Reference no: EM133160386

Question 1:

Select the diagram from the two given below which correctly illustrates the situation for China under the conditions described above. Using the selected diagram, explain what China's central bank does to keep its exchange rate fixed.

How does China control exchange rates?

Unlike many of its international trade partners (who allow the values of their currencies to float freely against others), China has a strictly controlled currency policy where it regulates trading activity and tries to control daily movements of the Yuan (Chinese currency) on the foreign exchange market.

China has customarily used a portion of its reserves to influence the value of its currency through foreign exchange market interventions. To strengthen the Yuan, the Chinese central bank sells foreign currency reserves (typically US dollars) into the market. On the other hand, if the country wants to weaken its currency, it uses its local currency to buy foreign currency.

By contrast, in 1983 the newly elected Labour government, with Bob Hawke as Prime Minister and Paul Keating as the Treasurer moved the Australian dollar onto a floating exchange rate. This meant that the dollar was now valued through the supply and demand of money within world currency markets.

1. What is an exchange rate?.
2. Why when we buy imports from another country do we need to buy or demand their currency?
3. How is an exchange rate determined under a floating exchange rate?

Question 2 Market Failure & Global Warming

Many economists have described climate change as an example of a market failure - though in fact several distinct market failures have been identified.

The core one is the so-called ‘greenhouse-gas externality'. Greenhouse gas emissions are a side-effect of economically valuable activities.
Most of the impacts of emissions do not fall on those conducting the activities - instead they fall on future generations or people living in developing countries, for example - so those responsible for the emissions do not pay the cost. The adverse effects of greenhouse gases are therefore ‘external' to the market, which means there isusually only an ethical - rather than an economic - incentive for businesses and consumers to reduce their emissions. As a result, the market fails by over-producing greenhouse gases.
Economists concerned about this market failure argue for policy intervention to increase the price of activities that emit greenhouse gases, thereby providing a clear signal to guide economic decision-making at the same time as stimulating innovation of low carbon technologies. To ensure that emissions cuts are spread out across the economy as inexpensively as possible, economists tend to favour policies that ensure that all businesses and households face the same price on carbon- such as a tax on emissions or an emissions trading scheme.

1. Answer the following multiple-choice questions based on the article above:

1.1 Which of the following does NOT involve market failure?
A. A perfectly competitive firm
B. A monopoly
C. A negative externality
D. A public good

1.2 Which of the following is NOT a feature or an example of a public good?
A. They are excludable.
B. They are environmental resources that are not paid a price when they are used to produce private goods.
C. As they are used the supply does not fall so your use of a public good is not reduced by my use.
D. They are non-excludable.

1. Answer the following multiple-choice questions based on the article above:

1.1 Which of the following does NOT involve market failure?
A. A perfectly competitive firm
B. A monopoly
C. A negative externality
D. A public good

1.2 Which of the following is NOT a feature or an example of a public good?
A. They are excludable.
B. They are environmental resources that are not paid a price when they are used to produce private goods.
C. As they are used the supply does not fall so your use of a public good is not reduced by my use.
D. They are non-excludable.

1.3 Which of the following is NOT true of externalities?
A. They can be positive or negative externalities.
B. They can be corrected or internalised by Pigouvian taxes and subsidies.
C. The Coase theorem explains how defined property rights and low transaction costs can create free market solutions to their effects.
D. They only cause a cost or a benefit to the person or business who buys or sells the product.

1.4 A Free Rider is NOT someone who
A. receives a benefit without a cost.
B. Pays their share of the cost of providing a benefit gained by them and a group of consumers or producers.
C. will underestimate the value of a benefit to pay less than their share of its provision or supply.
D. includes a shoplifter, tax evader or a thief

2. The following diagram represents the negative externality of global-warming caused by burning fossil fuels like coal creating green-house gases. The diagram is labelled with letters A to D. Match each letter to its correct description given below from 1 to 4.

Descriptions:
1. The Pigouvian tax on emitters of carbon.
2. The estimated size of the social cost of carbon emissions.
3. The effect that the cost of the tax has on producers causing a fall in how much they supply of coal etc.
4. The effect the increase in the price of products that emit carbonhave on the quantity consumers buy.

3. Use your understanding of the term "Free Rider" to explain the problem with getting all countries to agree to measures to reduce green-house gas emissions.