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Question/Answer Booklet ECONOMICS 3B SEMESTER ONE EXAMINATION Student Name: ____________________________________________ Time allowed for this paper Reading time before commencing work: ten minutes Working time for paper: two and a half hours Materials required/recommended for this paper To be provided by the supervisor This Question/Answer Booklet Multiple-choice Answer Sheet To be provided by the candidate Standard items: pens, pencils, eraser, correction fluid, ruler, highlighters Special items: non-programmable calculators satisfying the conditions set by the Curriculum Council for this course. Important note to candidates No other items may be taken into the examination room. It is your responsibility to ensure that you do not have any unauthorised notes or other items of a non-personal nature in the examination room. If you have any unauthorised material with you, hand it to the supervisor before reading any further. 1 Structure of this paper Section Number of questions available Number of questions to be answered Suggested working time 24 24 3 2 Marks available Percentage of exam 30 24 30 3 65-75 36 45 1 45 20 25 Total 100 (minutes) Section One: Multiple-choice Section Two: Data interpretation/Short response Section Three: Extended response Instructions to candidates 1. Answer the questions according to the following instructions. Section One: Answer all questions on the separate Multiple-choice Answer Sheet provided. For each question shade the box to indicate your answer. Use only a blue or black pen to shade the boxes. If you make a mistake, place a cross through that square, do not erase or use correction fluid, and shade your new answer. Marks will not be deducted for incorrect answers. No marks will be given if more than one answer is completed for any question. Sections Two and Three: Write answers in this Question/Answer Booklet. 2. You must be careful to confine your responses to the specific questions asked and to follow any instructions that are specific to a particular question. 3. Spare pages are included at the end of this booklet. They can be used for planning your responses and/or as additional space if required to continue an answer. Planning: If you use the spare pages for planning, indicate this clearly at the top of the page. Continuing an answer: If you need to use the space to continue an answer, indicate in the original answer space where the answer is continued, i.e. give the page number. Fill in the number of the question(s) that you are continuing to answer at the top of the page. 2 SECTION ONE: MULTIPLE-CHOICE 30% (24 Marks) This section has 24 questions. Answer all questions on the separate Multiple-choice Answer Sheet provided. For each question shade the box to indicate your answer. Use only a blue or black pen to shade the boxes. If you make a mistake, place a cross through that square, do not erase or use correction fluid, and shade your new answer. Marks will not be deducted for incorrect answers. No marks will be given if more than one answer is completed for any question. Suggested working time for this section is 30 - 35 minutes. 1. Macroeconomic equilibrium in Australia occurs when a) b) c) d) 2. total spending equals total output. total income equals total output. supply equals demand savings equal investment. This question relates to the graph below. The marginal propensity to consume is Consumer expenditure C C1 Real disposable income a) b) c) d) the slope of the consumption function the value C1 the reciprocal of the marginal propensity to save. the reciprocal of the spending multiplier. 3 3. Macroeconomic equilibrium in Australia occurs when a) b) c) d) 4. Which of the following would be most likely to cause a boom in the business cycle? a) b) c) d) 5. A rise in the terms of trade The rise in the level of unemployment Rising inflation A rise in replacement investment An increase in aggregate demand will result in a) b) c) d) 6. total spending equals total output. total income equals total output. supply equals demand savings equal investment. higher prices and slower growth in real GDP. higher real GDP and higher interest rates. lower interest rates and higher inflation. higher inflation and job creation. This question relates to the graph below. AE AE 10000 8800 8000 10000 Y=O The graph has a marginal propensity to consume of _______________ and, therefore, a multiplier of _________________. The missing figures are, respectively, 4 a) b) c) d) 7. In a trough, a balanced budget would: a) b) c) d) 8. a decrease in government tax revenue an increase in tax collections during a boom an increase in government tariff revenue a reduction in marginal income tax rates A significant problem with monetary policy is that a) b) c) d) 10. increase the severity of the slow-down in economic activity. have a long implementation lag. assist in repaying past government debt interfere with the political cycle. Which one of the following is an example of discretionary fiscal policy? a) b) c) d) 9. 0.6, 1.67 0.6, 2.5 0.8, 5 0.8, 2.5 the Reserve Bank of Australia can be influenced by the Treasurer. interest rates can only be changed by 0.25%. consumers do not react to interest rate increases during a boom. it may not be effective during a recession. Contractionary monetary policy is most likely to be used when a) b) c) d) inflation is high, unemployment is low and consumer spending is high. inflation is low, unemployment is high and consumer spending is low. inflation is high, unemployment is high and consumer spending is low. the current account deficit is high, unemployment is low and consumer spending is high. 11. An aim of microeconomic reform is to a) increase wages growth. b) increase aggregate demand. c) lower firms’ production costs. d) eliminate excess capacity. 12. Which one of the following statements about productivity is correct? a) b) c) d) Productivity growth always results from capital investment. Labour productivity is the best measure of productivity growth. Productivity growth is measured by increases in the output of the economy. Productivity growth results from capital deepening. 5 13. The federal government’s (underlying cash) deficit for 2009-10 was planned to be $40.1 billion. This compared to an actual budget outcome of –$57.8 billion for 2009–10. The change in the forecasted Budget outcome was, in part, due to: a) b) c) d) 14. A decrease in the number of home loan approvals is: a) b) c) d) 15. an increase in income tax rates. discretionary fiscal policy. automatic stabilisers. a decrease in the unemployment rate. A leading indicator. A lagging indicator. A coincidental indicator. An adverse indicator. In June 2009, the unemployment rate was 5.8% and fell to 5.1% by June 2010. This decrease in the unemployment rate could be due to: a) the increase in the cash rate from 3.00% to 4.50% over the same period. b) the increase in the value of the Australian dollar from 81 US cents to 90 US cents over the same period. c) the increase in the inflation rate from 1.5% to 2.1% over the same period. d) the increase in the rate of economic growth from 1.0% to 2.8% over the same period. 16. The Reserve Bank of Australia is likely to increase interest rates if: a) b) c) d) 17. If the consumer price index (CPI) increases from 120 to 126 the inflation rate was a) b) c) d) 18. there is a decrease in the value of the Australian dollar. there is an increase in inflation expectations. the unemployment rate decreases. The Australian Government reduces the size of the Budget deficit. 5% 6% 8% 10% If the economy is operating at the natural rate of unemployment then there would be no a) b) c) d) unemployment cyclical unemployment structural unemployment frictional unemployment 6 19. In the AS/AD Model an appreciation of AUD would result in a shift in a) b) c) d) 20. Assuming a closed economy with no government, if the multiplier is 4, then an autonomous increase in a) b) c) d) 21. the level of consumption the level of taxation revenue the level of imports none of the above Real GDP: Year Nominal GDP CPI 1 200 bn 115 2 208 bn 116 3 210 bn 118 a) b) c) d) 23. consumption of $1, would result in savings decreasing by $1. investment of $1, would result in consumption increasing by $3. investment of $1, would result in income increasing by $3. investment of $4, would result in income increasing by $1. An increase in interest rates in Australia would have very little effect on: a) b) c) d) 22. A higher price level A higher output level aggregate demand to the right aggregate demand to the left. rises over the three years rises then falls over the three years falls then rises over the three years cannot be measured because of insufficient information If the level of saving exceeds the level of investment, it is likely that a) b) c) d) investment will increase because there is more available funds the level of income in the circular flow will fall in the next time period inventories (unsold stock) will decrease the level of saving will rise during the next time period 7 24. Automatic stabilisers a) keep tax revenue equal to government spending over the business cycle b) cause an increase in tax revenue during a boom c) can be actively used by the government during a boom together with monetary policy to reduce inflation d) increase tax revenue relative to government spending during an economic downturn End of Section One 8 SECTION TWO: DATA INTERPRETATION/SHORT RESPONSE 45% (36 Marks) This section has three (3) questions. Answer all questions. Write your answers in the space provided. Planning: If you use the spare pages for planning, indicate this clearly at the top of the page. Continuing an answer: If you need to use the space to continue an answer, indicate in the original answer space where the answer is continued, i.e. give the page number. Fill in the number of the question(s) that you are continuing to answer at the top of the page. Suggested working time for this section is 65 – 75 minutes. Question 25 (12 marks) This question refers to the graph below. a) Explain what is meant by the cash rate. (2 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ 9 b) Account for the trend in the cash rate observed in the graph over the last 5 years. (3 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ c) Explain how the monetary policy adopted by the RBA in 2010-11could be expected to impact on inflationary pressures. (7 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ 10 ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ 11 Question 26 (12 marks) a) With respect to the Federal Budget, what is meant by ‘the government needs to issue an extra $50 billion of bonds to meet its needs’? (2 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ b) What type of budget would require the government to sell bonds? (1 mark) ______________________________________________________________________ c) Under what circumstances would a government implement a surplus budget? (2 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ 12 ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ d) Comment on the possible consequences of a surplus budget. (7 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ 13 ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Question 27 (12 marks) Jobs outlook tests economy The RBA’s assistant governor, Dr Philip Lowe told a forum in Sydney that Australia’s commodity boom was leading to “very strong” employment growth in the mining sector. Surging investment in the resources sector is increasing demand for engineers, project managers, equipment hirers, lawyers and accountants. Higher export prices for Australia’s iron ore and coal have substantially boosted national income which will eventually increase household demand. The problem is that with a jobless rate of 5%, “there is little overall spare capacity”. “a jobless rate of 5% may be the envy of the world, but it also means the economy is operating close to … (the point) where labour shortages start feeding into higher wages and inflationary pressures.” Editorial, Opinion ‘Jobs outlook tests economy’ Financial Review Friday 11 March p 62 14 a) What is meant by “there is little overall spare capacity”? (1 mark) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ b) Use the AD/AS model to describe the impact of increased AD in the scenario suggested above. (3 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ c) Suggest policy options that the Government has available to address this problem. (8 marks) ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ 15 ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ End of Section Two 16 SECTION THREE: EXTENDED RESPONSE 25% (20 Marks) This section contains two (2) questions. Answer one (1) question. Write your answer in the space provided and number your answer clearly. Spare pages are included at the end of this booklet. They can be used for planning your responses and/or as additional space if required to continue an answer. Planning: If you use the spare pages for planning, indicate this clearly at the top of the page. Continuing an answer: If you need to use the space to continue an answer, indicate in the original answer space where the answer is continued, i.e. give the page number. Fill in the number of the question(s) that you are continuing to answer at the top of the page. Suggested working time: 40-45 minutes ______________________________________________________________________ Question 28 (20 marks) a) Examine how strong economic growth among Australia's major trading partners, e.g. China and India, can affect the components of aggregate expenditure in Australia. (8 marks) b) Explain the consequent change in Australia’s economic growth how this would affect each of the economic policy objectives. (12 marks) Question 29 (20 marks) a) Distinguish between microeconomic reform and structural change . (4 marks) b) Explain the concept of economic efficiency. (6 marks) c) With reference to an example, demonstrate and explain the impact of microeconomic reform on aggregate supply in the economy. 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