Download ECN315111 Assessment Report

T A S M A N I A N
Economics
C E R T I F I C A T E
Subject Code: ECN315111
O F
2011 Assessment Report
E D U C A T I O N
TASMANIAN QUALIFICATIONS AUTHORITY
Question 1
•
•
•
•
The economic problem is how a society can satisfy unlimited wants with the limited
resources available.
Resources are allocated by making choices i.e we rank our preferences by lowest
opportunity cost
Some wants will remain unsatisfied
Could mention the four key economic issues/questions
Question 2
A pure market has no government intervention. Resources are allocated by the prices
mechanism (demand & supply determine price and quantity traded).
Characteristics include:
•
•
Private ownership of resources
Self-interest/profit motive
In a planned economy government planners allocate resources, based on needs of society.
Characteristics include:
•
•
Public ownership of resources
Lack of material incentive
Question 3
Market failure occurs when the price mechanism takes account of the private benefits and
costs of production to consumers and producers, but fails to take into account indirect or
social costs.
Examples of market failure include:
- failure to provide necessary goods and services e.g. public hospitals
-failure in income distribution
- negative externalities
- abuse of market power
- wide fluctuations in the business cycle
2011 Assessment Report
Economics
2
Subject Code: ECN315111
Question 4
•
Demand is the quantity of a particular good or service that consumers are willing and
able to purchase at various prices at a given point in time.
•
There may be an individual or market demand.
•
The law of demand states that quantity demanded and price are inversely related.
•
Factors which affect demand include:
price of the good (law of demand)
income
tastes and preferences
price of substitutes & complements
Question 5
Economic development is a broad measure of the welfare of a nation that includes indicators
of health, education and environmental quality as well as material standards of living (as
measured by the traditional measure economic growth: percentage increase in real GDP).
The HDI is a measure of economic development devised by the UN Development Program.
HDI takes account of:
•
•
•
Life expectancy at birth
Levels of educational attainment
Materials standards of living (GDP per capita)
Question 6
The MPC is the proportion of each extra dollar that is spent on consumer products and
services.
The multiplier, k, is the greater than proportional increase in national income resulting from
an increase in aggregate demand.
They are related by the formula: k= 1/(1-mpc) so that the larger the MPC, the larger the
multiplier.
2011 Assessment Report
Economics
3
Subject Code: ECN315111
Question 7
•
Sustainable economic growth (% increase in real GDP) is growth over the longer term.
•
It is economic growth which takes into account the need for low inflation, low
unemployment and consideration of environmental effects.
•
It is growth supported by macroeconomic policies (fiscal and monetary) and
microeconomic reform.
Question 8
Structural unemployment is unemployment caused by a mismatch of skills arising from
changes in technology or changes in the pattern of demand. E.g impact of on-line banking on
the number of bank tellers
Cyclical unemployment refers to unemployment created by a downturn in the business cycle.
E.g increased unemployment in many countries experienced as a result of the Global
Financial Crisis.
Question 9
The Current Account Deficit (CAD) occurs when the debits in the Current Account (from
imports and income payments to overseas) are greater than the credits (exports and income
receipts from abroad).
The budget deficit is a situation where the government’s expenditure exceeds its revenue
(from taxation, asset sales and other sources)
Question 10
•
•
Opportunity cost is the value of the next best forgone alternative.
If decide to mine the forest, then the opportunity cost of mining is either the value of
the forest industry or the value of the forest to the tourism industry, whichever is larger.
Question 11
•
o
Using total outlay method;
If the revenue remains unchanged, demand is unit elastic.
2011 Assessment Report
Economics
4
Subject Code: ECN315111
At point
At point
•
Since the rectangles are equal, revenue is equal and demand is unit elastic.
Question 12
Effect (a): Supply curve shifts left due to a 10% increase in aviation fuel which increases the
cost of operating a plane.
Effect (b): Since a seat on the Spirit of Tasmania is a substitute for transport to Melbourne by
plane, an increase in the price of a seat on the Spirit of Tasmania leads to a shift to the right
in the demand curve for next-day flights.
•
•
Total effect on price is to increase above $165.
Total effect on quantity uncertain.
Market for Next-­‐Day Flights from Hobart to Melbourne
price of ticket ($ / seat )
S1
S0
(a )
P2
$165
(b)
D0
0
Q2 Q1
D1
Q (seats )
2011 Assessment Report
Economics
5
Subject Code: ECN315111
Question 13
Effect (a): A new coal-fired power station is built in Sandy Bay, which increases the demand
for pollution permits.
Effect (b): An existing coal-fired power station invests in a new cleaner technology that does
not produce as much pollution, therefore reducing the demand for pollution permits.
$ price / tonne
(a )
(b)
23
S
D
0
Qb
Qe
Qa
Q (tonnes)
Question 14
Effect (a): A factor that shifts supply left (e.g. an increase in the cost of an input) means the
price ceiling will constrain the price to
and quantity to .
Effect (b): A factor that shifts demand to the right (e.g. an increase in the price of a
substituted good) will result in price ceiling
and quantity
2011 Assessment Report
Economics
6
Subject Code: ECN315111
(a )
P
S
Pmax
Pe
(b)
D
Qb
Qe Qa
Q
Question 15
Initially domestic supply is
and the number of apples imported is
to $950, then domestic quantity decreases to
and imports increase to
$950 < domestic supply intercept, then only imports are consumed.
If P decreases
NOTE: If
$ price / tonne
S Domestic
Pw
SWorld
$950
D
0
Q1D
Q0D
Q∗
Q1
Q
2011 Assessment Report
Economics
7
Subject Code: ECN315111
Question 16
•
•
•
Between 17/5/11 and 21/5/11, the ER appreciates, making imports cheaper (value of
imports likely to decrease).
Between 21/5/11 and 27/5/11 ER depreciates, making imports more expensive (value
of imports likely to increase).
Effect of ER on demand for imports may be important.
Question 17
•
In theory, welfare payments are an automatic stabiliser since in a boom, incomes and
employment increase so welfare payments decrease; whereas during a downturn, income and
employment decrease so welfare payments increase: that is, counter-cyclical.
•
Between 1/9/08 and 1/6/09 the Australian economy experienced a downturn, and
welfare payments can be seen to increase over the same period.
Question 18
Gov Rev
Gov Exp
Surplus/deficit
•
•
With tax
$378bn
$363bn
+$15bn
Without tax
$315bn
$330bn
-$15bn
Central bank’s objectives are to achieve economic growth and maintain price stability.
Tax would result in 3% less growth in real GDP and 3% more inflation (CPI growth).
Hence CB would not support the tax policy.
Question 19
Candidates were expected to briefly define market failure indicating why governments do
intervene.
Market failure occurs where the free operation of markets results in undesirable outcomes in
areas such as resource allocation, concentration and abuse of market power, externalities, the
business cycle and income distribution. Governments intervene by regulating, redistributing,
producing and managing.
A wide range of negative consequences of inappropriate market interference were addressed
by candidates. These included
•
Price ceiling/maximum too low leading to shortages
•
Price floor/minimum too high leading to surpluses
2011 Assessment Report
Economics
8
Subject Code: ECN315111
•
•
•
•
•
Incorrect forecasts leading to incorrect policy to stabilise the economy
The opportunity cost of unnecessary intervention eg to produce goods and services or
reduce inequality. A number of candidates referred to technical and allocative
efficiency.
Incorrect taxes applied, eg to prevent pollution can impact on economic growth and
cost push inflation. Some candidates included diagrams of supply and demand with
supply curves showing private cost and social and private costs to illustrate the impact.
Incorrectly applied subsidies and tariffs reduce choice and use resources inefficiently.
A small number of candidates discussed the problems caused by interfering in markets
in such a way that the normal competition and efficiency benefits of markets were
diminished.
A top answer could include one thorough explanation or several briefer explanations of
problems.
Question 20
There were several successful approaches to this question.
1.
2.
3.
A general approach showing impacts on firms, individual and, governments (see text
6.4)
Specifically referring to problems of tariffs and subsidies (text 2.3)
Looking at the reasons for protection (text 2.2) and listing problems associated with
reducing protection such as enabling dumping, damaging infant industries and reducing
self-sufficiency.
High quality responses were accurate, showed clear linkages in thinking and good detail. For
example reduced protection ‘causing unemployment’ was not as well rewarded as ‘reduced
demand for some goods and services leads to reduced demand for labour (derived demand)
causing short term structural unemployment’.
Question 21
Strong responses briefly defined exchange rates and stated floating exchange rates were
determined by supply and demand. Appreciation and depreciation were also quickly defined.
Most candidates explained that an appreciation of the dollar causes problems for exporters
and that a depreciation causes problems for importers. Few candidates explained the
problems thoroughly, for example, what are the consequences of reduced demand for exports
or increased costs of imports?
2011 Assessment Report
Economics
9
Subject Code: ECN315111
Other points raised included:
•
•
Volatility causing problems of uncertainty which in turn may lead to lower investment.
impact on producers using imported inputs
Question 22
This question asked the candidates to explain, in terms of the circular flow of income model,
how an economy returns to an equilibrium position following an increase in the taxation
leakage. A contractionary situation.
It required an explanation of the process whereby the initial fall in consumption expenditure (
caused by the taxation increase) sponsors a fall in incomes leading to further fall in
consumption, savings , taxation and expenditure on imports (S,T and M in the model).
The process will continue until an equilibrium is reached at a reduced level, where S,T and M
will once again equal I,G and X.
The question was done very well by relatively few candidates. Some answers were
exceptional showing a clear grasp of the concepts.
The very large majority of candidates expressed the view that in order to balance the increase
in taxation (T), government expenditure must increase (G) and hence there is a return to
‘equilibrium’ as G now equalled T.
Candidates were rewarded for demonstrating knowledge of the circular flow model and the
role of leakages and injections, but needed to demonstrate their understanding of the process
by which the economy moved from one equilibrium position to another to achieve high
marks.
That so few candidates gained high marks for this question, which is relatively straight
forward, prompted the markers to contemplate whether the wording of the question – in
particular ‘explain how market mechanisms in an economy can solve an imbalance…’ – was
an issue.
Question 23
This question was straight forward and well done by many candidates.
Better answers discussed the meaning of economic recession- either in the global or
Australian context- and went on to identify appropriate fiscal and monetary policy actions
which addressed the situation.
2011 Assessment Report
Economics
10
Subject Code: ECN315111
Most candidates gave appropriate examples such as the stimulus package, education funding
and so on.
Question 24
Explain the role of monetary policy in managing demand-pull inflation and
unemployment.
Candidates needed to show that they understood demand-pull inflation and then make the
link between the RBA policies and Aggregate Demand (AD).
Better answers were able to define demand-pull inflation and explain how the RBA can use
monetary policy to manipulate the interest rate, which affects the level of AD. An increase in
the cash rate will lead to higher interest rates, and subsequently reduce consumption and
investment expenditure, and so dampen AD.
Reduced AD means a lower level of output, which may result in a reduced demand for labour
and consequently an increase in unemployment.
Only a few candidates were able to mention the policy conflict between managing demand
pull inflation and unemployment.
Weaker candidates often had little understanding of demand-pull inflation. They were not
able to link the RBA’s monetary policy to aggregate demand. They showed very little
understanding of the transmission mechanism.
It should be noted that many candidates spent a lot of time explaining Domestic Market
Operations in detail which is not required in the new course.
Section E
Most candidates chose to answer questions 25 and 27.
Criterion 7 = analyse and evaluate. Need to discuss both sides of an issue where possible.
Question 25
a)
Using an appropriate model’ caused problems for many candidates. Candidates
generally used supply and demand curves or the circular flow model to explain lower
growth. The best model was aggregate demand and supply curves. Aggregate supply
decreases and the curve moves to the left with the introduction of the carbon tax. The
general level of prices increases (higher inflation) and the quantity of goods and
services produced in the economy decreases (lower growth).
2011 Assessment Report
Economics
11
Subject Code: ECN315111
b)
c)
d)
e)
Good answers gave definitions of opportunity cost and underlined the fact that the
government has to make a choice between higher growth or protecting the
environment. The opportunity cost of having a carbon price is the higher growth
foregone rather than lower growth.
Candidates who explained 3 – 4 points rather than merely listing were rewarded here.
Candidates generally answered this question well although some answers focussed too
much in the problems caused by unemployment. Candidates should note that a
reduction in growth does not necessarily mean an economy is in recession.
Higher levels of cyclical and structural unemployment were expected. Better answers
differentiated between the short term and long term and referred to likely effect of
government offsets mentioned in the stimulus. These answers showed a level of
analysis and evaluation required by criterion 7. Weaker answers used the terms cyclical
and structural unemployment without demonstrating understanding of the terms. Other
candidates limited their discussion to the energy sector alone rather than analysing
energy as a cost in other industries.
Analysis and evaluation demanded that candidates think about how the RBA could
respond and explain why. Candidates who considered a ‘spike’ being short term and the
effect of government offsets on inflation gave the best answers.
Question 26
Only 21 candidates chose to attempt question 26. This seems to reflect the fact that many
candidates find CAD and associated issues quite difficult to grasp. Candidates who were
prepared for this question scored well.
The stimulus required careful reading to distinguish between CAD in the December quarter
and longer term trends.
a)
b)
c)
d)
e)
Candidates were required to identify the net income component of the current account.
Foreign investors in Australia received larger dividends and other income in the
quarter. Better answers talked about greater outflows than inflows and why dividends
and other income are paid.
In the context of a relatively low CAD, more domestic saving means less foreign
borrowing and asset sales are needed to fund investment. This will reduce CAD by
reducing net incomes figure. This may also mean that consumers are saving more than
spending and imports will decrease, decreasing the net exports figure.
Floods in Queensland will decrease exports of commodities and agricultural products
and increase the deficit on the balance of goods and services. Some candidates
suggested the government may need to borrow to fund repair to infrastructure and so
net incomes would contribute to a higher CAD in this case too.
For full marks candidates needed to discuss both sides of the issue.
Candidates needed to identify and discuss effects on imports, exports and debt
servicing.
2011 Assessment Report
Economics
12
Subject Code: ECN315111
Question 27
a)
b)
c)
d)
e)
Candidates received marks if they could explain how the unemployment rate was
calculated. Some candidates were under the misapprehension that 23 400 jobs had been
created but were not yet filled.
Structural unemployment increases – less unemployed in mining, more unemployed in
non-resource areas. Change in the non-resource sector could be due to less international
competitiveness, while cyclical factors may also have contributed.
The mining boom and increasing employment indicates increasing incomes and
consumption and AD (C = a component of AD). The RBA might increase the cash rate
as this could lead to demand-pull inflation. HOWEVER, there is no indication in the
article that inflation is a problem and the unemployment rate has not changed. With
non-resource industries struggling in a 2 speed economy the RBA might consider
stimulating demand in these industries. Monetary policy is a blunt instrument and, with
such big structural change occurring, the RBA might want to ‘wait and see’.
The increasing AUD reduces Australia’s international competitiveness. This reduces
AD since there is an increase in M and a reduction in X. Some candidates also
discussed the implications for foreign investment in Australia. Candidates needed to
specifically address how these factors might impede job growth.
The new tax on mining profits makes future investment in mining less desirable.
Together with the high Australian dollar, this could limit growth in the mining sector.
The government is able to redistribute tax to other areas of the economy. Candidates
need to relate RBA policies to these new developments.
2011 Assessment Report
TASMANIAN QUALIFICATIONS AUTHORITY
ECN315111 Economics
ASSES SMENT PANEL REPORT
Award Distribution
EA
HA
(48)
This year
11% (18)
28%
Last year
t0% Q3\
2t% (47)
tL%
Previous 5 years
Previous 5 years
(all examined
subjects)
CA
$L)
SA
2s% @2)
169
46% (J0L\
22% (49)
220
20%
39%
30%
9%
23%
39%
28%
tL%
L9%
40%
30%
36%
Last year (all
examined
subjects)
Student Distribution (SA or better)
Male
Female
This year
sL% (87)
49%
Last year
Previous 5 years
Total
Year 11
Year 12
(L47)
(82)
L3%
Q2)
87%
61% (13s)
3e% (8s)
1.L%
(24)
89% (196)
63%
37%
t7%
83%