VCAA Economics Aggregate supply policies

Answer(s) could include:

Tariff diagram:

• price – Y axis, quantity – X axis
• tariff originally set to raise price in market and raise government revenue eliminated
• domestic supply falls, imported supply rises
• domestic consumption expands.

Tariff explanation and short-term effects:

• reduction in price for consumers and expansion in domestic consumption
• switches consumption from domestic producers to imports
• decrease the cost for domestic producers if an imported capital item
• domestic suppliers sell less for less
• possible reduction of government revenue from tariff
• reference to DWL and market effects (CS, PS, TS).

Subsidy diagram:

• price – Y axis, quantity – X axis
• supply curve shifts to the left for domestic suppliers (decrease)
• increased gap between local supply and local demand
• price remains at world price
• domestic consumption is unchanged.

Subsidy explanation and short-term effects:

• increased domestic costs as subsidy removed
• lower competitiveness against imports
• decreased domestic production
• imports increase
• reduction of Government subsidy cost.
• reference to DWL and market effects (CS, PS, TS).

Longer term effects of tariff elimination:

• reduction in retaliatory tariffs
• less Government revenue for spending in other areas
• increase in economic output and employment through increased free trade
• structural change in the economy as resources such as labour shift from uncompetitive trade exposed industries to competitive industries
• higher national income.

Longer term effects of subsidy elimination:

• efficient producers are advantaged
• decreased burden on the tax payer
• promotes innovation in the economy
• government expenditure can be re-allocated to more effective areas of social need.

Answers could include:

Economic policy objectives

• price stability
• full employment
• sustainable economic growth
• equitable distribution of income
• efficient allocation of resources.

Complementary objectives

• full employment and economic growth – expanding the economy requires the employment of more resources, including labour. This complements economic growth
• efficient allocation of resources and economic growth – as the economy expands, resources become scarcer and are used more intensively and efficiently.

Conflicting objectives

• price stability and economic growth – expanding the economy will increase competition for resources, increasing the cost of resources to meet additional demand
• and equitable distribution of income could reduce economic growth through increase in welfare payments
• equitable distribution of income - gains from economic growth are likely to benefit specific groups at a cost of others
• full employment and price stability – typically, during periods of full employment inflation is generally high. Inflammatory policies are often used during periods of full employment and counteract demand-pull inflation with higher cash rates or lower fiscal spending. As a result of lower aggregate demand, higher unemployment can be expected.

Answers could include:

Methods:

• labour productivity equals GDP per worker
• multifactor productivity equals output divided by all inputs – the growth in output caused by the growth in inputs.

Impacts:

• increased productivity decreases costs of production thereby achieving price stability
• increased productivity leads to increased economic growth, rising standard of living.
• higher wages from increased productivity can impact on standard of living and equitable distribution of income
• increased productivity may have negative impacts on employment in the short run. In the long-run, productivity increases incomes, leading to an increase in jobs, lowering unemployment
• increased productivity will result in higher government revenue which can be used to improve income distribution.

The model should show:

• a rightward shift in the AD curve
• a rightward shift in the AS curve;

Common set of rules; further access into other sectors, e.g. financial, healthcare and others listed.

India and the United States

Answer(s) could include:

• free trade based on comparative advantage can lead to greater efficiency and economic growth
• promotes efficiency
• increases economic growth; improves standard of living; increases incomes and consumption
• lower prices; net increase in jobs; lower costs of production/inputs
• gains to consumers
• gains to producers.

Tarriff diagram:

• A clearly and correctly labelled tariff diagram showing price on the y-axis and quantity on the x-axis.
• Tariffs raise the price in the market and raise government revenue, and domestic consumption falls.

Effects on consumers:

• For consumers, imposing a tariff will cause prices to rise, consumption to fall, and decreased consumer surplus, as tariffs increase prices of imports.

Effects on producers:

• For producers, imposing a tariff will cause price increases, domestic producers to increase production, and increased producer surplus, as domestic producers sell more goods.