ECONOMICS 2014

1) What is trading bloc? – European Union

2) What group is Australia a member of? – G20
3) What will occur if there was a recession in the domestic economy? – Income taxation receipts would decrease
4) In which of the following circumstances could the international monetary fund be called in to assist a country? – A financial crisis
5) Which of the following has been a disadvantage of a floating exchange rate? – Increased exchange rate volatility (1983 Aus. moved
from a fixed to floating exchange rate)
6) Describes a positive externality likely to arise from this project. – Reduced traffic congestion around the existing airport
7) What would be the long-term effect on the unemployment rate and the participation rate of an increase in labour market flexibility?
– Unemployment rate – increases and the participation rate – decreases
8) Table – The CPI has risen by less than the change in nominal GDP
9) If a government stopped funding education, what would happen to the market equilibrium price and quantity of education? –
Equilibrium price – rises and equilibrium quantity – falls
10) Diagram – which combination of shifts in the demand and supply curves must result in a depreciation of the AUS $ - Demand curve
shifts the left and supply curve shifts the right
11) The effect of reduced competition on product markets? – Equilibrium price – increases and quantity – decreases
12) Table – Inflation rate – 4% (start CPI – Last CPI divide start CPI x 100)
13) Which of the following shows the effects of this increase on Australia’s balance of payments? – Primary income account – debit
increase and Capital and financial account – credit increase
14) Which of the following changes to commercial banks’ holding of assets is most likely to occur? – Government securities – decrease
and exchange settlements – increase
15) Diagram – marginal tax – decreases and profits – increase
16) Table – A surplus of $14 billion
17) Most likely to cause increase in youth unemployment – Minimum wage for youth – increases and minimum wage for adults –
unchanged
18) Table - $20 million
19) $200 million
20) 40 million units
a) 21) Distinguish between local content rules and incentives –
Local content rules specify that products imported from a country must contain a minimum percentage of locally made parts.
Export incentives, on the other hand, give domestic producers assistance such as loan subsides or technical advice to
encourage them to export their output.
b) 21) Explain the likely effects of this policy on farmers and consumers in Australia –
One likely effect of United States subsides is lower world process and therefore reduced prices and profit margins for Australian
farmers, many of whom may be unable to compete and may be forced out of production. Australian consumers may enjoy
lower process and increased supply and choice in agricultural products because of the United States farmer subsides.
c) 21) Discuss the reason that a domestic industry could give to argue for its protection –
One reason that a domestic industry could use to argue for its protection is the presence of dumping of similar foreign -made
products at prices below production costs that force domestic producers out of business. The government might be asked to
impose special tariffs.
Another reason the domestic industry may argue for protection is the infant industry argument; a new domestic industry
requires protection to grow and gain the economies of scale that make it competitive with imports.

a) 22) Briefly explain one cause of an exchange rate depreciation –

One cause of an exchange rate depreciation is a fall in demand for a country’s exports. Less demand for exports will lead to a
decrease in demand for the country’s currency, thus depreciating the exchange rate.
b) 22) Explain how Australia’s trade weighted index can decline even as the Australian $ appreciates against the euro –
The TWI is the value of the AUD against a weighted basket of the currencies of its major trading partners. This include the euro
but is dominated by the $US and Asian currencies.
While on the one hand the AUD could have appreciated against the euro due to the European crisis, the AUD may be weaker in
the TWI due to lower commodity prices, causing its decline against currencies of the US and Asia.
c) 22) Analyse the effects of rising interest rates on both the current account and the capital and financial account of the balance
of payments –
Rising interest rate will discourage individuals from spending which will lead to low imports thus improving the trade balance
on the current account. On the other hand, rising interest rates will tend to appreciate the exchange rate, making imports
cheaper and exports more expensive leading to a worsening in the trade balance.
Rising interest rates will increase income payable on existing debt to overseas investors on the income account of the current
account. It will also cause an inflow of foreign investment which will credit the financial account.
a) 23) What is the difference between the working age population and the labour force?
The working age population includes anyone over the age of 15 who can participate in the labour force. The labour force refers
to that proportion of the working age population who are either in work or not working but available and actively seeking work.
b) 23) Explain why an economy’s labour force participation rate might decline –
The participation rate can decline as a result of an economic slowdown as a reduction in the number of available jobs
discourages people for seeking work. These discouraged workers are not counted in the labour force; they are hidden
 unemployed. The participation rate can also decine if young people decide to spend longer in full-time study, rather than
seeking paid employment.
c) 23) Explain how a change in the labour force participation rate can affect the federal government’s revenues and expenditures
–
An increase in the participation rate could mean more people are working which will increase income tax revenues. Also,
people will have more disposable income leading to increased consumption and GST revenues.
An increase in the participation rate could increase transfer payments or government expenditure due to a larger number of
unemployed.
a) 24) (a) Explain ONE cost and ONE benefit of microeconomic reform.
A cost of microeconomic reform (such as tariff reform) in the short run in the unemployment that may arise due to the
structural adjustment in the economy. This occurs because of the mismatch of skills between the labour force and industry.
A benefit of microeconomic reform is sustainable economic growth that will occur in the long run. This occurs because
resources are allocated to industries that are more efficient in the economy and able to compete against imports.
b) 24) Explain the limitations of both fiscal policy and monetary policy in addressing an economic slowdown.
The limitations of fiscal policy include political constraints – taxation and spending decisions are the outcome of political
compromise rather than being economically optimal. Implementation of fiscal policy is also subject to time lags due to the time
required to pass necessary legislation through parliament. Monetary policy is subject to shorter time lags than fiscal policy since
it is managed by the politically independent Central Bank. Nevertheless, changes in official interest rates take time to affect the
real economy as consumers and businesses do not change their spending and borrowing behaviour immediately. Monetary
policy is subject to global influences to a greater extent than fiscal policy. For example, low global interest rates will put upward
pressure on a country’s exchange rate if the local Central Bank does not reduce local interest rates.

25) Explain how both labour market policies and fiscal policies can be used to reduce income inequality and wealth inequality. In your
response, you should refer to the economic information provided.

Fiscal stimulus (means tested) • Transfer payments eg aged pension, disability pension, unemployment benefits • Progressive taxation

26) Explain the causes of inflation and its effects on the Australian economy. In your response, you should refer to the economic
information provided.

• Demand Pull Inflation eg mining boom • Cost Push Inflation eg labour market skills shortage • Inflationary expectations eg economic
uncertainty • Imported inflation eg rising import prices • Governments increasing indirect taxes eg carbon tax • Imposing price controls

28) Discuss the role of government in attempting to achieve environmental sustainability in Australia.

Market failure • Private versus social costs and benefits • Public and private goods • Free riders • Non-excludability • Non-rivalry •
Renewable and non-renewable resource depletion • Renewable energy targets and subsidies • Water management policies eg quotas,
licence buy-backs • Land clearing policies • Land reserve policies eg National Parks, Marine Reserves • Carbon reduction targets, carbon
taxes, emissions trading schemes (ETS) • Endangered species policies • Fisheries policies eg catch limits, quotas • Signing international
agreements eg Kyoto Protocol • Attending international environmental forums
 ECONOMICS 2015

1) Assume that foreign producers are selling canned tomatoes in Australia at below their cost of production. Domestic producers
ask the government to impose a tariff on these imports. What is the most likely reason for this request? – To prevent dumping
2) Which of the following economic policies has the shortest time lag for implementation? – Monetary policies
3) Which of the following is most likely to increase gross world product? - Increased investment by transnational corporations in
developing countries
4) Which of the following could be a negative impact of foreign direct investment in an emerging economy? - An increase in the
influence of transnational corporations on government regulation
5) Australia provides foreign aid to build schools in a developing country. This will be entered in Australia’s Balance of Payments as
a – Debit in capital account
6) A government wants to increase the efficiency of its domestic industries in order to improve their international
competitiveness. Which combination of trade policies would be most likely to achieve this? – Import quota – increases and
domestic producers – decreases
7) With reference to the data in the table, which policy response would be best for this economy? - Contractionary fiscal and
contractionary monetary policy
8) Which of the following is most likely to operate as an automatic stabiliser during an upswing in the Australian economy? - The
$A has appreciated because of an increase in demand for Australian exports.
9) Which of the following is most likely to operate as an automatic stabiliser during an upswing in the Australian economy? –
Income tax
10) What is the effect of the changes from Year 1 to Year 2 on the terms of trade and international competitiveness of this
economy? – Terms of trade decreases and international competitiveness – decreases
11) Which of the following government policies would be most likely to reduce an economy’s Gini coefficient? - An increase in
childcare subsidies for low-income earners and an increase in the highest marginal income tax rate
12) A firm invests in a new, environmentally sustainable method for recycling used aluminium soft drink cans. Which of the
following best describes the likely economic outcome that will result from this innovation? - A positive externality and a
reduction in social costs
13) Which of the following is most likely to reflect government policy designed to increase efficiency and equilibrium output? - AS
curve shifts to the right
14) Which of the following reasons would account for these changes from Year 1 to Year 2? – increased consumer confidence and
increase in school retrenching rates
15) Which of the following could lead to a deterioration in the structural component of Australia’s current account deficit? - An
increase in net foreign liabilities
16) If the government wishes to raise the level of national income by $1000 in Year 4, by how much will it have to increase
investment? - $200
17) The Reserve Bank of Australia purchases Commonwealth Government Securities in order to alter the cash rate. Which of the
following is the most likely result of this decision? – AUS $ - depreciates and GDP – rises
18) 0%
19) Which combination of reasons is most likely to account for changes in the headline and underlying inflation rates from Year 1 to
Year 3?- headline inflation – flooding in agriculture areas and underlying inflation – increased microeconomic reform
20) The table shows Balance of Payments data for a hypothetical economy with a flexible exchange rate. - $15 billion surplus
21) A) Distinguish between renewable and non-renewable resources – The use and consumption of non -renewable resources
reduces the quantity available for future generations, whereas the use of renewable resources do not diminish the quantity
available for future generations.
c) For an economy other than Australia, outline ONE impact of globalisation on its environmental sustainability - The increasing
economic integration of the world’s economies (globalisation) has impacted on China’s ability to provide for future generations
(environmental sustainability). One major impact of the rising income of many Chinese workers has been the demand for oil
especially to power the increasing number of motor vehicles. Oil is a non-renewable resource; continual demand for the
resource will mean sustainability is adversely affected.
d) Explain how market-based policies can be used to address market failure in relation to environmental management. – Market
failure occurs when the price mechanism does not show the impact of externalities on the environment. Market – based
policies help ensure that all social costs and benefits are incorporated in the market price and hence that production and
consumption decisions reflect these social costs and benefits. In turn, this more accurately reflects the impact of production
and consumption on the environment, which is more likely to encourage better environmental outcomes.

22a) Australia’s budget deficit is projected to decrease from 2.5% of GDP to 2.1% of GDP. Explain ONE possible reason for this
change. – Australia’s budget deficit as a proportion of GDP is projected to decrease due to reductions in government expenditure,
such as on paid parental leave or foreign aid.

22b) Compare the impact of TWO different methods of financing a budget deficit on domestic interest rates in the Australian
economy - Two methods of financing a budget deficit are borrowing from the Reserve Bank or borrowing from the private sector.
Borrowing from the RBA involves the RBA creating an increase in the money supply and loaning these funds direct to the
government. Borrowing from the private sector involves “selling” new Commonwealth Government securities to the private sector.
Borrowing from the private sector does not directly impact interest rates. However it may increase interest rates indirectly. This is
because of increased competition for limited funds available in the domestic market. In contrast, borrowing from the RBA may have
inflationary consequences due to the additional money supply in the domestic economy. This could lead to increased interest rates
as the RBA seeks to maintain the inflation target.

22c) Analyse how ONE possible strategy to reduce the budget deficit could affect income distribution - One strategy to reduce the
budget deficit is to increase the GST. Other things being equal, increasing the GST would increase government revenue and reduce
the budget deficit. The GST is a regressive tax because it is a flat rate on all taxpayers and lower income earners spend a higher
proportion of income. Raising the GST would increase the relative burden of taxation on lower income households therefore
increasing income inequality.

23a) How is the measurement of the unemployment rate in Australia influenced by hidden unemployment? – Hidden unemployment
occurs when workers become discouraged, stop actively seeking work and are not officially counted as unemployed. Therefore,
hidden unemployment makes the unemployment rate look lower than it actually is.

23b) How would an appreciation of the US dollar relative to the Australian dollar affect inflation in Australia?- An appreciation of the
US dollar is equivalent to a depreciation in the Australian dollar. When the AUD depreciates, the value of the domestic currency is
lower compared to other nations (ie each dollar of the domestic currency buys fewer dollars of the foreign currency). This leads to
imports from the US becoming more expensive in Australian dollar terms, which contributes to a general rise in the level of prices in
Australia. This is often referred to as imported inflation.

23c) A country’s economy is operating at the non-accelerating inflation rate of unemployment (NAIRU). What are the policy
implications of this for the country’s government if its aim is to reduce unemployment? - At the NAIRU an economy is operating with
zero cyclical unemployment (ie full employment). This means any policy which aims to increase aggregate demand (eg expansionary
fiscal policy) will increase inflation without reducing unemployment. Therefore, a government that aims to reduce unemployment
must reduce structural or frictional unemployment. Government can do this by labour market reforms, which increase flexibility,
mobility and skills in the labour market. This is potentially difficult for governments due to limitations such as time lags and political
constraints.

24a) (a) How does the international division of labour contribute to globalisation?- The international division of labour is when
different nations specialise in different types of production and labour skills. For example, developing nations often have low skilled,
low paid labour markets, which are part of global markets through transnational corporations and global production webs. These low
skilled workers depend upon income and investment from developed nations, which in turn depend upon the supply of low cost
manufactured products. This is a key part of the increased integration and interdependence between economies.

24b) Explain TWO reasons why economies experience different levels of economic development. - There are many reasons for
different levels of economic development between nations. One reason for different levels of economic development is natural
resource endowment. Economies with larger quantities of resources use these resources to generate export income, which can be
used to fund education and health. Economies with limited quantities of natural resources are unable to generate income to fund
this development. Another reason for different levels of development is the differences in the quality of political and economic
institutions. Some economies are supported by well-developed institutions, which protect property and investments and minimise
corruption. In contrast, other economies have weak political institutions, which discourage the private and public investment
necessary

25) Discuss the continuing role of microeconomic reform in achieving Australia’s economic objectives. In your response, you should
refer to the economic information provided.

Shift in Aggregate Supply curve to the right as main rationale for microeconomic reform (MER) • Reference to Contemporary
Australian economic information including examples of past MER, including but not limited to: – motor industry reforms changes –
trade liberalisation – financial markets – floating of the Australian dollar – competition policy

26) Analyse the changing sources of economic growth and their effects on the Australian economy. In your response, you should
refer to the economic information provided. - Possible changes in sources of growth in Australia – mining boom (different phases) –
terms of trade – exchange rate movements – international business cycle – structural reform/change, 2-speed economy, 3-speed
economy – government stimulus – changes in fiscal and monetary policy – housing sector – productivity growth (labour and
multifactor) – slowing wages growth. Possible effects on the Australia economy – quality of life – real income changes –
unemployment effects – inflation effects – impact on external stability – resource use – environment sustainability effects – income
inequality changes – reliance on narrow export base – structural unemployment in some regions/sectors – 2 speed economy –
housing boom.

27) Discuss the contributions of international organisations and trade agreements to global economic growth and development.
International Organisations: IMF, WTO, World Bank, WHO, G20, G8, OECD, UN – how their role and design/operation contribute to
growth and development International Trade Agreements: – Existing (NAFTA, EU, Australia-US, CERTA, ASEAN Australia New Zealand
FTA, China, South Korea, JAFTA, CHAFTA) – (TPP, Doha Round) – how their role and design/operation contribute to growth and
development Differences between economic growth and economic development Global economic growth: – Role of economic
growth in growing real income – Global income inequality – role of TNCs – barriers to trade Global economic development: – Human
Development Index – environmental impacts of international integration Types of economies: developing, emerging, advanced
Perspectives on the contributions: arguments may be positioned as positive, negative or varied depending on the effects on different
types of economies and the examples selected
 ECONOMICS 2016

1. Which of the following is an example of a monetary union? – EU

2. Which of the following policies is mainly used to manage inflation? - Monetary policy
3. Which of the following is most likely to result in an increased budget surplus?- Reduced
government spending and increased taxation
4. Other things being equal, which of the following is most likely to increase if Australia’s major
trading partners experience an economic slowdown? - Australia’s unemployment rate
5. A government decides to reduce tariffs on imported goods. Other things being equal, what
will be the most likely impact on the domestic economy? - There will be a redistribution of
income from local producers to importers.
6. An increase in which of the following will most likely change a Gini coefficient from 0.3 to
0.4? - The goods and services tax rate
7. Which of the following best describes a person experiencing frictional unemployment? - A
self-employed worker whose business has shut down and who plans to start a new business
8. Which of the following is most likely to increase as a result of the change in income inequality
from Year 1 to Year 2? - Labour force mobility
9. A government has recently decided to increase the age of retirement. Which of the following
are the most likely impacts of this decision on the labour force participation rate and taxation
revenue? – INCREASE AND DECREASE
10. Diagram - The implementation of a decentralised method of determining employment
contracts
11. A government has changed the method of financing its budget deficit. Instead of borrowing
from the domestic private sector, it will now borrow from overseas. All other things being
equal, what is the most likely impact of this change on the domestic economy? - Current
account deficit will increase
12. What is the most likely impact of an increase in the official cash rate on the domestic
economy? - A redistribution of income and wealth towards those with a relatively high
marginal propensity to save
13. The Australian Government has received a repayment of an interest-free loan made to a
developing economy. How will this be recorded in Australia’s balance of payments? – A credit
in the capital and financial account
14. Which of the following is most likely to result in a decline in Australia’s terms of trade? –
decreased and increased
15. Which of the following is most likely to allow an infant industry in Australia to benef from
globalisation? - An increase in Australia’s recognition of international educational
qualifications
16. All other things being equal, how are real Gross Domestic Product (GDP) and the Human
Development Index (HDI) most likely to change from Year 1 to Year 2? - Real GDP increases
and the HDI decreases.
17. An increase in which of the following is most likely to lower the non-accelerating inflation
rate of unemployment (NAIRU)? - Infrastructure investment
18. All other things being equal, how did the purchasing power of Australian consumers change
overseas and domestically from Year 1 to Year 2? – increased and decreased
19. What is the value of Australia’s Net Foreign Liabilities? – $300 billion
20. It can be argued that a public road is NOT a public good because - travel times vary with
usage
 21. (a) Why might a government prefer to protect an industry with a subsidy rather than a tariff?
Governments may believe subsidies are better for consumers. A subsidy tends to lower prices
for domestic consumers by making domestic goods cheaper while a tariff tends to raise prices
by making imported goods more expensive for domestic consumers.

(b) Explain how removal of a subsidy might promote greater efficiency in an economy.
Removal of a subsidy might encourage domestic producers to reduce their costs of
production and, therefore, improve their international competitiveness. This allows scarce
economic resources (eg capital, government spending, labour) to be redirected away from
inefficient domestic production towards higher-return investment opportunities in other
industries.

(c) Discuss the likely impacts on government revenue and expenditure of removing a subsidy.
Subsidies can impact on both the revenue and expenditure side of the government budget.
Removal of the subsidy will reduce government expenditure and, other things being equal,
increase a budget surplus or reduce a budget deficit. However, in removing the subsidy, the
government may decide to allocate funds to help workers who lose their jobs retrain and find
new jobs in other industries. Removing the subsidy, therefore, may increase government
spending in the short term. On the revenue side, to the extent that the removal of the
subsidy encourages more private sector investment in more efficient industries, this should
result in an increase in government taxation revenue over the long term. More efficient
industries will generate greater profit and, therefore, pay more company tax.

22. a) Outline the difference between a private benefit and a social benefit

Private benefits include profits made by the producers in the selling of goods and services and the
utility gained by consumers through consumption. Social benefits are the positive spillover effects of
private production on the community/society eg shopping complex car park.

(b) Explain why developed and developing nations may take different approaches to environmental
sustainability

Developing nations in pursuing the economic benefits of development (eg higher incomes,
improving infrastructure) may not consider the environment as a priority nor do they have the
resources to invest in ecologically sustainable development. There is generally a trade-off between
economic growth and environmental sustainability. Developed nations have the resources to better
alleviate the negative externalities associated with economic growth on the environment. There is
also greater awareness of the benefits of environmental sustainability within the advanced
economies.

(c) Explain an advantage and a disadvantage of international environmental agreements in

addressing environmental sustainability in the global economy.

International agreements such as the Kyoto protocol have an important role in promoting
environmental sustainability within the global economy by coordinating action across all members.
Recognising that the global climate is a public good, greater participation reduces the risk of free-
riding thus reducing the ‘tragedy of the commons’. On the other hand it may be difficult to enforce
an international agreement especially with more powerful economies. As a result countries may not
abide by the terms of the agreement making it less effective

b- Briefly explain why there might be an increase in the supply of Australian dollars.
An increase in the supply of Australian dollars can be caused by an increase in demand by
Australians for imported goods. More Australian dollars must be sold in order to purchase the
foreign currency required to buy these foreign goods.

c- Explain how a decrease in an economy’s Trade Weighted Index may affect the level of inflation in
that economy.

The Trade Weighted Index refers to a measure of the AUD against a basket of the currencies

of Australia’s major trading partners. The weighting is according to the importance of trade

between Australia and the other nations. A decrease in the TWI is likely to be reflected

through a depreciation of the AUD against the currency of these countries. The depreciating

Australian dollar will increase the cost of imports, and domestic businesses dependent on

imports will have higher costs. Other things being equal, the imported goods from these

countries coming to Australia are likely to increase in price as a result of the decrease in the

TWI. Given the rise in prices, imported inflation is likely to rise.