Introductory Economics 2020, Complete Student Tutorial Guide

2020

Contents of Introductory Economics 2020 Student Tutorial Guide

TOPIC L1: WHAT IS ECONOMICS? 2

TOPIC L2: DEMAND & SUPPLY 4

TOPIC L3: ELASTICITY 5

TOPIC L4: ECONOMIC EFFICIENCY 7

TOPIC L5: BEHAVIOURAL ECONOMICS & ASYMMETRIC INFORMATION 11

TOPIC L6: INTRO TO MACROECONOMICS – GDP, Unemployment and Inflation 13

TOPIC L7: AGGREGATE DEMAND & AGGREGATE SUPPLY 15

TOPIC L8: MONETARY POLICY 17

TOPIC L9: FISCAL POLICY 18

TOPIC L10: EXCHANGE RATES 19

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L1
Lecture Outline: WHAT IS ECONOMICS?

A definition of economics
Scarcity, trade-offs & the economic problem
Production possibility frontiers & opportunity cost

Freakonomics has an informative video on correlation versus causation in the case of polio and ice-
cream in the 1950s: http://www.youtube.com/watch?v=lbODqslc4Tg

The Concise Encyclopedia of Economics provides a very good definition (with examples) of opportunity
cost: http://www.econlib.org/library/Enc/OpportunityCost.html

L1 Workshop Questions, Chapter 1 (Part A and B)

1. What are the key ideas in traditional economics?

2. Explain the idea of a tradeoff and think of an important tradeoff that you have made
today. Explain why opportunity cost is the best forgone alternative and provide
examples of some opportunity costs that you have faced today.

3. Using marginal analysis determine the optimal number of hospitals given the following
data:
No of Hospitals Total Benefits Total Costs
$million $million
0 0 0
1 100 50
2 190 110
3 270 180
4 340 260

4. Serving breakfast all day at McDonald’s is a recent addition to the franchise in some
countries. Using marginal analysis, explain intuitively why McDonald’s might feature an
‘All Day Breakfast menu’.

5. [Textbook Problem 2.10, p.18]

Assume that the state and territory governments throughout Australia increase the price of water
in an attempt to reduce consumption for domestic use. What are the equity considerations with
this policy?

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6. [Based on Textbook Problem 5.9, p.41]

You have exams in economics and chemistry coming up and five hours available for studying.
The table shows the trade-offs you face in allocating the time you will spend in studying each
subject.

HOURS SPENT STUDYING EXAM SCORE

CHOICE ECONOMICS CHEMISTRY ECONOMICS CHEMISTRY
A 5 0 95 70
B 4 1 93 78
C 3 2 90 84
D 2 3 86 88
E 1 4 81 90
F 0 5 75 91

a. Use the data in the table to draw a production possibility frontier graph. Label your
vertical axis ‘Score on economics exam’ and label your horizontal axis ‘Score on
chemistry exam’. Make sure you label the values where your production possibility
frontier intersects the vertical and horizontal axes.
b. Label the points representing choice C and choice D. If you are at choice C, what is
your opportunity cost of increasing your chemistry score?
c. Under what circumstances would A be a sensible choice?

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L2
Lecture Outline: DEMAND & SUPPLY

Demand side of the market

Supply side of the market
Market equilibrium
Predicting changes in price & quantity
WebPedia divides complement goods into complement goods in consumption and complement goods in
production. It also provides various real-life examples of these types of complement goods:
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=complement+good

WebPedia divides substitute goods into substitute goods in consumption and substitute goods in
production. It also provides various real-life examples of these types of complement goods:
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=substitute+good

L2 Workshop Questions, Chapter 2

1. Using the demand/supply model explain the effects of the following on the market for
pizza:
a. the price of mozzarella cheese decreases
b. consumers’ incomes increase
c. several pizza producers leave the market
d. a new report states that pizzas consumption contributes to heart disease
e. new pizza ovens reduce the cooking time of pizza
f. McDonald’s lowers the price of its burgers

2. Severe floods in Queensland caused vegetable prices to increase sharply in Australia.

Use the model of demand and supply to illustrate the vegetable market and explain
why prices have increased. What would happen in substitute markets for fresh
vegetables?

3. [Textbook Problem 1.10, p.81]

During times of economic downturns and recessions, when unemployment rates are rising, it has
been observed that sales of cheap chocolates and other sweets increase.

4. e-cigarettes tend to be less harmful than regular cigarettes and could help teenage smokers quit
Source: ‘As health experts freak out over teen vaping, data [in the US] show decline’, arstechnica.com/science, 14 December 2016
- Do some research, and then discuss this statement with reference to two non-price
economic factors affecting the changes in US demand for e-cigarettes in recent years.

5. [Textbook Problem 4.6, p.83]

The demand for watermelons is the highest during summer and lowest during winter. Yet
watermelon prices are normally lower in summer than in winter. Use a demand and supply graph
to demonstrate how this is possible. Carefully label the curves in your graph and clearly indicate
the equilibrium summer price and equilibrium winter price.

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L3

Lecture Outline: ELASTICITY

Price- elasticity
meaning of demand
- measurement
- determinants
- relationship with total revenue
Income elasticity of demand
Price elasticity of supply
Samuel Baker from the University of South Carolina has created an interactive module which illustrates the
principle of elasticity of demand: http://sambaker.com/econ/elast/elast.html

L3 Workshop Questions, Chapter 3

1. [Textbook Problem 2.6, p.115]

A study of the price elasticities of products sold in supermarkets contained the following data:

PRODUCT PRICE ELASTICITY OF DEMAND Is it inelastic?

Soft drinks 3.18

Canned soup 1.62
Cheese 0.72
Toothpaste 0.45

a. The demand for which products is inelastic? Discuss reasons why the demand for
each product is either elastic or inelastic.
b. Use the information in the table to predict the change in the quantity demanded for
each product following a 10 per cent price increase.

2. [Textbook Problem 3.3, p.116]

Use the following graph for Yolanda’s Frozen Yoghurt Stand to answer the questions that follow.
Figure 3.3

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a. Use the midpoint formula to calculate the price elasticity of demand for D1 between
point A and point C, and the price elasticity of demand for D2 between point A and
point B. Which demand curve is more elastic, D1 or D2? Briefly explain.
b. Suppose Yolanda is initially selling 200 cones per day at a price of $3.00 per cone. If
she reduces her price to $2.50 per cone and her demand curve is D1, what will be
the change in her revenue? What will be the change in her revenue if her demand
curve is D2?

3. [Based on Textbook Problem 6.7, p.118]

On most days, the price of a rose is $6 and 10,000 roses are purchased. On Valentine’s Day, the
price of a rose jumps to $16 and 100,000 roses are purchased.
a. Draw a demand and supply diagram that shows why the price jumps.
b. Based on this information, what do we know about the price elasticity of demand
for roses? Calculate values for the price elasticity of demand and the price elasticity
of supply or explain why you can’t calculate these values.

4. [Textbook Problem 4.7, p.117]

Rank the following four goods from lowest income elasticity of demand to highest income
elasticity of demand. Briefly explain your ranking.
a. Bread
b. Pepsi
c. Mercedes-Benz cars
d. Personal computers

5. Study the list of determinants of price elasticity of demand in the table below, and then
do the following activity:

Determinants of price Elastic Inelastic

elasticity of demand
Availability of close Many substitutes/alternatives Few substitutes/alternatives
substitutes
More time that passes, e.g. people
Length of time buy more fuel-efficient cars over
Less time that passes, e.g. people
involved time.
don’t buy a new car frequently.

Necessities and Necessities (for life itself; habit-

Luxuries
luxuries (goods) forming goods)

Definition of the More specific markets or brands (i.e. market in general (i.e. when
market when more substitutes are available) substitutes are not readily available)

Proportion of income
spent on the good Large proportion, e.g. furniture Small proportion, e.g. salt
(cheap/expensive)
Indicate for each pair of goods below which good has the more elastic price demand and why:
a. fast food; pizza
b. Shell petrol; petrol
c. champagne; beer
d. male haircuts; female haircuts

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L4
Lecture Outline: ECONOMIC EFFICIENCY

Consumer surplus & producer surplus

Efficiency of competitive markets
Price floors & price ceilings
Taxes

China Daily reports on price ceiling ordered for car plate auction in Shanghai, China. Such a price ceiling
was initially introduced as a means to control the growth rate of private car ownership in the city and to
ease traffic congestion: http://www.chinadaily.com.cn/china/2013-04/11/content_16391765.htm

The Conversation reports that Australian consumers could be the victims of international price
discrimination (i.e. a loss of consumer surplus): http://theconversation.com/as-the-victims-of-
international-price-discrimination-australians-need-to-fight-back-13873

The Khan Academy provides a short interactive module on the effects of rent control and deadweight
loss associated with it: https://www.khanacademy.org/economics-finance-
domain/microeconomics/consumer-producer-surplus/deadweight-loss-tutorial/v/rent-control-dead-weight-
cost

The following YouTube clip shows how to draw and calculate the incidence of tax:
www.youtube.com/watch?v=Rqgb0G0bEpA

What is consumer surplus?

Demand (D) = consumer’s willingness to pay for a good. Willingness to pay (WTP) is the marginal or
additional benefit. Price on a D schedule reflects marginal benefit (MB) of additional goods, the maximum
price people are willing to pay for goods. Demand curve is a MB curve and so the area under D curve is
the additional benefits from consumption.

How is consumer surplus measured?

Consumer surplus is equal to the difference between the buyer’s willingness to pay and the actual price
paid “marginal benefit (MB) of a good minus the price paid summed over the entire quantity purchased”
or “difference between the highest price a consumer is willing to pay and its actual price” … Where MB >
Price paid. Consumer surplus measures the net benefits from consumption WTP or MB – Price (surplus
= excess).

What is producer surplus?

Supply (S) = marginal cost curve, the additional cost a firm is willing to accept in order to produce an
additional good. Price on an S schedule reflects marginal cost (MC). Producer surplus is the price of a good
minus the marginal cost of producing it.

How is producer surplus measured?

“Sale price minus the cost of producing it summed over all units produced/sold” or “the difference between
the lowest price a firm is willing to accept and the price it actually receives”. Producer surplus is measured
by the area below the price and above the supply curve.

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L4 Workshop Questions, Chapter 4

1. [Textbook Problem 1.8, p.140]

The following figure illustrates the market for a breast-cancer-fighting drug, without which
breast cancer patients cannot survive. What is the consumer surplus in this market? How does it
differ from the consumer surplus in the markets you have studied up to this point?

2. [Textbook Problem 3.13, p.143]

Suppose the competitive equilibrium rent for a standard two-bedroom apartment in Adelaide is
$1000 per month. Now suppose the state government passes a rent control law imposing a price
ceiling of $800 per month.
- Use a demand and supply graph to illustrate the impact of the rent control law.
- Suppose that shortly after the law is passed a large employer in the area announces that
it will close a factory in Adelaide and lay off 1000 workers. Show on your graph how this
might affect the market for rental property in Adelaide.

Rent control law will push the price down from $1000 to $800, creating a __________________ equal to
___________, since only ___________ apartments will be supplied at $800.

Price S

$1000

$800

Q2 Q0 Q1 Quantity

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3. Examine the following figure for the milk market with a price floor, and then answer
the following questions.

Price of
milk per
litre
Supply

$1.30
B
D
$1.00 E
C

Demand

140 180 320 Quantity (millions of

litres of milk per year)

a. Suppose the government was convinced to impose a price floor of $1.30 per litre of
milk, as seen on the graph. Show on the graph the areas representing consumer
surplus, producer surplus and deadweight loss, with respect to the following
scenarios:
At normal market equilibrium conditions,
CS =
PS =
DWL =

With a $1.30 price floor,

CS =
PS =
DWL =

With a $1.30 price floor,

loss of CS =
gain of PS =

b. Why might some milk farmers want to convince the government to intervene and
set a price floor? Briefly explain.

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4. Rising rates of obesity is a serious social and individual health problem. The government
wants to decrease the consumption of sugar by imposing a large tax on soft drinks
(sodas).
a. Assume you tax sellers, who would pay more of the tax – buyers or sellers? Include
a D & S diagram in your answer.
b. In what way could this tax be considered ‘efficient’?

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L5
Lecture Outline:
BEHAVIOURAL ECONOMICS & ASYMMETRIC INFORMATION

Behavioural economics – irrational and social influences on decision-making

Government intervention (due to market failure)
Externalities – negative & positive
Public goods & the free rider problem
Common resources – tragedy of the commons
Asymmetric information – adverse selection, moral hazard, principal-agent problem

The Khan Academy (for instance) has a useful animated clip which demonstrates the ‘tragedy of the
commons’: https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-
producer-surplus/externalities-topic/v/tragedy-of-the-commons

This article from The Guardian considers positive externalities generated by the emergence of Google:
https://www.theguardian.com/technology/2013/jan/08/why-charge-everything-kill-creativity

L5 Workshop Questions, Chapter 5 (Part A and B)

1. [Based on Textbook Problem 1.11, p.162]

Suppose Coldplay can sell out a concert at a stadium with tickets priced at $180. Coldplay’s
manager estimates that they could still fill the stadium at $300 per ticket. Why might Coldplay
and the manager want to keep ticket prices at $180? HINT: Think about how people like to
consume, and to be seen consuming, a popular product? Think about the role of fairness too?

2. [Textbook Problem 2.4, p.163]

A radio station has a promotion in which it announces that a local petrol station will sell petrol
at 95 cents per litre beginning in 30 minutes. Jack hops in his car and drives to the station to fill
up his half-empty tank. He pays only $19 for 20 litres instead of the going price of $29.
- Did Jack save $10.00? Is the radio station doing its listeners a favour by offering this
promotion? Briefly explain.

3. What is an externality? Explain the difference between a positive and a negative

externality. Identify each of the following externalities and explain why they are (or not)
an externality.
a. after eating a burger you vomit on your best friend
b. a cyclone causes the price of bananas to increase
c. your mobile phone goes off during the lecture
d. a firm pours chemical wastes into the river killing the fish
e. you visit the doctor and get a flu vaccination
f. tension in the Middle East increases the price of petrol

4. [Textbook Problem 7.10, p.186]

Briefly explain whether you agree with the following statement: ‘The reluctance of healthy young
adults to buy private health insurance creates a moral hazard for insurance companies’.
- Which ‘types’ of young people are more likely to buy health insurance?
- Is this a problem of moral hazard or adverse selection? Discuss.

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5. [Textbook Problem 8.9, p.187]

An analyst remarked that economic booms are always accompanied by fraud, which is revealed
when the boom is over and the share values are falling.

During a boom, there is an increased opportunity and ability to carry out fraud.
i. During a stock market boom, investors are making money from many of their investments and have funds available to
invest in new projects.
ii. The person carrying out a fraud uses funds from new investors to pay returns to existing investors and to pay off
investors who want to withdraw their money.
iii. As long as a person running a fraudulent investment scheme is able to continually recruit new investors, and as long
as only a few investors withdraw all of their money, he or she can keep the fraud going indefinitely.

- Why are frauds easier to carry out during a share market boom and more likely to be
exposed during a share market downturn? In your answer, relate to the principal-agent
problem.

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L6
Lecture Outline:
INTRO TO MACROECONOMICS – GDP, Unemployment and Inflation

Overview of macroeconomics
Measuring GDP and economic growth – real & nominal
Employment & types of unemployment
Inflation – costs & causes

The popular YouTube music-rap clip ‘Fear the Boom and Bust’ summarises in a cool fashion the key
debates in macroeconomics (Keynes vs. Hayek): https://www.youtube.com/watch?v=d0nERTFo-Sk
‘Round 2’ is here: https://www.youtube.com/watch?v=GTQnarzmTOc
The Economist provides a nice n’ short and simple summary of the two main competing ideas of Keynes
and Hayek: https://www.economist.com/blogs/freeexchange/2014/03/keynes-and-hayek

The Australian Bureau of Statistics (ABS) has kept detailed macroeconomic data (e.g. GDP,
unemployment etc.) on Australia since 1900. Visit the ABS website to obtain the most recent key economic
indicators in Australia: http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/1345.0?opendocument?opendocument#from-banner=LN

The Chart Pack, available from the Reserve Bank of Australia (RBA), is a user-friendly interface for
extracting and plotting GDP growth and inflation in Australia: http://www.rba.gov.au/chart-pack/
The RBA’s inflation calculator is an interesting tool for looking at the change in cost of representative
purchases over time: www.rba.gov.au/calculator/

Useful international statistics on national accounts and alternative measures of economic performance
are found in the United Nations Human Development Programme (UNDP) website. For example, the Human
Development Index (HDI) is available at: http://hdr.undp.org/en
The World Bank maintains a comprehensive database of key economic indicators for all countries in the
world: http://data.worldbank.org/

L6 Workshop Questions, Chapter 6 (Part A, B, C), Chapter 7 (Part A)

1. [Q based on the textbook pre-reading of Chapter 7 (Part A)] Describe the effects of the business
cycle on the unemployment rate and the inflation rate.

2. Which component (if any) of GDP will be affected by each of the following transactions?
a. You purchase a new apartment.
b. You purchase a second-hand car.
c. An overseas person studies a degree at an Australian university.
d. A dairy farmer in Harvey (Western Aust.) produces milk which is shipped to China.
e. A bakery such as Bakers Delight store purchases a new oven.
f. The government builds new roads to help improve access to mine sites in Western
Australia.

3. Identify whether there is likely an increase or decrease in measured GDP in the following
scenarios and discuss whether GDP is a ‘good’ measure of progress in each case:
a. The proportion of women working in paid employment outside the home
increases.
b. There is a sharp increase in the crime rate and illicit substance abuse.
c. An increase in the rate of logging of old growth forests.

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4. How do statistical organisations (e.g. the ABS) typically measure the unemployment
rate? Discuss how the measure of the unemployment rate neglects the problems of
discouraged workers and underemployment.

5. What problems does hyperinflation cause? What problems does deflation cause?

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L7
Lecture Outline: AGGREGATE DEMAND & AGGREGATE SUPPLY

Aggregate demand (AD)

Aggregate supply (AS)
Macroeconomic equilibrium
AD-AS model & the business cycle

L7 Workshop Questions, Chapter 7 (Part A and Part B)

1. Explain how each of the following events would affect the AD curve.

Event Impact on the AD curve, shifts left or right?

a. Increase in the price level

b. Increase in government purchases

c. Higher income taxes

d. Higher interest rates

e. Faster income growth in other countries

2. Explain how each of the following events would affect the SRAS & LRAS curves.

Event Impact on the SRAS, shifts left or right?

a. An increase in the price level

b. An expectation of a higher price level in

the future

c. A price level that is currently higher than

expected

d. An unexpected increase in the price of

an important raw material

e. An increase in the size of the labour

force

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Event Impact on LRAS curve, shifts left or right?

f. Higher price level

g. Increase in the labour force

h. Increase in the quantity of capital goods

i. Technology change

3. [Textbook Problem 5.7, p.310]

In the early to mid-2000s the Australian economy was experiencing rapid economic expansion,
leading to an economic boom. By 2007 data indicated that actual real GDP had exceeded
potential GDP, and the unemployment rate was the lowest it had been in over 30 years. Explain
how it was possible for actual real GDP to be greater than potential GDP at this time.

4. Use a basic AD/AS graph (with LRAS constant) showing the long-run equilibrium
[sketched below]. Assume that there is an unexpected increase in the price of oil.
- With reference to real GDP, the price level, and the unemployment rate:
i. show the resulting short-run equilibrium on your graph;
ii. explain how the economy adjusts back to long-run equilibrium;
iii. Show the resulting short-run equilibrium on your graph.

Price
level
LRAS
SRAS

100

AD

0
$1000 Real GDP (billions of dollars)

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Introductory Economics 2020, Complete Student Tutorial Guide

TOPIC L8
Lecture Outline: MONETARY POLICY

Role of Central Banks – the cash rate

Link between monetary policy (interest rate targeting) & economic activity
Effectiveness of monetary policy

What is the cash rate? What role does it play in monetary policy?
The cash rate is the interest rate that commercial banks, the RBA and other financial institutions charge
each other in the overnight money market. Because the cash rate is the rate of interest that financial
institutions pay for cash, changes in the cash rate are then passed onto changes in the interest rates that
banks charge their customers. Managing the cash rate is the way in which monetary policy operates in
Australia – changing the cash rates lead to changes in other interest rates, which leads to changes in real
GDP and the price level by influencing AD.

L8 Workshop Questions, Chapter 8

1. Go to the Reserve Bank’s website and view the latest monetary policy decision:
http://www.rba.gov.au/media-releases/index.html
Find out whether the RBA raised, lowered or left unchanged the cash rate. Summarise the
reasons for the decision.

2. How does an increase (or decrease) in interest rates affect aggregate demand? Aim for
specificity in your answers below.
a. NET EXPORTS (X – M)
In your answer, discuss the role of (foreign) investors and the impact they have on (i) the
value of Australian Dollar (AUD) and therefore (ii) imports and exports.

b. INVESTMENT (I)
In your answer, discuss what will happen to the (i) costs of borrowing (for investment
purposes), (ii) share price, and hence (iii) profit expectations.

c. CONSUMPTION (C)
In your answer, discuss what happens to (i) savings, (ii) spending on consumer durables, (iii)
the costs of borrowing (for consumption purposes) and (iv) asset prices (real estate, shares
etc.) and household wealth.

3. [Textbook Problem 3.14, p.343]

Briefly explain whether you agree with the following statement: ‘The RBA has an easy job. If it
wants to increase real GDP by $20 billion, all that it has to do is reduce interest rates.’
- Is the relationship between interest rates and the components of AD (C, I, G, X – M) known
with any accuracy?
- Are interest rate reductions effective during severe recessions?

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TOPIC L9
Lecture Outline: FISCAL POLICY

Fiscal policy & economic activity

The multiplier effect
Effectiveness of fiscal policy
Government debt

L9 Workshop Questions (mostly covered in the lecture), Chapter 9

How can the Government use fiscal policy to stabilise the business cycle?
Business Discretionary
Issue Fiscal Policy Action Result
Cycle Fiscal Policy
Slow economic INCREASE government Shifts AD curve to the right;
Contraction growth, rising Expansionary spending, price level and Real GDP
unemployment DECREASE taxes increases
DECREASE government
Shifts AD curve to the left;
Expansion Inflation Contractionary spending,
price and Real GDP decreases
INCREASE taxes

How do income taxes and transfer payments work as automatic stabilisers to dampen the business cycle?
Automatic stabilisers – changes to government expenditure and taxation
revenue without direct government intervention
Less taxation, as during contraction there is lower profits
Lower taxes (rev) and lower household income (high unemployment, people
Trends toward a deficit
not working).
automatically, as government
Contraction
revenues are lower but expenses
Higher government Higher government expenditure, as there is more
are higher.
expenditure (exp) unemployment. More people claim transfer payments (in
Australia, from Centrelink)
Higher taxation during expansion as profits and household
Higher taxes (rev)
incomes are higher (low unemployment). Trends toward a surplus
automatically, as government
Expansion
Lower government expenditure as there is less revenues are higher but
Lower government
unemployment/hardship, fewer people claim transfer expenses are lower.
expenditure (exp)
payments (in Australia, from Centrelink).

1. How can fiscal policy counter a recession? Are budget deficits a problem? Is fiscal policy
a reliable means for controlling the economy?

2. Is fiscal or monetary policy more effective in stabilising the business cycle?

3. How does fiscal policy relate to the basic AD/AS model?

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TOPIC L10
Lecture Outline: EXCHANGE RATES

The foreign exchange market and exchange rate fluctuations:

Demand & supply factors that determine the price of the AUD
What are the likely effects a depreciation or an appreciation of the AUD would have on:
- aggregate demand in the Australian economy?
- particular markets in the Australian economy?

What are the influences on the demand for Australian dollars and the supply of Australian dollars in the
foreign exchange market?

Demand Supply
Foreign firms and consumers preference for Australian firms and consumers preference for
buying Australian produced goods and buying overseas produced goods and
services services

Foreign firms and consumers preference for Australian firms and consumers preference for
investing in Australia (direct/portfolio investing abroad (direct/portfolio
investment) investment)

Currency traders that expect the value of Currency traders that expect the value of
the AUD to rise against foreign currencies the AUD to fall against foreign currencies in
in the future (buying low, selling high) the future (selling high, buying low)

L10 Workshop Questions, Chapter 10

1. [Based on Textbook Problem 2.9, p.398]

Use the graph to answer the following questions.

a. Briefly explain whether the dollar appreciated or depreciated against the yen.
b. Which of the following events could have caused the shift in demand shown in the
graph?

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i. Interest rates in Australia declined relative to those in other countries

ii. Income rose in Japan
iii. Speculators began to believe that the value of the dollar will be higher in the
future
iv. An increase in income payments to foreigners
v. Japanese financiers are keen to invest into the Australian property market

2. [Textbook Problem 2.10, p.399]

In 2010, when the Australian dollar hit US$1.00, and exceeded this in 2011 and 2012,
manufacturers, farmers, tourist operators and educational institutions expressed the view that if
the exchange rate did not improve it would be difficult for their businesses to compete with
overseas producers.
a. Why was the exchange rate of the Australian dollar (AUD) to the US dollar particularly
high between 2010 and 2012?
b. When people in these Australian industries were talking about an ‘improvement’ in the
exchange rate between the AUD and the USD, did they want the Australian dollar to
exchange for more US dollars or for fewer US dollars? Why?

💕💕 The End! 💕💕

❣❦♥❧❣
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