Economics Assignment: Government Intervention and Economy

This economics assignment explores the significance of government intervention in addressing market failures and improving economic conditions. It delves into the causes of market failure, including incomplete markets, externalities, and property resource issues, and examines government policies such as subsidies, taxation, and regulations to correct these failures. The report also analyzes different types of unemployment, focusing on the use of monetary policy, specifically interest rate adjustments and money supply management, to combat unemployment in Australia. Furthermore, it illustrates the impact of monetary policy on the Australian economy using the AD-AS curve, demonstrating how expansionary monetary policy can increase aggregate demand and reduce unemployment. Finally, the assignment discusses the determination of the value of the Australian dollar and the impact of exchange rate fluctuations on the external sector, highlighting the effects on trade and financial flows, and concluding with the importance of government intervention in stabilizing the economy.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author’s Note

1ECONOMICS ASSIGNMENT
Table of Contents
Introduction......................................................................................................................................2
Answer 1..........................................................................................................................................3
Causes of market failure..............................................................................................................3
Possible government policies for correcting this market failure.................................................4
Answer 2..........................................................................................................................................4
Types of unemployment..............................................................................................................4
Use of monetary policy for addressing unemployment problem.................................................5
Impact of monetary policy on the Australian economy using AD-AS curve..............................5
Answer 3..........................................................................................................................................6
Determination of value of $AUS.................................................................................................6
Impact of change in Australian currency on the external sector.................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2ECONOMICS ASSIGNMENT
Introduction
The purpose of this assessment is to analyze the importance of government intervention
for improving the state of an economy. The government intervention in a particular economy is
necessary as it helps to redistribute income for improving equality of opportunity as well as
equality of outcome (Ireland 2016). This study focuses on the causes of market failure and
government policies for correcting market failure. The importance of monetary policy for
addressing unemployment problem in Australia is also discussed in this study. The effect of
monetary policy on the Australian economy is also elucidated in this study. Furthermore, the
effect of change in Australian currency is also explained in this assessment.
Answer 1
Causes of market failure
As per Goodwin et al. (2015) market failure occurs when inefficient allocation of
resources occurs in free market. It happens when price mechanism fails in allocating scarce
resources effectively or market force operation leads to social welfare loss. There are some main
causes of market failure, which include-
 Incomplete market- Absence of markets for certain things such as property resources and
public goods is one of the reasons of market failure. Markets are missing mainly under
perfect competition.
 Externalities-The existence of externalities in production as well as consumption also
causes market failure. Brue et al. (2014) opines that, externalities are considered as
market imperfections where market provides no price for the service. These externalities
also leads to resources malallocation and causes production or consumption to fall of
Pareto Optimality.

3ECONOMICS ASSIGNMENT
 Property resources-Another reason for market failure is general property resource. The
common ownership along with open access might also lead to exploitation where the user
ignores the impact of their action.
 Over provision of demerit products- Over consumption of demerit commodities also lead
to negative externalities.
 Underproduction of merit products- Under production of merit products also leads to
failure in market.
Possible government policies for correcting this market failure
When market forces fail in allocating resources properly, the government might attempt
to intervene policies for correcting market failure. The government might intervene in the market
through several ways –
 The government might subsidize goods with positive externalities. This in turn increases
supply as well as reduce product price for encouraging production or consumption of a
commodity.
 The government also adopts taxation policy for reducing supply of products and therefore
enhancing price for discouraging production or consumption of products.
 The government integrates rules regarding production or use of products and backs this
legally via fines. This helps the government to tackle negative externalities.
Answer 2
Types of unemployment
There are numerous types of unemployment, which are given below-

4ECONOMICS ASSIGNMENT
Cyclical unemployment- This form of unemployment occurs if the economy experiences ups
and downs. It occurs when wages are too high since the workers do not accept low wages.
Moreover, when an economy enters into recession, several jobs lost are also considered as
cyclical unemployment (Gregory and Smith 2016).
Structural unemployment-This type of unemployment occurs due to absence of certain kind of
workers demand. It also occurs when existing sectors decline due to long tern changes in the
market conditions.
Frictional unemployment- This unemployment occurs due to turnover in labor market and time
it requires for workers in searching for new jobs. When workers change their jobs in the labor
market, it also considered as frictional unemployment (Mavromaras, Sloane and Wei 2015).
Use of monetary policy for addressing unemployment problem
The government adopts expansionary monetary policy for reducing unemployment in the
nation. The monetary policy integrated involves reduction of interest rates. Lower interest rate
reduces borrowing cost as well as motivate consumers for spending and investing. This in turn
increases aggregate demand (AD) and declines demand deficient unemployment (Bekaert,
Hoerova and Duca 2013). The government might also increase money supply for increasing
consumer expenditure. The policymakers might reduce direct or indirect taxes for encouraging
consumption. However, decrease in taxes on total profits might also motivate investment
(Goodwin et al. 2015).
Impact of monetary policy on the Australian economy using AD-AS curve
During the past few years, domestic economic stability was not attained fully. Even
though inflation has been slow, economic activity was slow and unemployment rate was high.

5ECONOMICS ASSIGNMENT
GDPGDP1GDP0
Price
P1
P0
AS
AD2
AD1
Fir correcting this circumstance, the policymakers of Australia has adopted expansionary
monetary policy with cuts in cash rate. The Australian government has increased aggregate
demand, economic activity and reduce unemployment through adoption of monetary policy. This
is explained with the help of AD- AS diagram. The initial aggregate demand curve is AD0
where economic growth and unemployment is relatively weak. This prompts RBA to integrate
expansionary monetary policy and reducing cash rate. This in turn increased the spending,
reduced unemployment rate and increased GDP of the Australian economy. As a result, this
increased the price of goods from P0 to P1 due to existence of unused capacity in Australian
economy.
Figure 1: Impact of monetary policy on Real GDP and unemployment of Australia
Source: ( As created by author)

6ECONOMICS ASSIGNMENT
Answer 3
Determination of value of $AUS
As per Mazzucato (2015), Australia has the floating exchange rate. The value of one
AUD is basically reported as nominal bilateral rate that is the rate at which per unit of Australian
currency can be exchanged for another. Provided that USD is world’s major currency, the
AUD/USD cross rate is considered. There are two measures of Australian dollar exchange rate
such as- bilateral exchange rate and trade weighted index (TWI). The bilateral exchange rate is
mainly against US dollar (AUD/USD). The Australian dollars are mainly traded against US
dollar, which is considered as major medium of exchange. TWI is not the price in form of single
foreign currency but the price in form of weighted average of currencies. It provides the measure
of rise or fall of Australian dollar against its currencies of this nation’s trading partners. This
gives more correct reflection of trade competitiveness since it involves exchange rate of the main
trading partners. Furthermore, the bilateral exchange rate is also considered as vital as main
proportion of this country’s trade is denominated in USD.
Impact of change in Australian currency on the external sector
Exchange rate is important to the Australian dollar due to its impact on trade as well as
financial flows between rest of the nations and Australia. Changes in the Australian currency
impacts this country’s external industry in two ways- direct and indirect. There occurs direct
impact on prices of products manufactured in this country relative to prices of commodities
produced internationally (Soesmanto, Selvanathan and Selvanathan 2015). There occurs an
indirect impact on the economic activity as well as inflation since variation in relative prices of
commodities and services manufactured domestically influence their decisions about
consumption and production. Mankiw (2015) has found out that the exports as well as imports,

7ECONOMICS ASSIGNMENT
GDP
Price
AD1
D
AD0
AS
P0
P1
domestic as well as foreign investors are affected by fluctuations in exchange rate. The change in
Australian currency impacts several sectors such as- mining, oil and gas and transport industries.
For instance, appreciating Australian currency positively affects evolution mining but adversely
affects the air transport industry. On the other hand, some companies might get positively
affected by increasing Australian currency since imported customer products becomes cheaper
with stringer AUD.
The change in Australian currency impacts this nation’s AD through its impact on export
and import prices. Decline in Australian dollar increases import prices by assuming elasticity of
demand (Brue et al. 2014). This in turn increases AD and shifts the AD curve to right, from AD0
to AD1. Thus, it creates improvement in balance of payments. On the contrary, increase in
Australian currency decline aggregate demand of the nation.
Figure 2: Shift in aggregate demand due to change in Australian currency
Source: (As created by author)

8ECONOMICS ASSIGNMENT
Conclusion
From the above discussion, it can be concluded that intervention of the government is
also vital in case of market failure. This is because if market fails in considering externalities and
likely to manufacture public goods, then the government of an economy subsidizes for providing
commodities with positive externalities. The policy intervention adopted by the government of
respective nation also helps to overcome recessions and decrease unemployment. As fluctuations
of Australian currency affects the external sector and economic performance, intervention of
government aids to stabilize economic health.

9ECONOMICS ASSIGNMENT
References
Bekaert, G., Hoerova, M. and Duca, M.L., 2013. Risk, uncertainty and monetary policy. Journal
of Monetary Economics, 60(7), pp.771-788.
Brue, S.L., McConnell, C.R., Flynn, S.M. and Grant, R.R., 2014. Essentials of economics.
McGraw-Hill Irwin.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Principles of
economics in context. Routledge.
Gregory, R.G. and Smith, R.E., 2016. 15 Unemployment, Inflation and Job Creation Policies in
Australia. Inflation and Unemployment: Theory, Experience and Policy Making, p.325.
Ireland, P.N., 2016. Monetary transmission mechanism. The New Palgrave Dictionary of
Economics, pp.1-7.
Mankiw, N.G., 2015. Ten principles of economics. Principles of Economics, pp.3-18.
Mavromaras, K., Sloane, P. and Wei, Z., 2015. The scarring effects of unemployment, low pay
and skills under-utilization in Australia compared. Applied economics, 47(23), pp.2413-2429.
Mazzucato, M., 2015. Innovation systems: from fixing market failures to creating markets.
Revista do Serviço Público, 66(4), pp.627-640.

10ECONOMICS ASSIGNMENT
Soesmanto, T., Selvanathan, E.A. and Selvanathan, S., 2015. Analysis of the management of
currency composition of foreign exchange reserves in Australia. Economic Analysis and Policy,
47, pp.82-89.