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BUS702 Economics For Manager

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Questions:

  1. A tax on sugar intended to shift consumption towards a healthier diet has been suggested and even implemented in some countries. Some people think that individuals should make their own choices and, if they prefer unhealthy products, the government should not interfere. On the other hand, those who become ill from obesity will impose costs on the health service so that others argue that the government has a role to play.

Read the following article:

http://theconversation.com/why-the-government-should-tax-unhealthy-foods-and-subsidise-nutritious-ones-72790

Also study the estimates of own-price elasticities of demand for some different types of food provided in Table 1 and assume that they are reasonably accurate.

Table 1: Own-price elasticities of demand for some categories of food

High or low calorie

Food type

Elasticity

High

Fruit and vegetables

-1.128

Low

Fruit and vegetables

-0.830

High

Grain, pasta, bread

-0.854

Low

Grain, pasta, bread

-0.292

High

Sweets and sugary snacks

-0.270

Low

Sweets and sugary snacks

-0.295

High

Dairy products

-0.1793

Low

Dairy products

-1.972


In your own words (excluding any diagrams that you decide to draw), and making appropriate links to the economic theory you have learned in the course, provide arguments for or against food taxes/subsidies designed to encourage healthy eating and/or discourage unhealthy eating.

  1. Read the article Flawed Fiscal Fundamentalismby Tony Makin, pages 21 to 29 of the document Fiscal Fallacies, which can be downloaded from The Centre of Independent Studies at:

https://www.cis.org.au/publications/policy-forum/fiscal-fallacies-the-failure-of-activist-fiscal-policy/

Each of the questions below contains a quote from Makin. Answer the question following each quote, in around 100 of your own words for each part, making appropriate links to the economic theory you have learned in the course. 

(a) “The simple idea that by pumping up total spending, government can supplement depressed private spending and temporarily boost economic activity has appealed to economists and governments since the Great Depression of the 1930s.” (Page 22)

Explain this “simple idea” due to J.M. Keynes.

(b) “Separating out the automatic changes in the fiscal position from the discretionary ones is difficult, and it is impossible to assess the counterfactual of how the economy would have performed had there been no fiscal response.” (Page 24)

During a recession, automatic changes take place in the fiscal position (budget deficit/surplus). Why? Also give some examples of discretionary changes in the face of a recession and their effect on the budget.

(c) “What has been ignored in current debate is that fiscal contraction that targets wasteful government programs improves macroeconomic performance.” (Page 25)

Explain by what process a fiscal contraction could possibly improve macroeconomic performance.

(d) “The key question is whether Australia really needs fiscal ‘stimulus’ in the form of budgetary outlays when monetary policy is best placed to influence short-run macroeconomic activity.” (Page 26)

In what way can monetary policy be used to create economic ‘stimulus’ and why, does Makin argue, is it more effective than fiscal policy?

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