Download TOPic 4 - CaRLO Economics

TOPIC 4
2015
2014
2013
Candidates showed strength in these areas:
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explaining the effects of current macroeconomic policy on both economic growth and
inflation in Australia
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integrating economic terms, concepts and theory related to the use of macroeconomic
policy mix
Candidates need to improve in these areas:
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answering the question rather than writing about a key concept such as macroeconomic
policy
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integrating data from the stimulus relating to the effects of the macroeconomic policy
mix
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understanding the difference between describing types of policy and clearly explaining
the effects of policy on both economic growth and inflation
2012
Question 28
Answers could include:
Economic objectives
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Economic growth and quality of life
Full employment
Price stability
Environmental sustainability
Distribution of income
• Conflicting economic objectives Economic policies (students do not have to
discuss all policies)
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Fiscal policy -Automatic stabiliser -Discretionary budget stimulus
Monetary policy -Changing interest rates/market operations -Role of banks in passing on
interest rates
Labour market policy/Income policy -Fair Work Australia -Decentralisation of the labour
market -Education and Training programs
Microeconomic policies -Deregulation -Competition policies -Innovation and industry
policies
Environmental management policies -Regulation -Market-based policies – the carbon tax
Effectiveness criteria
- Time lags
- Political constraints
- Global influences, business cycles, exchange rates, economic shocks
- Did the policy achieve the objectives?
- Successful implementation
- Policy mix
Question 28
In better responses, candidates provided a clear and comprehensive description of the
government’s economic objectives. They demonstrated a strong understanding of a range of
policies the government uses to achieve these objectives, such as fiscal and monetary
policies and microeconomic policies.
These candidates extensively discussed the effectiveness of the government’s use of these
policies in achieving their objectives, often supporting their arguments by drawing on
contemporary examples and through the aid of correctly labelled and explained diagrams and
data. In these responses, the candidates made substantial reference to the suitability and
limitations of each type of policy.
In weaker responses, candidates tended to be more descriptive and general in nature. They
described some economic objectives and government policies. These candidates made little
or no use of data or reference to current government policies or policy objectives, and
provided either superficial or no discussion of the effectiveness of these policies.
These candidates sometimes made use of diagrams, but their explanations of these diagrams
were generally inaccurate, inadequate or non-existent.
2011
Question 25
Answers could include:
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Economic growth rates
Progressive income taxation
Unemployment benefits
Welfare payments
Company taxation
Business cycle
Discretionary and non-discretionary changes in fiscal policy
Surplus and deficit budgets
Automatic stabilisers
Expansionary and contractionary stance
GFC
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Fiscal stimulus
Income inequality
Gini coefficient
Booms and recessions
Inflationary pressures
Counter-cyclical policy
Fiscal outcome
Underlying cash outcome
Headline cash outcome
Multiplier
Aggregate demand
Changes in consumption and investment
Question 25
Most candidates provided an adequate distinction between contractionary and expansionary
fiscal policy. Better responses distinguished between the changing stance of fiscal policy and
simplistic budget deficit/surplus analysis. Many responses merely stated that a budget
deficit/surplus is expansionary/contractionary without any explanation or reasoning as to how
this occurs.
Better responses integrated solid theory on how fiscal policy affects economic activity and
income distribution with application to the current budget and reference to the stimulus
material. Weaker responses tended to only describe aspects of the current Commonwealth
Government budget, providing little or no reference to theory or explanation as to how these
aspects were relevant to answering the question.
Many responses made a clear distinction between discretionary and non-discretionary fiscal
policy, relating this to the fiscal stimulus package put in place by the Rudd Government in
2008 in response to the GFC. Better responses linked the effects of automatic stabilisers
(social security and progressive income taxes) to income distribution. They distinguished
between the non-discretionary effects of automatic stabilisers and the effects of discretionary
changes in tax rates, unemployment benefits and pensions.
Better responses were well structured and gave equal weighting to the effects of fiscal policy
on both economic activity and income distribution. The use of relevant and correctly
explained diagrams was a feature of such responses. Some weaker responses were
characterised by incorrectly drawn and/or poorly explained diagrams, or diagrams that were
not adequately linked to answering the question.
In some better responses, candidates referred to the twin deficits hypothesis, the effects of
fiscal policy on currency exchange rates (via its effect on economic activity), the balanced
budget multiplier, and the effects of various specific expenditure initiatives in education and
other areas.
Some weaker responses seemed to be prepared responses, which resulted in the candidates
not adequately addressing the question.
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Question 26
Answers could include:
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Cash rate
Domestic Market Operations
Consumer Price Index (CPI)
Demand–pull inflation
Cost–push inflation
Aggregate demand
Full employment
Target inflation rate
Sustained level of economic growth
Reserve Bank of Australia (RBA)
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Exchange rate changes
Money supply
Short-term money market
Exchange Settlement Accounts
Secondhand Commonwealth Government Securities
Transmission mechanism
Multiplier
Interest rates
Time lag
Expansionary, contractionary and neutral stance
Inflationary expectations
Wages growth
External forces
Cyclical unemployment
Question 26
In better responses, candidates wrote specifically on the links between the changes in the
cash rate and the corresponding effects on both inflation and unemployment. These
candidates often referred to the various channels of the transmission mechanism, including
consumption, savings, investment, cash flow, expectations, exchange rate and asset prices.
They also considered the trade-offs between inflation and unemployment using the short- and
long-run Phillips curves, and referred to concepts such as cyclical unemployment and the
NAIRU (Non-Accelerating Inflation Rate of Unemployment).
In better responses, candidates referred to the Reserve Bank of Australia’s (RBA) inflation
target, and differentiation was made between the headline and underlying rates of inflation.
Use of the stimulus was sound and often led to a discussion of the problems associated with
monetary policy, with particular reference to both inflation and unemployment. Better
responses integrated economic theory with both the stimulus material and their own data,
and considered the three most recent key phases of the Australian economy in detail: preGFC, the GFC itself, and post-GFC to the present day. These responses included key
definitions and were well structured and sustained. Relevant diagrams were used, which were
labelled clearly and carefully explained.
In weaker responses, candidates answered the question in a much more descriptive, general
manner, often with too much emphasis on the mechanics of domestic market operations. The
connection between the cash rate and inflation was treated superficially, and usually only
referred to aggregated demand in simple terms without specifically working through the
various links of the transmission mechanism. Unemployment was often only treated as a
secondary issue. The integration of the stimulus material into the responses was also general
and often not related to the question. Many candidates simply chose to copy out parts of the
quote provided without any further discussion. Diagrams tended to be poorly drawn and not
explained. The use of statistics, from both the stimulus and candidates’ own knowledge, was
similarly limited.
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Question 27
Answers could include:
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Supply side economics
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Environmental targets
Allocative technical and dynamic efficiency
Structural change
Deregulation, financial sector, agricultural industries
National Competition Policy
Reforms to public trading enterprises
Privatisation
Corporatisation
Economic growth
Living standards
Labour market reforms
Productivity growth
Lower unemployment in the long term
COAG reform agenda
Long-term benefits
Short-term costs
External balance
Australian Competition and Consumer Commission (ACCC)
International competitiveness
Lower costs of production
Question 27
Most responses provided a clear definition of microeconomic reform (MER). Many contained
the definition of MER with examples, and provided a diagram showing the increase of
aggregate supply arising from MER. The majority of candidates had a good understanding of
the goals of MER and of the historical developments in microeconomic reform. These
responses were distinguished by a thoughtful integration of economic concepts pertaining to
MER. They defined microeconomic reform in relation to increases in aggregate supply and
allocative, technical and dynamic efficiency. They clearly distinguished between product and
factor markets, and discussed a range of MERs and their effects on these markets. They also
gave a variety of examples of the effect of MER on markets, including linking increased wages
to increased productivity, increased human capital, increased competition, decreased prices
and costs, innovation, structural change and structural unemployment. Such responses often
highlighted the effect of a microeconomic policy initiative on, say, a factor market, and how
the reformed factor market subsequently affected a product market.
In weaker responses, candidates defined MER and suggested examples of microeconomic
reforms; however, they needed to distinguish between factor and product markets. These
responses generally provided a discussion of specific examples of microeconomic reform and
their effects on the economy as opposed to product and factor markets. They also provided
general information pertaining to MER, and sometimes provided a limited discussion on the
benefits and costs of microeconomic reform in relation to the Australian economy.
2010
Question 25
In better responses, candidates provided a comprehensive discussion of the reasons for the
Australian government’s formulation of policies to manage the environment. Economic
concerns about market failure, negative externalities, free riders, common property (tragedy
of the commons), and ecological sustainable development featured prominently in these
responses through a discussion of relevant microeconomic theory.
Discussion about the price mechanism and the market failure to price environmental
resources at their social or opportunity cost rather than allowing a private cost regime to
prevail was typical. Government policies to address this failure through market-based
mechanisms such as the ETS approach, a taxation regime such as the carbon tax, or some
form of regulatory regime (direct intervention) was also evident. In these responses,
candidates typically made reference to recent approaches to environmental policy, such as
the use of renewable energy targets and subsidies for low-emission technologies as preferred
strategies to the issue of carbon pollution.
In better responses, candidates also provided a macroeconomic approach to the question by
providing a comprehensive discussion of the impacts of the Australian government’s
formulation of policies to manage the environment. Economic concerns about the impacts on
economic growth, inflation, unemployment and external stability as a result of government
environmental management policies, were discussed. Budgetary impacts of such policies
were also addressed.
Accurate and relevant diagrams commonly supported these better responses.
In weaker responses, candidates provided a description of some economic concerns faced by
governments when formulating environmental management policies. These candidates
described economic concerns about the impact of government environmental management
policies and were general in nature.
In weaker responses, candidates often referred to relevant microeconomic theory such as
free riders, common property (tragedy of the commons) and externalities but failed to relate
these sources of market failure to various policy instruments appropriate for their correction.
They provided a general description of more recent 'topical' government programs or
initiatives directed towards environmental issues such as 'cash for clunkers’, ceiling insulation
batts, the option of a carbon tax and direct intervention type programs.
2009
Question 25
The majority of responses made use of or referred to the economic information provided.
Better responses identified and explained a range of microeconomic reforms implemented in
Australia over time. These responses typically developed clear and comprehensive arguments
linking the microeconomic reforms to their positive and/or negative impacts on Australia’s
economic performance. A common feature of these responses was the incorporation of
relevant economic theory and diagrams related to changes in aggregate supply and prices.
Better responses typically referred to both the short-term and long-term impacts of
microeconomic reform on Australia’s economic performance. These responses often linked
these changes over time to the data provided in the stimulus. They identified and explained
the impacts on internal economic performance, such as lower inflation and more sustainable
economic growth, as well as improved international competitiveness. These responses
typically demonstrated sophisticated literacy skills, synthesising arguments in a sustained and
well-structured response.
Weaker responses were typically general, simply describing different types of microeconomic
reform. These responses sometimes offered a limited explanation of the link between
microeconomic reforms and economic performance. For example, they may have stated that
microeconomic reforms reduced inflation but did not demonstrate an understanding of how
particular reforms might have increased efficiency for businesses and lowering their costs,
which may translate into lower prices. Some candidates relied on the stimulus material too
much, rather than using it to support particular arguments. These responses typically made
little or no reference to relevant economic theory.
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Question 27
The best responses demonstrated an ability to identify and explain relationships between the
macroeconomic policy mix and the issues of inflation and unemployment in the Australian
economy, and to draw out the implications of these.
Better responses gave a balanced coverage of both monetary and fiscal policies as the main
components of the government’s macroeconomic policy mix and the impacts of these policies
on the issues of inflation and unemployment. They provided clearly described relationships
between these policies and issues, and many included relevant and well-labelled diagrams
such as the Phillips curve and Keynesian diagrams. Many also looked at the limitations of the
use of monetary and fiscal policies in addressing inflation and unemployment.
Most of these responses made detailed and accurate reference to the impact of the global
financial crisis on the Australian economy and provided a substantial quantity of data in
relation to this. Some responses also made reference to the use of the macroeconomic policy
mix in managing the issues of inflation and unemployment prior to the global financial crisis.
A small number of candidates decided to leave monetary policy out of their response, as it is
administered by the Reserve Bank of Australia, not the Federal Government.
Many weaker responses did not provide a balanced coverage of the policies (monetary and
fiscal) or the impact of these policies on the issues (inflation and unemployment). Many did
not demonstrate a clear link or explanation as to how the policies impacted on the issues. In
addition, these candidates tended to provide generalised responses that lacked specific detail
or accurate descriptions as to the operation of monetary and fiscal policies in the Australian
economy.