QUESTION

Question 1.  Read the following statement and answer the question that follows:

‘Economics teaches that a higher interest rate lowers investment, but this does not make sense.  I know that if I can get a higher interest rate I am going to invest more in my savings and investment accounts thereby increasing investment’  Do you agree with this reasoning.  Why?  Why not?

Question 2.  Illustrate and explain the effect of each of the following on the equilibrium price level and quantity.  Use the AD-AS diagram to illustrate your answer. (2 + 2 + 2 = 6 marks)

China and Japan increase spending on Australian mining exports.

1. The Federal Government increases indirect taxes on alcohol and tobacco.
2. The economy experiences deflation (inflation rate is – 2%).

Question 3.  Suppose the price of a barrel of oil increases from $100 to $150.  Use the aggregate demand and aggregate supply diagram to show the short-run and long-run effects on the Australian economy.  Briefly explain your answer.  (4 marks)

Question 4.  During the 1990s and early 2000s firms implemented new technologies that increased productivity.  Briefly discuss why firms might be likely to implement new technologies during a period when (a) demand is rising and (b) demand is falling.

Question 5.  Read the following statement and answer the question that follows:

“Some economists claim that a possible cause of the economic downturn in 2008-09 was a decline in investment.  This cannot be true.  If there had been a decline in investment the only firms hurt would have been in construction firms, computer firms and other firms selling investment goods.  But in fact, many firms experienced falling sales during this time, including car firms, furniture retailers and cinemas.’  Do you agree with the economists’ claim?  Why? Why not? (2 marks)

Question 6.  Use the market for loanable funds to illustrate and explain what happens to the equilibrium interest rate and the quantity of loanable funds, and the quantity of saving and investment, when the federal government is consistently in surplus.

Question 7.  Read the following statement and answer the question that follows:

‘Most of Australia’s money supply is created by banks making loans’. Explain this statement.  Do you agree?  Why? Why not?

Question 8.  If bank customers withdrew their deposits from Non-Bank Financial Institutions and deposited these funds in term deposits with banks.  Would this action decrease the total quantity of Broad Money and M3?  Explain.  Would this action have an impact on credit creation?  Explain your reasoning

SOLUTION

Question 1: economics is all about the study of an individual, while macro economics includes the study of a group or a country as a whole. Macroeconomics (Blanchard, Olivier, 2000) is a part of economics that deals with the structure of performance, behavior and the decision-making of the whole economy. Macroeconomics comprise national, global and area-wise economy. Alongside microeconomics, macroeconomics is one of the most general field in economics. The study of this type of economics has indicated methods, including GDP, unemployment rates, and price indexes to get a knowledge about the functioning of whole economy. This is responsible for developing models that explains the relationship amongst factors such national income, output, unemployment, consumption, inflation, savings, international trade and finance. Business Disruption (Thompson, 2011) is the cost insurance of business that covers the loss of income that the operation faces after a disaster, however it is being rebuilt. Business disruption cost, which is also known as business income expense, takes care of any physical damage occurs to the business, with extra coverage allocated by the business disruption policy to cover the profits that might have been earned at the time of disruption. This provision of additional plan is applied to all the business and operations, as it was created to keep a business in a same position, when it comes to finance of the operations. The disruption remains in the business taking care of the financial issues, if the company does not face the losses for a longer time, otherwise it has be removed by the company, as it cannot its cover its losses in the market. The Business Disruption Expenses also enumerate the decrease in the operating cash flows of assets as control hikes. These expenses can lift up to 30%, of the company’s value.

Question 2:

(i). The regulation theory in Australia is a point of discussion and comparison. Over so many years there have been several points or debate, discussion and arguments on the requirement of for regulation. There are many points included in this regulation that are markets do not function every time in the greatest interest of the societies and to optimize the allocation of resources. Although, these interests form some sort of intervention according to the requirement of the regulation.

The issues of regulation of accounting became an issue of concern and discussion, specifically following the economic crisis and crash of the year 1920-30s that headed to for the accounting theory and principles defined. The main aim of accounting is to offer details and detail to the involved parties, who might not have contact to full or partial, but required economic decision. Due to their information disadvantage, they are irregularity in the working and use of information.  However, the regulation of accounting is seen as relating to “sustained and focused control exercised by a public agency over activities valued by a community” (Baldwin, Cave, 1999), there are other outlooks. Accounting policy in Australia a requirement, but it is over-rated and the main reason of this over-rate is that government is the ultimate monopoly (Baker, 2005.)

(ii).                    All the departments of the government must have a rigid, declining, regulatory budget – measured both by quantum and pressure of regulation. Any organization (Majone, 1996), which goes over the budget of the government, is likely to be banned from launching new regulations until they find old regulations to remove. The yearly budget for each section would lead to a decline in the overall regulatory burden each year (R v London County Council).

(iii). The economic method to manage is constant with the theory of public choice that focuses on the limit to which the behavior of government is meant by imagining all performers as balanced entity maximizers of their own welfare. Analysis is led to the challenging methods (Peltzman, 1979) of the entities included– how they get across the regulatory that aims for adding their own aims. As a result, private interests are served in spite of the the common interest. Public selection theory settles the questions related to politics and economics. It depends on the neo-classical monetary expectations of rational selection, which is also known as self interest to guess the behavior of politicians, who are also called as the regulators. These politicians only pass those regulations that allow their scope of reelection which, as discussed in the section above, will head the politicians to those that have the methods to add this goal.

Question 3: This is the model of business disruption (Leland, 1994) that any company adopt, gets a properly customized and analyzed financial position of the company. With this model the organization gets the following:

1. A follow up of the geometric value of the geometric value of the company, on the basis of option pricing model.

2. Calculation of debt that the company faces. As mentioned above the result of the debt, calculated by the model should be more than 30% to be deductable. If it is less than the mentioned percentage, the model does not consider it to be enough to be counted as debt for that company.

3. Despite the interest rate of the debt, the model shows it as loss and provides the solution to the company to conquer it. The solutions provided by the model are auto-generated and are business friendly. Most of the companies across the world depend on these solutions and implement them in the working of their operations, wherever and whenever required.

Question 4: All the departments of the government must have a rigid, declining, regulatory budget – measured both by quantum and pressure of regulation. Any organization (Majone, 1996), which goes over the budget of the government, is likely to be banned from launching new regulations until they find old regulations to remove. The yearly budget for each section would lead to a decline in the overall regulatory burden each year (R v London County Council).

This policy is not normally understood to be a part of the common law, and so a law continues in force, until canceled by parliament, although long the time may have been since it was known to have been actually imposed.  There is though some model for the principle, and at times the Latin maxim “jus incognitum” or “unknown rule” has been used to change down unclear and outdated rules by the courts. Developing the principle of desuetude would give the prosecutors the methods to strike down old, the legislation that is not used as no longer law – of course, the regulations for this must be a bit restricted, so that objector moderators cannot use the approaches to hit down legislation only as they do not like it.

Question 5: All the departments of the government must have a rigid, declining, regulatory budget – measured both by quantum and pressure of regulation. Any organization (Majone, 1996), which goes over the budget of the government, is likely to be banned from launching new regulations until they find old regulations to remove. The yearly budget for each section would lead to a decline in the overall regulatory burden each year (R v London County Council).

This policy is not normally understood to be a part of the common law, and so a law continues in force, until canceled by parliament, although long the time may have been since it was known to have been actually imposed.

Question 6: The economic method to manage is constant with the theory of public choice that focuses on the limit to which the behavior of government is meant by imagining all performers as balanced entity maximizers of their own welfare. Analysis is led to the challenging methods (Peltzman, 1979) of the entities included– how they get across the regulatory that aims for adding their own aims. As a result, private interests are served in spite of the the common interest. Public selection theory settles the questions related to politics and economics. It depends on the neo-classical monetary expectations of rational selection, which is also known as self interest to guess the behavior of politicians, who are also called as the regulators. These politicians only pass those regulations that allow their scope of reelection which, as discussed in the section above, will head the politicians to those that have the methods to add this goal.

Question 7: The current stage of the economic cycle surely mentions that country is going to see more companies in difficulty, many other issues from clients regarding investments, and more criticisms basically about revelation, suggestions and tricks. Actually, the standards of corporate governance basically have been set as a standard by many of the trading partners of country. Regardless of the fact that the nation does not believe that these subsides show a systemic failure of governance, also not a return to some of the endemic features of 1980s. There has been public discussion latest surrounding the correctness of the “unitary board” corporate governance model. However, the regulation of accounting is seen as relating to “sustained and focused control exercised by a public agency over activities valued by a community” (Baldwin, Cave, 1999), there are other outlooks. Accounting policy in Australia a requirement, but it is over-rated and the main reason of this over-rate is that government is the ultimate monopoly (Baker, 2005. The impact of this governmental monopoly on the law-making procedure is to manage that what is produced and the ways of distribution of consequential production within the societies. The governments driven environments that are not checked properly are ever an expanding perpetual-motion machine. Any administration is rapidly confined by special-interest units such as the receivers of the regulation, the minister and their staff who are keen to keep that portfolio and make it influential; the departmental employees, who run the regulation and wish to make it “better” and non beneficiaries who do not want to be excluded.

Question 8: The regulation theory in Australia is a point of discussion and comparison. Over so many years there have been several points or debate, discussion and arguments on the requirement of for regulation. There are many points included in this regulation that are markets do not function every time in the greatest interest of the societies and to optimize the allocation of resources. Although, these interests form some sort of intervention according to the requirement of the regulation.

The issues of regulation of accounting became an issue of concern and discussion, specifically following the economic crisis and crash of the year 1920-30s that headed to for the accounting theory and principles defined. The main aim of accounting is to offer details and detail to the involved parties, who might not have contact to full or partial, but required economic decision. Due to their information disadvantage, they are irregularity in the working and use of information.  However, the regulation of accounting is seen as relating to “sustained and focused control exercised by a public agency over activities valued by a community” (Baldwin, Cave, 1999), there are other outlooks. Accounting policy in Australia a requirement, but it is over-rated and the main reason of this over-rate is that government is the ultimate monopoly (Baker, 2005. The impact of this governmental monopoly on the law-making procedure is to manage that what is produced and the ways of distribution of consequential production within the societies.

REFERENCES:

“R v London County Council”; Ex parte Entertainments Protection Assn Ltd , 1931 2 KB 215

Baldwin, R & M Cave, 1999, “Understanding Regulation, Theory, Strategy and Practice, Oxford”, Oxford University Press

Baker, C .R., 2005, “What is the meaning of ‘the public interest’ Examining the ideology of the American accounting profession”, Accounting, Auditing and Accountability Journal, v 18, pp 690-703

Majone, G., 1996, “Regulating Europe, London, Routledge”

Peltzman, S., 1979, “Toward a More General Theory of Regulation”, Journal of Law and Economics, v 19, pp 211-240

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