4 Economics Stage 3 Exam 2013The correlation of section totals with the examination total is strong, with Section 1 (Multiple choice) at 0.82, Section 2 (Data interpretation) at 0.93 and Section 3 (Extended response) at 0.93.
5 Areas of Weakness The meaning of productivity The difference between labour productivity & MFPHow government policy can affect productivityThe effect of economic activity on the current account in the B of PThe effect of interest rates on the trade balanceThe effect of an appreciation on the economy & the factors underpinning a high $AUsing the AD/AS model to explain the business cycle
6 Section One: Multiple Choice Most questions (14/24) recorded a mean between 50 and 80 per cent.Four questions recorded a mean between 80 and 90 per centSix questions recorded a mean of less than 50 per cent.Overall, Section 1 worked well.
7 SECTION 1 79% 2. Which of the following statements is correct? (a) Australia has a comparative advantage in both products.(b) New Zealand has a comparative advantage in steel.(c) It would be best for Australia to produce both products.(d) The opportunity cost of producing 1 unit of butter in Australia is 2 units of steel
8 SECTION 13. Which of the following combination of factors provides the best explanation for an increase in the volume of Australian imports? (a) an appreciation of the Australian dollar and a high rate of inflation in China (b) an appreciation of the Australian dollar and a high rate of domestic economic growth (c) a depreciation of the Australian dollar and a low rate of domestic economic growth (d) a depreciation of the Australian dollar and a high rate of economic growth in China81%
9 SECTION 155%4. Which of the following statements relating to the introduction of a subsidy is incorrect?(a) The total cost of the subsidy is DCBW.(b) The increase in producer surplus is DCAW.(c) There is a deadweight loss of CBA.(d) Domestic production will increase to OQ3.
10 SECTION 19. What is the most likely impact of a significant improvement in Australia’s terms of trade? (a) more imports can only be purchased with an increased volume of exports (b) a depreciation in the value of the Australian dollar (c) a decrease in the capital and financial account surplus (d) the current account deficit will increase32%
11 SECTION 111. Which of the following is most likely to increase the level of Australia’s foreign debt in the short term? (a) an appreciation of the Australian dollar (b) a fall in the proportion of income saved by households (c) an increase in the Federal Government budget surplus (d) a fall in the current account deficit52%
12 SECTION 112. Which one of the following events is likely to have an effect on aggregate demand that is different from the other three events? (a) an increase in the income tax free threshold (b) an appreciation of the Australian dollar (c) an increase in the terms of trade (d) an improvement in business expectations32%31%
13 SECTION 114. The consumption function will tend to shift upward as a result of an increase in the (a) level of income. (b) marginal propensity to save. (c) level of consumer confidence. (d) value of net exports.52%32%
14 SECTION 143%16. Calculate the new equilibrium level of income for Year 3 if investment falls by $20 billion. (a) $380b (b) $280b (c) $220b (d) $205bWhats the mpc?Whats the multiplier?Income will change by ?
15 SECTION 115. Which of the following factors would shift the aggregate supply curve in an economy to the left? (a) the implementation of competition policy, such as tariff reform (b) an increase in world oil prices (c) the implementation of a contractionary fiscal policy (d) a cut in interest rates67%
16 SECTION 117. The change shown in the diagram is most likely to have been caused by (a) the Federal budget changing from a deficit to a surplus. (b) the Reserve Bank of Australia cutting the cash rate. (c) increased competition in the provision of electricity in Australia. (d) a fall in the value of the Australian dollar.48%44%
17 SECTION 122. A decrease in the cash rate is likely to lead to (a) an increase in aggregate expenditure and a fall in asset prices. (b) a decrease in aggregate expenditure and an increase in the exchange rate. (c) an increase in aggregate expenditure and an increase in asset prices. (d) a decrease in aggregate expenditure and a decrease in the exchange rate.48%
18 Section 2 The mean was 56% - higher than 2012! Strong correlation with exam total (0.93)Q25 – Productivity growthMean of 55.5% (Correlation 0.84)Q26 – Trading partners - descriptiveMean of 61% (Correlation 0.81)Q37 – B of P & the exchange rateMean of 52% (Correlation 0.88)
20 Section 2(b) Explain why the change in labour productivity between Period 2 and Period 3 is a cause of concern for the Australian economy. (4 marks) Many students confuse productivity with production. Also most students incorrectly stated that labour productivity fell rather than the rate of productivity growth slowed. Need to spend more time on teaching the meaning of productivity & the difference between labour productivity & multifactor productivity. What’s the difference?
21 Section 2Labour productivity consists of 2 elements: i) capital deepening – increasing the capital-labour ratio ii) multifactor productivity – ‘real’ measure of productivity, it is a measure of technical progress & innovation
22 Section 2(c) Explain how fiscal policy and microeconomic reform can be used to increase labour productivity. (6 marks) - mean 46%! Many students could not discuss how fiscal policy could be used to increase labour productivity. Most responses referred to expansionary fiscal policy as a means for raising productivity rather than specific measures such as spending on education and training, R & D or investment on infrastructure
23 Section 2 Question 26 Australia’s Trading Partners (b) Describe the factors that have contributed to Australia being a major exporter to China. (c) Describe the advantages to Australia of the increased linkages among the countries in the Asia-Pacific region in recent decades Many students simply talked about trade linkages and failed to mention investment or immigration
24 Section 2Question 27 Balance of payments & the $A
25 Section 227. (a) (i) What was the value of Australia’s current account balance in 2006–07? Mean 29%!!! (b) Describe and explain the relationship between the change in net capital inflow and the change in the exchange rate from 2000–01 to 2006–07. (4 marks) Great data interpret question It is evident that many students incorrectly think that a high dollar causes an inflow of foreign investment rather than foreign investment causing a rise in the currency. This is an important teaching point that should be addressed.
26 Section 227. (c) Explain how changes in domestic interest rates affect the goods and services balance. (6 marks)This proved difficult – mean 48%An increase in i/rs will decrease C & I spending which will decrease imports – the trade balance will increaseBut an increase in i/rs will appreciate the $A which will increase imports & decrease exports - the trade balance will decreaseAre you confused?
27 Section 3The overall mean for this section was 50% - lower than 2012 (52%). The mean for section 3 should arguably be higher than section 2Strong correlation with exam total 0.93The most popular questions were questions 31 and 30Q28 – The Australian Dollar (mean 45%)Q29 – The CAD: causes & effects (51%)Q30 – Policy stance & economic objectives (53%)Q31 – The business cycle – causes & effects (51%)
28 Past Essay Questions1987Define & discuss economic growth & its measurement.Discuss three ways in which a Commonwealth Government could promote economic growth in the Australian economy.
29 Past Essay Questions1993What factors might cause an increase in business investment?Using an appropriate economic model, demonstrate the effect of an increase in investment on the level of GDP and employment.
30 Past Essay Questions1997With the aid of supply & demand analysis explain how the value of the Australian dollar is determined in the foreign exchange market.Explain the effects of an appreciation of the $A onAustralia’s primary producers.Australia’s domestic consumers.
31 Past Essay Questions2000Discuss the meaning & significance of each of the following to the Australian economy:Foreign investment in AustraliaAustralia’s terms of tradeAustralia’s foreign debt
32 Past Essay Questions2005Discuss the recent trend in Australia’s terms of trade & discuss the likely causes and effects of this trend.
33 Past Essay Questions2007Explain why the Reserve Bank may reduce official interest rates & discuss the likely effects this would have on the economy.Discuss the strengths & weaknesses of monetary policy.
34 Section 3Question 28From early 2012 to mid 2013, the Australian dollar was strong against most other major currencies. Using examples, describe the impact this had on the Australian economy. (10 marks) Mean 51%Effect on trade – Xs fall, Ms rise, CAD risesNegative effect on export sector & import competing sectors e.g. manufacturingPositive effect on consumers & producers importing raw materials & capital goodsOverall contractionary effect on economy – implications for monetary policyOther – lower inflation rate
35 Section 3Question 28(b) Explain why the value of the Australian dollar remained relatively strong in the second half of 2012, a period that saw a significant fall in commodity prices. (10 marks) Mean 40%Interest rate differentialChina’s continued demand for Aust exportsForeign investment into mining sectorRelatively weak US & Europe; Aust’s AAA rating
36 Section 3Question 29 Discuss the causes and effects of Australia’s persistent current account deficit. Mean 51% Up to 3 marks allocated to explainng the CAD Rough equal split on causes & effects Key cause – the I –S gap Key effect – increased foreign liabilities & servicing costs
37 Section 3Question 30 In 2010–11 and 2011–12, the Australian Government ran budget deficits of $54.5 billion and $47.5 billion. In 2012–13, the Government ran another budget deficit of $43.4 billion. Furthermore, in July 2010, the cash rate was 4.5%, and since then has been lowered to 2.5% as of August (a) Describe the economic conditions in Australia that led to these policy stances. (8 marks) Mean 51% (b) Using a diagram/s, show how these policies can help the Government achieve its internal economic objectives. (12 marks) Mean 56%
38 Section 3Question 30Describe the economic conditions in Australia that led to these policy stances. (8 marks) Mean 51%Few students could explain why the budget deficit was falling. Most simply focussed on the expansionary impact of a budget deficit. The key understanding was that the Australian economy was weak with economic growth well below trend (2.5%) and unemployment rising (5.7%). Contributing factors were the slowdown in the Chinese economy, decline in domestic investment and the high $A.
39 Section 3Question 30 (b) Using a diagram/s, show how these policies can help the Government achieve its internal economic objectives. (12 marks) Mean 56% Generally answered quite well - most students were able to discuss how expansionary monetary and fiscal policy can be use to offset a weak domestic economy
40 Section 3Question 31 (20 marks) Describe the causes of the business cycle and the effects of the boom phase of the business cycle on the Australian Government budget outcome, business investment and imports and exports. Mean 51% This was the most popular question! But most students do not understand the causes of business cycles - students simply described the phases of the business cycle.
41 Section 3Question 31 (20 marks) Describe the causes of the business cycle and the effects of the boom phase of the business cycle on the Australian Government budget outcome, business investment and imports and exports. Mean 51% Good answers should have incorporated the AD/AS model to show how changes in AD and/or AS can cause fluctuations in economic activity e.g. changes in business & consumer confidence, the terms of trade, external shocks, natural disasters, world economic growth
42 Decrease in AD 1. The economy is at point A AS Price level2. A financial crisis shifts the AD curve to the leftAP1BP23. Both Real GDP and the price level fall – unemployment risesFigure 13.9: Long-run macroeconomic equilibrium.In long-run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the LRAS curve. In this case, equilibrium occurs at real GDP of $1000 billion and a price level of 100.AD1AD2Y2Y1Real GDP
43 Decrease in AS SRAS2 LRAS SRAS1 B A Price levelLRASSRAS2SRAS11. The economy is at point ABP22. A natural disaster or oil price shock shifts AS to the left.AP13. Real GDP falls, unemployment rises and the price level rises (B)Figure 13.9: Long-run macroeconomic equilibrium.In long-run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the LRAS curve. In this case, equilibrium occurs at real GDP of $1000 billion and a price level of 100.ADYfReal GDPY1
44 Increase in AD LRAS SRAS1 B A Price levelLRAS1. The economy is at point ASRAS1BP22. A mining boom shifts AD to the right.AP13. Real GDP rises, unemployment falls and the price level rises (B)Figure 13.9: Long-run macroeconomic equilibrium.In long-run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the LRAS curve. In this case, equilibrium occurs at real GDP of $1000 billion and a price level of 100.AD2AD1YfY1Real GDP
45 Topical Stuff South Korea FTA – huge boost for Australia The demise of Ford, Holden & ToyotaAbbott government rejects ‘protectionism’Australia appears on track to complete its 23rd year of uninterrupted economic growth in 2014 – but at below trend growthWe are entering the 3rd stage of the resources boom – the start of the export boomStage 1 was the terms of trade income boom,Stage 2 was the mining investment boom