Economics for Managers Homework Solution - Semester 1, 2024

This Economics for Managers assignment solution delves into the application of economic principles in a managerial context. The paper analyzes the impact of government interventions such as taxes and subsidies on market dynamics, specifically focusing on the markets for healthy and unhealthy foods. It examines the effects of subsidies on encouraging healthy eating habits and the consequences of taxes on unhealthy food consumption, drawing parallels to successful policies in areas like smoking and alcohol. The assignment further explores fiscal policies, contrasting the classical and Keynesian approaches, and discussing the use of fiscal stimulus during economic crises. It also covers automatic changes in fiscal positions, discretionary fiscal policy, and the implications of fiscal contraction and expansion, including their effects on interest rates and exchange rates. Finally, the solution assesses the effectiveness of monetary policy, particularly through interest rate adjustments, and its impact on investment, productivity, and international competitiveness, especially within the context of Australia's economy and its reliance on foreign borrowing. The assignment provides a comprehensive overview of economic concepts relevant to managerial decision-making.

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..........................................................................................................................................4
Answer a......................................................................................................................................4
Answer b......................................................................................................................................4
Answer c......................................................................................................................................5
Answer d......................................................................................................................................5
References........................................................................................................................................6

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Answer 1
Tax and subsidies are tools with which government intervenes in a free market scenario.
Unhealthy food and beverages adversely affects health condition and increases health
expenditure. In order to encourage healthy eating subsidies can be provided for foods like fruits
and vegetables. The effect of subsidy is described in diagram give below.
Figure 1: Imposition of subsidy in foods and vegetables market
A subsidy reduces the effective production cost. This encourages the producers to supply
more and accordingly the supply curve shift from SS to ScSc. The price that buyers pay is P2, a
price lower than the free market price. Sellers receive a price of P1, higher than market
equilibrium. The demand for high calorie food, vegetables, and low calorie dairy product is

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elastic and have elasticity greater than 1. Therefore, when price decreases then people increases
demand significantly and more health food includes in their diet.
Figure 2: Market for unhealthy food with a tax
When a tax is imposed then price of the product increases. The cost to sellers raises
because of tax payment. The supply curve shifts leftward. PC is the price paid by buyers after tax
and PS is the price sellers receive. The elasticity of unhealthy food like sweet and sugary snacks
are inelastic. Therefore, a higher burden is imposed on buyers. Success of tax policy in reducing
smoking and alcohol consumption in Australia make this policy recommendable for controlling
unhealthy food consumption (theconversation.com 2017).

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Answer 2
Answer a
The classical economists were in support of leaving the economy on the hand of free
market. Keynes in contras suggested government should intervene in the economy to rescue it
from crisis. After great depression of 1930s, the fiscal stimulus has received appeal to the
economist and policymaker. At that time, the instrument of monetary policy was unknown
(cis.org.au 2017). The concept was that government should increase spending in times of
recession. The support of government spending gives stimulus to private expenditure and lead to
economic expansion in the short-run through increase in aggregate demand. Keynes gave this
simple idea of fiscal stimulus to resist economic shock.
Answer b
Automatic changes in fiscal position refer to changes occur in fiscal position at the phase
of recession or economic expansion without direct government intervention. In recession, the
production in the economy goes down. As a result, a low income is received by people and hence
pay a low amount of taxes. The burden of some transfer payment increases automatically
affecting government budget.
Discretionary fiscal policy is the policy tool used by government in times of recession.
For example, in times of recession government reduces the tax rate to increase disposable
income of the people. Government also increases their spending during this time. This imposes
additional burden resulting in a deficit budget.

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Answer c
In order to make fiscal contraction an effective policy means unproductive or wasteful
expenditure should be redundant. A cut in wasteful expenditure has an impact on the money
market in terms of reducing interest rate. In times of fiscal expansion the money market
operation crowd out investment. Here, there is a crowd in impact on investment (cis.org.au
2017). A reduction in interest rate reduces cost of real investment and stimulate investment. A
counter effect of declining interest rate is strengthening exchange rate. The exchange rate affects
national income through the channel of trade balance. A stronger trade balances increases
aggregate demand and income.
Answer d
The framework of monetary policy is regarded as most suitable to expand
macroeconomic activity. The monetary policy in implemented in the form of a declining interest
rate. When interest rate reduces, the investment spurs because of a small borrowing cost.
Increased investment enhances productivity and give boost to economic activity (cis.org.au
2017). Related to the interest rate, a depreciation in the exchange rate is also occurred that
increase international competitiveness of Australia.
The monetary policy is more effective than fiscal policy in Australia because of
Australia’s dependence on foreign borrowing. The foreign funds have channelized through the
banking sector where interest rate is an import instrument.

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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].