1.1. Assume a perfectly competitive market for apples. Now assume that there are negative externalities of production because apply farming results in pesticide run-off which harms neighbours who live downstream. Draw a demand-supply diagram which represents this situation. 1.2. What would be the Pigovian Tax solution to this problem? 1.3. What would be the Coase Theorem solution to this problem? Question 2 2.1. Using average and marginal cost curves and average and marginal revenue curves show a firm in a perfectly competitive market in short run making and maximising its profit. (Draw a diagram and explain it.) 2.2. Using average and marginal cost curves show a firm in a monopolistically competitive market making a loss whilst simultaneously behaving rationally in the short run. (Draw a diagram and explain it.) 2.3. Explain the Prisoner's Dilemma. (You can use a pay-off matrix if you wish.) Question 3 3.1. Define "natural" unemployment. 3.2. What formula is used to calculate real GDP? Assuming nominal GDP is $100 billion and the Implicit Price Deflator (i.e. price index) is 110, calculate real GDP. 3.3. What factors impinging on a population's wellbeing are not captured by GDP per capita?

Question 4 4.1. Explain the relationship between the real interest rate and gross private investment. 4.2. According to the Aggregate-Demand-Inflation model, why is there an inverse relationship between the inflation rate and equilibrium real GDP? 4.3. What are the economic costs of inflation? Why is it likely that they have fallen in Australia since in the mid-1990s? Question 5 5.1. How can the RBA "cool down" the economy if it were "overheating"? 5.2. Why is it economically (as opposed to politically) more difficult for the government to generate a budget surplus in a recession than in an economic boom? 5.3. Draw the Keynesian income-expenditure model of the economy showing the equilibrium level of real GDP above the full employment level of output. How could the government use fiscal policy to return the unemployment rate back to its "natural" level? Show this diagrammatically