concept of automatic changes in fiscal position. The assignment also analyzes the effectiveness of fiscal contraction and monetary policy, particularly interest rate adjustments and their influence on investment, exchange rates, and economic growth, with a focus on the Australian context. The document also provides a detailed analysis of the effectiveness of different economic policies to manage economic challenges.

Running head: ECONOMICS FOR MANAGER
Economics for Manager
Name of the Student
Name of the University
Author note

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

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Answer 1
Unhealthy food habit of people increases government cost of health service. In order to
change people’s habit from unhealthy food to healthy ones government in many countries has
imposed tax on sugar and other unhealthy products. Australia imposes tax on cigarettes and
alcohol and get a positive result in terms of reduced smoking and alcohol (theconversation.com
2017). Along with taxing unhealthy food product, a subsidy on healthy product can be proved
beneficial. The extent of effectiveness on either policy depends on the demand elasticity of the
food items.
Figure 1: Effect of subsidy on healthy food item
(Source: As created by Author)

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D0D0 and S0S0 are the demand and supply curve for unhealthy food items. A subsidy on
healthy food products reduces the cost to the producer an increases supply as reflected from a
shift of the supply curve from S0S0 to SS. The price to the consumer is PB and price to producer is
PA. The lower price induces consumers demand more than the price change for products having
elastic demand. Elasticity for high calorie fruits, vegetables, and dairy product of low calorie is
greater one. Therefore, subsidy on these items are more beneficial.
Figure 2: Effect of tax on unhealthy food product
(Source: as created by Author)

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A tax on unhealthy food items shifts the supply curve leftward from S0S0 to St. The
burden of tax however depends on the elasticity of supply and demand. Unhealthy food items
with inelastic demand means buyers bear a greater burden of taxation and hence gradually
reduces demand for these items moving towards a healthy diet.
Answer 2
Answer a
In times of recession, the economy faces a downturn in economic activities. The
aggregate demand needs to be pushed up to rescue the economy. Government expenditure is an
important component of aggregate demand. Increase in government expenditure increases
demand. It also affects private spending by raising disposable income. This is the simple idea as
proposed by J.M. Keynes (cis.org.au 2017).. The idea was to give fiscal stimulus in times of
economic contraction. Keynes gave the simple idea of the need for government support in
contrast to classical concept of a completely free market economy. Monetary policy for
influencing economic activity was not introduced then.
Answer b
Recession causes a decline in growth rate. People face a decline in the income. They pay
lower taxes reducing the tax revenue. Because of economic contraction unemployment increases
and government needs to give more transfer payments. This affect government budget. These
sort of changes that occur in budget without direct intervention is called automatic changes in the
fiscal position (cis.org.au 2017).
In contrast to automated fiscal policy, discretionary fiscal policy is implemented by
altering government expenditure and taxes. In recession, government increases their expenditure

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to increases demand and productivity. Tax rate are reduced to freed up more spendable income
and boost demand. The additional burden on government budget results in a budget deficit.
Answer c
Fiscal contraction refers to reduction of government expenditure or increase in the tax
rate. Generally, tight fiscal policy leads to economic contraction. However, fiscal contraction is
can be beneficial for the economy when the policy is implemented in form of cutting expenditure
in wasteful areas. The parallel activity in the money market reduces the interest rate and induce
investment with crowd in effect. Reduction in interest rate means reduction in the cost of real
investment and increases productivity by stimulating investment (cis.org.au 2017).. A related
effect on reduced interest rate is the strong exchange rate and improves net export balance that
increase national income.
Answer d
Monetary policy works with different instruments of the money market. The common
monetary tool is the interest rate of the economy. An effective monetary policy can be
implemented in the form of reducing interest rate. When interest rate reduced then borrowing
cost becomes lower and hence, encourage investment. The increased investment gives stimulus
to the economy and bring economic growth. Associated with a declined interest rate, there is a
depreciation of the exchange rate. The depreciated currency positively affects national income.
The expansionary monetary policy is more effective to give stimulus to a financial
economy. Australia has a strong financial sector and the economy is relied borrowing from
external sector (cis.org.au 2017).. Therefore, monetary policy is more effective than fiscal
expansion.

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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 26 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 26 Oct. 2017].