Tutorial 11 Economics ECON101 PDF

INTRODUCTION TO Economics (ECON101) Tutorial 11  Outline Practice on the AS-AD Model The 2 Wings of the Economy (Fiscal & Monetary Policies) Productivity (Definition & Determinants) Population: A blessing or a curse? (Activity) Economic Growth...

INTRODUCTION TO Economics (ECON101) Tutorial 11  Outline Practice on the AS-AD Model The 2 Wings of the Economy (Fiscal & Monetary Policies) Productivity (Definition & Determinants) Population: A blessing or a curse? (Activity) Economic Growth: Ordinary vs. Sustainable The “Catch-Up” Effect Public Goods 2 Tutorial Sheet 11 Question 1: Suppose a computer virus disables the nation’s automatic teller machines, making withdrawals from bank accounts less convenient. As a result, people want to keep more cash on hand, increasing the demand for money. Explain how would this affect production level in the economy, illustrate that based on AD and AS curves. In this question, we are operating in two graphs, which are: 1- Money Market 2- AS-AD Model In the Money Market, demand for money increases. So, MD1 shifts upwards to MD2. As a result, interest rate increases from R1 to R2. 4 Question 1: Suppose a computer virus disables the nation’s automatic teller machines, making withdrawals from bank accounts less convenient. As a result, people want to keep more cash on hand, increasing the demand for money. Explain how would this affect production level in the economy, illustrate that based on AD and AS curves. The increase of interest rates will lead to two things: 1- People will save more, to benefit from the higher rate of return offered by the financial system. So, Consumption (C) decreases. 2- Investors will borrow LESS loans, because the cost of borrowing increases. So, Investment (I) decreases as well. The decrease in both C & I will lead to a decrease in Aggregate Demand (AD). So, its shifts left from AD to AD2. 5 As a result, both P & Y decrease. Question 2: The economy is in a recession with high unemployment and low output. What economic policies can the government use to solve recession in the short run? Illustrate using graphs. The government can apply two economic policies, either separately or mixed, in order to stimulate the economy in the Note: We are in a recession. So, start BELOW (on the left of) LRAS. short run. These policies are: 1- Expansionary Fiscal Policy: The government can increase spending or reduce taxes to boost Aggregate Demand (AD). 2- Expansionary Monetary Policy: The Central Bank (CB) can lower interest rates by increasing Money Supply (MS) in order to encourage investors to increase borrowing and people to increase consumption. Both policies will stimulate AD, shifting it to the RIGHT from AD1 6 to AD2. As a result, both P & Y increase. Question 3: The economy is facing high inflation. What economic policies can the government use to solve inflation in the short run? Illustrate using graphs. The government can apply two economic policies, either separately or mixed, in order to manage inflation in the short Note: We are in an inflation. So, start run. These policies are: ABOVE (on the right of) LRAS. 1- Contractionary Fiscal Policy: The government can reduce spending or increase taxes in order to limit Consumption & Investment (decreasing AD). 2- Contractionary Monetary Policy: The CB can increase interest rates by reducing Money Supply (MS) in order to limit borrowing and consumption (So, AD decreases as well). Both policies will decrease AD, shifting it to the LEFT from AD1 to AD2. As a result, both P & Y decrease. 7 Question 4: Define “Productivity”. List the determinants of productivity Definition: Productivity measures the output produced per unit of input (e.g., labor, capital) in an economy. In other words, it shows how much output can 1 Worker (Labor) or 1 machine (Capital) produce during a given time period. The 4 main determinants of Productivity are: 1- Physical Capital: Refers to tangible assets such as machinery, buildings, and tools that are used in production. 2- Human Capital: Represents the knowledge, skills, and experience of workers (labor). 3- Natural Resources: resources such as land, water, and key raw materials are essential for productivity. 4- Technological Knowledge: The higher the technological know-how of workers, the more productive they are. 8 Question 5: What’s the difference between physical capital and human capital Physical Capital: Refers to tangible assets such as machinery, buildings, and tools that are used in production. Human Capital: Represents the knowledge, skills, and experience of workers (labor). 9 Question 6 (Activity): Explain how population growth can be a “double-edged weapon” with regard to productivity and growth. Population growth can either be a blessing or a curse, depending on how the nation manages it. Nations that manage it well reap its rewards, whereas nations that manage it poorly suffer its drawbacks. Accordingly, there are both positive and negative effects of population growth. Let us break them down as follows: Positives Negatives Larger workforce increases potential output. Overpopulation puts extra pressure on available resources, which reduces productivity. Larger population leads to greater demand for Excessive pressure on hospitals and schools goods and services, which stimulates the make these services poorer and less efficient. As economy. a result, human capital deteriorates. 10 Question 7: How Economic growth is different from sustainable growth? Economic Growth: Refers to the increase in the economy's output (real GDP) over time. It often focuses on short to medium term gains. Sustainable Growth: Emphasizes long-term growth that balances economic, social, and environmental goals. Ensures that resources and environment are preserved for future generations. 11 Question 8: Based on World Bank data for 2022, economic growth in India was 7% Whereas developed countries, such as Germany and France, did not exceed 2%. How is this possible? The accumulation of capital is subject to diminishing returns. What does this mean? It means that the more capital an economy has, the less additional output the economy gets from an extra unit of capital. Developed countries have already come very close to their potential LRAS. As a result, growth became harder. On the other hand, the return to capital is high in poor countries, because they are in the early stages of capital accumulation and are still very far from their potential LRAS. Moreover, these countries can grow faster because of the “Catch-Up Effect”. India, as a developing economy, benefits from this effect, achieving higher growth rates compared to already industrialized nations like Germany and France. 12 Question 9: “Knowledge is a Public good.” Explain. Knowledge is a public good for two main reasons: 1- It is Non-Rival: One person's use of knowledge does not diminish its availability to others. Example: Scientific discoveries or open-source software benefit society without being depleted through usage. 2- It is Non-Excludable: Once knowledge is created, it is difficult to prevent others from using it. Example: Governments and organizations often subsidize research to ensure its widespread availability. 13  Thank you! Next Week: Q&A Session + Quiz 4 (both in the LECTURE)