ECON 8069 ANU Economic Concepts Questions

1. According to the Nash Bargaining model of employment, what is the effect of minimum wage laws on unemployment? [As always, you need to carefully explain your response. You will likely want to use graphs to aid in your explanation. You will want to use graphs in many other questions as well.]

2. Inflation in Australia is currently running at 7%, well above the target range of 2-3%. Suppose the government is considering increasing the inflation target to 7%. Explain potential pros and cons of increasing the inflation target in this way.

3. With the removal of cigarette’s from prisons, prisoners have begun using packet noodles for trade among themselves. Evaluate the following claim: These packet noddles cannot be considered to be money as they can be eaten by the prisoner which owns them at any time.

4. Initially emerging in November 2019, becoming prominent in 2020, and continuing to the present, the Covid crisis has had a very significant impact on the economy and society at large.

a) Suppose the Covid crisis and lockdowns caused a temporary 30% fall in the demand for labour in the economy. Suppose that the Supply of labour has not changed. As this shock is expected to be temporary, there is very strong downward wage rigidity in the economy. Using the Labour Market and Production Function model, argue why we expect output to fall, and to fall by less than 30%.

b) Suppose we have the shock as in part (a) but the government enacts policies which eliminate downward wage rigidity. Show how the removal of downward wage rigidity can help increase aggregate output.

c) What kinds of policies might be employed by the Central Bank to help increase output? Why would these policies be effective?

d) Assume the economy is as in part (b). That is, 30% drop in Demand for Labour, and no downward wage rigidity. Would higher inflation have an impact on real output? Explain your reasoning (as always).

e) Give possible reasons why the usual CPI measure may not be a good measure of the cost-of-living for consumers during Covid, especially the earlier years of Covid. f) Given your experience of Covid lockdown, would you expect inflation to be higher than expected during lockdowns, or lower than expected? Why do you think this?

5. Consider the market for wheat as shown in the Wheat Exports figure. In that figure, the world price pw for wheat is $300 per tonne.

a) Perform a Welfare Analysis on the free trade equilibrium. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, Total Surplus, and any Deadweight Loss.

b) Suppose the government introduces a tax on exported wheat, so that firms must pay the government $75 per tonne of wheat exported.

(i) Argue why this would reduce the price paid by domestic consumers, even though wheat sold to them does not attract the tax.

(ii) Perform a Welfare Analysis on the effect of this tax. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, Total Surplus, and any Deadweight Loss.

(iii) For any Deadweight Loss identified, give an intuitive description of why this deadweight loss exists.

c) Suppose instead the tax were $150 per tonne for exports.

(i) What price would domestic consumers now pay for wheat (and explain why)?.

(ii) Perform a Welfare Analysis on the effect of this tax. That is, describe and show the Consumer Surplus, Producer Surplus, Government Tax Receipts, Total Surplus, and any Deadweight Loss. Wheat Exports p Supply pw = $ 300 $ 200 Demand qd q∗ qs q

6. Japan has a 282% tariff on rice, and Switzerland has a 138% tariff on dairy products. Japan’s principle reason for these tariffs is to make sure they can feed their population in the event of a blockade, while Switzerland’s is to maintain the ‘farming culture’ in the highlands, and to keep the land under use. Compare and contrast these tariff policies using the Arguments For and Against International Trade from class.

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