ECOM4000 Microeconomic and Macroeconomic Assignment Sample

ECOM4000 Microeconomic and Macroeconomic Assignment

The assignment must be completed individually and submitted using Turnitin on the portal before the due date. The assignment covers both microeconomics and macroeconomics.

When doing your assignment, you might like to consider the following points.

• Answer each question directly and fully, using the minimum number of words. You do not need to write an essay. The overall word limit is 2000 words.

• Where necessary, make sure you explain your diagrams. You can insert diagrams by drawing them in programs like “paint” and pasting them into the document, or by drawing them by hand, scanning them and then pasting them as a picture into the document. Do not copy pictures or graphs from the internet - you must draw them yourself (it’s ok if they are a bit messy...).

• 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 subject material given to you in ECOM4000.

• As the assignment is to be submitted using Turnitin, any plagiarism will be identified. It is possible that you could get zero for your assignment if you copy someone else’s work.

• Consult Academic Success Centre resources on the portal and on campus for assistance with referencing and plagiarism.

The assignment has two sections. Section A (20 marks) is on microeconomics and Section B (20 marks) is on macroeconomics.

Section A: Microeconomics (20 marks)

Question 1

The Australian government has a four pillars policy for the banking sector in Australia. Basically, the policy means that the four largest banks in Australia (the “Big 4”) are not allowed to merge with each other. Using your own independent research, briefly explain the reasons for this policy, and the advantages and disadvantages of this policy. (6 marks)

Question 2

Identify the market structure the Big 4 banks operate in. Justify your choice of market structure using the market characteristics used to classify markets. Explain how the Big 4 banks compete, and the nature of their interdependency. (6 marks)

Question 3

Consider a “game” between Commonwealth Bank (CBA) and ANZ Bank (ANZ) that the banks may participate in. The rules of the game are:

• If both CBA and ANZ keep interest rates low, then they will both make a profit of $2.5b.

• If both CBA and ANZ keep interest rates high, then they will both make a profit of $3.5b.

• If one bank keeps interest rates low and the other keeps interest rates high, then the low interest rate bank will make $4.0b profit and the high interest rate bank will make $2.0b profit. Using these rules, solve this game for the Nash equilibrium (make sure to include your diagram and the logic you followed to solve the game).
Is your outcome the best one for both CBA and ANZ?

Section B: Macroeconomics (20 marks)

Question 1

The Chinese government has recently removed their domestic zero covid policy. Using your own research briefly explain what this policy is, and the effect you think it has had on the Chinese economy. At a minimum, your answer should include commentary about the effect on Chinese GDP, unemployment, inflation and other aspects of the Chinese macroeconomy. Support your comments with appropriate economic data. (Make sure you use reputable economic sources and reference your sources.) (8 marks)

Question 2

Outline a possible fiscal policy program the Chinese government could undertake to recover from the effects of the zero covid policy. Draw a diagram of the Chinese macroeconomy using the aggregate demand and aggregate supply (AD/AS) model showing the effect(s) of the zero covid policy, and then after the (successful) implementation of your fiscal policy program. Clearly show on your diagram(s) the before and after cases. (8 marks)

Question 3

The zero covid policy has not just affected the Chinese economy, but economies all around the world. Explain the effect the policy has had on the Australian economy, as well as the impact its removal might have on the Australian economy. Support your answer with appropriate economic theory.

Solution

Question 1: Four Pillars Policy

In Australia, the Four Pillars Policy for MBA assignment expert is the current regulatory policy in place to ensure the stability and ultimate competitiveness of the Australian financial system. The policy is an outright ban on Big 4 merger and acquisition—Big 4 being the Commonwealth Bank of Australia, Westpac Banking Corporation, Australia and New Zealand Banking Group, and National Australia Bank.

Reasons for the Policy:

• Financial Stability: Reduces the concentration of market power, which could prevent more banks from posing systemic risks if one were to fail

• Competition: Objective is to create a competitive environment, which inhibits Big 4 from becoming so dominant, which eventually could bring better conditions for consumers.

• Consumer Choice: Ensures consumers have the greatest range of choices for financial services that will create customer service incentives, innovation-driven value, and competitive pricing.

Advantages of the Policy:

• Risk Mitigation: Reduces the amount of consolidation in the banking sector making it less likely for a super-sized bank to fail, thereby reducing the risk of a banking crisis..

• Competitive Prices: Keeps a competitive market, resulting in lower interest rates and fees for consumers in most cases

• Innovation Drive: Hopes it would encourage the Big 4 to innovate and be more efficient than their competition.

Disadvantages of the Policy:

• Global Competitiveness: May prevent Australian banks from achieving the scale necessary to compete effectively on a global stage

• Cost Efficiencies: Limits potential cost efficiencies and economies of scale that could be achieved through mergers.

• Market Distortion: A concern raised by some who claim that it constitutes an artificial way of keeping the banking sector as it is, not letting the natural market forces/movements adjust..

Question 2: Market Structure of the Big 4 Banks

The Big 4 banks in Australia operate within an oligopoly market structure. This classification is based on several market characteristics:
Characteristics Justifying Oligopoly:

• Limited Number of Firms: The market is dominated by a small number of large firms (the Big 4), each holding a significant market share.

• High Entry Barriers: Significant capital requirements, regulatory compliance costs, and established brand trust create high entry barriers for new competitors.

• Interdependence: Each bank's decisions can affect the market outcomes for the others, necessitating careful strategic planning and competitive tactics.
Competition and Interdependency:

• Price Competition: While direct price wars are less common, the banks compete on interest rates for loans and deposits, fees for services, and other financial product offerings.

• Non-Price Competition: They also engage in non-price competition through differentiation strategies, including technology offerings (e.g., mobile banking apps), customer service, product features, and branch network reach.

• Interdependency Nature: The actions of one bank often lead to reactive measures by the others, whether in terms of pricing, service improvements, or promotional campaigns. This mutual awareness shapes their strategic decisions, maintaining a balance in their competitive tactics to attract and retain customers without triggering destructive price wars.

Question 3 Consideration of Game

To solve this game between Commonwealth Bank (CBA) and ANZ Bank (ANZ) using the rules provided, we first set up the payoff matrix, which displays the profits for each bank depending on whether they choose to set their interest rates high or low. We then analyze this matrix to find the Nash equilibrium, which is a set of strategies where no player can benefit by changing their strategy while the other player's strategies remain unchanged.

Payoff Matrix

The following are the strategies

• H: Setting high interest rates

• L: Setting low interest rates

The payoff matrix based on the rules of the game is:

• The first number in each cell is CBA’s profit in billions.

• The second number is ANZ’s profit in billions.

Analysis

• When Low selected by both (L, L): Both banks make a profit of $2.5b each.

• When High selected by both (H, H): Both banks make a profit of $3.5b each.

• Low for CBA, High for ANZ (L, H): CBA makes $4.0b and ANZ makes $2.0b.

• CBA High, ANZ Low (H, L): CBA makes $2.0b and ANZ makes $4.0b.

Finding Nash Equilibrium

We need to determine if either bank can improve their payoff by unilaterally changing their strategy:

• From (L, L) to (H, L) or (L, H): CBA can increase their profit from $2.5b to $4.0b by switching from L to H if ANZ stays at L. Similarly, ANZ can increase their profit from $2.5b to $4.0b by switching from L to H if CBA stays at L.

• From (H, H) to (L, H) or (H, L): Neither bank would want to switch to L if the other stays at H, as their profit would decrease from $3.5b to $2.0b.

• Responses to (L, H) and (H, L): If CBA chooses L and ANZ chooses H (L, H), ANZ will not switch to L as it reduces their profit to $2.5b. Conversely, if ANZ is at L and CBA at H (H, L), CBA will not switch to L as it reduces their profit to $2.5b.

Therefore, the Nash equilibria in this game are (L, H) and (H, L).

Best Outcome Analysis

• Optimal Outcome: If both banks choose (H, H), each earns $3.5b, which is the highest mutual benefit scenario within the rules.

• Nash Equilibrium Outcome: The Nash equilibrium outcomes (L, H) and (H, L) are not Pareto optimal, as they favor one bank over the other ($4.0b vs. $2.0b).

• Best for Both: Both banks would be better off choosing (H, H) compared to any Nash equilibrium found, as it maximizes both of their profits equally and avoids an imbalance.

In conclusion, the Nash equilibria (L, H) and (H, L) are strategically stable but not the best for both banks. The best mutual outcome is (H, H), where both banks agree to keep rates high, each earning $3.5b, maximizing their profits equitably.

Section B: Macroeconomics

Question 1 - Zero covid policy

Zero-COVID policy implemented

Since early 2020, the Chinese government has been pursuing a zero-COVID policy to halt the spread of the virus within its borders by conducting mass testing, placing cities on lockdown, limiting people's movement and imposing quarantine standards. In this China has succeeded initially, but it also had severe economic consequences.

Zero-COVID Effect on Chinese GDP

The zero-COVID policy has crippled economic activities. Supply chain constraints, industrial production and trips to the shop would be interrupted again and again if the metropolitan city of Beijing and the expansive city of Shanghai shut down (Huang et al. 2024). China National Bureau of Statistics said the growth rate hit 2.3% in 2020, the lowest in decades. After a rebound in 2021 to 8.1% (on a low base) growth has again decelerated in 2022 to about 3%, which fell short of the government’s target of 5.5% (BBC 2021). This continuous changing disrupted interests of both the local and global investments, exacerbating the uncertainty of the economy.

Unemployment

Unemployment rates rose with the influence of the policy on enterprises and especially SMEs. The U-6 unemployment rate for all Americans was 12.6% in November 2019, down 0.5% from the previous month, but still 2.1 points higher than a year earlier. Extended lockdowns ultimately led to business closures and lay-offs in the retail, hospitality and manufacturing sectors, causing an increase in job losses.

China inflation

Inflation in China was still pretty mild relative to global benchmarks, in part because the zero-COVID policy was crimping demand. Inflation as measured by the Consumer Price Index (CPI) remained around 2% in 2020 and 2021 (Gao & Woo 2023). Nevertheless, disruptions in the supply chain resulted in spikes in food prices and hence marking food inflation as an area for concern. Producer Price Index (PPI) moved with great volatility reflecting supply chain difficulties and commodity price instability.

Supply Chain Disruptions

Other Macroeconomic Aspects: The countries adopting a zero-COVID policy, due to the economic impact of the policy, have disrupted global supply chains as China is a major manufacturing and exports hub (Kong 2022). This disrupted global economic recovery, leading to delays and shortages in industries around the world.

Investment and Business Confidence

The eroded the business confidence of corporate India. Domestic as well as foreign investors held caution as the nature of lockdown and restrictions were so unpredictable. This uncertainty reduced foreign direct investment inflow and weakened capital formation.

Public Debt

Following expanded fiscal spending by the Chinese government in helping struggling sectors, public debt increased (Hsu 2021). Borrowing was used to finance infrastructural projects and stimulus packages to counter economic slowdowns which raised the debt-to-GDP ratio.

Consumption

Resurgence in Covid-19 cases and related lockdowns weighed on consumer sentiment. A dramatic deceleration in retail sales growth also struck the service sector. Although there was an increase in online sales, this could not compensate for the loss of sales in physical retail.

Question 2 - Possible fiscal policy program

For addressing the economic crisis caused by the Zero COVID policy, the government of China can impose multi-faceted fiscal policy program that aims to stimulation of both demand and supply within its economy..

1. Greater Government Spending: The government will be able to restart economic growth by increasing the level of investment in infrastructure projects, such as highways, bridges, and subways. Besides creating jobs, such spending also raises the efficiency of the economy making it a more attractive candidate for private investment (Huang et al. 2023). In addition, spending more in Healthcare can facilitate a more preparedness for future health crises, bring back confidence with the public, and promote spending by consumers.

2. Tax Relief: The implementation of tax cuts for businesses, particularly to Small and Medium Enterprises, would help these entities alleviate some of the financial burdens. Lowering personal income tax rates for households, especially those in the lower- and middle-income communities, can do wonders for their tax costs and help them save more of their income (Hu et al. 2024). That will increase consumer spending, translating to more demand in a number of sectors of the economy.

3. Key sector subsidies: Zero COVID restrictions have impacted certain industries such as tourism, hospitality, and exports more than others. Providing these
sectors with subsidies or financial aid could accelerate their recovery and thereby help drive wider economic stabilisation and growth.

Economic effect: The aggregate effect of this expansive fiscal policy would be a movement of the Aggregate Demand (AD) curve to the right, representing higher aggregate demand thoroughly. Such a change should increase the natural equilibrium GDP and reduce the NAIRU. Both the rise in government spending and consumption, and the improvement in business investment due to tax breaks, will bring about economic recovery and growth.

Question 3 Effect of the policy

The hawkish mentality of Zero-COVID was first adopted by China and had a big impact on Australia and then, on the world economy. Major Chinese cities were under a strict lockdown causing broken supply chains and hurting countries like Australia that rely heavily on China-related trade. Industries Down Under that bank upon Chinese purchase and student enrolment, like mining, agriculture and education suffered from plummeting consumption and mobility in China (Chen et al. 2023).

The ending of China's Zero-COVID policy could bring about a recovery in these areas as global trade and student movements return more to normal. China consumer and industrial demand will continue to increase inbound from Australia, schedules for commodities and educational services, which are essential for the Australian economy. Lifting these restrictions will enable a revitalisation of two-way trade and investment, which is particularly important given Australia's reliance on Chinese demand for resources.

Easing restrictions on economic activities show that some of the losses during the lockdown can be made up during normal working conditions and promote growth through revival in demand for Australian products including iron ore and coal, which are essential raw materials for the Chinese industrial sector (Chen et al. 2023). Nonetheless, recovery may be hampered by logistical disruptions and a gradual transition to the new economic landscape for consumers and businesses post-pandemic. How quickly China is able to recover its industrial and consumer activity and how rapidly Australia can adjust to changes in demand will have a lot to do with how much these losses actually affect the Australian economy.

References

BBC 2021, ‘China rebounds with economic growth target above 6%’, BBC News, 5 March.
Cai, J, Hu, S, Lin, Q, Ren, T & Chen, L 2022, ‘China’s “dynamic zero COVID-19 strategy” will face greater challenges in the future’, Journal of Infection, vol. 85, no.
1.

Chen, P, Zhang, L, Feng, Y, An, F-R, Su, Z, Cheung, T, Lok, K-I, Ungvari, GS, Jackson, T, Xiang, Y-T & Zhang, Q 2023, ‘Prevalence and network structure of post-traumatic stress symptoms and their association with suicidality among Chinese mental health professionals immediately following the end of China’s Dynamic Zero-COVID Policy: a national survey’, Translational psychiatry, vol. 13, Springer Nature, no. 1.

Gao, L & Woo, R 2023, ‘China’s consumer, factory prices skid as demand falters’, Reuters, 11 April.

Hsu, S 2021, COVID-19 Made China’s Debt Problem Worse, thediplomat.com.

Hu, X, Jiang, W, Wan, G & Zhang, J 2024, ‘The Welfare (Inequality and Growth) Effects of Urbanization: Empirical Evidence from China’, Hacienda pública española/Hacienda pública española, vol. 248, Instituto de Estudios Fiscales, no. 1, pp. 3–20.

Huang, P, Tan, Y-Y, Chen, B, Shang, H-F, Wang, L-J, Liu, C-F, Chen, L, Chang, Y, Wang, H, Wang, X-L, Lei, X-G, Yao, L-F, Yu, Y, Ye, Z, Chen, H-B & Chen, S-D 2024, ‘Life and disease status of patients with Parkinson’s disease during and after zero-COVID in China: an online survey’, Translational neurodegeneration, vol. 13, BioMed Central, no. 1.

Huang, Y, Huang, X, Li, R & Cheng, W 2023, ‘Assessing the effectiveness of targeted poverty alleviation policies in Xinjiang, China’, Humanities & Social Sciences Communication, vol. 10, no. 1.

Kong, Q 2022, Supply chains catch a breath as China lifts zero-COVID, UNSW Sites.
Qian, N 2023, The long tail of China’s zero-Covid policy, The Strategist.