Economics Higher School Certificate Art of Smart Mock Examination Solutions. Total marks 100

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1 Economics 017 Higher School Certificate Art of Smart Mock Examination Solutions Total marks 100 General Instructions Reading time 5 minutes Working time 3 hours Write using black pen Board approved calculators may be used Write your student number and/or name at the top of every page Section I Pages 9 0 marks Attempt Questions 1 0 Allow about 35 minutes for this section Section II Pages marks Attempt Questions 1 4 Allow about 1 hour and 15 minutes for this section Section III Pages marks Attempt either Question 5 or Question 6 Allow about 35 minutes for this section Section IV Page 0 0 marks Attempt either Question 7 or Question 8 Allow about 35 minutes for this section This paper MUST NOT be removed from the examination room STUDENT NUMBER/NAME:..

2 Section I 0 marks Attempt Questions 1 0 Question Answer Targeted Performance Band 1 B 3-4 A 1-3 D 5 4 D 4 5 D 4 6 C B 3 8 C A C A 3 1 B 6 13 C 4 14 A 5 15 C 4 16 B 5 17 C 5 18 A 4 19 A 6 0 D 5 Page

3 Section II 40 marks Attempt Questions 1 4 Allow about 1 hour and 15 minutes for this section Answer the questions in the spaces provided. These spaces provide guidance for the expected length of Question 1 (10 marks) a) Calculate the inflation rate between Year and Year 3. Correctly states the inflation rate between Year and Year 3. 1 Sample answer: Inflation rate = New CPI Old CPI/ Old CPI x 100 = (11-18)/18 x 100 = -1.5% b) Outline one positive effect and one negative effect caused by inflation on the economy. Sketches in general terms both a positive and a negative effect of inflation States either a positive or a negative effect of inflation 1 A positive effect from inflation is that it helps borrowers with loans at fixed interest rates as a rise in inflation leads to a fall in the real interest rate. This means that people with fixed rate loans pay less interest. A negative effect caused by inflation is the fall in living standards due to a reduction in consumer purchasing power and real wages leading to increased inequality. This means that consumers are consuming goods and services at a higher or at the same value as their income. Page 3

4 c) Explain how inflationary expectations might affect inflation in an economy Demonstrates a clear understanding of how inflationary expectations affect inflation in an economy. 3 Sketches in general terms how inflationary expectations affect inflation. Defines inflationary expectations with limited understanding of its effect on inflation. 1 Inflationary expectations refer to people s perceptions of future inflation based on past and current rates of inflation. Inflationary expectations can be self-fulfilling. For example, if consumers believe that there will be rising inflation in the future, they will increase their spending today as they believe they have greater purchasing power. An increase in demand for the goods and services will increase the prices and so inflation will rise. Alternatively, if producers predict an increase in expected future costs, they could build this into higher prices of their goods or services in the present creating inflationary pressures. If there is no expectation of rising inflation then consumers or producers would not change their actions and there will be no impact on inflation. (d) Examine how a high rate of wage-growth might affect both demand-pull and cost push inflation. Clearly explores and communicates the reasons behind how high wagegrowth can affect demand-pull AND cost-push inflation. 4 Clearly explores and communicates the reasons behind how high wagegrowth can affect demand-pull OR cost-push inflation AND defines either 3 demand-pull OR cost-push inflation. Clearly explores and communicates the reasons behind how high wagegrowth can affect demand-pull OR cost-push inflation. States limited knowledge of either demand-pull/cost-push inflation. 1 High wage-growth will increase demand-pull inflation as higher wages encourages people to spend more total income on consumption. Hence, due to increased consumption, demand will shift to the right, prices will rise and this will result in demand-pull inflation. On the other hand, wages/labour costs represent a supply-side factor of production. Higher rates of wagegrowth would result in higher cost-push inflation. This is because supply will shift upwards (to the left), leading to higher prices and thus higher levels of inflation. Page 4

5 Question (10 marks) (a) Distinguish between macroeconomic policies and microeconomic policies Clearly demonstrates understanding of the difference between macroeconomic policies and microeconomic policies Sketches in general terms the features of macroeconomic policies or microeconomic policies 1 Macroeconomic policies are policies used by the government to stabilize the level of economic growth by targeting and shifting the aggregate demand of the economy. It is an effective instrument in the short term rather than in the long term. Microeconomic policies are policies used by the government to target and shift aggregate supply of the economy to improve efficiency. It deals with improving competitiveness, productivity and efficiency in industries and takes place in the long run. b) Distinguish between microeconomic reform and structural change Clearly demonstrates understanding of the difference between microeconomic reform and structural change. Sketches a rough distinction between microeconomic reform and structural change. 1 The fundamental objective of microeconomic reform is to improve the economy's technical, allocative and dynamic efficiency and thereby raise our material standard of living. This is different to structural change, which refers to a long-term shift in the fundamental structure of an economy, which is often linked to growth and economic development. Page 5

6 (c) Discuss how microeconomic policies can be used to improve either the energy product market or the labour factor market. Identifies many issues and provides points for how microeconomic policies can be used to improve EITHER the energy product market OR the labour 6 factor market. Identifies issues and provides some points for how microeconomic policies can be used to improve EITHER the energy product market OR the labour 5 factor market. Mentions some ways microeconomic policies can be used to improve either 4 the energy market or the labour market. Discusses microeconomic policies in the context of both energy and labour. 3 Puts forward a microeconomic policy and a way it could improve either market. Provides a limited outline of a microeconomic policy. 1 Microeconomic policies target the supply-side economics of an economy. Labour Hence, through labour market policies which improve the quality of labour, the government may improve the quantity, quality or accessibility of the labour force. This has the consequence of improving the labour factor market. Increased expenditure on employment programs such as PaTH (Prepare, Trial, Hire), encourage the labour market to expand their skills. Thus, through a greater skill level, employability would increase, improving the efficiency of the overall labour factor market. Furthermore, the decentralisation of the labour market would provide a greater incentive for firms to hire more workers at different pay rates, thus increasing productivity. Energy Energy forms both a product and a factor market. Microeconomic reforms that seek to expand competition in the energy market can assist in lowering prices for both individuals and firms. Lower energy prices increases the standard of living as less income is diverted to paying for electricity bills. At the same time, reduced electricity prices make firms more internationally competitive. In 009, the Australian Energy Market Operator was established to provide a single market for national wholesale electricity prices (Blink & Dorton, 011). This provided a more robust market and assisted with planning future investments. Improved competition and information has increased the number of investments in Australian energy generation. Page 6

7 Question 3 (10 marks) (a) Analyse a fiscal taxation strategy that could be used to reduce income inequality in the Australian economy. Clearly identifies components of a fiscal taxation strategy and the relationship of this strategy and its effect of reducing income inequality in the Australian 4 economy. Identifies some components of a fiscal taxation strategy and the relationship of this strategy and its effect of reducing income inequality in the Australian 3 economy. Sketches in general terms some components of a fiscal taxation strategy AND/OR the relationship of this strategy and its effect of reducing income inequality in the Australian economy. Provides limited knowledge of a fiscal taxation strategy that could be used to 1 reduce income inequality. The progressive taxation system is utilised by the government to reduce income inequality. The government uses its formation of the annual budget as part of fiscal policy. The government could reduce income inequality by increasing the taxation rates for high income earners. This would result in the government having more revenue to spend on transfer payments as well as public goods. This would further reduce income inequality. (b) Analyse the impact of high levels of income inequality in a country other than Australia. Demonstrates a clear and concise understanding of the main implications of income inequality on the economy AND society within a country AND 6 includes a minimum of TWO Statistics. Demonstrates a clear and concise understanding of the main implications of 5 income inequality on the economy AND society within a country. Demonstrates a clear and concise understanding of the main implications of 4 income inequality on the economy OR society within a country. Demonstrates a general understanding of the main implications of income 3 inequality on the economy and/or society within a country. Demonstrates a limited understanding of the main implications of income inequality on the economy or society within a country. States some ways that income inequality can impact the economy or society in a country. 1 OR Correctly defines income inequality A high level of income inequality has both positive and negative implications on an economy and society in a country. Firstly, high-income inequality encourages the labour force to be more productive and improve their education and skills. This is due to lower income earners willing to educate themselves as well as work harder and longer in order to access higher income earning opportunities. A more productive and skilled workforce will boost GDP and encourage economic growth. On the other hand, high-income inequality has high cost implications on the government and tax payers who must increase spending on unemployment Page 7

8 benefits. In addition, more people will be reliant on government-funded public services such as education and healthcare. This redirects money that could be used to improve infrastructure, development and growth in the economy. Furthermore, high-income inequality leads to social class divisions that promote feelings of frustration and anger from lower classes that can escalate into social and economic instability. The rise of poverty from high-income inequality can trap families is vicious cycles of limited economic opportunities. Consequently, issues such as crime, mental health problems, diseases and low literacy rates can occur. Question 4 (10 marks) (a) State the formula for, and calculate the value of the simple multiplier using the information in the table. (b) Using the above multiplier, calculate the total boost to an economy s national income if the government increased investment by $500 million. States the correct value. 1 States the incorrect value. 0 5 * $500 = $,500 million. (c) Briefly outline why a country with a higher Marginal Propensity to Consume (MPC) leads to a higher increase in income after an investment compared to a country with a lower MPC. Provides a reason for why a higher MPC results in a larger 1 multiplier. States no/wrong reason. 0 A higher MPC means that consumers would spend a higher proportion of additional income on further consumption, which would have a compounding effect on income and economic growth. Thus a smaller MPC means a higher MPS, acting as a leakage and reducing the impact/size of the multiplier. Page 8

9 (d) Briefly explain the effect of achieving ecologically sustainable development on economic growth for the Australian government. Clearly and comprehensively demonstrates understanding of the relationship between ecologically sustainable development and economic growth for the Australian government Demonstrates a sound understanding of the relationship between ecologically sustainable development and economic growth for the Australian government Demonstrates an understanding of the relationship between ecologically sustainable development and economic growth for the Australian government Sketches in general terms the effect of achieving ecologically sustainable development on economic growth for the Australian government Makes a relevant statement about the relationship between ecologically sustainable development and economic growth Makes a relevant statement about ecologically sustainable development or economic growth The Australian government is conflicted in their ability to simultaneously achieve ecologically sustainable development and economic growth due to the reliance on the primary industry to create and maintain positive economic growth. Ecologically sustainable development involves the conservation and enhancement of the community s resources so that ecological processes and quality of life are maintained. This means that economic growth should not come at the cost of destruction or depletion of natural resources. The overuse or exploitation of natural resources for short-term growth will deplete these resources, permanently damaging the environment and reducing the productivity of the affected sectors. Achieving both ecologically sustainable development and economic growth is a costly procedure to the Australian government as the limited supply of resources retrains economic growth. Stricter regulations on natural resources will lead to the rise in prices of these goods as supply is reduced, making the resources unappealing to foreign investors. This will decrease financial inflow into the economy whilst potentially decreasing living standards and widening the inequality gap as businesses are forced to seek alternative methods to remain competitive and law-abiding. These consequences may need for increased government involvement, which will affect the ability of the country to grow. Page 9

10 Section III Question 5 (0 marks) Targeted Performance Bands: -6 Explain how the Reserve Bank of Australia implements monetary policy and the impact of changing stances of monetary policy on the level of the exchange rate. Synthesises own information and the information provided to develop a sustained, logical and well-structured Integrates appropriate economic terms, relevant concepts, relationships and theory. Clearly demonstrates how the RBA implements monetary policy and the impact on the level of the exchange rate. Uses own information and the information provided to develop a coherent Consistently applies appropriate economic terms, relevant concepts, relationships and theories. Demonstrates how the RBA implements monetary policy and the impact on the level of the exchange rate. Uses own information and/or the information provided to develop a coherent Applies appropriate economic terms, concepts and relationships. Provides a thorough description of how the RBA implements monetary policy and/or its impact on the level of the exchange rate. Uses some appropriate economic terms, concepts and relationships. Uses own information or the information provided to develop a generalised Sketches in general terms how the RBA implements monetary or how monetary policy can affect the exchange rate. Uses some economic terms and/or concepts. Presents a limited Identifies some components of monetary policy Definition of monetary policy Definition of exchange rates International competitiveness Value and Volatility of the $A Open market operations Dirtying the float Purchasing foreign exchange increases supply of AUD Exchange Settlement Accounts Valuation Effect Contractionary/Expansionary Stances Diagrams of the ESA s Cause and effect between expansionary stance and falling exchange rate Page 10

11 Question 6 (0 marks) Explain how signing up for more free trade agreements can both improve and deteriorate various components on Australia s Balance of Payments. Synthesises own information and the information provided to develop a sustained, logical and well-structured Integrates appropriate economic terms, relevant concepts, relationships and theory. Clearly demonstrates how an increase in free trade agreements can improve and deteriorate different components on Australia s Balance of Payments. Uses own information and the information provided to develop a coherent Uses appropriate economic terms, relevant concepts, relationships and theory. Demonstrates how an increase in free trade agreements can improve and deteriorate different components on Australia s Balance of Payments. Uses own information and/or the information provided to develop a coherent Applies appropriate economic terms, concepts and relationships. Provides a thorough description of how an increase in the number free trade agreements can improve OR deteriorate different components on Australia s Balance of Payments. Uses some appropriate economic terms, concepts and relationships. Uses own information or the information provided to develop a generalised Sketches in general terms the balance of payments and some changes that could result from more free trade agreements. Uses some economic terms and/or concepts. Presents a limited Identifies the balance of payments and some changes that could result from more free trade agreements Definition of bilateral free trade agreements Definition of multilateral free trade agreements Definition of balance of payments Components of the balance of payments Influences of further trade on key import and export markets (e.g. iron ore exports) Credits and Debits Definition of Terms of Trade Advantages / disadvantages of free trade Effect on the current account deficit Structural change some industries will no longer be protected Financial Account Increased Investment Opportunities Reduction in tariffs Allocative efficiency Page 11

12 Section IV Question 7 (0 marks) Analyse the role of microeconomic reform and fiscal policy in achieving the three main objectives of the Reserve Bank of Australia (RBA). Synthesises own information to develop a sustained, logical and wellstructured Integrates appropriate economic terms, relevant concepts, relationships and theory. Clearly demonstrates how microeconomic reforms and fiscal policy can be used to achieve external stability, full employment and increase social welfare equality. Uses own information to develop a coherent Uses appropriate economic terms, relevant concepts, relationships and theory. Demonstrates how microeconomic reforms and fiscal policy can be used to achieve external stability, full employment and increase social welfare equality. Uses own information to develop a coherent Applies appropriate economic terms, concepts and relationships. Provides a thorough description of how microeconomic reforms and fiscal policy can be used to achieve external stability, full employment and increase social welfare equality. Uses some appropriate economic terms, concepts and relationships. Uses own information or the information provided to develop a generalised Sketches in general terms how microeconomic reforms and fiscal policy can be used to achieve external stability, full employment and increase social welfare equality. Uses some economic terms and/or concepts. Presents a limited Identifies the microeconomic and fiscal policies Goals of RBA: - the stability of the currency of Australia; - maintenance of full employment in Australia; and. - the economic prosperity and welfare of the people of Australia. Definition of Microeconomic Reform Definition of Fiscal Policy Examples of Micro/Fiscal policy strategies Shows how various policies help achieve external stability. Microeconomic reform / labour market policies can reduce unemployment Fiscal policies that reduce income inequality, increasing economic welfare Note: Answers should not include anything about monetary policy. Page 1

13 Question 8 (0 marks) Analyse ONE microeconomic and TWO macroeconomic policy strategies that can be used to reduce Australia s Current Account Deficit and thus improve external stability. Synthesises own information to develop a sustained, logical and wellstructured Integrates appropriate economic terms, relevant concepts, relationships and theory. Clearly demonstrates how ONE microeconomic and TWO macroeconomic policies can be used to reduce Australia s CAD and improve external stability. Uses own information to develop a coherent Uses appropriate economic terms, relevant concepts, relationships and theory. Demonstrates how ONE microeconomic and TWO macroeconomic policies can be used to reduce Australia s CAD and improve external stability. Uses own information to develop a coherent Applies appropriate economic terms, concepts and relationships. Provides a thorough description of how some microeconomic and macroeconomic policies can be used to reduce Australia s CAD and improve external stability. Uses some appropriate economic terms, concepts and relationships. Uses own information or the information provided to develop a generalised Sketches in general terms how microeconomic reforms and macroeconomic policy can be used to achieve external stability. Uses some economic terms and/or concepts. Presents a limited Identifies some microeconomic or macroeconomic policies that can be used to promote external stability External stability: Balance of payments issues Current Account Deficit % Gross Domestic Product Foreign Debt % Gross Domestic Product Net Foreign Liabilities % Gross Domestic Product International competitiveness Composition of Australia s Trade Macroeconomic Policies: Fiscal Policy o Expansionary and Contractionary fiscal policy o Crowding out effect o Budget outcome and stance o Cyclical vs discretionary/structural policies o Expenditure and taxation changes Page 13

14 o Methods of financing a budget deficit o Investor confidence in the Australian economy Monetary Policy o Expansionary and Contractionary monetary policy o Goals of RBA monetary policy o Management of inflation o Impact of interest rates on value of Australian dollar o Impact of inflation on confidence of foreign investors o Interest rate differentials Microeconomic Policies: o Labour Market Reform (e.g. PaTH program) o Improve international competitiveness o Improvement of factor markets o Deregulation o Role of ACCC or other government institutions. End of paper Page 14