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HSC 2020 – Economics Answers
Find out how we would have answered the multiple-choice and short answer sections of the 2020 Economics HSC exam.
We break down in detail all the answers, so you can compare, and see how well you’ve done!
SECTION I (20 MARKS)
MULTIPLE CHOICE
QUESTION 1: Which of the following identifies two economic objectives of monetary policy?
A. Price stability and full employment
B. Economic growth and external stability
C. Price stability and distribution of income
D. Economic growth and environmental sustainability
ANSWER
A – This is articulated on the RBA website as part of its role in conducting monetary policy
QUESTION 2: Which international organisation is responsible for maintaining financial stability in global financial markets?
A. World Bank
B. World Trade Organisation
C. International Monetary Fund
D. Asia-Pacific Economic Cooperation
ANSWER
C – This is stated on the website of the International Monetary Fund as part of its role
QUESTION 3: Which of the following is most likely to be a feature of decentralised wage determination system?
A. Increased income equality
B. Wage increases are linked to inflation
C. Government policy determines wages outcomes
D. Employment contracts can vary from one workplace to another
ANSWER
D – Decentralisation means that the wages and working conditions are determined through the process of workplace negotiations between employers and employees. Such negotiations do not involve the government (Hence C is wrong) and are likely to lead to variations between workplaces based in individual nuances.
QUESTION 4: A developing economy is most likely to be characterised by
A. low productivity and low population growth.
B. low employment and low infant mortality
C. inadequate access to education and underprovision of public goods.
D. inadequate access to health care and GDP dominated by the provision of services.
ANSWER
C – Developing countries typically have high population growth, rapidly rising levels of employment, high infant mortality (but falling) and GDP dominated by the provision of manufactured goods, agricultural produce and tourism. They will not generally have highly developed educational assets and the focus will not be on the provision of public goods, hence C is correct.
QUESTION 5: A country imposes a quota on wheat imports. Assume that it does not allow any imports of wheat beyond the quota.
Which of the following is most likely to occur if this country decides to reduce this quota on wheat imports?
A. Increased wheat prices within the country
B. Increased revenue for foreign wheat exporters.
C. Decreased income for wheat producers within the country
D. Decreased government revenue from the change in the volume of imports.
ANSWER
A – A quota is a pre-defined limit. Limits to imports mean less domestic competition and thus higher domestic prices and higher incomes for domestic producers. Since quotas do not attract or derive government revenue (as a tariff would) the D is incorrect. Since domestic prices are higher than. they otherwise would be exports are likely to fall not rise.
QUESTION 5: The table represents data for a hypothetical economy.
Which of the following shows the value of the terms of trade index in Year 2 and the terms of trade trend from Year 1 to Year 2?
ANSWER
B – TOT = Export price index ÷ Import price index. The TOT in Year 2 is 80 ÷ 160 = 50 hence C and D can be eliminated. The TOT is year 1 was 100 ÷ 125 which is 80 (stronger) hence the TOT has decreased, and the answer is B.
QUESTION 7: A foreign business purchases the rights to sell an Australian-designed product overseas. How will this transaction be recorded in Australia’s Balance of Payments?
A. Debit in the capital account
B. Credit in the capital account
C. Debit in the financial account
D. Credit in the financial account
ANSWER
B – Purchase of Australian IP hence credit and capital in nature.
QUESTION 8: Which of the following is likely to cause a decrease in the labour force participation rate?
A. A decrease in the rate of unemployment
B. A decrease in the number of discouraged workers
C. An increase in the level of hidden unemployment
D. An increase in the value of transfer payments made to the unemployed
ANSWER
C – The labour force participation rate is affected by the number of people in the labour force relative to the working age population. If unemployment falls, then more people are employed, and it simply move people within the labour market from unemployed to employed hence A can be ruled out. If the number of discouraged workers decreases, then more people will enter the labour market and LFPR will rise hence B is incorrect. If transfer payment rise, then there is greater incentive to stay unemployed or become unemployed hence LFPR will rise. If hidden unemployment rises, then people will leave the labour market and not be counted hence the LFPR will fall and C is correct.
QUESTION 9: The following shows two aggregate demand curves for a hypothetical economy.
All other things being equal, the shift fromAD1 toAD2 is most likely to have been caused by an increase in
A. the income tax-free threshold.
B. business investment in training programs.
C. the cash rate of the hypothetical economy.
D. employment in the economy of a major trading partner.
ANSWER
C – The graph show that Aggregate demand has fallen. If the tax-free threshold rose then people would have more to spend and AD would rise hence A is incorrect. If businesses invested in training programs then aggregate supply would rise (not on the graph) hence incorrect. If the cash rate rose then people would tend to spend less and save more, leading to a decrease in AD as shown. Finally, if there is increased employment in the economy of a major trading partner then the level of export income would rise so AD would increase not decrease. Hence C is correct.
QUESTION 10: The table shows hypothetical data for the Australian economy over a two-year period.
Which row of the table below best accounts for the changes in CPI and unemployment rate from Year 1 to Year 2?
ANSWER
D – The change in CPI is a 3% rise in inflation from 100 to 103. This would come about if people spend more and if costs rise. A reduction in the cash rate would reduce supply costs hence A can be eliminated. An appreciation of the dollar would reduce import costs and thus B can also be eliminated. The unemployment rate from Year 1 to Year 2 went from 10% [200 ÷ (1800 + 200)] to 5.9% [125 ÷ (2000 + 125)] which is a sharp decline. This decline in unemployment would not occur during an economic downturn hence C is incorrect. If the currency of a major trading partner appreciated, then there would be greater demand for exports and in those industries a greater derived demand for labour so unemployment would fall. Higher incomes from export industries would flow through to increased employment elsewhere in the economy hence D is correct.
QUESTION 11: A central bank’s monetary policy ·stance results in a depreciation of the economy’s exchange rate.
All other things being equal, which of the following best identifies the stance and a possible effect on the economy of the depreciation in the exchange rate?
ANSWER
B – A depreciation in an economy’s exchange rate follows a fall in the cash rate as investment is relatively less attractive for offshore investors. Hence the cash rate must have fallen – which is expansionary. Thus, C and D can be eliminated. Since the local currency has fallen debt servicing will rise and the cost of international borrowing will rise (assuming the borrowing is characterised in other currencies), hence B is correct. A is possible but not immediately likely as the cost of investing overseas will be higher will a falling domestic exchange rate.
QUESTION 12: The table shows data for a hypothetical economy.
Assume the economy is operating at the non-accelerating inflation rate of unemployment (NAIRU).
Which of the following describes the most likely relationship between the changes in the economy’s real GDP growth rate and level of unemployment?
A. Lower aggregate supply leading to a reduction in dynamic efficiencies
B. Lower aggregate supply accompanied by a decrease in technical efficiencies
C. Higher aggregate demand accompanied by a decrease in underemployment
D. Higher aggregate demand leading to a reduction in structural unemployment
ANSWER
C – Growth in real GDP has risen and the unemployment rate has not fallen below the NAIRU. This means that rapid inflation has not occurred. This would only be the case if supply could rise – most likely to occur if those underemployed worked more hours. Hence A and B cannot be correct and nor is D as the unemployment rate is constant.
QUESTION 13: A domestic economy has experienced a decline in its net foreign liabilities as a percentage of Gross Domestic Product (GDP).
Which of the following is most likely to have increased, contributing to this decline?
A. Debt servicing costs
B. Exchange rate volatility
C. Foreign investment into the domestic economy
D. Returns on international investments by domestic businesses
ANSWER
D – The decline in foreign liabilities means that there is less foreign debt and equity. This in turn means that debt servicing costs would fall (A is incorrect), there would be lower exchange rate volatility as fewer international transactions and less foreign investment (B and C are also incorrect). If the level of domestic equity investment in offshore markets rose the NFL would
QUESTION 14: Under a floating exchange rate, the capital and financial account for an economy in Year 1 is $10.6 bn surplus. In Year 2 the current account balance is in a $3.5 bn surplus.
Which of the following represents the outcome of the capital and financial account in Year 2 and the change in size of this account from Year 1 to Year 2?
ANSWER
B – If the capital and financial accounts in Year 1 are in surplus by $10.6bn then it must mean that the current account deficit must be $10.6bn in Year 1. In Year 2 the current account has now moved into a surplus of 3.5bn. This represent a change of $14.1bn. Hence, A and C are incorrect. The outcome must mean that the current and financial account balances (equal and opposite) are in deficit hence B is correct.
QUESTION 15: An economy has a headline inflation rate of 2.3% while its underlying inflation rate is 2.6%.
Which factor could best account for this?
A. Increased minimum wage
B. Short-term oversupply of petrol
C. Reduced supply of fruit due to drought
D. Increased demand for the domestic currency
ANSWER
B – The headline inflation is lower than the underlying rate meaning that there has been a rapid temporary fall in the price of a widely used good, such as fuel. Hence, B is correct.
QUESTION 16: The table shows data for a hypothetical economy.
All other things being equal, which statement is most likely to be true for this economy?
A. Real GDP remains unchanged due to a decrease in global economic activity.
B. Nominal GDP has increased due to an appreciation of the economy’s exchange rate.
C. Nominal GDP has increased due to a decrease in the tariff applied to imported products.
D. Real GDP remains unchanged due to increases in the cost of production for businesses.
ANSWER
D – Nominal GDP has risen by 5% (420 ÷ 400) x 100%. This is identical to the rise in CPI, hence real GDP remains the same. The rise in CPI indicates inflation – not likely to occur if there is lower demand from a decrease in economic activity – hence A is incorrect. An increase in the nation’s exchange rate would reduce import inflation, hence B is incorrect. A decreased tariff would lower the price of input-imports thus reducing costs, not inflating them. Finally, increased cost of production would create cost push inflation which would be passed on to consumers in the form of higher prices. Hence D is correct.
QUESTION 17: An initial increase in government spending of $10 million leads to a final increase in national income of $25 million.
What is the value of marginal propensity to consume (MPC)?
A. 0.25
B. 0.4
C. 0.6
D. 0.75
ANSWER
C – Increased government spending is amplified 2.5 times ($10m –> $25m), so the multiplier, k i= 25 ÷ 10 = 2.5. k = 1 ÷ MPS hence MPS is 0.4. Since, MPS + MPC = 1 then MPC must equal 1 – MPS = MPC. So, MPC must be 1 – 0.4 = 0.6.
QUESTION 18: At equilibrium, when there is no international trade, an economy consumes 30 000 kg of cotton.
The government opens the economy to trade and introduces a tariff of $5 per kg on cotton resulting in imports of 10 000 kg and a total consumption of 35 000 kg of cotton. The world price for cotton is $20 per kg.
What is the change in the domestic production of cotton and in government revenue?
ANSWER
A – When the government opens the closed economy to imports then the total consumption rises to 35,000 kg of cotton (given). If 10,000 kg is imported, then domestic suppliers must supply the rest. This means they supply 25,000 kg. Hence, C and D are incorrect. Now, the world price is $20 per kg and the tariff is $5 per kg. The tariff is applied to imports and we know that there is 10,000 kg imported. This means that government revenue must be $5 x 10,000 = $50,000, hence A is correct.
QUESTION 19: The table shows exchange rate movements for the Australian economy and the United States economy.
All other things being equal, which of the following best accounts for the fluctuation of the exchange rate between Year 1 and Year 2?
A. There has been a depreciation of the AUD caused by an upturn in the international business cycle.
B. There has been a depreciation of the AUD caused by a downturn in domestic economic activity.
C. There has been a depreciation of the USD caused by an increase in Australia’s cash rate relative to the US cash rate.
D. There has been a depreciation of the USD caused by a decrease in the deficit of the net income component of the US balance of payments.
ANSWER
C – The Australian dollar has appreciated because in Year 1 it was worth on 90 US cents and in Year 2 90AUD cents could buy IUSD. This means that 1AUD = $1.11US. A and B can be eliminated as they refer to a depreciation of the AUD when there has been an appreciation. A decreased deficit in US NPY would likely arise from a USD appreciation not depreciation, hence C is incorrect. If Australia’s cash rate rose there would be increased investment in Australia and if the US cash rate fell, much of this would come from USA. When capital flight occurs from USA there would greater domestic supply of currency and the USD would fall. There would be greater demand for AUD and its value would rise. Hence C is correct.
QUESTION 20: The diagram shows the demand and supply curves of the labour for a hypothetical economy.
The government of this economy has introduced a minimum wage (W1) set above the equilibrium wage rate (We).
The introduction of this minimum wage has an impact on the Lorenz curve of this economy. The most likely impact on the Lorenz curve will be a shift
A. inwards as all employees receive a higher wage.
B. inwards as there is an increase in the level of employment.
C. outwards as all employees receive a higher wage.
D. outwards as there is an increase in the level of unemployment.
ANSWER
D – The figure depicts a price floor above the equilibrium wage. This means that supply side costs rise as the cost of employment to employers has risen. The effect of this that employers will take on less labour, so unemployment rates will rise and this will worsen the level of income inequality so the Lozenz Curve should shift outwards (indicating greater income Inequality) and the Gini Coefficient will rise. Thus, D is incorrect. A is incorrect as employees on a wage above the minimum wage will not experience a wage rise. B is incorrect as the level of employment will fall. C is incorrect for the same reasons as A.
SECTION II (40 MARKS)
SHORT ANSWER
QUESTION 21 (11 marks)
PART A (2 marks) – The table shows economic information for a hypothetical economy.
With reference to the given data, outline ONE possible reason for the change in the distribution of income from Year 1 to Year 2 for this economy.
SAMPLE ANSWER
One possible reason for this change is increases in transfer payments from progressive taxation, leading to lower levels of inequality and a higher HDI from increased income, and therefor living standards for the poor.
Note: Other answers may include centralisation of wage determination, increased taxation etc.
PART B (2 marks) – A developing economy has entered into a multilateral free trade agreement with advanced economies.
Outline ONE disadvantage to the developing economy of entering into this trade agreement.
SAMPLE ANSWER
The relatively lower price of manufacturing leads to higher levels of exports demanded from the developing economy, which may lead to environmental degradation from excessive production and development.
Note: Other answers may include “brain drain”, limiting of quaternary industry production etc.
PART C (3 marks) – Describe ONE way in which the World Bank helps promote economic development in developing economies.
SAMPLE ANSWER
Through providing low-interest loans, the world bank is able to help developing economies stabilise and grow. The world bank provides financial assistance for the purpose of reducing poverty, and therefore provides access to funds for countries that are ordinarily unable to borrow at feasible rates. Such lending allows for government investment, leading to economic growth, but also expenditure on infrastructure etc, to lead to economic development.
Note: Other answers may include technical assistance to developing countries.
PART D (4 marks) – Economic growth does not always lead to an improvement in economic development.
Explain TWO factors that could cause this.
SAMPLE ANSWER
Economic growth is a measure of the growth in production within an economy, whereas economic development refers to the economic wellbeing/quality of life of the people within an economy. Where economic growth occurs, if all the extra wealth/income is attributed to only those in the highest income brackets, there may be little to no increase in the incomes/wealth of the general population. Therefore, with high inequality, the living standards of most of the population may not rise with economic growth, not leading to an improvement in economic development.
Another factor is the environmental degradation that accompanies high levels of growth and production, especially for developing economies specialising in manufacturing. Although difficult to quantify, environmental degradation may lead to a loss in the quality of life, and therefore offset the increased incomes resulting from growth, thus leading to a lack of economic development accompanying growth.
QUESTION 22 (9 marks)
PART A (2 marks) – Distinguish between structural unemployment and cyclical unameployment.
SAMPLE ANSWER
Structural unemployment refers to those who do not possess skills demanded in the labour market while cyclical refers only to those unemployed due to effects associated with economic downturn.
PART B (3 marks) – Describe how ONE government policy has been used to address a skills shortage in the Australian labour market.
SAMPLE ANSWER
The recent restructuring of commonwealth supported places (CSP) for university students aims to address to skills shortage in education and STEM through greater subsidies to education providers for these courses while reducing the subsidies to HSIE students due to a percieved oversupply of such skills.
Note: Other answers could include TAFE subsidy, Centrelink “no dole-bludgers” scheme, skilled immigration policies etc.
PART C (4 marks) – Explain how a decrease in aggregate demand can lead to underemployment of labour in an economy.
SAMPLE ANSWER
When a decrease in aggregate demand (AD) occurs, businesses reduce their production as well, which will lead to a lower AD for labour. However, as hiring, training and induction processes are often costly, if businesses anticipate a future increase in AD, they will be incentivised to reduce the hours of each worker rather than make workers redundant to save on the aforementioned costs. By reducing the hours of workers, businesses operate with excess capacity whereby they can increase production when AD increases, avoiding both redundancy and hiring costs. However, this leads to underemployment, defined as people who are employed but wish to work more, as well as peoples skills not being fully utilised. Thus, a decrease in AD may manifest as both unemployment and underemployment of labour.
QUESTION 23 (9 marks)
PART A (2 marks) – Outline ONE reason for the protection of domestic industries.
SAMPLE ANSWER
One reason for protection is to ensure national security through protecting critical industries. The widespread protection of defence and critical infrastructure industries results from a risk of international relationships breaking down and potential conflicts, which may threaten national security if such industries relied on imports. Thus, through protection, economies ensure a degree of self-sufficiency to ensure national security.
Note: Other answers may include infant industry argument, political reasons, other countries doing protection.
PART B (1 mark) – A government wants to protect the sugar industry by introducing a subsidy.
The diagram below shows the market before the introduction of the subsidy. On the diagram, draw the curve to show the effect of a subsidy with imports equal to zero.
SAMPLE ANSWER
PART C (6 marks) – Discuss Australia’s involvement in ONE bilateral trade agreement.
SAMPLE ANSWER
ChAFTA is Australia’s most impactful free trade agreement as 38% of our exports go to Chinese consumers, making China our biggest export market by far. This bilateral trade agreement has allowed for increases in export volumes and trade, where in 2000, China only made up less than 20% of our export volumes whereas today, makes up almost 40%. The high level of demand for primary resources resulting from the rapid urbanisation and development of China has led to high levels of coal and steel exports, which has been supported by the bilateral free trade agreement, leading to domestic economic growth.
Furthermore, as China develops into an advanced economy, their demand for Australian education has further encouraged growth in our education services sector to become our second largest export, while the work-holiday and student visa schemes under the FTA facilitates education exports. This FTA has also improved international relations with China, while its visa schemes has provided access to a highly skilled labour force.
However, due to the relative competitiveness of Chinese manufacturing industries, this FTA serves to eliminate the little remaining manufacturing producers in Australia. Furthermore, the low price of Chinese manufactured goods leads to higher imports and may worsen our CAD and increase our NFL position.
Note: Other choices include NZAFTA, US-AFTA etc. If US free trade agreement is chosen, should refer to productivity commission report detailing the losses we sustain each year due to the agreement.
QUESTION 24 (11 marks)
PART A (3 marks) – Describe the relationship between microeconomic reform and aggregate supply
SAMPLE ANSWER
Aggregate supply (AS) refers to the price that producers are willing to sell at, which is dependant on factors deciding the cost of production. Thus, to influence the AS, microeconomic policies and reform is necessary. By reforming the markets to improve efficiency, governments can increase AS as producers are able to produce at a lower cost. Furthermore, other reforms like market liberalisation allow for resources to be re-directed to efficient industry, leading to higher AS in the long term.
PART B (4 marks) – With reference to a specific product market, explain how ONE microeconomic reform has led to increased efficiencies.
SAMPLE ANSWER
The telecommunications market has experienced increased efficiencies resulting from microeconomic reform through privatisation. Following the national competition act (NCA), formerly government owned Telstra was privatised to create greater incentives for profit which would lead to greater incentives to reduce costs of production. Thus, more efficient processes and practices were developed to maximise profits, leading to greater efficiencies in Telstra. An example included the offshoring of technical support services to low cost regions, reducing costs.
Furthermore, any government assistance provided to Telstra was phased out, allowing for the entrance of competitors. This greater level of competition drove innovation, eventually leading to greater levels of technology utilised in the telecommunications sector, and thus increased efficiencies within the sector.
Note: Other options include infant energy industry, financial markets etc.
PART C (4 marks) – Explain how microeconomic reform in the labour market can lead to a lowering of cost inflation in Australia.
SAMPLE ANSWER
Cost inflation refers to inflation attributed to increases in the cost of production resulting in increases in general price levels. Microeconomic reform in the labour market often consists of decentralisations, addressing skills shortages and policies to improve productivity and participation.
Decentralisation allows for efficient wage determinations through greater levels of discrimination, and therefore incentivises increased productivity to achieve a higher wage, but also leads to lower overall wage levels. This reduces the costs of labor and therefore production, leading to lower cost inflation.
A similar mechanism takes places with policies which aim to improve productivity and skills shortages as the labour force is able to operate more efficiently and at a lower cost, therefore leading to lower costs of production and reduced cost inflation.