Ask an Economic Question

You are welcome to ask any questions on Economics. Though you might also like to try google custom search (top right) to see if the topic has been covered before.

I am looking to explain economic principles / ideas/ recent developments in economics. I can’t promise to answer, but will try if it meets the criteria below.

  • Please don’t ask me to do your coursework / assignment e.t.c. (I can usually tell if it is a homework question!)
  • Please don’t ask any maths calculations.
  • The question and answer will be published here so that everyone can see it (including your teacher!)
  • I aim to try and simplify economics; as a rough guide, I would aim at an understanding similar to a good British A Level student.
  • I am looking to explain economic principles/ideas/ recent developments in economics.
  •  I will answer as a new post, if you leave email address, I’ll usually send quick email. Check home page of blog for new post. With question and answers

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2,583 thoughts on “Ask an Economic Question”

  1. I have to answer this question and not sure how to approach it.

    Employ the aggregate demand and supply mode for the Australian economy to analyse the consequences for real GDP and the general price level of the following senarios:

    – there is an improvement in the productivity of workers
    – favourable set of weather conditions leads to a substantial rise in Australian agricultural output
    – the government pursues a policy of reducing business tax
    – The Australian dollar improves in value relative to our trading partners

    any way that you can help would be much appreciated.

    • For the first scenario: an improvement in productivity increase LRAS as it increases the productive potential of the economy as more can be produced with the same factors of production. This leads to a fall in the price level as it reduces the pressure and scarcity on existing factors of production.
      Second scenario: possibly a rise in both AD (due to higher confidence) and a rise in LRAS (due to higher productivity of existing factors of production) leads to econ growth and little inflation as an increase in AD is offset by the increase in LRAS
      Third scenario: Right shift in AD as higher profits (less taken in tax) may result in an increase in I, Right shift in SRAS as costs of production fall. LRAS may also increase if the I leads to supply side improvements in factors of production.
      Fourth scenario: Imports fall in costs shifting SRAS right, exports more expensive so X falls whilst M increases so AD falls and balance of payments on the current account worsens.

    • Any form of structural change aimed towards greater efficiency. For example, deregulation of the labour market to allow for working hour flexibility, deregulation of the banking industry to allow greater competition among the airlines.

  2. What are the impact of increase in saving on aggregate expenditures and equilibrium level of national income

    • AD falls as less income is spent in consumption so AD falls, as a result firms produce less output and lay off workers. Real national income falls as a result of the fall in AD

  3. How does a strong economy benefit the people at the bottom such as part time workers making less per hour than the full time people i.e. Walmart?

    It seems to me American Capitalism benefits only the wealth? Where am I wrong?

    • By “strong economy” i’m assuming you are referring to a stable economy with sustainable growth in a developed country.
      Economic growth leads to higher demand for labour which pushes up wages (obviously benefits workers) and also leads to higher employment.
      Also leads to higher tax revenues for the government (higher incomes and profits) which can be spent on welfare, education etc.
      Higher profits can be reinvested in technological change, innovation and invention leading to lower prices, higher productivity, higher quality products all of which benefits the poor.
      In a strong economy there is also likely to be a high level of competition leading to allocative and productive efficiency (which benefits the poor as choice is high, prices are low, scarce resources are allocated according to demand, quality is high).
      A certain level of inequality leads to incentives to set up businesses and meet demands, people work harder leading to higher productivity and lower costs etc.
      Economic growth is also linked to the multiplier effect as one persons spending creates incomes for others (which sees wages rise).

  4. Are savings good or bad for the economy?

    I have known savings boost investment but I came across a passage which says “Inflation is evil, but in a good kind of way, it rewards the debt holder and penalises the cash hoarder. Debt funds consumption and investment, which grows output in an economy. Savings are a leakage from the economy which do the opposite.” Kindly explain this contradiction.

    • for sure savings boost investment because with the saved money you are able to start production units such as small and large scale industries depending on how much you saved.
      inflation is evil much as it rewards the holder and penalizes the cash hoarder in the following aspects it increases costs of production which discourages investment thus evil, it leads to poor standards of living in the country,it leads to political instability in the country as people turn against the government because of poor standards of living.And investment grows output in an economy compared to debt fund consumption for example massive investments in sectors of the economy like industrialization ,agriculture, mining,fishing and tourism automatically leads to economic growth

    • I think there is a good case to draw negative consumption externality. Though you could argue if you produce sugary drinks, there are going to be external costs from producing – in that producing sugary drinks contributes to obesity by providing the unhealthy foods.

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