RESPONCES TO THE ANSWERS
Study Guide for BUS102 Introduction to Economics 2018 - Semester 1 Contents Chapter 0: Course Information10 Key points – Chapter ZERO10 Brief summary of course information10 Course information11 Learning support12 Blackboard12 Hints for success in this course13 Reading14 Assessment tasks14 Task #1 – online multiple choice tests15 Task #2 – responses to articles15 Task #3 – Final exam16 Chapter 1: Opportunity Cost; The Policy Consensus; Economic growth17 Key points – Chapter one17 Introduction17 A parable: The broken window fallacy18 Opportunity cost21 Can economists agree on anything?22 Some history of economic thought22 Economic policy consensus before the Global Financial Crisis24 Keynesian policy27 Why is economic growth so important?28 The power of compound growth28 End of chapter exercises – chapter 131 Multiple choice31 Multi-choice answers35 Tutorial exercises35 Review of key points – Chapter 139 Chapter 2: GDP and the general price level40 Key points – Chapter 240 Introduction40 GDP and other definitions40 Components of GDP43 Inflation44 Nominal vs real prices45 Why is inflation a problem?47 Why is deflation a problem?49 The quantity theory of money50 What is money anyway?51 How do the commercial banks create money?52 End of chapter exercises – chapter 253 Multiple choice53 Multi-choice answers57 Tutorial questions57 Review of key points – Chapter 264 Chapter 3: Money and interest rates65 Key points – Chapter 365 Introduction65 The term structure of interest rates65 How do interest rates influence economic activity?66 Consumption67 Investment67 Government spending72 Net exports72 Monetary policy73 Taylor rule74 The price of a bond and its rate of return (interest rate)75 When monetary policy comes up against deflation76 End of chapter exercises – chapter 377 Multiple choice77 Multi-choice answers81 Tutorial questions81 Review of key points – Chapter 386 Chapter 4: The business cycle and unemployment87 Key points – Chapter 487 Introduction87 What is the business cycle?87 The business cycle87 Which variables are pro-cyclical?89 What causes free market instability?91 Unemployment93 Facts and definitions93 The unemployment-inflation trade-off95 References98 End of chapter exercises –chapter 499 Multiple choice99 Multi-choice answers103 Tutorial questions103 Review of key points – Chapter 4107 Chapter 5: Keynesian economics and neo-classical economics108 Key points – Chapter 5108 Introduction108 Fiscal policy vs monetary policy108 The Keynesian approach to fiscal policy109 Deficits and automatic stabilisers109 The economy as a circular flow110 The Keynesian multiplier112 The Keynesian prescription113 The growth of government114 End of chapter exercises –chapter 5117 Multiple choice117 Multi-choice answers121 Tutorial questions121 Review of key points – Chapter 5125 Chapter 6: The market system –supply and demand126 Key points – Chapter 6126 Introduction126 The market system126 Economic systems126 Prices127 Market supply and demand128 Shifts in supply and demand130 Some thought experiments in supply and demand132 What happens if a price ceiling is set?132 What happens if a price floor is set?133 Who will bear a tax imposed on a good?134 Applications of markets in macroeconomics135 The market for loanable funds135 What can the loanable funds approach explain?136 The bond market137 The labour market138 End of chapter exercises –chapter 6141 Multiple choice141 Multi-choice answers145 Tutorial exercises145 Review of key points – Chapter 6151 Chapter 7: The efficiency of the market system152 Key points – Chapter 7152 Introduction152 Consumer surplus, producer surplus and the efficiency of the market system152 The context of the market system154 How interventions reduce economic welfare155 What has economics to say about the firm's pricing decision?156 Price elasticity of demand157 Determinants of a product's elasticity159 Other types of elasticity160 End of chapter exercises – chapter 7161 Multiple choice161 Multi-choice answers166 Tutorial exercises166 Review of key points – Chapter 7171 Chapter 8: competition and market power172 Key points – Chapter 8172 Introduction172 A simple rule for profit maximization172 Example of calculating marginal cost173 The profit-maximizing rule174 The marginalist principle in general175 The principal-agent problem176 When should the firm invest or take on labour?177 Labour and capital177 The hiring decision177 Limitations of neo-classical labour market analysis178 The market vs the firm: transaction costs178 How can a firm sustain market power?179 Market structure and market power179 How to keep market power or competitive advantage180 Oligopoly183 End of chapter exercises – chapter 8184 Multiple choice184 Multi-choice answers188 Tutorial exercises: Profit maximization and market power188 Review of key points – Chapter 8192 Chapter 9: Market failure and government Intervention193 Key points – Chapter 9193 Introduction193 Should government encourage competition?193 Types of regulation194 Reinforcing the price mechanism194 Consumer protection195 The capture theory of regulation196 Privatisation196 Can government intervention improve market outcomes?197 The tradition of objection to uncontrolled capitalism197 Income redistribution197 Abuse of monopoly or market power199 Externalities199 Public goods201 Information as a public good202 If market failure, why not government failure?203 End of chapter exercises –chapter 9204 Multiple choice204 Multi-choice answers208 Tutorial questions208 Review of key points – Chapter 9214 Chapter 10: trade; capital and labour flows215 Key points – Chapter 10215 Introduction215 Can there be anything to gain from trade protection?215 Why does trade take place and what are its advantages?215 Absolute advantage and comparative advantage216 Absolute advantage and comparative advantage in words216 Absolute advantage and comparative advantage in numbers217 What determines comparative advantage?218 Factor endowments219 Other reasons for trade220 Should the government intervene, and if so, what is the ‘best’ way to intervene?221 Trade liberalisation223 If free trade in goods is a good thing, how about free flow of the factors of production?224 Free flow of the factors of production?224 What do we mean by capital flows?225 Modelling capital flows: supply and demand again!225 Free trade of goods … free flow of capital … free flow of labour?228 Theory: the gains from migration228 It’s not all about wages229 End of chapter exercises –chapter 10230 Multiple choice230 Multi-choice answers235 Tutorial questions235 Review of key points – Chapter 10240 Chapter 11: The balance of payments; exchange rates241 Key points – Chapter 11241 Introduction241 The balance of payments241 What is the BOP?241 What the BOP is not243 Does the BOP matter?244 The exchange rate245 Volatile exchange rates: a problem for an importer245 The exchange rate defined246 Trade-weighted index247 The real exchange rate247 What determines the value of AUD?248 A fixed exchange rate249 The currency market249 Exchange rate theories251 Purchasing power parity251 Limitations of PPP252 Interest rate parity252 Bubbles and sentiment253 How can you prepare for the exam?253 End of chapter exercises – chapter 11254 Multiple choice254 Multi-choice answers258 Tutorial questions258 Review of key points – Chapter 11262 Appendix: The use of mathematics in economics263 Topics263 Percentage changes264 Examples264 Simple and compound interest265 Examples265 Present value267 Examples267 Real versus nominal interest rates268 Examples268 Real versus nominal prices269 Examples269 Exercises for practice271 Answers273 Chapter 0: Course Information Key points – Chapter ZERO The most important points covered in this chapter are: (1) The ASSESSMENT tasks that you need to complete. (2) The ESSENTIAL READING. (3) How best to succeed in this course. Brief summary of course information It is fundamental to complete all assessment tasks if you want to pass this course; the main reason for students failing in the past is not submitting all assessment tasks. The assessments consist of: (1) Nine online multiple-choice tests. These are similar to the test at the end of each chapter of this guide. Your best six count for five marks each for a total of 30%. You can find the tests on Blackboard under “Assessment.” (2) There are two articles to read and answer questions about. Each is worth 15% for a total of 30%. For deadlines and template, look on Blackboard in “Assessment.” (3) An exam. This is at the end of the course and is a closed book exam. A sample exam will be posted on Blackboard close to the end of the course. The exam is worth 40%. This Study Guide is essential reading for the course. No text book is necessary; if you want to read more, use the library or internet. Each chapter in this guide contains notes and tutorial exercises. There is space in the tutorial exercises for you to write in your answers. Understanding the tutorial exercises is the key to success in this course. Please consult Blackboard to find out the schedule of when assessment is due and what you need to do to keep up. Although the course outline provides such information, it is better to check Blackboard regularly in case any changes have to be made. Extensions to assessment deadlines will only be given for exceptional circumstances such as serious illness or bereavement and not for workload reasons or time management issues. If you have questions about course content, please post them on the Discussion Board on Blackboard or email the course coordinator or tutor. Staff contact details can be found on Blackboard. Course information This course is compulsory for students of Business, but the ideas in it are equally useful to students in Arts and Sciences. If you have done some Economics before, maybe at high school level, you will recognise some of the concepts but maybe the approach will be different. If you have never studied Economics before, you may at first find yourself faced with a different and challenging way of thinking. Give yourself time to adjust and to learn a few new concepts. You may be surprised that, after a few weeks of finding new ideas difficult, that you will start to see things more clearly as you see the same tools applied more than once. The main point of this course is for you to understand some important ideas which you can use in other courses, your future work and in life in general. Your understanding will not necessarily need to focus on the technicalities of economics (equations and graphs) which, for most people, help but, for a few, hinder their understanding of concepts. However, there will be some use of supply and demand diagrams and you are expected to be literate (in English) and numerate and, if necessary, to develop your skills further in both of these areas. Good economics requires a combination of literary and technical skills. If you need to refresh your knowledge of some basic maths, please see the Appendix for topics relevant to this course. There are three contact hours in each week of this course: a 2-hour lecture and a 1-hour tutorial. A recording of the lecture will be available on Blackboard. However, unless you have a very high degree of self-motivation, it is advisable to attend class and, much more importantly, to concentrate during these contact hours. There is little point being present if your attention is on social media or on socialising in person. Trying to turn off all of your electronic devices and focus your attention on the subject at hand and you will find not only that you learn more but that the time appears to pass more quickly. Since this Study Guide already provides you with full notes, you could focus on just listening and watching, but it can enhance your learning if you have pen and paper and take note of important points for yourself and also actively work through examples given in class. Having said that attendance at class, provided you engage with the material, will help your learning, remember that knowledge and skills are only useful if they are embodied in individuals that is, learning takes place in your brain. So, do not expect to do well by just coming to class; you need to read and, above all in economics, you need to do, you need to practise doing the exercises. Learning support If you need help, ask EARLY. You can ask questions in tutorials, you can post questions for