Module Code:1303AFE/AFE133

Module Subject: Economics for Decision Making 

Question 1 on Topic 4 (10 marks)

  • The average house price in 1972 was $100,000, and $320,000 in 2000. CPI was 38 in 1972 and 145 in 2000.
  • Calculate the rate of inflation between 1972 and 2000. (2 marks)
  • What is the average house price in 2000 in real terms (i.e. in terms of the 1972 average house price)? (2 marks)
  • Have average house prices become more expensive in real terms? Justify your answer. (2 marks)
  • Would banks be happy or reluctant to lend money if a country has a history of inflation rising unexpectedly? Justify your answer(s). (4 marks)

Question 2 on Topic 5 (10 marks)

  • The average person in Atlantica would deposit $95 out of every $100 they have into their bank accounts, keeping the rest as cash in their wallets. The central bank has instructed the commercial banks to hold 3% of all bank deposits as reserves.
  • Estimate the extended money multiplier (2 marks)
  • Assume the average person puts in $3,000 into their bank accounts. Based on the extended money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation. (2 marks)
  • Is it ever possible for the simple money multiplier value to be the same as the extended money multiplier value? Justify your answer with a numerical example. (6 marks)

Question 3 on Topics 6 & 7 (15 marks)

  • The economy is booming and growing faster than potential GDP. The finance ministry has advised the government to raise stamp duty and other purchase service charges for those wanting to buy existing houses in order to slowdown economic growth. As well, the finance ministry wants the government to also raise company taxes as this will lead to firms decreasing their level of investment in the economy. The prime minister has asked you, as her chief economic advisor, for your views. In particular, she wishes to know the following:
  • Would a rise in stamp duty and other purchase charges on the purchase of existing houses really slowdown the economy? Your advise on this is ____________________ (Feel free to use external resources to assist you in your answer if you prefer). (5 marks)
  • Is the claim that higher company taxes decreasing investments correct or is it debatable if the future projections on economic growth remain positive, and can you explain why? Your advise on this is ____________________ (provide your answer and justification. Feel free to use external resources to assist you in your
  • Countries with low levels of debt-to-GDP ratios are rich countries. Explain why you agree or disagree with this statement and provide real world examples to support your argument. (5 marks)

Question 4 on Topics 6 & 8 (15 marks)

  • Inflation is above the target range set by the Central Bank of Gravisa, and is of concern to its board, who feel compelled to act.
    • What does this tell you regarding the likely output gap? Illustrate it using an AS-AD diagram, and briefly explain your diagram. (5 marks)
    • Explain the process of what happens to the economy in the long-run if the central bank does not intervene (assume also that the government does not intervene). Amend the AS-AD diagram drawn in part (i) to illustrate your answer. (5 marks)
  • Low interest rates are guaranteed to boost consumption in a severe recessionary environment such as that faced by the Australian economy during the COVID-19 lockdown. Do you agree or disagree with this statement? Provide two reasonings to justify your answer. (5 marks)


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