Business Economics Australia

Questions: Question 1Oil prices have risen temporarily due to political uncertainity in the Middle East. An advisor suggests, "Higher oil prices reduce aggregate supply. To offset this we must increase the money supply. Then the price level won't need to adjsut to restore equilibirium and we'll prevent a recession."Question 2It is a role of every government to smooth the business cycle. Every economy faces different challenges including the business cycles that may emanate from the global market. Try to examine measures taken by the UK's coalition government in trying to ensure that the economy benefits every citizen and reduces overall burden of it(QE, Fiscal policy, Monetary policy, Multiplier effect). Answers: Oil prices and supply The rise in the oil prices will certainly lead to decrease in the supply. As, the Middle East is the sea of oil and supplies oil to many countries therefore, if there is rise in oil prices in Middle East that it can affect the supply scenario of all the oil importing countries. On the other hand, the increase in the oil price can increase the cost of production that can lead to decrease of economic growth and GDP. An increase in price can decrease the supply of oil and the demand for oil may decrease and it can lead to unbalance in the demand and supply curve. Therefore, the equilibrium quantity may decrease. P represents price of oil and if there is increase in price supply of oil shifts from S1 to S2. Moreover, the quantity demand also shifted from Q1 to Q2. The price rise can increase the costs of production and transportation that can ultimately result in hike in the price of various goods and services. Therefore, in order to tackle the situation of arising recession and control the price rise of oil, the money supply in the economic can be effective. The money supply can increase the income level of the people and they can increase their investment to check the growing oil prices. The increase in money supply can help in reaching to equilibrium level so that fear of recession can be handled. Therefore, money has to be supplied keeping in view that money supply and money demand is at equilibrium. The equilibrium point can help in meeting the oil price hike and control the prices of goods. On the other hand, if the price is above the equilibrium then the money level in the hands of the people can be higher that would affect the company and can lead to shortage of products. If the supply of money is below equilibrium, then the people may have shortage of money and people may not be able to avail oil. Therefore, for supplying money in the economy, the government has to consider all the effects that may be related to the money supply. However, if money supply is in the right direction then it can be beneficial for the country in gaining oil and supply products to people. Measures taken by UKs coalition government Business cycle is considered as the fluctuations in the aggregate trade, production and activity over the years in a global market. The business cycle represents the upward and downward movement of the GDP level. Therefore, in order to battle the situation of business cycle and provide benefits to citizens and economy, the coalition government of UK has taken several steps such as: Transfer Payments: The government of UK provides basic level of income through transfer payment to the low income people or households so that they can lead minimum standard of life. In 2010-11, around 196 billion was invested by UKs government on welfare benefits. Current Government Spending: On the other hand, the government spends on defense, state education, state-provided product and services, NHS so that GDP of the nation can be improved and the people can avail basic requirements. Capital Spending: The government for improving business cycle invests in infrastructure development such as schools, hospitals, road and prisons. The spending helps the nation to improve capital stock of economy. Therefore, the UKs government has increased their spending so that public goods and merit goods can be provided to the society and whole economy. The spending of government has increased the multiplier effect that helped in economys growth. For instance, in 2011-2012 BBC gained more than 8 billion for the economy of UK. Taxation: The government seeks that all the taxpaying parties pay their tax on time. The government has imposed different tax revenue cover so that collected tax can be invested for the development of economy and its citizens. The government has made investment in small scale industries so that necessary requirements of the people can be fulfilled. On the other hand, the government focused more on improving the product quality in order to increase the demand for product in world market and gain higher foreign exchange.