2021 HSC Economics Exam Solutions

Multiple Choice:

A) The primary roles of the WTO are to promote free trade and resolve trade related disputes between countries.

B) As the country has a high per capita income and a well established, broad export base, it is an advanced economy.
Contrastingly, emerging and developing economies have rising income per capita and low income per capita respectively.

C) Answers A, B and D are all included within the NES, whereas a national minimum wage is not.

4) In periods of low economic activity, tax revenue will fall as households have less disposable income. The deficit will increase as government spending increases in periods of low economic activity. Further, the deficit will not be adequately offset by the tax revenue received by the government given there is less of it (as stated above).

B) The answer cannot be either C or D as both are to do with monetary policy.

The answer cannot be A as the cyclical component of the budget is not in the government’s direct control given it is based on the business cycle.

This means the answer is B, as the structural component represents deliberate fiscal policy decisions.

B) If the GINI coefficient increases, it means that the economy has become more unequal. An increase in the tax on consumption will worsen inequality given it is a form of regressive taxation.

D) The answer is not B as infrastructure expenditure is not a type of automatic stabilizer. D best represents the function of an automatic stabilizer, in the sense that it is an underlying policy which reacts to changes in economic growth.

C) A, B and D all represent policies which decrease trade volumes in some way. C is the only correct answer, as it represents a country lessening the impact of existing protectionist policies in order to move towards free trade.

D) The answer cannot be A or B, as decreases in net saving, a depreciation of the AUD and a decrease in the price of imports will all worsen the CAD.

In option C, whilst an increase in export prices will positively impact BoGS in the short-run, an increase in debt servicing costs will exacerbate the NPY deficit and worsen the CAD.

D is the most correct answer as a decrease in portfolio investment will lessen the NPY deficit, and an increase in business investment will not impact the BoP as individual firms are personally engaging in investment, rather than relying on foreigners to invest.

D) The graph depicts the presence of contractionary macroeconomic policy. Contractionary fiscal policy means that the government has increased taxation. Contractionary monetary policy means that the Reserve Bank has raised the cash rate. This means the answer is D.

C) Public goods are non-rival and non-excludable, meaning the answer is C.

C) The answer cannot be A or B as personal transfers of migrants are related to the secondary income account. Outflows of money by migrants represents a debit, meaning the answer is C.

A) An increase in the minimum wage would prompt more people to join the workforce, thereby raising the participation rate. However, it will also increase production costs for businesses, who may respond to this by laying off workers, causing an increase in the unemployment rate.

C) Land near the tollway would likely decrease in value rather than increase.

A) The unemployment rate has decreased from 18.3% to 16% between years 1 and 2. The participation rate has increased from 54.4% to 55% between years 1 and 2. Meaning the answer is A as unemployment has decreased and participation has increased.

D) BoGS = Exports of Goods – Imports of Goods = $125 – $110 = $15

CA = 15 – 30 – 20 = – $35

Capital Account = – $45

– 35 + – 45 = -80

Given the assumption BoP = CA + KAFA = 0, Financial Account = $80

B) The domestic currency has increased beyond the target rate. This means that the central bank wants to depreciate the currency. To do this, they will decrease the cash rate, meaning the answer is B. Whilst D also mentions the aim to ‘depreciate the currency’, buying domestic currency will actually appreciate it.

Question 21

a) Outline ONE influence of the G20 on the global economy.

The G20 is an economic forum which comprises the 20 largest economies in the world. As such, it is highly influential on levels of economic growth within the global economy. Indeed, in 2014, after the events of the Global Financial Crisis, member countries unanimously committed to raise global economic growth by 2.1%. This commitment would have a wide-spread influence on levels of growth, given that the largest economies in the world were directly involved in this commitment.

b) Distinguish between trading blocs and monetary unions.

A trading bloc refers to a group of countries who abolish trade restrictions between themselves to the exclusion of other countries. Differently, a monetary union is a specific type of trading bloc which involves the adoption of a common currency between member countries, and whose monetary policy decisions are conducted by a single central bank.

c) Evaluate strategies used to promote economic development in an economy other than Australia.

In an attempt to raise levels of economic development, the Chinese government has implemented a number of strategies in order to raise the quality of life of its citizens through improving levels of environmental sustainability. China’s pursuit of high rates of economic growth has been at the expense of the environment in the form of wide-spread environmental degradation, resource depletion and pollution. The Chinese government has recognised the increasing threat of climate change on standards of living and economic development by increasing their investment in renewable sources of energy and cutting down Co2 emissions. For example, in 2015, the Chinese government dedicated US$6.6B towards reducing pollution levels through shutting down coal power stations and investing in renewable energy infrastructure. As such, China is the world’s largest producer of renewable energy, with ultimate aims to generate 35% of power from renewable energy sources by 2030. By targeting the issue of pollution and climate change through funding renewable energy projects, the Chinese government aims to improve the quality of life and living standards of its population, thereby demonstrating an increased focus towards prioritising economic development. However, the success of such measures is limited by the fact that China continues to be one of the largest emitters of Co2, contributing to 29% of global emissions in 2016. In continuing to further the process of climate change, the Chinese government will need to undertake further actions to reduce their emissions of Co2, in order to ensure high standards of living and economic development in the future.

Question 22

a) The diagram shows the private costs and private benefits of producing plastic bottles. On the diagram, draw the curve that would include the total cost to society of producing these bottles.

b) Explain how ONE market-based policy can affect environmental sustainability in Australia. Support your answer with an example.

The implementation of a tax on goods or services in a market is a market-based policy that may be implemented by the Australian government in order to promote greater environmental sustainability. Given the fact that the price of goods generally only reflects private costs, the imposition of a tax on the good would allow for the price to also reflect the public cost of this good, that is, the creation of a negative externality in the production process. The implementation of a tax on the good would increase its price. This in turn will reduce the quantity of the good demanded by consumers with a lower willingness to pay. Such will reduce the quantity produced by consumers, thereby decreasing the size of the negative externality affecting the environment. Alternatively, if the incidence of the tax is borne by producers, they may consider investing in ways in which they can reduce their impact on the environment during the production process. An example of this can be seen through the implementation of the carbon tax in 2012, which was a market based environmental policy which hoped to reduce emissions of Co2 and promote environmental sustainability by charging firms $23 per tonne of carbon they emitted. Here, firms attempted to reduce the amount of tax they paid to the government by innovating new ways in which they could produce their good with lower pollution, in an attempt to lessen the effect of the tax and retain profits.

c) Explain the limitations of economic policies in relation to Australia’s ability to achieve environmental sustainability.

Whilst the government has recognised environmental issues by committing to environmental targets, there remains a policy implementation lag in terms of deciding what policy action should be taken to achieve these targets. This is evident within the Australian government’s recent commitment to achieving net zero emissions by 2050, yet alongside the announcement of this ‘national plan’, the government does not intend to introduce any new market based policies or regulations to ensure that this target is met. Such poses a significant limitation on Australia’s ability to achieve environmental sustainability, given the lack of tangible policies to accompany the environmental targets the government commits to, representing an implementation lag. Another limitation on government environmental policies are the political constraints posed by the fact that the government wanting to implement an environmental policy must continue to win public support in elections and stay in power. This constraint was particularly seen when the Gillard government’s carbon tax in 2012 was repealed by the Abott government in 2014 when they came into power. Such demonstrates the political limitations on the implementation of environmental policies by a government, as policies may be easily repealed by the next government if they don’t align with their political goals.

Question 23

a) Outline the impact of an increase in the minimum wage on cost inflation.

An increase in the minimum wage will increase the cost of labour for firms. As such, the increase in the minimum wage will cause cost-push inflation, whereby firms will respond to an increase in the price of inputs, in this case labour costs, by increasing the price of the good.

b) Explain the effects of low inflation on the Australian economy.

Low inflation would have a positive effect on businesses, as they will not experience significant increases in the costs of inputs such as labour and raw materials. This means that firms are able to continue to produce at a level which meets consumer demand without needing to raise their prices or lose profits. Additionally, low inflation will also impact Australian exporters, who will not need to raise prices in response to inflationary pressures. This ensures that the international competitiveness of Australian exports is maintained. However, low inflation will negatively affect individuals with assets, as they will not be able to gain high capital gains from their investment in assets such as houses given the benefits of asset price inflation are reduced in the presence of low inflation levels.

c) How can microeconomic policies reduce the non-accelerating inflation rate of unemployment (NAIRU)? Support your answer with an Australian example.

Microeconomic policies targeting labour market reform have the ability to reduce the non-accelerating inflation rate of unemployment (NAIRU). Particularly, labour market policies such as subsidies may be implemented to increase the level of education and training of future employees. Such has been implemented in Australia within the Youth Employment Package, which was included within the 2016 budget. Here, the government dedicated over $840 million in funding training programs for young people, involving building leadership and IT skills, and increasing work experience through an internship placement. In up-skilling the workforce through subsidising such programs, employers will express a greater demand for labour, and will employ more skilled workers, thereby reducing the issue of structural unemployment. Such microeconomic reform will shift the ‘Long-Run Phillips Curve’ inwards in response to the decrease in unemployment, and by extension, will lead to a reduction in NAIRU.

Question 24

a) Outline how an increase in protectionist policies in the global economy could affect the demand for the Australian dollar.

An increase in protectionist policies by foreign countries, such as tariffs on Australian exports, will reduce demand for Australian goods. This reduction in foreign demand for Australian exports will result in a decreased demand in the Australian dollar, as less AUDs are being used for the purchase of Australian goods, resulting in a depreciation of the AUD.

b) Explain how the Australian dollar can both appreciate against the US dollar and depreciate against the trade weighted index at the same time.

Australia’s trade weighted index (TWI) is made up of a basket of currencies of Australia’s largest trading partners. As such, a measure of the value of the AUD in terms of its bilateral exchange rate is not necessarily indicative of its value against many other currencies in the global economy. This means that whilst the AUD may appreciate against the USD through the bilateral exchange rate between Australia and the US, it may perform poorly against other currencies included in the measure of Australia’s TWI, and hence may simultaneously depreciate in terms of TWI.

c) Analyse the effects of an appreciation of the Australian dollar on the Australian economy.

In the short-run, an appreciation of the AUD will increase the price of Australia’s exports relative to the exports of foreign countries, thereby generating higher export income from the sale of each exported good. As the price of exports will be higher than goods that Australia imports, the value of Australia’s Balance on Goods and Services (BoGS) will increase, thereby reducing the Current Account Deficit (CAD) or promoting a Current Account Surplus, and strengthening rates of economic growth. An appreciation of the AUD will also positively affect the Net Primary Income Account, as due to the valuation effect, an increase in the value of the AUD will reduce the value of Australia’s debt denominated in foreign currencies, thereby decreasing the servicing costs of this debt. However, in the long-run, an appreciation of the AUD will lead to a reduction in the international competitiveness of Australia’s exports. As Australia’s exports will be priced higher than those of other countries, foreigners will demand less Australian exports, thereby decreasing the value of Australia’s BoGS. The worsening of Australia’s trade balance will be exacerbated by the fact that an appreciation of the AUD will make imported goods cheaper for domestic consumers, which will contribute to worsening the BoGs, and by extension, will promote a CAD.

Question 25

Evaluate the effectiveness of Australia’s fiscal policy in managing unemployment, income distribution and external stability. In your answer, refer to the information provided.

Answers could include:

• A discussion of major employment related policies undertaken by the Australian government, and their specific impact.
  • E.g. Subsidising education and training programs will make entrants to the workforce more skilled, and therefore more desirable to employers.
  • The second extract provided in the question may also assist in a student’s discussion of policies undertaken by the government during the COVID-19 recession in order to maintain unemployment within the target range (4-5%). More specifically, the stimulus mentions investment in infrastructure projects by the government in order to create jobs, as well as payments to businesses through Jobkeeper in order to prevent current workers from becoming unemployed.
• In relation to the distribution of income, students should refer to the two main ways in which the government is able to manage income distribution: social welfare payments and taxation.
  • Students may discuss the role of transfer payments, and how they provide low income earners with more disposable income.
    • Students may reference the Coronavirus Supplement mentioned in the second stimulus in their response.
  • Students may discuss various taxation reforms the government has undertaken in order to make the distribution of income more equal.
    • E.g. In 2012, the government raised the tax free threshold from $6000 to $18,200. This would increase the disposable income of low income earners as they would need to pay less tax, thereby decreasing social inequality.
    • Conversely, students may discuss increases in the rate of taxation which target high income earners, which are implemented with the aim to redistribute income back to low income earners in the form of the provision of public goods and transfer payments.
  • The second stimulus also references the government’s early release of superannuation to eligible low-middle income earners, which may also potentially affect the distribution of income.
• One of the core elements needed to achieve external stability relating to fiscal policy is Australia’s ability to maintain a sustainable debt to GDP ratio. This particularly relates to the government’s federal budget, whereby Australia’s external stability is negatively affected in situations where the government sustains a large budget deficit.
  • As indicated by the first stimulus, the Australian government has sustained a large and consistent budget deficit since the Global Financial Crisis in 2007. Students should refer to the particularly high increases in the budget deficit after Australia’s response to the Global Financial Crisis and the COVID-19 recession.
  • A large budget deficit represents a decline in national savings and an increase in Australia’s foreign debt. Indeed, the stimulus indicates that the servicing costs of this debt will be unsustainably high. This in turn will increase the balance of the Net Primary Income Account, and will promote a Current Account Deficit which worsens Australia’s external stability.
• As students need to ‘evaluate the effectiveness’ of fiscal policy, a consideration of the limitations on fiscal policy should also be included in their response. These include:
  • Global influences
  • Political constraints
  • Time lags

Question 26

Evaluate the effectiveness of Australia’s monetary policy in managing economic growth, income distribution and external stability. In your answer, refer to the information provided.

Answers could include:

• The RBA’s use of monetary policy impacts the level of Australia’s economic growth.
  • Students should consider the implications of increases or decreases in the cash rate on consumers and businesses in the economy, in order to shape their discussion on how monetary policy impacts economic activity.
  • Students should discuss the impact of monetary policy on economic growth in relation to the actions taken by the RBA during major economic events such as the mining boom, the Global Financial Crisis and the COVID-19 pandemic, using the first stimulus provided.
• Monetary policy actions have an impact on all three aspects of external stability: a positive trade balance, meeting the servicing costs of foreign debt, and a stable exchange rate.
  • Monetary policy actions have a direct impact on the exchange rate. A decrease in the cash rate leads to a depreciation of the AUD, and vice-versa for an increase in the cash rate.
    • This is discussed in the second stimulus where it notes that the RBA is attempting to assist ‘trade-exposed industries’ through the manipulation of the exchange rate.
    • The RBA is also able to directly affect the exchange rate through the buying and selling of foreign currencies in the FOREX market.
  • The impact of monetary policy on the exchange rate will also impact the servicing costs of foreign debt in the Net Primary Income Account (NPY). This is due to the valuation effect.
    • For example, an increase in the cash rate will lead to an appreciation of the AUD. Due to the valuation effect, the value of Australia’s debt denominated in foreign currencies will decrease, leading to a reduction in the NPY deficit, and hence, improving the Current Account Deficit.
• Monetary policy impacts the distribution of income through the way in which these decisions impact borrowers and lenders of funds.
  • For example, if the cash rate were to be reduced, borrowers would face lower interest rates. This distributes income away from lenders and towards borrowers, who now have more disposable income as a result of their reduced loan repayments.
  • The second stimulus acknowledges that individuals reliant on ‘interest income’, typically high income earners, will be negatively affected by recent reductions in the cash rate. However, as mentioned above, this income is redistributed towards borrowers who make up the majority of the community.
• As students need to ‘evaluate the effectiveness’ of monetary policy, a consideration of the limitations on monetary policy should also be included in their response. These include:
  • Time lags (monetary policy decisions generally take between 6-18 months to have an impact on levels of economic activity)
  • The risk of a liquidity trap

Question 27

Assess the effects, over the last ten years, of free trade agreements and protectionist policies
on the global economy.

Answers could include:

• Beneficial effects of protectionism.
  • The infant industry argument.
  • Protection of domestic employment.
  • Prevention of dumping.
  • National defence.
• Negative impact of protectionism.
  • Students may mention that the above arguments for the use of protectionist policies don’t hold in the long-run.
  • Lower consumer choice.
  • Higher prices of goods.
  • Less international trade, leading to lower gross world product and global economic growth.
• Beneficial effects of free trade.
  • Facilitates the process of globalisation and the creation of global supply chains.
  • High consumer choice.
  • Decrease in the price of goods as they are being produced by countries with comparative advantage in that particular industry.
• Negative impacts of free trade.
  • Countries without comparative advantage in the production of a good will be unable to compete with producers in other countries.
  • Exacerbates import outflows, thereby worsening a countries’ trade balance.
  • Exploitation of workers in developing countries and increased global income inequality.
  • Increased structural unemployment in inefficient and not internationally competitive industries.
  • The movement towards free trade has led to higher global economic integration, which in turn, will strengthen the contagion effect.
• Students should accompany their discussion of the above concepts with reference to the various free trade agreements and protectionist policies undertaken by both Australia and other countries.

Question 28

Assess the effects, over the last ten years, of changes in the global economy on Australia’s trade and financial flows.

Answers could include:

• Changes in the value, composition and direction of Australia’s trade.
  • The composition of Australia’s trade has drastically changed within the past 10 years, in response to changing global demand.
    • Australia has been increasingly moving towards finding non-mining sources of economic growth. This can be particularly seen through the fact that education related services represent Australia’s third largest export.
  • The value of Australia’s trade is directly related to the level of economic activity in the global economy.
    • Students should discuss the various changes to the value of goods Australia exports and imports given changes in the international business cycle, exchange rates and the relative international competitiveness of foreign goods.
    • The value of Australia’s trade has also increased due to Australia’s reduction in protectionist policies, and participation in free trade agreements.
  • The direction of Australia’s trade has shifted away from the UK and US, and instead, towards China. This is given the following factors:
    • China’s geographical proximity to Australia.
    • The high levels of economic growth in China, and hence the high demand for Australian exports.
    • Lower production costs in China, meaning there is a cheap supply of imports to Australia.
• Trends in the pattern of Australia’s financial flows.
  • Due to high volumes of foreign investment within Australia, many transnational corporations have now established subsidiaries in Australia.
    • Students may consider the various benefits and disadvantages associated with increased volumes of foreign investment in Australia.
  • Australia has also increased their investment in foreign countries.
    • Students should discuss the conditions for which domestic businesses engage in foreign investment, such as seeking high rates of return on their investments or wanting access to foreign export markets.