Taxation and government expenditure

Answer any five (5) of the following questions.  Each question is worth 10 marks.


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Question 9:


[Parts (a) to (g), ½ mark each; parts (h) and (i), 1 mark each; parts (j), (k) and (l), 1.5 marks each]


Suppose the following are National Accounts data for a given year for some particular country:


Measure / Variable


(Billions of Dollars)

Consumption of fixed capital


Gross private fixed capital formation


Government consumption expenditures


Government investment expenditures


Imports of goods and services


Exports of goods and services


Household consumption expenditure


Net property and  other income paid overseas


Returns to labour


Firm profits


Other factor rentals



(a) Calculate GDP using the Income method:


(b) Calculate GDP using the Expenditure method at market prices:
(c) Calculate Gross National Expenditure (GNE):


(d) Calculate Net Domestic Product (NDP):


(e) Why might NDP be a better measure of economic performance that GDP:


(f) Calculate Gross National Product (GNP):


(g) Calculate Net National Product:


(h) Calculate Current Account Balance:


(i) Calculate Gross National Savings:


(j) If tax revenues are $17 Billion for the fiscal year, then what is the value of national savings?


(k) If mpcd remains at 0.63 and GDP changes to $4873 billion; then what will the new level of domestic consumption be?


(l) If exports then increase by $4 billion, private sector investment decreases by $3 billion; and government consumption and investment decrease and increase by $3 billion and $4 billion respectively; by how much will GDP change and what will its new value be?



Question 10:


(a) Which of the following are final goods and services and which are intermediate goods and services?  Please explain why in your answer.  (4 marks – 1 mark each)


(i) A windscreen purchased by a motor vehicle spare parts supplier;


(ii) A new bulldozer to be used by a construction company;


(iii) A household cleaning service purchased by a family from a domestic cleaning service company;


(iiii) Coking coal


(b) An economy produces final goods and services with a market value of $870 billion in a given year, but only $720 billion worth of goods and services is sold to domestic or foreign buyers.  Is this nation’s GDP $870 billion or $720 billion?  Explain your answer. (2 marks)


(c) Explain why a new truck sold for use by a mining company is a final good, even though it is a fixed investment (capital) used to produce other goods.  (2 marks)


Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP?  Explain your answer.  (2 marks)



Question 11:


(a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation;

(5 marks total – 1.25 marks for each diagram and 1.25 marks for the explanation);


(b) Provide (describe) two (2) causes of each type of inflation

(5 marks total – 1.25 marks for each demand-pull cause plus 1.25 marks for each cost-push cause)



Question 12:


(a) Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero?  Why or why not should this be the case?  (2.5 marks, 1.25 marks for each part)


(b) How did the classical economists interpret long-run unemployment? (2.5 marks)


(c) How does structural and cyclical unemployment differ and how concerned should policymakers be about these types of unemployment?  (2.5 marks)


(d) Describe the essential differences between the Keynesian and monetarist approaches to the workings monetary policy.  Make sure that your explanation includes the relevant assumptions.  (2.5 marks)



Question 13:


(1.25 marks for each correct diagram and 1.25 marks for each correct explanation)


Using the aggregate demand – aggregate supply (AD-AS) diagram, show how the four economic events would affect economic activity and the price level. (Note: use a separate AD-AS diagram for each event)


(a) A decline in the marketing and selling skills of firm marketing agents;


(b) An increase in imports;


(c) A significant destruction in an economy’s capital stock because of war;


(d) An decrease in personal income tax;



Question 14:

(a) The consumer price index (i.e. CPI) is the most commonly used measure of changes in the general level of prices in Australia.  Discuss some of the advantages and disadvantages of using this measure.

(4 marks)


(b) Explain why some people ‘lose’ from inflation and why do some people ‘win’ from inflation?  (3 marks)


(c) How accurate is the Australian measure of unemployment?  (3 marks)



Question 15:


Which of the following would cause a growth in the money supply? Answer yes, no, or possibly and explain your answer (i.e. please provide reasons).  (2 marks each)


(a)The selling of government securities to banks;


(b) A fall in interest rates;


(c) An increase in government expenditure, financed by borrowing from the banking sector;


(d) The purchase of government securities by the Central Bank from the banking sector;


(e) It is agreed by the Treasurer and the Governor of the Central Bank to reduce the target rate of inflation



Continued over the page

Question 16:


Assuming the following changes to an economy are the only changes:


Identify for each change, what GDP variable would be affected (i.e. C, I, G, X or M) and whether it would cause it to increase or decrease? (1 mark for each complete answer)



(a) A town council funds a new library;


(b) The Ferderal Government raises the tax free threshhold;


(c) Fewer tourists visit Australia;


(d) Consumers demand more domestically produced goods but total consumption remains constant;


(e) People are purchasing bonds issued by the banks;


(f) Manufacturing firms are encouraged by lower interest rates to borrow to finance the building of new factories;


(g) Consumers abroad are deterred by high prices for the Australian dollar from buying imports from Australia;


(h) Both taxation and government expenditure are reduced;


(i) People decide to save more of their income;


(j) Our trading partners abroad begin to recover from a recession.





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