Question

1. The market/industry for coffee is competitive. a. Write down the characteristics of perfect competition. b. The coffee market is at long-run equilibrium. Illustrate the long-run equilibrium using diagrams for the coffee market and for a representative coffee farm. c. A severe winter hits Europe and demand for coffee products induces a surge in the demand for coffee. Using your diagrams in part (b), show and explain what happens in the short run to (i) the coffee market and (ii) each existing coffee farm. 2. Australia and 1) United States are trade partners. How would higher interest rates in Australia relative to the US cause the AUD to appreciate. Explain in detail. Illustrate your answer with the demand and supply diagram of the Australian dollar.

2. Explain how the RBA uses open market operations (OMO) to stabilise the target cash rate. In your answer discuss the role of the exchange settlement account.

3. Aggregate Demand – Aggregate Supply Diagram a. Ghana’s economy is operating at long-run equilibrium. Analyse the short-run impact of an adverse (negative) aggregate demand shock on real GDP, unemployment rate, inflation rate, and interest rate. Illustrate your answer with the AS-AD diagram. b. What type of fiscal policy could the government implement to return the economy to its long-run equilibrium level? Explain the transmission process of the policy you identified.

4. The RBA has increased its target interest rate. What would be the impact on the Australian dollar and net exports. In your answer, discuss the actions of Australian residents and foreign residents towards the Australian dollar. Illustrate your answer with the exchange diagram.

Answer 1

1a) Perfect competition is an ideal market structure. The charecteristics of perfect competitve market are:

i) Under perfect competition, there is the presence of a number of buyers and sellers in the market.

ii) The firms under perfect competition is are price takers, they have no role in price determinantion in the market.

iii) There is no restrictions to entry for new firms.

b) Under perfect competiton, in the long run, the participating firms just earn normal profit. In the short run, if the firms are earning a profit, then attacted by the profit figures more firms would try to enter themarket and this would eventually drag down the profit margings of the firms. The opposite would happen if there is loss in the market under short-run. Ultimately the firm ears normal profit in the long run.

In the long run, the average cost curve would make tangency with the price line, which indicates that the firms would earn normal profit.

c) Under the perfect competiton, the demand curve is equal to the price line. As the demand for coffee rises, the demand curve would shirt upwards, this would increase the price in the market, and the firms average cost curve would now lie below the demand curve. This implies that the existing firm would earn profit in the short run.However, being attacted by the profit new firms would enter the market and in the long run, the firms would be earning only normal profit.