Economics: Government Failure and Market Intervention
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Questions and Answers

What is an example of a government intervention to correct market failure?

  • Encouraging government capture by interest groups
  • Subsidizing education or healthcare services (correct)
  • Imposing tariffs on imported goods
  • Implementing a voting mechanism to determine public goods

What is meant by 'government failure' in economics?

  • The failure of the government to provide public goods
  • When the government fails to adequately correct for market failure (correct)
  • The absence of a price mechanism in the economy
  • The failure of the market to provide private goods

What is the primary difference between an open economy and a closed economy?

  • The presence or absence of international trade (correct)
  • The level of government intervention in the economy
  • The type of goods and services produced in the economy
  • The level of economic growth in the economy

What is the purpose of the 'voting mechanism' in economics?

<p>To determine the level of public goods society wants (C)</p> Signup and view all the answers

What is the term for goods and services produced domestically but sold to other countries?

<p>Exports (A)</p> Signup and view all the answers

How can we determine if a country is an open economy or not?

<p>By examining the proportion of exports and imports as a percentage of GDP (A)</p> Signup and view all the answers

What is the likely effect of a depreciation of a country's currency on its export earnings?

<p>Increase in export earnings (B)</p> Signup and view all the answers

What is a key difference between an open economy and a closed economy?

<p>Open economy interacts with the rest of the world, a closed economy does not (B)</p> Signup and view all the answers

Which of the following is a determinant of exchange rates?

<p>Differences in inflation rates between countries (B)</p> Signup and view all the answers

What is a benefit of the removal of domestic industry protection and other barriers to free world trade?

<p>Increase in economic efficiency (C)</p> Signup and view all the answers

What is a function of Central Banks in determining exchange rates?

<p>Setting interest rates and intervening in the currency market (D)</p> Signup and view all the answers

What motivates everyday people and businesses to invest in a particular currency?

<p>Expectations of higher interest rates (D)</p> Signup and view all the answers

What percentage of GDP is consumption typically?

<p>55% - 60% (B)</p> Signup and view all the answers

What is the most volatile component of GDP?

<p>Investment (C)</p> Signup and view all the answers

What would be the result of a demand-side shock on the economy?

<p>Reduction in demand for certain goods and services (C)</p> Signup and view all the answers

What is the definition of potential GDP?

<p>The maximum output level possible for an economy when all firms are producing at normal capacity (C)</p> Signup and view all the answers

What was the immediate supply-side shock caused by the Covid-19 pandemic?

<p>Closure of many businesses Australia-wide (B)</p> Signup and view all the answers

What is the value of net exports in terms of GDP?

<p>Normally between -2.0% and +1% of GDP (B)</p> Signup and view all the answers

What is the primary goal of the Reserve Bank of Australia's monetary policy?

<p>Achieving full employment of the labour force (C)</p> Signup and view all the answers

What is the target inflation rate set by the Reserve Bank of Australia?

<p>Between 2% and 3% on average over the medium-term (C)</p> Signup and view all the answers

What is the purpose of the Reserve Bank of Australia's demand management policy?

<p>To smooth economic fluctuations in the short run (D)</p> Signup and view all the answers

What is an example of an economic shock that may influence the Reserve Bank of Australia's monetary policy?

<p>A natural disaster such as a drought (A)</p> Signup and view all the answers

What is the advantage of the Reserve Bank of Australia's independence from the government?

<p>It enables the RBA to focus on achieving macroeconomic objectives (A)</p> Signup and view all the answers

What is the primary tool used by the Reserve Bank of Australia to implement its monetary policy?

<p>Interest rates (B)</p> Signup and view all the answers

What is the multiplier effect according to the theory?

<p>One person's income is spent, becoming another person's income, and so on (A)</p> Signup and view all the answers

What is the term for the time it takes for policy makers to recognize a problem?

<p>Recognition lag (A)</p> Signup and view all the answers

What is the result of an increase in government purchases, according to the crowding out effect?

<p>A decrease in private expenditure (A)</p> Signup and view all the answers

What is the term for the upward pressure on prices of inputs and wages due to government purchasing?

<p>Resource crowding out (D)</p> Signup and view all the answers

What is the total time lag for fiscal policy, according to the text?

<p>Up to 18 months (C)</p> Signup and view all the answers

What is the consensus among economists regarding crowding out in the long run?

<p>There is complete crowding out in the long run (D)</p> Signup and view all the answers

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