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Chapter: 5 -Problem: 3 >> Many central banks use ‘inflation targeting’. Their principal aim is to achieve a particular annual rate of inflation within an acceptable range. For example, they might aim for a 2% rate of inflation but will accept a rate between 1% and 3%. Some economists claim that inflation targeting will help reduce the actual rate of inflation. The Central Bank of Turkey uses this approach and Table 5.1 sho
Answer Preview: a. i) In 2003, Turkey was the most successful to achieve the target inflation rate. ii) In 2008, Tur…

, Chapter: 5 -Problem: 1 >> Explain the causes of an increase in a current account surplus on a country’s balance of payments.
Answer Preview: When credits exceeds debits, the country enjo…

, Chapter: 6 -Problem: 2 >> a. Using examples, explain why cost–benefit analysis is central to the decision making process in the allocation of public goods.b. Discuss some of the limitations of cost–benefit analysis in the allocation of public goods.
Answer Preview: a) The outcome of the analysis will determine whether …

, Chapter: 8 -Problem: 3 >> The differences in wage rates paid in different occupations are caused entirely by the differences in the elasticity of supply of labour. The way, therefore, to overcome the differences in wage rates is to increase the training available to workers. Discuss whether economic analysis supports this argument.
Answer Preview: Thus a highly skilled worker will be able to command a high wage due to high MRP …

, Chapter: 1 -Problem: 2 >> a. Using examples, explain the characteristics of public goods and merit goods.b. Discuss why in many countries certain types of education and health care are provided as private goods and not as merit goods.
Answer Preview: Characteristics of public goods and merit goods. Public goods Definition: Public goods refer to the type of goods that are for all people. No one gets excluded from using any public good. Everyone is …

, Chapter: 7 -Problem: 3 >> a. Analyse the likely benefits that a car manufacturing firm might gain through expanding its scale of operations. b. Discuss whether gaining these benefits will mean that the firm is maximising its profits. The supermarket business in the UK is dominated by the so-called ‘Big Four’. Their market shares in March 2014 are shown below: Tesco ..................  28% Asda  ................... 19% Sain
Answer Preview: a) The long run increases in scale A firms efficiency is affected by its size. Large firms are often …

, Chapter: 9 -Problem: 4 >> The main way a developing country could become a developed country is for government policy to concentrate on the protection of domestic industry and investment in infrastructure. Do you agree that this is the best policy?
Answer Preview: YES, It is True That The main way a developing country could become s developed country is for gover…

, Chapter: 7 -Problem: 2 >> a. Analyse the factors that might lead to contestability in a market.b. Discuss the extent to which a rise in contestability in a market is beneficial for consumers as well as firms. The supermarket business in the UK is dominated by the so-called ‘Big Four’. Their market shares in March 2014 are shown below: Tesco ..................  28% Asda  ................... 19% Sainsburys ..........  18% Mo
Answer Preview: a. Factors that might lead to contestability in a market include: the number of potential entrants, …

, Chapter: 4 -Problem: 2 >> Discuss whether a satisfactory balance of payments, a strong exchange rate and a low rate of inflation are likely to be achieved at the same time.
Answer Preview: The amount of inflation in a country can have a significant impact on the value of its currency and …

, Chapter: 2 -Problem: 3 >> Air Passenger Duty (APD) is a flat rate indirect tax on passengers who fly from UK airports. It is collected by the airlines who add the tax onto ticket prices. In 2009, the tax was £5 for economy class passengers travelling on flights within the European Union. The table below summarises the likely effects of increases in APD on a typical flight.a. Calculate the price elasticity of demand for eac
Answer Preview: a Price elasticity of demand is the responsiveness of change in price on change in quantity demanded. formula of price elasticity is equal to percenta…

, Chapter: 4 -Problem: 1 >> Explain how an economy may face a deficit in its trade in goods yet have a surplus on its current account of the balance of payments.
Answer Preview: Current account surpluses refer to positive current ac…

, Chapter: 3 -Problem: 1 >> Explain why a plastic bag in many Indian cities is seen as a demerit good. India leads with bans on plastic bags. On June 20 2014, the Times of India reported that Agra was the latest city to ban the use of most types of plastic bags. The reasons here as elsewhere are to curb pollution. The issue with plastic bags is that their irresponsible disposal causes many problems. Plastic bags block drains
Answer Preview: India generates nearly 26,000 tonnes of plastic waste every day, making it the 15…

, Chapter: 9 -Problem: 1 >> a. Why may a country experience a rise in unemployment? b. Discuss whether an increase in unemployment is always harmful.
Answer Preview: a) The causes of unemployment in high income countries …

, Chapter: 2 -Problem: 1 >> a. Explain how an equilibrium price for a product is established in the market and how it may change.b. Discuss whether a firm’s revenue would increase in response to price and income changes if the price elasticity of demand for its product became highly elastic.
Answer Preview: a) Equilibrium price and quantity are determined by the intersection of supply and demand. A …

, Chapter: 3 -Problem: 3 >> Comment on the case for introducing an indirect tax on plastic bags compared with that of banning their use in many Indian cities. India leads with bans on plastic bags. On June 20 2014, the Times of India reported that Agra was the latest city to ban the use of most types of plastic bags. The reasons here as elsewhere are to curb pollution. The issue with plastic bags is that their irresponsible
Answer Preview: There are a few reasons for why an indirect tax might be a more effective measure than an outri…

, Chapter: 8 -Problem: 1 >> As economies grow and develop, the market has less of a role and government a greater role in securing an efficient allocation of resources. Discuss the extent to which you agree with this view.
Answer Preview: Ideally, the government plays the most pivotal role in the market pattern compared to the market pa…

, Chapter: 5 -Problem: 2 >> Discuss whether a reduction in the rate of interest will reduce a current account surplus on a country’s balance of payments.
Answer Preview: However, an increase in interest rates can lead to an apprec…

, Chapter: 9 -Problem: 3 >> In 2009, there was an economic recession in many countries. One aspect of the recession was that unemployment rose. Governments paid large subsidies to a number of industries to try to stop the rise in unemployment. This increased the government’s debt and affected its other expenditure. In an attempt to recover part of the extra expenditure, some governments increased income tax rates on people w
Answer Preview: a. Recession is a phase in the business or economic cycle, where due to high prices, the aggregate s…

, Chapter: 1 -Problem: 1 >> a. Using a production possibility curve, explain how opportunity cost can be used to show the trade-offs involved.b. Discuss some of the problems when a planned economy makes the transition to a market economy.
Answer Preview: a) The production possibilities curve (PPC) is a model …

, Chapter: 1 -Problem: 3 >> a. Explain what you understand by ‘information failure’.b. Explain why it is necessary to know what this means when classifying goods as merit or demerit goods.
Answer Preview: a Information failure occurs when people have inaccurate, inco…

, Chapter: 8 -Problem: 2 >> In 2013 the Intergovernmental Panel on Climate Change published clear evidence that the growth in air transport was one of the main contributors to climate change.a. Using a diagram, explain the market failure associated with the increased use of air transport.b. Discuss the extent to which an indirect tax on air passengers might reduce the demand for air transport.
Answer Preview: a. Market failure in the context of air transport refers to the failure of the market to allocate resources efficiently and to internalize the negativ…

, Chapter: 10 -Problem: 1 >> a. Explain how the impact of the Keynesian multiplier process will change if a free-market closed economy becomes a mixed economy with foreign trade. b. Analyse how a change in the equilibrium level of income resulting from the multiplier process might lead to unemployment or inflation.
Answer Preview: 1. The multiplier effect refers to the effect on national income and product of an exogenous increase in demand. For example, suppose that investment …

, Chapter: 9 -Problem: 2 >> A country experiences an increase in its GDP. Discuss whether this means that its citizens will enjoy an increase in their standard of living.
Answer Preview: An increase in GDP will raise the demand for money because people wil…

, Chapter: 7 -Problem: 1 >> a. What evidence is there to indicate that the UK supermarket business is an oligopoly? What further evidence might you need to be more certain that this is the case?b. Comment on the suggestion that Tesco’s position as price leader is being undermined.c. Other than price cutting, analyse the ways in which the Big Four might restrict the growth of new entrants such as Aldi and Lidl.d. Discuss the
Answer Preview: a) Economists have long back understood that an individual recognizes the structure of an industry, one can predict behaviour of the firms in that ind…

, Chapter: 4 -Problem: 3 >> Between January 2002 and July 2008 the world price of rice, a staple food for many people in developing countries, rose by slightly over 300%. As shown in Figure 4.26 the price of rice changed very significantly in the six months to July 2008 and was influenced by the actions of different governments.The rise in the price of rice was typical of a wide range of commodities. These price rises caused
Answer Preview: a. World Price of Rice in January 2002 will be nearly about $200 per tone. b. Because of the restric…

, Chapter: 10 -Problem: 2 >> a. Explain how economic growth can occur without the price level increasing.b. Discuss what policy measures a government might use to increase the country’s economic growth rate.
Answer Preview: Ans(a) There can be economic growth with zero inflation. Thi…

, Chapter: 2 -Problem: 2 >> Market research has produced the following estimates of cross elasticity of demand. Branded cola and branded iced tea ...............................  +1.5 Branded cola and own label cola     ................................. +0.5a. Explain what these estimates mean and their business significance for sales of branded cola when the price of branded iced tea and own label cola increase by 20%.b. Us
Answer Preview: a) The cross price elasticity of +1 5 means that Branded cola and braded iced tea are very close substitutes. The positive coefficient implies a direc…

, Chapter: 6 -Problem: 1 >> a. Using examples, explain what is meant by a negative externality. b. Discuss the extent to which an indirect tax alone can rectify the problem of market failure due to negative externalities.
Answer Preview: b) a) A negative extremely exists when the product…

, Chapter: 3 -Problem: 2 >> Using a diagram, explain the effects on the market of an indirect tax on the use of plastic bags. India leads with bans on plastic bags. On June 20 2014, the Times of India reported that Agra was the latest city to ban the use of most types of plastic bags. The reasons here as elsewhere are to curb pollution. The issue with plastic bags is that their irresponsible disposal causes many problems. Pl
Answer Preview: The diagram below illustrates the effects of an indirect tax on …

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