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STAGE 2 ECONOMICS ASSESSMENT TYPE 1: SKILLS AND APPLICATIONS TASK Task 2: Macroeconomics test This test, an extract from a country’s economic report, gives you the opportunity to use, interpret, evaluate, and reflect on a selection and range of primary and secondary sources in relation to economic issues. Answers should be written in spaces provided. The test should take 50 minutes. Economic Report Cash rate Inflation rate Retail sales Change in consumer sentiment Capital inflows Exchange rate (against US$) Dec. 2007 4.5% 3% $400bn 3% $65bn 80c Mar. 2008 5.2% 3.6% $405bn 2% $69bn 85c June 2008 5.6% 4.2% $410bn -1% $75bn 90c Sept. 2008 6% 4.2% $405bn -8% $78bn 95c AD-AS diagram representing economic conditions in September 2008 The government has highlighted low rates of unemployment as its main achievement. However, the opposition has criticised the government for not using the correct policy mix to achieve its macroeconomic objectives and has argued that supply management policies should be implemented to achieve these objectives. A university economics professor has supported the call for the use of supply management policies, arguing that the short-term costs of implementing such policies could be overcome. However, he pointed out that whatever the government does, it will experience a range of problems, such as the limitations of available measurement and institutional and political factors. He also pointed out that the expenditure multiplier effect must be considered by the government when making policy decisions. Page 1 of 6 Stage 2 Economics annotated student work for use from 2011 493699177 (October 2010) © SACE Board of South Australia 2010 (a) Refer to the aggregate demand – aggregate supply (AD-AS) diagram above. (i) Which one of the following types of unemployment would not occur in September 2008 in the economy represented in this diagram? Tick the appropriate box. Frictional unemployment Structural unemployment Seasonal unemployment Cyclical unemployment (1 mark) (ii) With reference to the AD-AS diagram, explain one economic reason why the state of the economy in September 2008 is not desirable. Inflationary gap occur. The economy is in a situation where employment of resources are more than the ideal nature rate unemployment. General price Communication Clear and appropriate use of economic terminology. level are unlikely to increase and inflation tend to occur. (2 marks) (b) (i) Using information from the table on page 1, state one factor that could have caused the change in the exchange rate from December 2007 to September 2008. Inflation in the economy will make our export less competitive in foreign market. Demand for our currency drop. Inflation also causes imports more Knowledge and Understanding Provides some evidence of knowledge, understanding, and application of economic concepts, principles, models, and skills. cheaper and thus supply of our currency to buy imports are likely to increase. Currency depreciate. (1 mark) (ii) Illustrate, on the following diagram, the effect on the exchange rate of the factor you stated in part (b)(i). Page 2 of 6 Communication Clear and accurate communication of economic principles. Stage 2 Economics annotated student work for use from 2011 493699177 (October 2010) © SACE Board of South Australia 2010 (iii) List two possible effects on the economy of the change in the exchange rate from December 2007 to September 2008. Effect 1: Our country equity and resources are now at a higher risk to be take over by foreigners. Effect 2: Analysis and Evaluation Evidence of evaluation of the effects of interdependence on individuals, business, and government, locally, nationally, and globally. Increase in foreign debt if the debt is express in foreign currency. We now need more money to pay the debt. (2 marks) (c) (i) With reference to the table on page 1, identify one: (1) leading indicator of economic performance. Change in consumer sentiment (1 mark) (2) lagging indicator of economic performance. Inflation rate. (1 mark) (ii) Explain how a government could use leading and lagging indicators of economic performance to achieve its macroeconomic objectives. Leading indicators: government can predict the economic performance through leading indicators. Suitable policy may be planned to adjust the economy so that macroeconomic objectives can be planned. (1 mark) Communication Clear communication of economic principles, models, and concepts. Appropriate use of economic terminology. Lagging indicators: government can confirm the economy performance and the exact magnitud and mix policy can be implementated to achieve its macroeconomic objectives. (1 mark) (d) Why is knowledge of the expenditure multiplier effect important to a government when making policy decisions? Knowledge of the expenditure multiplier effect is important as the exact magnitud Knowledge and Understanding Comprehensive knowledge, in-depth understanding, and focused application of complex economic concepts, principles, models, and skills. to policy can be measure so that the effects of the policy implemented is ideal. (2 marks) Page 3 of 6 Stage 2 Economics annotated student work for use from 2011 493699177 (October 2010) © SACE Board of South Australia 2010 (e) Present an argument for the most appropriate monetary policy response by the government to the state of the economy in September 2008, as described in the economic report on page 1. Contractionary monetary policy should be employed. It is to cool off the economy which have high inflation and to reduce the inflationary gap. Increase in interest rate will cut down the consumption and investment in the economy. AD are likely to shift to the left. General price level will drops and thus improve the external balance. Besides that, with the drop of AD, Ye is closer to Yf although structural unemployment may occur but full employment objective are likely to achieve. With higher interest rate, it also can appreciate the exchange rate of the country. (5 marks) (f) Analysis and Evaluation Perceptive evaluation of the effects of interdependence on individuals, business, and government locally, nationally, and globally. Analysis and Evaluation Well-informed evaluation of the way in which economic decisions involve costs and benefits. (i) What are supply management policies? Supply management policies are micro economic reform that aim to increase productivity and reduce cost of production. (1 mark) Communication Consistent, clear and appropriate use of economic terminology. (ii) State one example of a supply management policy. Competition policy. (1 mark) (iii) Refer to the following AD-AS diagram, which has been reproduced from the economic report on page 6. It represents the country’s economic conditions in September 2008. Knowledge and Understanding Focused application of complex economic concepts principles, models and skills. On the diagram above, illustrate the long-term impact on this economy of implementing supply management policies. (1 mark) Page 4 of 6 Stage 2 Economics annotated student work for use from 2011 493699177 (October 2010) © SACE Board of South Australia 2010 (iv) State one example of a short-term cost of implementing supply management policies. Unemployment, as structural unemployment are likely to occur when structural change in implementing the supply management policies. (1 mark) (g) Explain why each of the following is regarded as a problem of economic management: (i) Limitations of available measurement. The available measurement is limited, the picture of the whole economy is uncertain. The exact magnitude of policy and mix of policy used will not adjust the economy to the desire situation to achieve macroeconomic objectives. (2 marks) Analysis and Evaluation Well-informed evaluation of the way in which economic decisions involve costs and benefits. Analysis and Evaluation Perceptive evaluation of the effects of interdependence on individuals, business, and government locally, nationally, and globally. (ii) Institutional and political factors. Institutional and political factors will cause problem to economic management. Example, during election, the government might employ expansionary fiscal policy to win votes but instead it is not a desirable policy to be implemented on that time. (2 marks) Communication Consistent, clear and appropriate use of correct economic terminology. Additional comments A review of the student’s work provides evidence of: Page 5 of 6 Comprehensive knowledge, in-depth understanding, and focused application of complex economic concepts, principles, models, and skills. (Knowledge and Understanding) Perceptive evaluation of the effects of interdependence on individuals, business, and government locally, nationally, and globally. (Analysis and Evaluation) Consistent, clear, and appropriate use of correct economic terminology. (Communication) Stage 2 Economics annotated student work for use from 2011 493699177 (October 2010) © SACE Board of South Australia 2010 Performance Standards for Stage 2 Economics A Knowledge and Understanding Analysis and Evaluation Communication Comprehensive knowledge, in-depth understanding, and focused application of complex economic concepts, principles, models, and skills. Astute and logical analysis and evaluation of economic issues and events (past and current) using economic models and the skills of economic inquiry. Sophisticated communication of economic principles and models, and complex concepts. Perceptive evaluation of the effects of interdependence on individuals, business, and government locally, nationally, and globally. Consistent, clear, and appropriate use of correct economic terminology. Comprehensive and well-informed understanding of the role of economic systems in dealing with the economic problem of scarcity. Incisive analysis and evaluation of the impact of economic change locally, nationally, and globally. Insightful and well-informed evaluation of the way in which economic decisions involve costs and benefits. B Some depth of knowledge and understanding, and focused application, of a variety of economic concepts, principles, models, and skills. Well-informed understanding of the role of economic systems in dealing with the economic problem of scarcity. Well-considered analysis and evaluation of economic issues and events (past and current) using economic models and the skills of economic inquiry. Clear and accurate communication of economic principles and models, and a variety of concepts. Well-considered evaluation of the effects of interdependence on individuals, business, and government locally, nationally, and globally. Clear and appropriate use of economic terminology. Well-informed analysis and evaluation of the impact of economic change locally, nationally, and globally. Well-informed evaluation of the way in which economic decisions involve costs and benefits. C Considered knowledge and understanding, and competent application, of economic concepts, principles, models, and skills. Informed understanding of the role of economic systems in dealing with the economic problem of scarcity. Considered analysis and evaluation of economic issues and events (past and current) using economic models and the skills of economic inquiry. Competent communication of some economic principles, models, and concepts. Considered evaluation of the effects of interdependence on individuals, business, and government locally, nationally, and globally. Appropriate use of economic terminology. Informed analysis and evaluation of the impact of economic change locally, nationally, and globally. Informed evaluation of the way in which economic decisions involve costs and benefits. D Superficial understanding and partial application of some basic economic concepts, principles, models, and skills. Basic consideration and description of one or more economic issues and/or events (past and current) using some skills of economic inquiry. Some recognition of the role of economic systems in dealing with the economic problem of scarcity. Basic consideration and description of one or more of the effects of interdependence on individuals, business, and government locally, nationally, and globally. Communication of some basic economic principles, models, and concepts. Some appropriate use of some economic terminology, with inconsistencies. Recognition of aspects of the impact of economic change locally, nationally, and globally. Some awareness of the way in which economic decisions involve costs and benefits. E Identification and attempted application of one or more basic economic concepts, principles, models, or skills. Emerging awareness of one or more economic issues or events (past and current), with limited use of skills of economic inquiry. Attempted communication of one or more simple economic principles, models, or concepts. Limited recognition of the role of economic systems in dealing with the economic problem of scarcity. Limited recognition of one or more of the effects of interdependence on individuals, business, and government locally, nationally, and globally. Limited use of economic terminology. Emerging recognition of an aspect of the impact of economic change locally, nationally, and globally. Limited awareness of the way in which economic decisions involve costs and benefits. Page 6 of 6 Stage 2 Economics annotated student work for use from 2011 493699177 (October 2010) © SACE Board of South Australia 2010