Economics Questions Thread

[unihigh1]

could someone please explain the effect of an appreciation of the exchange rate on income and employment?

[chasej]

could someone please explain the effect of an appreciation of the exchange rate on income and employment?

An appreciation of the exchange rate will tend to decrease levels of employment and therefore reduce incomes. This is because as the dollar appreciates imports become cheaper thus consumers are likely to reduce demand for locally made products and switch to international products. And people overseas are likely to stop purchasing Australian goods and services as they have become more expensive.

Both these factors cause a decrease in aggregate demand thus less production will occur in the economy meaning there is less need for employees, thus the unemployment rate is increasing and factors of production are receiving less income.

BTW a question like this is unlikely to appear on the end of year exam as the key knowledge stipulates you need to know AD/AS factors and not specific ones. A question more likely to appear is something like "explain one aggregate demand and one aggregate supply factor that has influenced the achievement of the goal of full employment over the last 4 years".

Also a good way to figure out the effects factors have on the achievement of economic goals is to draw a little chart mapping out the effect and the chain reaction is causes (hard to explain, maybe I'll write up a tutorial or something sometime to explain it, because it really does make it easier to work out).

[abcdqdxD]

I used to also do the chain reaction thing. However, once you get good at it you can just do it naturally in your head.

Re the income bit of the question, it's also important to mention that as more individuals lose their jobs and move onto lower unemployment benefits, their disposable income declines, thus reducing material living standards as their access to goods and services become more limited.

[dantan]

Re the income bit of the question, it's also important to mention that as more individuals lose their jobs and move onto lower unemployment benefits, their disposable income declines, thus reducing material living standards as their access to goods and services become more limited.

Ding ding ding!! 100% absolutely :p That is the kind of statement which will distinguish your A from your A+, so take note.

@chasej, I know the study design doesn't specifically stipulate the $A as a factor you have to know, but it is very very important. Besides, firstly, teachers like asking about it on SACs or review questions, and secondly, knowledge of the operations of the exchange rate/$AUD is expected in the study design under 'External Stability'.

Finally, the 'chain method' is (to me) the only way you should be going about answering AD/AS analysis questions. It's the only way you can really be sure that you've stepped out every single link and explained why, but you do need to practice getting good at it. You can even just draw a whole bunch of factors out of a hat and draw quick 30 second arrow diagrams to help you out.

[chasej]

@chasej, I know the study design doesn't specifically stipulate the $A as a factor you have to know, but it is very very important. Besides, firstly, teachers like asking about it on SACs or review questions, and secondly, knowledge of the operations of the exchange rate/$AUD is expected in the study design under 'External Stability'.

I know. I was just making the point that you don't have to worry about memorizing absolutely every AD/AS factor listed in the textbook.

[abcdqdxD]

Just know the important ones

[LazyZombie]

Can someone please outline what consumer sovereignty is, its characteristics, and how it relates to/if it has any relationship to market power?

And maybe some links for reading on it?

Can you say that a market has high levels of consumer sovereignty? I assume you can't?

[chasej]

Can someone please outline what consumer sovereignty is, its characteristics, and how it relates to/if it has any relationship to market power?

And maybe some links for reading on it?

Can you say that a market has high levels of consumer sovereignty? I assume you can't?

Consumer soveriegnty just means that consumers can vote with their money as to what they choose to buy and therefore the way resources are allocated. Basically it means that consumers can choose what goods and services they get.

You can say a market has high levels of CS. A market where CS is most prevalent would be a perfectly competitive market as in this type of market producers are likely to be dynamically effiecient and will only produce products that consumers want and therefore would make them a profit. In a monopoly situation companies may not have as much incentive to follow what consumers want as they can already control all or most of the resources in the market so have no real reason to need to switch resources around to keep up with the market.


http://www.businessdictionary.com/definition/consumer-sovereignty.html

[abcdqdxD]

Basically it means that consumers can choose what goods and services they get

I liked the earlier part of your explanation more. Consumers don't necessary choose what they get - they choose what is produced by private entities.

CS means that consumers signal to private firms the goods and services they like to see produced through the idea of relative prices (remembering that the key assumption in our economic model is that firms are motivated by greater profits and hence are *in theory* reactive to consumer demand)

[unihigh1]

thanks for clearing that up guys! could someone explain the 'chain' method?

[dantan]

thanks for clearing that up guys! could someone explain the 'chain' method?

It's basically the most standard method of analysing the effect of particular events on AD/Goals etc. etc. You're probably already doing it anyway:

1. Identify and explain the event
2. Identify which component of AD this will affect and explain why
3. Identify how this component will affect AD (increase or decrease)
4. Identify how the movement of AD will impact whatever the question is asking

So basically people (and I) practice/d it with simple abbreviations and arrows:

Increased CC --> Increased C --> Increased AD --> Increased inflation (for example)

You're probably already doing it, but this method means that you're unlikely to miss a link in your explanation and you can do it for AS too.

Hope this helps! Feel free to message me if you need more help with this

[chasej]

This one's bugging me:

Explain the effect of a more equitable distribution of income on the allocation of resources?


Edit: never mind, asked my teacher today. Was just to do with equity vs. efficiency which I hadn't properly revised yet.

[chasej]

With regard to transmission mechanisms, which of the following is most likely to occur when monetary policy is loosened?

A. The value of the Australian dollar should rise.
B. The price of imports should fall.
C. The price of exports should fall.
D. The rate of savings should increase.

[abcdqdxD]

With regard to transmission mechanisms, which of the following is most likely to occur when monetary policy is loosened?

A. The value of the Australian dollar should rise.
B. The price of imports should fall.
C. The price of exports should fall.
D. The rate of savings should increase.

Just started monetary policy so I'm not that familiar with transmission mechanisms.

But if you had to break it down:

A) would expect depreciation in AUD so not A
B) if dollar is worth less, price of imports will rise
D) savings will fall as return on investment though term deposits is less
C) I think it's C. Lower int rates -> depreciate dollar -> exports cheaper for foreign countries to purchase

[chasej]

Just started monetary policy so I'm not that familiar with transmission mechanisms.

But if you had to break it down:

A) would expect depreciation in AUD so not A
B) if dollar is worth less, price of imports will rise
D) savings will fall as return on investment though term deposits is less
C) I think it's C. Lower int rates -> depreciate dollar -> exports cheaper for foreign countries to purchase

Thanks. Problem is the resource says the answer is B, the argument for C being correct is pretty convincing, and it's the same logic I had when answering the question, so I think it's a misprint on the sheet.