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</p> Signup and view all the answers

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

    <p>Exports</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</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</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</p> Signup and view all the answers

    Which of the following is a determinant of exchange rates?

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

    What percentage of GDP is consumption typically?

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

    What is the most volatile component of GDP?

    <p>Investment</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</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</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</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</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</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</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</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</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</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</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</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</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</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</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</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</p> Signup and view all the answers

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