20 Questions

Question 1

2. Tax rate question

Answer 1

Proportional tax
- Simple
- Everyone pays same rate
- Don’t have to display income when paying
Tax revenue could be increased by decreasing tax rate, follows the Laffer Curve
Cigarettes are inelastic/addictive, so the government can increase the tax rate and people will keep buying
Other goods - Alcohol, sugary drinks etc.
If the government wants to make people healthier, then they will increase tax rates, to discourage consumption of demerit goods, unlikely they would ever reduce the tax rate

Question 2

3. Consumer and Producer Surplus

Answer 2

Consumer surplus is the difference between the price that a consumer is willing to pay for a good and the actual price that they pay
Producer surplus is the difference between the price that producers are willing to sell their good for and the price that they actually sell it for

Question 3

4. House question

Answer 3

Supply increases, causing price to decrease
Assume demand is constant

Demand for country houses will decrease, it is a substitute good (XED is positive)
If accompanied by infrastructure then demand may increase, as they are complementary goods (XED is negative)

Question 4

8. Water cheaper than diamonds

Answer 4

It can:
1 unit of diamonds have much higher utility than 1 unit of water
High supply of water
Low supply of diamonds
Marginal utility greater for diamonds
Overall utility of water is greater
Water is a necessity

Axioms - monotonicity
Consumer could be greedy

Question 5

12. IS-LM Model

Answer 5

True:
IS curve is negatively sloped
IS curve steeper if investment is not very sensitive to interest rate
Monetary policy not effective for steep IS curve, investment won’t change by much
Fiscal policy more efficient the steeper IS curve is

True:
Slope of LM curve depends on sensitivity to interest rate, will be vertical if not sensitive
Monetary policy will be effective, as money demand is very elastic
Fiscal policy ineffective for steeper LM curve

Question 6

14. Exit recession

Answer 6

Austerity policy is the opposite of what they should be doing
Governments should spend in a recession
Austerity discourages consumers
Decreases equilibrium income
Decreases AD

Government will always spend more than they receive in taxes

Question 7

15. IS-LM model in a closed economy

Answer 7

Fiscal contraction shifts IS left
Monetary expansion shifts LM right
Interest rates decrease

Effect is called Crowding Out
Government spending causes interest rates to increase, therefore causing private investment to decrease
I is inversely proportional to G
Fiscal expansion increases IS curve
LM curve is vertical
No change on income

Question 8

16. Keynesian Cross Model

Answer 8

Budget deficit = G - T
Government running budget surplus
I inversely proportional to G

No, banning imports will:
Increases cost of production
Shifts AS
Raises prices
Lowers consumption
Lower AD

True
Closed: 1/ c(1-t)
Open: 1/ c(1-t)*z
z: Marginal Propensity to Import
Higher z means lower multiplier

Question 9

17. Savings rate

Answer 9

Y = C + S
Y = C + I + G + (X - Z)
S = I + G + (X - Z)
S and G are proportional
Higher savings = Higher government spending

Large trade deficit could make G have no impact
Savings can’t be negative
Savings start at - a (a: autonomous consumption)
If trade deficit > government spending, then savings will stay at 0