Student Economics Forum 2011 CCI/ETAWA Student Economics Forum 2011 Preparing for the WACE Stage 3 Exam Steven Kemp School of Economics Curtin University

Economics 2011 You need to . . . Know the Syllabus in 3A and 3B – textbook theory and concepts account for around 60 – 80% of the paper Use models in your answers Be aware of current economic conditions & events – around 20 – 30% of the paper Remember that the exam paper was written before July

3A: International Economics Global Markets Patterns & trends in world trade International competitiveness Globalisation Free Trade & Protection Comparative advantage Demonstrate the gains from trade Types of protection (tariffs & subsidies) Arguments for protection & trade liberalisation Trade agreements

3A: International Economics Pattern of Australia’s trade The terms of trade The balance of payments The exchange rate Foreign liabilities Foreign debt Foreign investment

Australia’s Exports Source: Bankwest Economic Snapshot

3B – Macroeconomic Theory Macroeconomics is about 2 things Explaining long term economic growth Explaining short run fluctuations in economic activity – the business cycle

Australia

Australia What caused the large fall in the March quarter 2011?

3B – Macroeconomic Theory You must learn 2 models! The AE model Macroeconomic equilibrium The multiplier The AD/AS model Aggregate demand curve Aggregate supply curve Use the AD/AS model to explain the business cycle, inflation, unemployment . . .

3B – Macroeconomic Policy Key macroeconomic objectives Sustainable rate of economic growth Full employment/Natural rate of unemployment Price stability

3B – Macroeconomic Policy Fiscal Policy Budget Outcomes Automatic vs discretionary Expansionary/contractionary Impact (use AD/AS model) Strengths/weaknesses Recent Budget

3B – Macroeconomic Policy Monetary Policy The cash rate Transmission mechanism Expansionary/ neutral/ contractionary Impact (use AD/AS model) Strengths/weaknesses Recent interest rate changes?

3B – Macroeconomic Policy Microeconomic Reform Examples Productivity Economic efficiency Impact (use AD/AS model) Strengths/weaknesses

Current Macroeconomic Performance and Policy Stance

World Growth Source: RBA

Australia - GDP Growth Quarterly % Annual % -1.2 1.0 0.8 2.7 0.0 2.5 March 2011 -1.2 1.0 Dec 2010 0.8 2.7 Sept 2010 0.0 2.5 June 2010 1.4 3.2

Inflation CPI Excl Volatile Weight. Median Trimmed Mean 3.6 2.5 2.7 June qrt 0.9 0.5 June 2011 3.6 2.5 2.7 Mar 2011 3.3 2.6 2.2 2.3 Dec 2010 Sept 2010 2.8 3.0 2.4

Unemployment 4.9 5.1 5.2 Trend Un Rate % June 2011 Mar 2011 Dec 2010 Sept 2010 5.2 June 2010

Exchange Rate

Balance of Payments

Budget Balance

Change in Cash Rate - % points Monetary Policy Date Change in Cash Rate - % points New Cash Rate Target % 3 Nov 2010 +0.25 4.75 5 May 2010 4.50 7 Apr 2010 4.25 3 Mar 2010 4.00 2 Dec 2009 3.75 4 Nov 2009 3.50 7 Oct 2009 3.25 8 Apr 2009 -0.25 3.00

Last Year’s Exam The exam highlighted certain areas of the syllabus that are not well understood: The terms of trade Automatic stabilisers in fiscal policy The link between the current account and the financial account in the balance of payments The aggregate demand/aggregate supply model

Every Year’s Exam Common Errors Poor understanding & application of basic models Agg Expenditure (45o model) Agg Demand & Agg Supply foreign exchange market – D($A)/S($A) Confusion over the CAD, foreign debt, foreign investment

Section 1 13. The graph has a marginal propensity to consume of _______ and, therefore, a multiplier of ________. (a) 0.6, 2.5 (b) 0.6, 1.67 (c) 0.8, 5 (d) 0.8, 2.5

Section 1 A worsening current account deficit is most likely to be a result of (a) a decrease in economic growth. (b) capital expansion in domestic manufacturing plants. (c) a positive gap between domestic savings and domestic investment. (d) an increase in exports. 

Section 1 An increase in aggregate demand is likely to result in (a) higher prices and slower growth in real GDP. (b) higher real GDP and higher interest rates. (c) lower interest rates and higher inflation. (d) higher inflation and job creation.

Section 1 Which one of the following is an example of discretionary fiscal policy? (a) a reduction in marginal income tax rates (b) an increase in tax collections during a boom (c) an increase in government tariff revenue (d) a decrease in government tax revenue

Section 1 23. Which one of the following statements about productivity is correct?  (a) Productivity growth always results from capital investment. (b) Labour productivity is the best measure of productivity growth. (c) Productivity growth is measured by increases in the output of the economy. (d) Productivity growth results from capital deepening.

Section 2 Q 25 The Terms of Trade Most students can define the terms of trade, but after that its good night! The increase in Australia’s terms of trade Why? The effects on economic activity, B of P & the $A

Section 3 29. Consider each of the following events: (i) an increase in world oil prices; (ii) a depreciation of the Australian dollar. (a) With the aid of separate AD/AS diagrams, explain the likely effects of each event on the Australian economy. (10 marks) (b) Discuss the possible macroeconomic policy options available to the Australian Government to combat any negative effects of an increase in world oil prices. (10 marks)

Section 3 29. Consider each of the following events: (i) an increase in world oil prices; (ii) a depreciation of the Australian dollar. With the aid of separate AD/AS diagrams, explain the likely effects of each event on the Australian economy. (10 marks) An increase in world oil prices would . . . A depreciation of $A would . . .

Section 3 29. (b) Discuss the possible macroeconomic policy options available to the Australian Government to combat any negative effects of an increase in world oil prices. (10 marks) What should the government do?

Australian Economy Be aware of the state of the economy – key developments & trends Key indicators GDP Unemployment Inflation $A CAD Cash rate Budget deficit

2011 – Key Developments?