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MCQ on Difference between market and government

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In economics, the main difference between market and government stems from differences in:

the majority and the minority
competition and cooperation
prevailing property rights.

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Competition and Cooperation

Market consists of number of players in the market and they compete against one another to ...

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This posting contains answer and explaination to an MCQ on the difference between market and government.

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Assume that, by using all its resources to produce X, nation A can produce 80 units of X

Kindly explain and use diagrams where appropriate, thank you.

Please see the attached file.


1. Assume that, by using all its resources to produce X, nation A can produce 80 units of X; by devoting all its resources to Y, it can produce 40 units of Y. Comparable figures for nation B are 60 units of X and 60 units of Y.
(i) Assuming constant costs, in which product should each nation specialise? Why?
(ii) Indicate the limits of the terms of trade.

2. Indicate whether each of the following creates a demand for, or a supply of, French francs in foreign exchange markets:
(i) An Australian importer purchases a shipload of French wine.
(ii) A French motor vehicle manufacturer decides to build an assembly plant in Sidney
(iii) An Australian university student decides to spend a year studying at a French university.
(iv) A French manufacturer exports machinery to Morocco on an Australian freighter.
(v) An Australian government bond held by a French citizen matures.

3. The four people listed in Table 1 specialise in producing the commodities indicated and have surplus available for trade. Each is willing to trade in order to obtain some of another product they want.

Table 1:
Commodity Produced Commodity Wanted
Betty Eggs Potatoes
Justin Milk Clothes
Beatrice Clothes Eggs
Michael Potatoes Milk

(i) Identify the trading transactions that Michael would need to undertake in a barter economy in order to purchase milk.

(ii) If money could be used as a medium of exchange, identify the transactions that Michael would need to undertake in order to purchase milk.

4. Consider a hypothetical market for gold. On a diagram show a market demand curve D1 and a market supply curve S1. Show on your diagram the market equilibrium price Pm and the quantity of gold produced qm.

Unfortunately gold mining pollutes the environment. The costs associated with the pollution is borne by the whole community.

(i) With reference to the diagram you have drawn, does the market supply curve S1 incorporate all the costs of mining gold? Explain.

(ii) Now assume that the government wishes to internalize the pollution costs associated with gold mining by imposing a constant per-ounce tax on all firms in the industry. Show the impact of such a tax on your diagram. What will happen to the equilibrium price and quantity?

(iii) What is the incidence of this tax on suppliers and buyers and on other parties who do not buy or sell gold? Use your diagram to illustrate your answer.

(iv) In general, what determines the incidence of tax on consumers and producers? Explain.

Part B : Macroeconomics
Question 1
(a) Use the data contained in Table 1 on the economy of Australia to determine the following national income accounting aggregates
Table 1
$ Billion
Gross operating surplus: dwellings 44.40
Social security payments 76.80
Exports 88.05
Wages, salaries and supplements 274.50
Government spending 126.45
Company income tax 41.40
Indirect taxes 225.00
Imports 99.15
Gross operating surplus: companies 85.05
Imputed bank service charge 13.65
Private final consumption spending 324.45
Income tax paid by households 89.55
Gross operating surplus: general government 9.90
Gross operating surplus: public enterprises 22.20
Subsidies 160.50
Statistical discrepancy 7.05
Gross private investment 106.50
Gross operating surplus: unincorporated enterprises 65.40
Gross operating surplus: financial enterprises 1.05

(i) Gross domestic product using the expenditure method
(ii) Gross domestic product using the income method
(iii) National turnover of goods and services
(iv) Gross domestic product at factor cost
(v) Gross national expenditure

(b) (i)State the difference between gross private investment and net private investment.
(ii)Why is net private investment of great interest to governments and economists?
(iii)With respect to national income accounting, explain what is meant by the "statistical discrepancy" and why it is necessary.

(c ) Table 2 presents national income data for the Brownland economy. Use this data to calculate:
Table 2:
$ Billion
Gross private domestic investment 69.0
Disposable income 285.0
Exports 13.5
Personal saving 15.0
Government purchases of goods and services 126.0
Consumption of fixed capital 78.0
Dividends 19.5
Imports 18.0
Indirect business taxes 57.0
Social security payments 34.5

(i) Consumption spending
(ii) Net domestic product
(a) Explain : "Ms Smith diminishes the national income by marrying her cook". In what ways is this true by definition of GDP? Is this one of the problems with the use of GDP as a measure of social welfare?

Question 2

(a)Design an anti-recession stabilization policy, involving both fiscal and monetary policies which is consistent with:
(i) A relative decline in the public sector.
(ii) Greater income equality
(iii) A high rate of economic growth

(b)Using the aggregate demand- aggregate supply model, explain how discretionary fiscal policy can be used to reduce the effects of demand - pull inflation.
(c) Is the crowding- out effect likely to be larger during recession or when the economy is near full employment? Use the aggregate demand- aggregate supply model to substantiate your answer.
(d) Draw an aggregate demand- aggregate supply diagram where equilibrium occurs below full- employment level of output. Now show the impact of a leftward shift in the aggregate supply curve. What developments might cause such a shift?.

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