Question 1

At the national level, public debate has centred on the performance of the main monetary measure - GDP. Each year we must do better than the last; otherwise we are officially in recession...while GDP growth is important for raising living standards, it is not synonymous with happiness.

The Weekend Australian June 1-2 2013

a) Critically discuss the strengths and weaknesses of using per capita national income (even once adjusted for purchasing power parity) as a measure of welfare.

b) Discuss at least two alternative measures of national welfare that have been put forward? What are the primary strengths and weaknesses of these alternatives?

Question 2

On 3 February 2009, the Australian Government, in response to the global financial crisis and fears of its impact on the Australian economy, announced the Household Stimulus Package to provide widespread assistance to low and middle-income households, as well as substantially increased expenditure on infrastructure. The total size of the Stimulus Package is estimated at $42 billion.

a) Briefly discuss the case both for and against governments engaging in active economic stabilisation.

b) What are automatic stabilisers, and how do they work?

c) Evaluate the following statement: ‘Fiscal policy is a very precise tool for controlling aggregate demand. If the government wants to increase aggregate demand by $5 billion, all it has to do is to carry out exactly $5 billion worth of government spending.

Question 3

Australia's east coast gas market -which has delivered comparatively cheap gas to industry and domestic consumers in isolation from the rest of the world - is heading for a huge shake-up that could see prices triple...after decades of isolation the east coast gas market will now be tied to the global gas market. And in this part of the world that means higher prices.

a) Employing the conceptual framework used to explain world trade, clearly illustrate and explain why opening the Australian gas industry to the export market will result in higher prices to domestic consumers. Be sure to clearly indicate any changes in producer and consumer surplus.

b) Although economists generally argue that increasing trade is good for economic welfare, there are a number of arguments put forward for why it might be a good idea to protect domestic industries from global competition. Clearly explain one of these arguments.

Question 4

The case for a global agreement to limit carbon-dioxide emissions has been bolstered after the world's top climate scientists increased their level of confidence that humans are changing the climate...Greens leader Christine Milne said the report confirmed urgent and deep emission cuts globally were needed. She said the government had "no option but to abandon" its direct-action approach and take "urgent and serious measures immediately".

a) Employing a supply and demand framework, clearly illustrate and explain why the free market may produce too many carbon-dioxide emissions.

b) The alternative to using ‘direct-action' to reduce carbon-dioxide emissions is to take a market-based approach. Building upon the framework developed for the answer to part a above, clearly illustrate and explain how a market-based approach could be used to ensure carbon-dioxide emissions are reduced to their socially optimal level.

c) The framework employed in parts a and b assumes that individuals are perfectly rational. Briefly discuss some of the insights from behavioural economics that might lead us to question this assumption.

Question 5

Economists are deeply puzzled by our desire to have children. First, kids are really expensive - the biggest financial decision most couples will make. Forget the cost of buying the family home; the kids you choose to populate it with will end up costing just as much, or more, over a lifetime. A survey released last week by AMP and the National Centre for Social and Economic Modelling found the typical Australian family spent $812,000 raising two kids. This is an increase of nearly 50 per cent in just six years. ...Economists like to assume we are rational individuals who make decisions based on anticipated costs and benefits.

a) Working within a supply and demand microeconomic framework, illustrate the conceptual equilibrium number of children in a household.
b) One of the key ingredients for higher productivity is to lower population growth.

Continuing to work within a supply and demand framework, discuss ways of lowering the equilibrium number of children in a household. Be sure to consider both the supply and demand side of the ‘market' for children.

Hint - the supply curve can be thought of as the marginal cost of children, the demand curve can be thought of as the marginal benefit of children.