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Question

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Question 1

(2.5 marks each part)

Using the aggregate demand- aggregate supply (AD-AS) diagram, show how the four economic events would affect economic activity, the price and employment levels. (Note: use a separate AD AS diagram for each event)

(a) A decrease in personal income tax;

(b) An increase in workforce skills through special training programs;

(c) An increase in exports;

(d) An increase in an economy's capital stock.

Question 2: Assuming the following changes to an economy are the only changes:

Identify for each change, what GDP variable would be affected (i.e. C, I, G, X or M) and whether it would cause it to increase or decrease?

A town council funds a new library;

The Ferderal Government raises the tax free threshhold;

Fewer tourists visit Australia;

Consumers demand more domestically produced goods but total consumption remains constant;

People are purchasing bonds issued by the banks;

Manufacturing firms are encouraged by lower interest rates to borrow to finance the building of new factories;

Consumers abroad are deterred by high prices for the Australian dollar from buying imports from Australia;

Both taxation and government expenditure are reduced;

People decide to save more of their income;

Our trading partners abroad begin to recover from a recession.

Question-3

(a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for the diagram and 2.5 marks for the explanation)

(b) Provide (describe) two (2) causes of each type of inflation

(2.5 marks for 2 demand-pull causes and 2.5 marks for 2 cost-push causes)

David · Accepted Answer

1 
 
Question 1 
(2.5 marks each part)
Using the aggregate demand- aggregate supply (AD-AS) diagram, show how the four 
economic events would affect economic activity, the price and employment levels. (Note: use 
a separate AD AS diagram for each event)
(a) A decrease in personal income tax; 
Answer – It would lead to rise in the disposable income of the people leading to rightward 
shift of the AD curve, thereby raising the price level and the GDP of the economy. Also, the 
employment levels will also rise because of positive impact over the economic activity.
(b) An increase in workforce skills through special training programs; 
Answer – Rise in skill level of workforce would lead to rightward shift of the AS curve 
leading to fall in price and rise in GDP level of the economy. As a result, there will be 
positive effect over economic activity and also on the employment levels as aggregate supply 
will raise leading to rise in requirements of resources. 
2 

(c) An increase in exports; 
Answer – There will be rightward shift in the AD curve leading to rise in prices and GDP of 
the economy because of positive impact of the net exports component. As a result, there will 
be rise in economic activity and employment level in the economy.
(d) An increase in an economy's capital stock. 
Answer – It will lead to rise in aggregate supply in the economy thereby shifting the AS 
curve rightwards which will increase the economic activity and the employment level in the 
economy because of rise in available resources and hence fall down in the price level. 
3 

Question 2: Assuming the following changes to an economy are the only changes:
Identify for each change,

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