ECOM4000
Economics
Trimester 1, 2014
Individual Assignment

Individual Assignment
Short Answer Questions– based on Economic Theory
This assignment counts for 20% of your total marks
Due Friday 6th June, Week 11 by 5pm (AEST Australian eastern standard time) on the portal under “Assessments and Revisions”
Instructions
• Do this assignment individually.
• You may need to do research of your own as well as reading the articles provided. Marks are awarded for this.
• Address each question directly. You do not need to present answers in essay or report form.
• Make sure you explain your diagrams and answer all parts of each question. You don’t need to write a lot to answer each question. The word limit is around 800-1500 words.
• Reference your answers if you are using information from another source using in-text referencing and include a reference list at the end of the assignment. You do not need to reference lectures and tutorials.
• 5 marks are awarded for correct use of in text referencing and a reference list at the end of the assignment.
• Please consult “Student Learning Resources” uploaded on Moodle with the assignment for assistance with referencing, plagiarism and note taking. The assignment will go through Turnitin and any plagiarism can be traced. As a result you can get 0 for your assignment.
• Do not plagiarise your answers- please see p.4 of Student Misconduct Policy for a definition of plagiarism and the consequences: http://kbs.edu.au/CurrentStudents/SchoolPolicies/InformationforallStudents/St udentMisconductPolicy/tabid/445/Default.aspx
• Doing this assignment will be good preparation for the exam.
• Please submit your assignment on the portal as a word document and insert any pictures/ diagrams that you draw as pictures into the word document.

Part 1: Firm Perspective [25 marks]
Use the following article and your own research to answer the following questions:
Competitive dynamics in the banking sector
The Treasury presentation earlier in the week to the Senate inquiry on competition in the banking sector drew attention to a number of significant developments which have, collectively, altered the competitive dynamics of the retail banking sector in recent years.
... there has been further consolidation in the Australian banking sector since the global financial crisis.
A consequence of these factors is that the four major banks have expanded their collective market share across a range of loan and deposit products.
This is illustrated in the home loan market (Chart 5). The share of total housing loan credit for the five largest banks — the four major banks (Commonwealth Bank, NAB, ANZ and Westpac) plus St George — has increased from around 60 per cent before the onset of the GFC in mid-2007 to around 73 per cent.
Chart 5: Major banks (Wespac, Commonwealth Bank, NAB, ANZ) gain market share

Source: RBA.
...The Government is seeking to enhance competitive pressures in the provision of retail banking products, including home loans, with the package of measures announced on the weekend. This includes:
• banning exit fees on new home loans;
• examining providing a capacity for consumers to transfer deposits and mortgages between banks;
• enhancing disclosure of home loan products;
• supporting credit unions and building societies;
• empowering the ACCC to investigate and prosecute anti-competitive price signalling;
• fast-tracking reforms to credit cards;
• monitoring and possibly enhancing ATM reforms; and
• a community awareness and education program designed to make consumers better informed.
Source: http://www.treasury.gov.au/PublicationsAndMedia/Publications/2011/Economic-Roundup-Issue-
1/Report/The-Australian-banking-system-challenges-in-the-post-global-financial-crisis-environment

1. Based on the article above answer the following questions.
a) What type of market do Australian Banks operate in? How has the Global Financial Crisis affected competition in this market? Explain your answer. 7 marks
b) Assume the biggest four banks in Australia decided to collude and agree to charge a high price on banking products. Graphically demonstrate the price and output in this market and explain your diagram. 8 marks
c) How and why is the government seeking to increase competition in the banking sector? Explain your answer with reference to the diagram you constructed in part b). 5 marks

2. Briefly describe what triggers entry in a perfectly competitive market and the process that ends further entry. Use a graph in your explanation. 5 marks

Part 2: Macroeconomic Perspective [40 marks]
1. Using the sources below and your own research answer the following questions:
ISTAT cuts Italy GDP forecast to -1.4 pc, unemployment to rise
Reuters May 6, 2013, 02.06PM IST

ROME: Italy's economy will contract by 1.4 per cent this year and post a timid recovery in 2014, national statistics institute ISTAT forecast on Monday.
The latest forecast for 2013 marked a sharp downward revision from a previous projection of -0.5 per cent made in November, reflecting the continued weakness of domestic demand as Italy languishes in its longest recession for 20 years. ...

a) What is austerity and why have some member countries of the European
Union had to pursue this policy? (Hint: You need to conduct some research)
5 marks
b) How would additional austerity affect Italy’s economic growth, unemployment and inflation today? What do you think would be a more effective fiscal policy for the government to use? Justify your answers with the aid of an economic diagram.10 marks

2. What was the unemployment rate in Italy in January 2013 and in July 2013?
(Look back to Question 1). What is the labour force participation rate in Italy in January 2013 and July 2013 according to the below data? What do these statistics tell you how employment in Italy has changed? 10 marks
Jan-13 Jul-13
Working age
population 40,100,000 40,900,000
Labour force 20,000,000 27,000,000

3. The International Monetary Fund’s World Economic Outlook database provides the data in the table for India in 2004, 2005, and 2006.

a) What changes in long-run and short-run aggregate supply and aggregate demand are consistent with these numbers? Demonstrate your answer with a diagram. 7 marks
b) List two factors that might have produced the changes in aggregate supply and aggregate demand that you have described in your answer to (a). 4 marks
c) From the above data, do you think India has an inflationary gap, a recessionary gap, or is at full employment? 4 marks

Do not forget to include a reference list for any sources apart from lectures or tutorials. You also need to include in text references. Both of these will count for 5 marks.

Total 70 marks