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Principles of Economics - Answer 1

Negative externalities is when there goods or services are consumed or produced that causes a harm to a third party. (Pettinger, 2019) e.g Burning coal though for energy might create pollution. It is also termed as External cost that is suffered by a third party as a consequence of an economic transaction (Externalities) In perfectly competitive market this cost is high due to competition.

At external cost, e.g the cost of pollution from industrial production, makes marginal social cost (MSC) line or cuve higher than the marginal (private) cost (MPC) and socially efficient output is at the intersection point where MSC = MSB, at Q1, it is a lower output than the equilibrium output, at Q

The govt. ensure efficiency when the externalities occurs in a monopoly market through regulation, taxation and subsides and permit system.

Meaning of externality- is a cost or benefit caused by a producer thai is not financially incurred or received by the producer.it can be both negative or positive.

Govt.ensure efficiency in the following ways-

Taxes- are enabled to reduce the externality and ensure efficiency.it also helps in discouraging those activities which causes losses to 3rd Parties.

Subsidies- it is the money or grants given by the govt.to support a business, project or industry.eg - health care, oil subsidies, and housing etc.it is done to make the essential items available to the public at affordable prices.it is done by the govt.to encourage consumption with positive externality.it reduces the cost of production and encourages the supplier to increase output.

Defining property rights- it limits the impact of economic activities on unrelated parties .but its not a wise option as air and water should and can never be assigned to a particular agent.

So, to sum up govt. ensure efficiency through regulations and reduces market failures and imperfection.

Principles of Economics - Answer 2

In Keynesian cross model, (Openstax) also referred to as the expenditure output approach. This strategy is clearly grounded in the basic assumptions of Keynesian economics: it concentrates on the entire length of spending in the economic system, without any explicit note of aggregate source or perhaps of the cost level. This model assumes that there is no money market and Investment is autonomous and does not depend on the rate of interest. Whereas in IS-LM model, money market is present and investment is inversely related to rate of interest. so when government expenditure increases, rate of interest increases with a result of reduction in investment. this reduction in investment partially offsets the increase in income due to increase in government expenditure. Keynesian cross model uses Y=C+I+G which is also used in the IS -LM model.

As per the post (Wright, 2020) it discusses Australia 's worst yearly outcome that came about in 1930, when the there's the great Depression, as well as the economic system shrank by approx. ten % whereas currently additionally the economic system is becoming down by more than seven % in June quarter. The economic system is believed to have contracted by five per dollar in the wake of World War II as army creation finished. And also the same occurred in Keynisician Model.

Current end result was pushed by a downturn in home demand and also usage by nearly 12.7 % in the quarter. Discretionary spending even decreased by 25 %, whereas paying on solutions gone down by 17.6 %. The largest hit is transport and traveling expense that is nearly 85.9 % down. That is creating a circumstance of Ad /AS version where aggregate demand (Ad) is reduced and is pressing on the AS also gradually and gradually and can lessen the supply capacity also in later creating a need and also supply problem once the need increases.

Principles of Economics - Answer 3

Economic Condition currently is the worst hit in every country and all economies are suffering due to COVID 19 Pandemic, It is an unprecedented situation which was never seen from last many decades. Many company are shut down and large number of people have lost their jobs in every country and economy in this pandemic condition. Aviation, tourism and hospitability are the biggest hit. Companies are closing their operations due to many reason due to no or less demand, availability of labours, raw material crisis and other logistics issues as world has stopped moving.

Frictional unemployment: Employees left the work but not having brand jobs in hands. Frictional unemployment describes the kind of unemployment which will be the outcome of regular market turnover, like individuals entering the labour force as well as the company is growing or contracting.

Frictionally unemployed workers are looking for great job matches. Reasons for the existence of frictional unemployment (why it's inevitable) Consumer decisions have significant impact on frictional unemployment

Structural unemployment- (KENTON, 2020) says that it is a unemployment which occurs when there is a shift in the economy and long-lasting unemployment. Current unemployment can also be put under this category as well. Structural unemployment may last for decades which usually requires radical changes to reverse it. According to (AMADEO, 2020) it is the result of forces other than the business cycle.

Cyclical unemployment: As per (AMADEO, cyclical-unemployment, 2020) When customer demand for products as well as services drops, it results in a decrease in production. Cyclical unemployment is the primary cause of higher unemployment rates. It’s induced by a downturn in the business cycle. It is part of the organic fall and rise of economic development which occurs over time. Cyclical unemployment is temporary

All these are interrelated and vicious circle which is creator of recession. For example a worker left the job but not getting a new job will be a case of frictional unemployment. It is surely a problem of an economy, that the new employments are not available. Then it becomes a cyclical unemployment. On the other hand if someone thinks why that person is not getting a new job, it could be found that his her expertise might be outdated or there is complete shift in the economy due which has created that vacuum and because a person is ideal for long so his skillsets becomes outdated and there is issue of mismatch of job vs skill.

Principles of Economics - Answer 4


  • Consumption function is C = 200 + 0.8Y;
  • Planned investment: I = 50;
  • Government expenditure: G = 50;
  • Exports of the country: X = 20
  • The import function: M = 10 + 0.1Y.

No transfer price and no taxes

  1. Aggregate expenditure is sum of household consumption , business investment , government expenditure and imports

So in this case it will

AD= C+I+G+M i.e. 200+0.8Y+50+ 50+ (20-10+0.1Y )

  • 310+0.9Y and in this y is the GDP so If GDP is known one can calculate the Aggregate Expenditure of that economy.
  • AD= 310+.9y and equilibrium level of income will be attained where AD is equal to real GDP
  • So, AD= y
  • AD= 310+.9(AD)
  • 310-.1AD = AD= 310/.1 = 3100 or Y = 3100 at the level of Equilibrium
  1. Value of consumption expenditure of economy , using the above value of AD we can calculate Consumption expenditure which is
  • C = 200+0.8Y = 200+.8*3100 =200+2480=2680
  1. Multiplier (HAYES, 2020), defines it as an economic factor which, when increased or changed in any ways will causes increases or changes in many related economic variables. In current Covid -19 situation if shutdown reduces Consumption to C = 150 +0.8Y and planned Investment falls by $20 billion.

So change in Aggregate function will be

AD= C+I+G+M i.e. 150+0.8Y+30+ 50+ (20-10+0.1Y )

  • 240+.9y
  • AD=y (at the point of equilibrium)

So , Y = 240+.9Y = .1Y= 240

  • Y= 240/.1 = 2400

Multiplier is change in proportion which is 2400/3100 i.e 77% which shows that change in household consumption and investment has reduced the real GDP by 23%.

References for Keynesian Cross Model

AMADEO, K. (2020, April). cyclical-unemployment. Retrieved from https://www.thebalance.com: https://www.thebalance.com/cyclical-unemployment-3305520

AMADEO, K. (2020, August). structural-unemployment. Retrieved from https://www.thebalance.com: https://www.thebalance.com/structural-unemployment-3306202

Externalities. (n.d.). Retrieved from https://www.economicsonline.co.uk: https://www.economicsonline.co.uk/Market_failures/Externalities.html

HAYES, A. (2020). Multiplier Definition. Retrieved from https://www.investopedia.com: https://www.investopedia.com/terms/m/multiplier.asp#:~:text=In%20economics%2C%20a%20multiplier%20broadly,in%20spending%20that%20caused%20it.

KENTON, W. (2020, September). structuralunemployment. Retrieved from https://www.investopedia.com: https://www.investopedia.com/terms/s/structuralunemployment.asp

Openstax. (n.d.). the-expenditure-output-or-keynesian-cross-model. Retrieved from https://openstax.org: https://openstax.org/books/principles-macroeconomics-ap-courses-2e/pages/11-3-the-expenditure-output-or-keynesian-cross-model

Pettinger, T. (2019, July). negative-externality. Retrieved from https://www.economicshelp.org: https://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/

-the-keynesian-cross-diagram.html. (n.d.). Retrieved from https://saylordotorg.github.io: https://saylordotorg.github.io/text_international-finance-theory-and-policy/s11-08-the-keynesian-cross-diagram.html

Wright, S. (2020, September). australia-in-recession-biggest-economic-contraction-since-great-depression. Retrieved from https://www.smh.com.au: at (https://www.smh.com.au/politics/federal/australia-in-recession-biggest-economic-contraction-since-great-depression-abs-confirms-20200902-p55rk4.html

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