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A carbon pricing scheme (CPS), commonly termed as a ‘carbon tax’ was introduced by the Gillard
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A carbon pricing scheme (CPS), commonly termed as a ‘carbon tax’ was introduced by the Gillard Government in 2011 and came into effect on 1 July 2012.  Under the legislation, the biggest carbon-emitting companies in Australia would pay a price for each tonne of carbon.  Then Opposition Leader Tony Abbott termed the intended tax as a “toxic tax from a government with the Midas touch in reverse”. Gillard’s CPS was in operation until it was replaced on the 17 July 2014 by the Abbott government.

1. Using appropriate diagram/s, discuss whether the carbon pricing scheme has been an adequate measure to correct the market failure and reduce CO2 emission. Also illustrate the socially optimal level of output and price of carbon content of fuels in the diagram. 

2. Prime Minister Gillard also proposed that Australian households would be handed more than $15 billion in compensation to help offset the impact of carbon tax.  Explain how this compensation would stimulate the output, employment and price level.  

3. Consumption expenditure is the largest component of GDP (expenditure method).  Lack of consumer confidence in the recent years is alleged to be the main reason for slower economic growth and rising Australia’s unemployment rate in recent years.  Discuss the trend in consumer expenditure and explain the effect of declining consumer spending on the equilibrium output using Keynesian Cross model.  

4. “Real jobless rate well above 20%” as indicated by (Australian’s) Adam Creighton (The Guardian, 30 May 2017).  Discuss the reason for this claim.  Explain why it is not easy to measure the hidden unemployment in an economy. (4 marks)


5. Consider an economy with the following characteristics:


Consumption function: C = 40 + 0.9YD;

Planned investment:  I = 40;

Government expenditure: G = 60;

The tax function: T = 0.2Y;

Exports of the country:  X = 14

The import function: M = 10 + 0.02Y. 

Assume there are no transfer payments and no autonomous taxes.

All variables are in billions of dollars. C is consumption expenditure; YD is disposable income; Y is real GDP; G is government purchases of goods and services; T is taxes; I is planned investment expenditure; X is exports, and M is imports.


6. Write the aggregate expenditure function. How much is the autonomous expenditure in this economy in billions of dollars? (

7. What is the equilibrium level of income of the economy? 

8. Define the concept of multiplier.  Calculate the size of the multiplier of the economy if exports rise from $14 billion to $30 billion. 

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