Principles of Microeconomics - Assignment Example

The paper “Principles of Microeconomics” is an excellent variant of the assignment on macro & microeconomics. First, it is important to understand that the inflation target rate of 2-3% indicates the rate that should be achieved within a particular period. In research by Thomas (2005), Taylor Rule requires that when inflation rises above the target rate, the Fed has to raise the federal funds rate target in order to slow down the growth of aggregate demand. This monetary policy has the effect of reducing inflationary pressures. Figure 1 serves to illustrate the effect of raising the nominal interest rate.

Figure 1: Monetary policy to curb inflationary pressure

Monetary policy rules demand that when inflation rises, the Fed responds by increasing the nominal interest rate. The real interest rate, as well, rises to reduce to the number of goods and services demanded effectively shifting the DAD curve inwards. The graph above represents the given values of the inflation target, output, and demand shock.

Question 2
Cost-push inflation is generated by the mentioned problem. Tucker (2010) maintains that cost-push inflation emanates from an increase in the general price level due to an increase in the cost of production. The scarcity of water, the emergence of new crop diseases, the escalating price of fertilizers and pesticides, and the declining supply of workforce affect the cost of production by increasing the general price level.

Question 3
Initial equilibrium: $1,200 billion
Real GDP: $1,200 billion
Autonomous investment: $50 billion
Multiplier: 4
Since AE = Y, the new aggregate expenditure after an investment of $50 billion is $1,400 billion (McEachern, 2011).

Figure 2: Upward shift in AE and an increase in GDP

According to figure 2, the injection of $50 billion shifts the AE line higher to trigger the multiplier effect, which generates a new equilibrium at $1,400 billion.

Question 4
The World Bank Group (2000) maintains that GDP and GNP growth rates are higher in developing countries compared with developed countries. One of the reasons is that developing countries have less capital per worker. As such, returns on capital are higher and a particular investment rate would give a higher growth rate in the stock of capital (Jain, 2006). Secondly, developing countries are now capitalizing on technologies that are already available in developed countries to improve their processes hence the fast pace of growth.

Question 5
Potential output is the long-run equilibrium output where the unemployment rate is equal to the natural rate (Gamber & Colander, 2006). It is the output when the facility is operating at full employment. On the other hand, the actual output is the short-run equilibrium, which indicates the production level that a firm is producing given the amount of currently available resources.

Potential output can be increased by increasing capital and labor.

Question 6
During deflation, fiscal policy can be utilized to support aggregate spending and push the price upwards (Elwell, 2010). Tax cuts or increasing spending is the required budget deficits that have a direct impact on aggregate demand. The Keynesian model comes into play to explain the impact on the output of increasing expenditure or cutting taxes. According to figure 3, an increase in government expenditure leads to an upward shift in aggregate expenditure eventually increasing equilibrium output from Y to Y*.

Figure 3: Upward shift in the AE curve

Question 7
Italian restaurant in Darwin is a monopolistic competitor earning supernormal profits in the short-run because the restaurant is not sharing demand in the market. According to Tewari (2003), such profits induce new firms to join the market in the long-run effectively eliminating supernormal profits. The long-run situation for new and old firms is that they will earn only normal profits given that the market is shared with new entrants. The short-run and long-run condition is illustrated using the figure 4 below.

Question 8

1. Considering an increasing proportion of the aging population in Australia, demand for health clubs will increase. This is because the elderly group of the population should be given medical attention. In order to meet the rising demand, the supply of the health clubs will increase.
2. The demand for general practitioner services will increase since the aging population requires general healthcare services.
3. The demand and supply of nightclubs will decline when the proportion of the aging population increases. Nightclubs are entertainment places for the younger generation and not those aged 65 years and above.
4. The market demand and supply for units and apartments will increase as the proportion of the aging population increases. The reason is that the elderly population would require a permanent home of residence.

Question 9
In understanding the present micro-economic environment in Australia, the concept of perfect completion has little use because of unrealistic assumptions that accompany the model. The model of perfect competition assumes that industry has a large number of firms supplying homogeneous goods (Arnold, 2015). Besides, the model assumes that the market has a large number of buyers, easy entry and exit and that the buyers and sellers have full information concerning the market. In the real world situation, a market that satisfies all the stated assumptions does not exist. This is why the model has little practical application. 

Question 10
Unit price received by a firm: $400

Total cost function:
Marginal cost function:

1. Profit maximizing level of output:
2. Total profit:
3. This is the short-run equilibrium before new firms are attracted by profits being earned in the industry.
4. Price received and quantity sold in the long-run:

In the long run, there is zero economic profit. The condition is that
Price is also equal to ATC in the long run hence;