Carbon Tax, Foreign Exchange Rate Value of the Economy's Currency, European Economies Recession - Assignment Example

1. The following effects will be witnessed in the short and long run for the following activities a. The imposition of a carbon tax upon local big polluting companies This will decrease the demand for products in the short run as the extra cost associated with the carbon tax will reduce the number of customers purchasing the product thereby making the demand curve to shift and will appear as follows The above graph shows that the demand will decrease in the short run due to increase prices which will be passed on. In the long run the effect of carbon tax will slowly wipe out as decrease in demand will make the manufacturer produce less. This will eventually push the price slightly and an equilibrium price and demand will be achieved at a different point. This is shown below Thus, both the demand and supply curves see the changes in the long run. b. An appreciation in the foreign exchange rate value of the economy’s currency Changes in the foreign exchange rate will have an effect on the aggregate demand and supply crves as shown below The appreciation of the local currency will increase the demand for goods and services as the economy will look towards purchasing more due to high purchasing power of currency. This will raise the demand for foreign products. This, it will result in an increase in equilibrium quantity and price as seen from the shift in the equilibrium quantity and price In the long run the effect will be as In the long run the supply will also increase which will create a situation where the change in equilibrium quantity is more than the change in equilibrium price as seen from the above graph. This will result in increase demand and price thereby making changes in the equilibrium quantity and price. c. The European economies all fall into recession The European economy falling into recession will decrease the demand for goods and services as people will spend less and hoard more money. This will decrease the demand in the short run keeping the supply the same and will look as follows The above chart shows decrease in demand from Eq1 to Eq2 due to recession which has brought changes in the equilibrium quantity and price. In the long run even supply will get reduced and a new level of equilibrium will be achieved as shown below The above graph shows that over a long run time period the supply will also fall which will result in changes in the equilibrium price and quantity and the new equilibrium point will be established. This is due to the fact that some producers will stop producing thereby reducing the supply to match the demand for goods and services. d. The country’s main exports fall in price while the goods the country imports from abroad rise in price This will have an effect on the demand and the magnitude of difference will depend whether exports are stronger or imports are stronger. This will result in a decrease in demand for product and is as follows The above chart shows that the demand for the product decreases because of changes in both export and import resulting in a new equilibrium to be established. There could be a situation where the demand increases and the change will be as follows The above graph show that the demand has increased thereby establishing a new equilibrium point for both the quantity demanded and supplied 2. Economist monitor the unemployment data to ascertain the level of employment and to forecast the future trends and government policies based on the unemployment data. An increase in the unemployment rate will decrease the interest rate in the near future because the government will look towards instigating spending. This can be done by allowing the public to have more money and making it possible for the industries to get loans at lower rate. The government with the objective of reducing the unemployment rate will reduce the interest rate so that industries get loans at cheaper rates which instigate demand for the goods and services thereby making industries hire more people and reduce the unemployment rate (Mankiw, 2008). This will also result in the fall of currency price as outside currency will become expensive in comparison to the currency of the local country. Reducing the interest rate will have an effect on the foreign exchange rate which will make the value of dollar or the local currency to fall in the international market. 3. The article which has been taken from The Australian published on 16th December, 2011 by Stewart highlights depleting mineral resources in Australia. The article has been taken because it highlights the manner in which depleting economic resources will affect the Australian growth rate in the near future. The economic concept which the article highlights is the unlimited human wants making the economic resources to deplete which will finally result in a situation where the economy is unable to ensure growth due to little resources. It also shows the substitution effect as the demand for gold has decreased which has increased the demand for copper. 4. The present mode of payment where the Australian economy is looking towards paying off their old mortgage and settling their credit card bills will have an effect on the future as people are delaying their future spending. This will have an effect on the future as when the debt is cleared than there will be nothing left to collect from the people. This will also lead towards a decrease in value especially when one’s house or superannuation nest egg decreases because it will have an effect on the spending pattern which will finally have an effect on the growth rate. 5. The difference between absolute advantage and comparative advantage is that absolute advantage means that the goods can be produced by a person or economy by using the minimum possible resources whereas comparative advantage means that the person or economy producing the good has comparative as they have a smaller opportunity cost. The difference between term of trade and exchange rate is that terms of trade is the price index for goods which are exported in comparison to the price index of imported goods where as exchange rate is the rate the currency of one country fetches in relation to the currency of another country The difference between the great moderation and the great inflation is that great modernization refers to asset price inflation where a great inflation relates to consumer price inflation The difference between a trade surplus and a budget surplus is that trade surplus results when the export is more than imports whereas budget surplus results when the government revenue or receipts exceeds the government spending. 6. The data pertaining to the economy of Australia which has been taken from Reserve Bank of Australia website and The Australian Bureau of Statistics website looks as follows Inflation 3.5% Unemployment 5.3% Economic growth rate 2.5% The size of the current account deficit $5,637 million Cash rate 4.25% The Australian dollar exchange rate 0.9895 on December 15, 2011 7. Economists state that a decrease in the budget deficit will eventually lead towards a rise in taxes because of the fact that the government needs to finance the budgets. Deficits results in a situation where the government has to make changes in the fiscal policies so that it is able to finance the government spending. Since, the government already has a shortfall in the form of deficit it will result in a situation where raising the taxes will ensure remedy for the government. The government to finance the deficit and to be able to finance future expenses need to bring changes in the tax structure. Increasing the tax rate will help the government to earn additional revenue which will be used by the government to finance the deficits thereby enabling them to ensure that the deficits is financed through increase in tax rate (McDermott & Wescott, 1997) 8. Every economy has to go through ups and downs which results in economic growth and recession. The Australian economy which hasn’t witnessed recession for the last 20 years doesn’t demonstrate that the business cycle doesn’t work. It simply states that the period in which an economy moves from economic growth the recession has increased. For example, suppose that the Australian economy gets into recession after every 5 years but it hasn’t got into recession for the last 20 years suggest that the time span in which an economic cycle gets completed has grown. The growth in the time period for the cycle to pass from one stage to another has resulted in the Australian economy not witnessing recession and once the time period gets complete the economy will slowly move into recession thereby completing the economic cycle. 9. The mineral resource boom is beneficial for the Australian economy and will have an impact on all other sectors. The mineral boom will help to increase the revenues due to increased sales which will result in higher wages and employment opportunities for more people. This will translate into more people getting jobs resulting in better purchasing power which will thereby translate into better per capita GDP and growth rate. The sectors which will be benefitted the most are the one that are directly related to the minerals and use it as their raw materials. The other sectors will also be benefitted but indirectly and the magnitude of benefit for those will be limited. Despite, the manner in which the mineral boom will affect different sectors on the overall basis the Australian economy will be benefitted (Riley, 2006). 10. There are situations when the monetary policy used by the government doesn’t work and becomes ineffective. Monetary policy doesn’t work when the economy is in an expansionary phase and inflation is also rising. Using monetary measures to control the inflationary rates by tightening of interest rates doesn’t provide the same advantage and doesn’t controls the inflation rates thereby making the monetary policy to be ineffective (Stavrou, 2011). Fiscal policy proves effective as government spending and taxation as the mechanism to control aggregate demand. This thereby makes the government use the budget and plan the expenditure accordingly so that the policy used by the government provides the correct results and help the economies to be able to grow. References Australian Bureau of Statistics website. (2011). Australian Bureau of Statistics Retrieved on December 15, 2011 from http://www.abs.gov.au/ McDermott, C. & Wescott, R. (1997). Fiscal Reforms that Works, International Monetary Fund. Retrieved on December 14, 2011 from http://www.imf.org/external/pubs/ft/issues4/index.htm Mankiw, Y. 2008. The influence of monetary and fiscal policy on aggregated demand. Short Run economic function. The Times Magazine Reserve Bank of Australia website. (2011). Reserve Bank of Australia website. Statistics Retrieved on December 15, 2011 from http://www.rba.gov.au/ Riley, G. 2006. Macroeconomics: Fiscal Policy effects. Eton College. Retrieved December 15, 2011, from http://www.tutor2u.com Stewart, R. 2011. Oz Minerals Cuts Resource Estimate for Gold, Lifts Copper Assessment. Retrieved on December 16, 2011 from http://www.theaustralian.com.au/business/mining-energy/oz-minerals-cuts-resource-estimate-for-gold-lifts-copper-assessment/story-e6frg9df-1226224172968 Stavrou, P. 2011. ECB Monetary olicy doesn’t work with a broker Credit Line. Retrieved on December 16, 2011 from http://protesilaos.blogactiv.eu/2011/12/09/ecb-monetary-policy-does-not-work-with-a-broken-credit-line/ Read More