1) Distinguish between headline and underlying inflation (2):
- Both headline and underlying inflation look at an increase in the general price levels
over a period.
- Headline inflation rate includes volatile movement, is measured by the % change in
CPI overtime. Whereas underlying inflation excludes volatile/ one-off price changes
and is measured by trimmed mean and weighted median.
Headline inflation refers to increase in general price levels, which may include volatile price
movements. On the other hand, underlying inflation refers to the increase in general price
levels that excludes or one-off price movements. Whilst headline inflation is calculated by
percentage changes in the Consumer Price index (CPI), underlying inflation is calculated
using trimmed mean and weighted median CPI method.
2) Outline the relationship between inflation and the exchange rate (2):
- When AUD increases price of foreign G&S decreases imported inflation
decrease cost push inflation
- Increase in inflation worsens of international competitiveness decreased demand
for export decrease demand for AUD depreciation
A depreciation of the exchange rate will require more domestic currency to purchase the
same amount of foreign currency, increasing the price of imports, leading to imported
inflation. More expensive imports lead to upward pressure on the level of inflation.
Alternatively, an appreciation of the exchange rate places downward pressure on important
inflation, as consumers have a greater purchasing power and hence goods are less expensive
(inverse relationship).
3) Analyse the relationship between inflation and unemployment (3):
- Identify the relationship ST- inverse relationship between inflation and u/e- use
Philip’s curve
- ST- explain why if unemployment decreases the average level of national
income increases consumer spending and investment increases Inc AUD
inflation
- LT however, in the LT the economy operates at the NAIRU, where there is no
relationship butene inflation and unemployment as cyclical unemployment=0.
In the short term, there is an inverse relationship between inflation and unemployment. As
unemployment decreases, more individual has a greater disposable income. This leads to an
increase in consumption, aggregate demand (AD=C+I+G+X-M) and hence increases the
level of demand-pull inflation in the short term. However, as the economy tends towards the
NAIRU in the long term, there is no relationship due to the level of cyclical unemployment
being 0 (or the emergence of the wage-price spiral forces employees to cut employment due
to increasing production costs).
4) Discuss the impacts of high inflation rates on the Australian economy (3)
- Negative impact- High inflation decreases purchasing power of income increase
cost of living decrease AG & growth/ worsens economic development/// worsens
the distribution of wealth and income
- Positive example in the short term encourages foreign investments as they suspect
there will be higher return
High inflation levels in Australia will decrease the purchasing power of consumers if nominal
income levels are fixed. This means the real income of individuals in the economy will
decline, and thus less G&S can be brought when the general price level rises. A benefit of
high inflation is no deflation. Deflation- the decrease in the general price level, will
discourage consumption as consumers continue to expect price decreases, lowering AD and
economic growth. This was evident in the 2nd qtr of 2020, where the Aust eco experienced a
period of -0.3% deflation alongside -6.2% of economic growth. However, during the periods
of high inflation, consumer are incentivised to bring forward consumption, so AD instead
increases.
5) Define ecologically sustainable development (1)
- The government pursuit to meet the need of current generations and future
generations.
- Intergenerational equity
Ecologically sustainable development refers to the govt’s objective to meet the needs of the
present without compromising the long-term preservation of the environment and therefore
the ahility of future generations to access these resources.
6) Outline two examples of a public good (2)
- Public goods are non-rival and non-excludable
- Give two examples
National defence and national parks are public goods- this is because these goods are nonexcludable. People cannot be excluded from receiving defence or entering national park,
since there is no price that has to be paid for either. In addition, these goods are non-rival,
since one individual’s access to defence and street light ie. Through consumption, will not
reduce the amount of available for consumption by others.
7) Explain tragedy of the commons with reference to Market Failure (3):
- Explain tragedy of the commons often due to the lack of clearly defined property
rights this often leads to exploitation of resources.
- Explain market failure & link to TOC occurs when the price mechanism fails to
consider negative externalities inefficient allocation of goods Since it doesn’t
take into account the total prices & because of the lack of property rights allows
depletion of resources to occur
The tragedy of the commons occurs because some goods do not have well defined property
rights. As a result, individuals continue to deplete resources without regard for
intergenerational equity, leading to the overuse of resources. As a result, market quantity of
this environmental good is too high, and the price is too low (due to an oversupply), creating
a negative externality (depletion of environment). The creation of a negative externality leads
to market failure, as the price mechanism fails to consider the unintended negative side
effects and thus the market does not operate at its most socially optimum point.
8) Propose and justify a policy response to address market failure in relation to the
environment. (4)
- Outlining market failure
- Proposing a policy- e.g. the carbon tax
-
Carbon tax internalises the externality increases production costs decreases
quantity produced closer to socially optimal equilibrium
Market failure occurs when the price mechanism fails to allocate resources most efficiently,
thus creates unintended positive or negative effects on society. The carbon tax can be used as
a policy response to address market failure caused by the negative externality of greenhouse
gas pollution. For example, the Australia government implemented a $23 per tonne tax on
CO2 emission in the 2011-12 budget. This policy would put a ‘price’ on the unintended
negative side effects of fossil fuels used, to internalise this social cost into the private costs of
firms., ‘internalising’ the externality. By internalising this cost, the free market will respond
by reducing the quantity of goods supplied and increasing their price, as firms pass on the
higher cost of production to consumers. This would result in lower carbon emissions,
lowering greenhouse gas pollution and putting downward pressure on the enhanced
greenhouse gas effects. This effectively removes the social costs created by greenhouse gas
pollution, addressing market failure in relation to climate change of the environment.
Evidently, during,2012-14, 20 tonnes of carbon emission was reduced it was eliminated due
to being politically unpopular.
9) Describe two ways in which a government can finance a budget deficit, (2)
- By borrowing from the private sector
- Monetary financing
A government can finance. A budget through monetary financing or through selling govt
assets. Monetary financing results in the govt instructing the RBA to print money, where the
govt sells commonwealth govt securities to the RBA in exchange. Alternatively, it can be
achieved through selling assets, such as the govt’s commonwealth share of land, allows the
govt to raise revenue to meet the Shortall in expenditure.
10) Explain two limitations of fiscal policy in achieving economic objectives (3):
- Two limitations:
o Implementation- Time lag, occurs once a year.
o Political constraints- depends on support rate, parties need to agree by voting.
- Explain limitations and linking to objectives time lag constrains Australia’s ability
to achieve economic growth.
A limitation of fiscal policy is the medium term implementation time lag. Since the budget is
released once per year, events that occur throughout the year can only be addressed yearly in
the budget and hence economic objective cannot be as frequently addressed as the short term
monthly implementation of monetary policy. Additionally, political constraints mean that the
government may prioritise certain objectives over others to satisfy the largest number of
voters. These objectives may not align with the economic objectives that are most helpful in
improving the strength of the nation’s economy, such as prioritising fiscal consolidation to
reduce public debt when economic growth is very weak.
11) Evaluate the effectiveness of macroeconomic policies in achieving sustainable
economic growth (4):
- Explicit evaluation about effectiveness of policies:
- Describing 2 macro policies- monetary and fiscal
- Using relevant stats
o COVID Monetary was ineffective since it was so low

Fiscal was effective- govt budget was the main factor of Australia
achieving a V-shaped recovery
- Explain links
Fiscal and monetary policy are macroeconomic policies, which attempts to achieve a
sustainable growth rate of 3-4%. Fiscal policy was expansionary, with the 2020-21 budget
calculating an underlying cash deficit of 7.8% of GDP, from a previous deficit of 4.3%. This
was due to the introduction of large expenditure package, such as the $90bn JobKeeper wage
subsidy. An expansionary stance generally led to an increase in the contribution of G to AD,
which creates higher output and thus economic growth. The monetary policy stance in
Australia was also expansionary, as the cash rate was lowered to an all-time low of 0.1%.
Expansionary MP leads to a decrease in the cost of borrowing which encourages borrowing
for C and I, leading to a rise in the level of aggregate demand. (AD=C+U+G+X-). When AD
increases short-term economic growth is created. As higher expenditure leads to higher
output. The cumulative effect of both expansionary macroeconomic policies moved growth
in Australia moving to 1.8% in 1st qtr of 2021 from -0.3% in the previous year, Whilst GDP
improved, since it did not move to its target, both macroeconomic policy in combination can
be considered ineffective in achieving sustainable economic growth.
12) Outline the managed flexible peg system of exchange rate determination. (2)
- Define it The RBA sets it daily by pegging it to a certain value at 9am, from which
it will operate through the day.
- Explain the extent/ role of the market forces and govt intervention int his exchange
rate system This allows government intervention, while providing more flexibilities
for the market.
The managed flexible peg system involves the central bank pinning the currency to a certain
value daily. The currency is allowed to drift away due to market forces within an upper and
lower range set by the central bank. If the exchange rate moves outside this flexible range,
the central bank is responsible for directly intervening in the forex market to bring the value
back into the range.
13) Discuss the impacts of an appreciating exchange rate on the Australian economy. (3)
- Positive effect higher purchasing power in the international market cheaper
imports domestic consumers become more inclined to purchase domestically
produced goods decreases employment as AD decreases
- Negative effect decreases export’s international competitiveness higher
unemployment/ worsening of the BoGS and CA and BoP
- Explaining links well
An appreciation of the exchange rate means that Australia is more easily able to repay its
foreign debt, known as the valuation effect. This occurs because the same amount of AUD
can buy more foreign currency, so servicing costs of debt will reduce. However, since 95% of
Australia is denominated in AUD terms, the exchange rate is negligible and the valuation
effect is minimal since more foreign currency is required to purchase the same amount of
AUD, Australian G&S become more expensive. In the long term, this will lead to a decrease
in the demand for Australia’s Xs, and thus a decline in international competitiveness which
worsens the BoGS and Ca and thus external stability.
14) Analyse the relationship between the exchange rate and the current account (5)
-
Exchange rate CAo Valuation effect
o J-Curve
- CA Exchange rateo Poor CA impacts investors confidences, hence investment decreases
demand for AUD decreases depreciation
- Stats and examples:
o The continuous depreciation of AUD over the last decades helped sustaining
the international competitiveness of Australian’s commodity exports helped
Aus to enter a CAS in June 2019 mainly due to the large surplus in BoGS of
77.4b.
- Sophisticated analysis
A depreciation in the AUD will lead to a decrease in the price of exports and an increase in
cost of imports for the Australian economy. In the short term, where quantity is fixed, export
revenue falls and import expenditure increases, worsening the BOGS and thus the CA- there
is a short-term proportional relationship. In the long term, export demand will rise due to
increased international competitiveness and import demand falls due to domestic consumer’s
decreasing purchasing power in the international market, contributing to higher export
revenue and lower import expenditure, improving BOGS and thus CA- there is a long term
inverse relationship. A depreciation may increase the cost of servicing cost through the
valuation effect, increasing debits on the NPY and thus worsening the CA. However, 95% of
Australia debt is denominated in AUD terms so the valuation effect is minimal. This
relationship was evident as the exchange rate depreciated from 0$.74 in 2016 to $0.69 in
2019, accompanied by an improvement in the BOGS from $2.2bn deficit to $7.4bn surplus in
the same period. Subsequently, the CA reached a $5bn surplus in 2019.
On the other hand, a deterioration in the CA is likely to result in a depreciation. When the CA
worsens, foreign investors are reluctant to invest into Australia as the economy may not be
able to repay all of its foreign debt, namely during a CAD. This results in decreased demand
for the AUD and hence may cause a depreciation. Likewise, an improvement of the CA to a
surplus suggests that Australia is able to pay back its foreign debt, resulting in increased
demand for the AUD and, hence causing an appreciation. This is evident during 2021 where
the CAS of $15.4bn encouraged investment inflows despite COVID-19 to appreciate the
AUD from its 0.58USD/AD covid low to $0.69 USD/AUD currently.
15) How fiscal policy can be used to improve Australia’s external stability. (4)
- Use a budget surplus to pay off existing net foreign debt dec in NFL/NFD
improves external stability
- Contractionary fiscal policy generate a surplus/ dec AD dec Y improves
BoGS improve CAD external stability
- E.g. Pre-Covid (not actually achieved), the govt was aiming for a 6 million surplus in
2019-10, this would be the first surplus since 2008 long term goal was to reduce
public debt to 0% by 2030.
Using contractionary fiscal policy by decreasing the amount government expenditure or
increasing the level of taxation will overall decrease the level of AD (AD=C+I+G+X-M). A
reduction in AD passes over to lower short term economic growth, and thus a reduction in the
level of income in the Australian economy. As this occurs, the level of import expenditure
will also decline, improving the BOGS, and subsequently the CA as a % of GDP. Also, fiscal
consolidation is a process used by the government in fiscal policy by cutting down on govt
expenditure or taxation to move the federal budget to a surplus. When a budget surplus
occurs, the excess of funds can be used to pay back overseas public sector debt, which
reduces NFD and NFL as a % of GDP, thus improving external stability. This was evident
pre-COVID-19, when FP’s main objective was fiscal consolidation which ultimately
projected a $6bn budget surplus in the 2019-20 budget, the first surplus since 2008. This
contractionary stance allowed for a reduction in the growth of overseas public debt with a
long-term goal reaching 0% by 2030.
16) With reference to the most recent budget, assess the effectiveness of fiscal policy in
achieving 2 of Australia’s economic objectives. (4)
- Extensive reference to recent budget
o $7.8 bn tax cuts for low Y earners creases consumption, increases AD
influences 10.2 million people -7% growth in June quarter of 2020 to 1.8%
March quarter 2021.
o $15.2 bn continuation of 10 year infrastructure plan (included projects such as
development of ports, airports etc leads to at least 30,000 jobs created
unemployment fallen from 7.4% in June 2020 to 4.9% in June 2021
In the 2021-22 budget, the govt announced an additional $7.8bn in tax cuts for low and
middle-income tax earners in order to increase economic growth. This would allow for higher
disposable income for up to 10.2 million individuals in these group, increasing consumption
(i.e. higher MPC for lower Y earners) ad AD (AD=C+I+G+X-M). Higher expenditure in the
economy will result in a higher level of output, thus effectively increasing economic growth
from its COVID-19 trough of -0.7% to 3.3% in 2021. The govt also announced an extension
to temporal loss carry-back and full expensing, which allows eligible business to carry-back
tax losses as far back as 2018-19. More untaxed benefits, estimated $20.7bn in tax relief,
allows firms to employ more individuals, reducing unemployment to 5.6% in 2021 from
7.5% in the June qtr of 2020, Thus FP has been effective at moving closer to its full
employment goal of 4.5%.
17) Using a diagram, discuss the effects of a subsidy to domestic producers on the
domestic economy. (4)
A subsidy given to domestic firms will result in a
decrease in production costs, passing over to a decline
in prices as shown in the graph from P to P1. This will
result in an increase in domestic supply to meet higher
demand at a lower price at P1, shifting the supply curve
to the right as shown from the graph. Thus, domestic
producers are positively benefited by an increase in
revenue and profits received. However, this subsidy can
cause ‘rent-seeking behaviour’, where domestic
producers become over-reliant on the govt assistance,
and thus have no incentive to be productive. This can
result in a decrease in efficiency of these firms,
constraining AS and slowing long term economic
growth.
18) Describe two non-tariff and non-subsidy methods of protection and explain their
effects on the domestic economy. (3)
- Demonstrate causality of 2 non-tariff and non-subsidy methods of protection on the
domestic economy.
Export incentives are economic instruments provided by the government that assist domestic
producers in increasing their global market share (marketing advice). This encourages
domestic firms to become more productive in order to increase their global consumer base,
which increases export income and thus AD and short term economic growth. Quotas are
protection policies that provide a quantitative restriction on the number of imports allowed
into the domestic economy. This restriction allows for domestic producers to gain a higher
domestic market share, thus increasing their revenue and profit.
19) Outline 1 bilateral trade agreement which Australia is currently party to. (2)
- E.g. CHAFTA removes tariff on Australian agricultural and services, should have
the complete removal of tariffs on wine, diary, beef, and wool by 2026// Increase in
FDI from China of $252m to $1.1bn.
Australia partakes in the Chinese-Australia Free Trade agreement (CHAFTA). CHAFTS
involves the removal of tariffs on Australia’s agricultural and service sectors, namely with
the complete removal of tariff on wine, dairy, beef and wool by 2026. CHAFTA also
involves an increase in the allowance of FDI inflows from China in non-sensitive sectors
from $252m to $1.1bn. However, current implementation of CHAFTA is postponed due to
the rising trade tension between China and Australia, where China in 2021 announced a
200% tariff on Australia wine, which was claimed as an anti-dumping measure.
20) Describe the impact of one trend in global trade flows on a regional business cycle:
- In 2020, consumer confidence decreased decrease in merchandise (tangible G&S)
trade of 14.9% in end quarter of 2020 contraction in the Asia pacific regional
business cycle. (2)
During early 2002, COVID-19 caused a drop in consumer confidence and consumption
namely with merchandise exports dropping by 14.9% in the 2nd quarter of 2020. This drop in
global merchandise trade has contracted the Asia-Pacific regional business cycle.
21) Examine the impact of an increasingly synchronized international business cycle on
the global economy. (3)
- Greater trade integration competitiveness advantage and specialisation increases
global allocative efficiencies increases GWP
- Financial contagion COVID decreased growth in China by 6.8% in 2020 fall
in GWP decreased to -3.6%.
An increasingly synchronised international business cycle indicates stronger trade integration
between individual economies of both intermediate and consumer goods, which leads to
synchronised economies specialising in their comparative advantage. This will increase
global allocative efficiency, which leads to stronger global world product (GWP) growth.
However, as economies become more synchronised, they are more susceptible to financial
contagion as evident in COVID-19, where market disturbances in China spread to other
economies. The decrease in China’s economies growth by 6.8% in early 2020 passed over to
a decline in global confidence evident with GWP growth at -3.6% in 2020.
22) Discuss the impacts of multilateral trade agreements on the global economy. (3)
- One positive: Involvement of large number of economies increase in allocative
efficiency trade creation increases GWP.
-
One negative: Negotiation is lengthy preference for bilateral,
o For example- RCEP signed in November 2020, first meeting regarding
formation was in 2013. Additionally, even after signing, it took 60 days before
it came into effect.
Multilateral trade agreements tend to be advantageous, since it implies the involvement of
large number of economies all reducing barriers to the international movement of goods and
services. When this occurs, economies are able to reallocate resources to efficient industries
to export, and import other G&S, which increases global allocative efficiency through trade
creation, increasing GWP. However, the process of negotiation tends to be long due to the
need to benefit all countries involved, which instead encourages the formation of bilateral
trade agreements. This was evident during the formation of RCEP (regional comprehensive
economic partnership), which is signed in November 2020, disregard the first meeting in
2013. Additionally, even after signing, it took 60 days before it came into effect.
23) Outline two reasons for differences for economic development between nations. (2)
- Internal:
o cultural/ technology
o Resource endowments
o Institutional factors
o Investment opportunities
- External:
o Global trade system
o Global financial system
A country with high level of natural resource endowment will be able to utilise more inputs
to increase its level of economic growth. An increase in economic growth allows for an
increase in per capita income levels, and thus higher material living standards and economic
development.
The global financial system favours the movement of financial flows to advanced economies
where the risk of investment flows are lower compared to developing economies. The lack of
investment into developing economies restricts the from being able to invest in infrastructure,
which will improve living standards.
24) Outline the relationship between net foreign debt and the CAD. (2)
- There is a proportional relationship between NFD and CAD.
- NFD requires services repayments it is debited from the NPY NPY worsens and
CAD worsens.
An increase in the stock of net foreign debt means that Australia’s debt obligation has
increased. In the future, these obligations are repaid via debt repayments of interest, recorded
on the net primary income of the CA, increasing the overall size of the deficit. The
relationship between NFD and the size of the CAD is thus proportional.
25) Assess the impacts of a sustained CAD on domestic economic performance. (3)
- 1 neg Investor confidence
- 1 pos Pitchford thesis
A sustained CAD suggests that the economy has high long-term obligations to foreign
economies, which reduces the confidence of potential investors in the domestic economy.
This will result in a reduction in investment inflows (FDI and FPI), which can result in lower
AD and thus economic growth. However, if a sustained CAD is a result of private sector
borrowing and capital inflow, then such finance will be allocated to sectors that will increase
output in the future, leading to higher productive capacity, AS and thus long term economic
growth. Thus, in the LT, a sustained CAD may be beneficial for a domestic economy’s
growth performance.
26) Explain the effects of the microeconomic reform in the 1980s on the size and
composition of Australia’s CAD. (4)
- Outline a feature of relevant MER financial reforms
- Explaining effects of MER on size and composition of CAD the deregulation of the
financial market increased access to international financial market allowed
capital inflow increases NFD and servicing costs worsens CAD.
- NPY became a predominant feature of the CAD (structural aspect)
Deregulation of the financial sector in 1980s, namely the entry of 16 foreign banks led to an
increase in access to foreign funds for Australians. Since Australia has a historically low level
of domestic savings and thus a saving-investment gap. Firms and consumers were able to
take advantage of greater access to overseas funds through international borrowing which led
to an increase in stock of net foreign debt. In the future, repayments for this high-level debt
were recorded as increased debits on the net primary account, creating a long term persistent
NPY deficit averaging -3% of GDP for the account. This structural factor thus caused an
increase in the importance of the NPY in the composition of the CA, and moved the CA to a
persistent deficit during 1990s to 2019.
27) Distinguish between dynamic and allocative efficiency:
- Dynamic efficiency is the ability to adapt to changes in the market such as consumer
tastes and preferences
- Allocative is the ability to allocate resources to achieve increase in productivity
28) Describe the feature of one microeconomic reform. (2)
National Competition Policy (NCP) was introduced in 1995, along with the Australian
Competition and Consumer Commission (ACCC) responsible for its application and
enforcement. NCP was aimed at fostering an environment of competitive neutrality where
firms were put on an ‘equal footing’ with one another through removal of special advantage,
in order to increase productivity and efficiency.
29) Outline two limitations of microeconomic policy in achieving its objective. (2)
- Time lag between tis implementation and its effects (generally 10-20 years).
- Causes structural unemployment
- Political constraints
Microeconomic reform has a long impact time lag, as it usually involves the reallocation of
resources and structural change in order to increase AS and long-term economic growth.
Microeconomic reform also has political constraints, since it will create short-term side
effects such as structural unemployment. Thus government are politically limited to not
pursue MER since these side effects tend to dissuade voters.
30) Discuss the impacts of microeconomy reform on inflation and employment within the
economy
- Pos inflation Shifts NAIRU, reduces inflation by increasing unemployment
- Pos unemployment increase in AS improves growth, higher productive capacity
allows higher employment rate
- Neg unemployment MR increases ST structural unemployment
- Link the removal of PMV subsidies
Microeconomic reform results in structural change that allows for an increase in aggregate
supply, and long-term non-inflationary economic growth. This increase in productive
capacity through MER reduces cost-push inflationary pressure, and thus lowers long term
inflation levels. However, this structural change typically involves a displacement of labour
resources from inefficient sectors to efficient sectors, creating an increase in short term
structural unemployment. This was evident with the establishment of free trade, via the
removal of PMV subsidies by the Australian government which caused an expected 50,000
decrease in employment in 2015. In the long term, the increase in aggregate supply supported
by structural change incentivises an increase in employment to meet the higher productive
capacity of the inflation, increasing employment in the long term.
31) Explain why govt are the main providers of public goods:
- Public goods tend to be beneficial, but are often underproduced as the public goods
are nonrival and non-excludable private firms lacks the incentive to profit as they
aims to maximise profit.
- Link between public good and the lack of provision.
Since public goods are non-excludable, i.e. Cannot be exclusively given to consumers by
putting a price on them, private firms gain no private benefits (i.e. Revenue/profit) by
producing them. This lack of provision of public goods creates market failure, since public
goods are necessary for society due to the positive externalities created. Thus govt involve
themselves as the main provider of these public goods due to the benefits for society. For
example,
32) Why does the open market fails to consider positive externalities. (3)
- Price mechanism
- Goods are underproduced positive externalities are not experienced by
- Sufficient reference to private and social benefits
The open market only considers private costs and private benefits, positive externalities are
those unintended positive side effects of production and/pr consumption of a G&S. Since the
price mechanism fails to accurately price these benefits, there is lower demand for these
goods than there should (e.g. individuals don’t understand the external benefits of education
such as reduced crime), so the price mechanism only takes into account private benefits. Thus
the market will eliminate positive externalities due to the additional price placed on goods if
the social benefits was to be incorporated which would otherwise reduce profit motive.
33) For an economy other than Australia, discuss the impacts of globalisation on
environmental sustainability.
- Positive impact joined the Paris agreement- in the 15th 5 year plan, China
announced a 50% carbon emission cut to be achieved by 2030
-
Negative impact pollution increases air pollution 50x above the recommended
level. in 2008, China had 11 of the 20th cities that’s most polluted.
For the Chinese economy, globalisation allowed for an increase in specialisation in the
economy’s comparative advantage- manufacturing, due to the increasing access to global
market. As a result, there was an increase in output from the secondary sector, which required
a high use of inputs, namely fossil fuel to meet global demand, leading to an increase in
pollution. This worsened environmental sustainability was recorded with China having 11 of
the 20 most polluted cities in the world in 2008. However, globalisation also created an
incentive for the formation of international environmental agreements, such as the Paris
Agreement. Given China’s poor environmental contribution, the international pressure from
the Paris agreement encouraged China to undertake environmental policies in its 13th 5 year
plan, with over $100bn allocated to creating the largest solar far in the world. Thus, more
recently globalisation has encouraged China to improve its level of environmental
sustainability.
34) Account for 1 recent trend in Australia’s inflation rate:
- Deflation during June quarter 2020 at -0.3% due to decrease in consumption,
evidently consumer confidence decreased from 113 to 73. Leading to decrease in AD
and demand pull inflation,
35) Outline the relationship between inflation and distribution of income within the
economy. (2)
- Inflation increase = worsens distribution of income Lower income earners
experience a greater decrease in purchasing power
- Increase in inequality decreases inflation, as higher income earners have a higher
MPS less spending and lowers demand pull inflation
A higher inflation rate will worsen the distribution of income, as lower income earners are
less likely to have their Y indexed to inflation, where higher income earners are more likely
to have their Y indexed to productivity (which can typically rise faster for higher Y earners
than inflation). Thus, when inflation increases, the real Y of lower Y earners will likely
decrease where higher Y earners will likely increase, worsening the distribution of income.
36) Explain how monetary policy is used to manage inflation. (3)
- MP is manipulation of CR by RBA to achieve 2-3% inflation in the median term.
- MP is manipulated through domestic market operation, where commonwealth
government securities are brought or sold. This will either decrease or increase the
monetary supply in the market, which will increase or decrease the cash rate.
- Higher cash rate would decrease inflation. As cost of borrowing increases, resulting in
decreased consumption and investment
Monetary policy involves the manipulation of the cash rate in order to influence market
interest rates to reach 2-3% inflation in the medium term. The cash rate can be manipulated
through domestic market operations, where second-hand commonwealth government
securities (CGS) are sold or brought to decrease or increase money supply in order to
increase or decrease the cash rate respectively. A higher cash rate will discourage borrowing
for consumption, lowering expenditure, AD and demand-pull inflation, whilst a lower cash
rate will increase demand-pull inflation to increase inflation to its target band.
37) Discuss the impacts of high rate of inflation on economic growth and unemployment.
(4)
- Benefits on growth and u/eo High inflation consumption being brought forward, leads to increase
consumption, increase AD and increases ST growth.
o Ue To meet increasing demand for G&S firms increase demand for
labour, resulting in decreased cyclical unemployment
- Costs on growth and u/eo High inflation suggests greater uncertainty deteriorates investor
confidence lower investment lower AD/ lower growth.
o To retain profit margin firms cut back on labour costs (~60% of total costs
for firms in AUS is labour) decreases demand for labour increase u/e
A high inflation rate will incentivise consumers to bring their consumption decisions due to
rising prices. This will result in a higher level of expenditure, increasing AD and output,
leading to short-term economic growth. Likewise, to meet higher output, firms will increase
their derived demand for labour, reducing cyclical unemployment. However, a high inflation
ate suggests an uncertain economic environment for potential investors, decreasing
investment in the domestic economy. This will result in a reduction in domestic expenditure,
AD and output, lowering the level of economic growth. To retain profit margins, firs will cut
back on labour costs by reducing their demand, increasing cyclical unemployment.
38) Outline the term “net foreign liabilities”
- Total Australia is liable for overseas – total amount of overseas is liable to Australia
- NFL= NFD + NFE
39) Explain the impact of a sustained CAD on future rates of economic growth. (2)
- Large CAD reduces investor confidence & potential downgrading of credit rating
decreases FDI & FPI  decreases I and decreases Eco growth.
A sustained CAD suggests that the economy has a high level of foreign liabilities, reducing
investor confidence. This will result in a reduction in FDI and FPI inflows, lowering AD and
short-term economic growth. This reduction in investment also reduced the ability of firms to
increase their productive capacity, lowering AS and long-term economic growth.
40) Evaluate the effectiveness of govt policies in maintaining external stability
- Require a judgement. (5)
- Eg. Fiscal consolidation (movement towards a budget surplus to pay off public
debt) Aim of $6 bn in 2019.20 pay off public sector debt to 0% by 2030 (improves
NFD as a % of GDP) Global influence (COVID-19)
- Compulsory savings on income and the planned increase from 9.5% pre-July 2021
10% currently 12% by 2025 reduces the savings and investment gap decreases
the need for international borrowing, which decrease NFL%GDP.
- However, increase labour costs increases cost-push inflation decrease
international competitiveness worsens external stability.
- Overall, judgement- mixed effectiveness
Before COVID-19, fiscal policy targeted improvement in external stability through a fiscal
consolidation strategy. This involved cutting down on government expenditure or taxation to
move the federal budget to a surplus. When a budget surplus occurs, the excess of funds can
be used to pay back overseas public sector debt, which educes NFD and NFL as a % of GDP,
thus improving external stability. This was evident pre-COVID-19, when FP projected
a %6bn budget surplus in the 2019-20 budget, the first surplus since 2008. However, FP’s
susceptibility to global influences, such as COVID-19 caused the budget to move to a
cyclical deficit with a significant increase in unemployment benefits (GE) and a decrease in
tax (T).
Additionally, government policy has target increases in the compulsory superannuation rate
from 9.5% in 2021 to 12% in 2025. Superannuation refers to compulsory savings on top of
income for employees, which will increase the level of domestic savings in Australia and
lower our savings-investment gap. This will reduce our need for international borrowing,
lowering the stock of NFD and improving external stability. However, the increase in
superannuation will increase labour costs, increase cost-push inflation and lower international
competitiveness, worsening external stability.
Overall, govt policies lack effectiveness in improving external stability with minimal changes
to NFD sitting at 55-60% in the pat 5 years.
41) Outline two advantages of the flexible exchange rate system. (2)
- Shock absorber decreased EG Currency appreciation LT increases
international competitive of export increases eco growth
- Better use of MP/ inflationary targeting by the RBA not pre-occupied with
maintaining the currency
A flexible exchange rate system is one that utilises the market forces of supply and demand
and hence the price mechanism in the forex market to determine the value of the exchange
rate. One advantage of the flexible exchange rate system is that it acts as a shock
absorber/buffer in periods of volatile economic growth (as it moves to the new equilibrium
position). For example, in a period of low growth, it would depreciate due to its low demand,
which would then boost exports and growth. Another advantage is the fact that a flexible
exchange rate system will provide a more realistic overview of the fundamentals of the
economy (growth, inflation and u/e) as its price is determined by the demand for, and supply
of the currency.
42) How have recent actions (2014- present) by the RBA affected the value of AUD.
- Action/ intervention direct intervention decreases cash rate worsening of the
IR differential- 2018, Aus dropped CR by 1.5% to 1.25%. while US was 2.5%
- Effects on S/D of AUD decreases demand for AUD and increases supply of
AUD (interest differential)
- Effects on price- depreciation from June 2011 USD $1.10 to 2020-USD $0.7
The RBA has plaed an indirect role in affecting the value of the Australian Dollar through the
changing of the cash rate through monetary policy, in reponse to sluggish ecnommic growth
caused by unfavourable global conditions (trade war, contractionary fiscal policy etc), fro
2016-19 and most recently, COVID-19, the RBA conducted expansionary monetary policy
throughout this period by decreasing the cash rate from 1.5% in 2015 to record 0.1% in
November 2020. This corresponded with a depreciation of the AUD from approximately $0.8
USD in 2016 to a decade low of $0.59USD. This is due to the lower cash rate creating a
negative interest rate differential compared to other economies, hence reducing capital
inflows into Australia and reducing demand for the AUD.
43) Discuss the factors that influences the demand and supply of the AUD (5):
- Demand is determined by people who wants to purchase AUS.
o 1. Increased demand for Australian dollar increases demand for export
appreciation
 US $1.10 peak in 2011 during mining boom
o 2. Decreased demand for AUD decreases CR negative IR differential
Lower FDI due to lower rate of return decreases demand depreciation
 depreciation from June 2011 USD $1.10 to 2020-USD $0.7
- Supply is made up by people who wants to sell the AUD
o Decrease in CR AUs seeks greater return in foreign countries increases
supply of AUD depreciation
o Rise in overseas protection increase price of imports decrease import
expenditure decrease supply in AUD in forex appreciation
The value of the Australian dollar is determined by the interaction of the market forces of
supply and demand of the AUD in the forex market. The supply of AUD is made up by
Australian residents, and is influenced by firstly, the rate of domestic economic growth. As
the Australian economy experiences growth, income levels will rise due to job creation and
employment levels. This will encourage greater import spending, thereby increasing the
supply of AUD in the forex market. Secondly, as the number of investment opportunities
overseas increases, more domestic investors will seek to invest their capital in these foreign
countries, hence increasing the supply of AUD in the forex market.
The demand of AUD is made up by foreigners, and is influenced by international
competitiveness of (or demand for) Australian exports. As Aus exports become more
competitive, the demand for Aus exports and hence the AUD will increase. This occurred in
2020 as the demand for Australian iron ore and coal increased as a result of China’s
infrastructure-led stimulus packages, causing an appreciation of the AUD from $0.59 in 2020
to $0.75 USD in July 2021. On the other hand, interest rate differentials can also influence
the demand for AUD. As the cash rate of Australian increases (positive interest rate
differential), foreign investors will seek to invest in Australia due to higher returns,
increasing the supply of AUD in the forex market.
44) Describe two main groups affected by unemployment. (2)
- Non-English speaking migrants language barriers decreases employability
- Youth lack of skills and experience decreases demand for youth
45) Define deregulation
Partial or complete removal of govt regulation restricting the operation of market forces,
such as the removal of a price floor for spirits.
46) Describe two economic impacts of a high rate of unemployment.
- Increases unemployment increases number of individuals requiring welfare
payments increases govt exp reduce ability of govt to meet other economic
objectives also increases tax burden on high income earners
- Decreased eco growth decreases national income decreases consumption and
AD. COVID stats- 7.4% u/e in 2020 -7% growth in June 2020.
A high rate of unemployment will lead to increased tax burdens for taxpayers, as the
government will need to finance its increased spending on transfer payments such as
unemployment benefits, passing that burden to taxpayers. This was evident in the $89bn
spent in JobKeeper in 2020. Another economic impact is a loss of human capital, as the
economy is not operating at its most efficient and productive level, due to the presence of
spare capacity, the economy will not be able to maximise level of AS and hence, long term
economic growth.
47) Explain the relationship between AS and economic growth:
- Increases AS LT growth
- Increases productivity, international competitiveness increase productive
capacity increases output increases real GDP
Aggregate supply and economic growth have a directly proportional relationship, as an
increase in AS will perpetuate long term economic growth. This is because increases in AS is
a result of improvements in productivity, efficiency and competition, allowing the economy
to operate at a higher capacity, and keep up with growing demand, thereby increasing output
and hence, GDP and growth.
48) Account for the use of real GDP rather than nominal GDP when measuring changes
in economic growth. (1)
- Real GDP takes into account inflation, therefore be used to compare between
countries and over time.
Real GDP, as opposed to nominal GDP, accounts for the rate of inflation when calculating
changes in economic growth. This allows the rate to be compared to different tie periods, or
with different economies.
49) Discuss the policy mix used by the Aus govt to respond to a decrease economic
growth (5)
- Exp FP increase GE relative to previous year increases G increases AD
o E.g $219 bn during COVID-19 in 2020-22 improved -7% growth in June
2020 to 3.5% sept 2020
o Limitation- increased GE  worsening of budget outcome worsening
external stability due to increased foreign borrowing (politically unpopular)
- Exp MP decreased CR decreased S and increased C& I increased AD. Nov
2020- decreased CR to 0.1% from 0.25%
o Limitation medium impact lag- 6-9 month
Expansionary Monetary policy can be utilised by the RBA to address a decrease in economic
growth, decreasing the cash rate, which impacts the economy through the channels of the
transmission mechanism. This leads to a decrease in saving, whereas consumption and
investment, both components of AD are increased, hence improving economic growth. This
was evident through the reduction of the cash rate from 0.25% to 0.1% in November 2020, in
response to the recession brought about by COVID-19. Similarly, expansionary fiscal policy
can also be used to boost economic growth, which involves increasing levels of H from one
year to the next. This injection into the economy, such as $500bn total injection in response
to COVID bolstered AD through the multiplier effect, assisting Australia in rebounding from
a -7% growth rate in June 2020 to 3.5% in the next quarter. Furthermore, microeconomic
reform can be used to improve productivity, efficiency, and competition in the economy,
thereby improving levels of AS and hence, perpetuating long term growth. Although limited
by a 10–20-year impact lag, reforms such as the liberalisation of Australia’s trade have
continued in assisting its growth by ensuring lower inflation due to greater competition, as
well as improved allocative efficiency.
50) Outline the trend in income distribution for 2 groups in Australia. (2)
- Recent migrants disparities in level of employment depending on language lack
of transferable qualifications
- Woman- whilst pay gap has narrowed from 18.5% in 2014 to 13.4% in 2020, on
average- woman experience lower levels of Y in comparison to makes. Caused by
historical discrimination, child rearing etc.
Recent migrants have typically received lower levels of income in Australia, mainly as a
result of disparities in level of employment. The unemployment rate for Australian citizens in
Nov 2019 (pre pandemic) was recorded to be 4.7%, while this figure was 9.2% for recent
migrants. This can be explained by a lack of transferable skills/ qualifications as well as
discrimination.
Furthermore, woman in the workforce have received lower levels of income compared to
their male counterparts. While this has improved from 2014 to 2020, as the 18.5% pay-gap
narrowed to 13.4%, woman still continue to experience lower levels of income due to fewer
opportunities to acquire education, skills and qualifications as well as discrimination in the
workforce.
51) Explain the impact of the labour market reforms in Australia on income distribution.
(4)
- PaTH creating apprenticeships and improving skill sets of youth improve DOI
- Work Choices (2005) decentralisation of labour market and also removal of unfair
dismissal laws decreased bargaining power for low Y earners worsen DOI
- Fair Work Act 2009 strengthened safety net (Min wage, modern awards IONES
improves DOI
- Gini 2007-08 0.335 to 2011-12 0.320
Australian labour market reforms largely involve a transition from a centralised industrial
relations system to a decentralised one, overall worsening the level of income distribution in
Australia. This involved the establishment of the Workplace Relations in 1996, where
collective agreements and individual agreements were introduced. Allowing employees to
negotiate wage and working conditions between their employees individually, or as a group.
This decentralisation process continued to Fair Work Australia (2009), which streamlined
over 4300 awards to 133, as well as further encouraging enterprise bargaining in the
workplace accompanied by the implementation of the Better Off Overall Test, which
protected their working conditions/wages from being exploited by their employers. While it
improved growth and unemployment levels, now that wages are tied to productivity rather
than inflation, employees with low bargaining power, which were typically low-income
earners will experience a deterioration of their real income. As they were not able to sustain
income levels compared to rising inflation rates. Hence this worsened the distribution of
income in Australia.
52) Outline the nature of one historical and one recent policy implemented by the
Australian government to reduce protection barriers. (2)
-
1988- industry statement acceleration of trade liberalisation- Tariff over 15% was
decreased to 15%, excluding steel, PMV and TCF
- Recent- CHAFTA 2015- 5% tariff on Chinese manufactured goods removed; 99%
tariff free upon completion
The 1988 industry statement involved the acceleration of trade liberalisation in Australia, as
the government ensured all tariffs greater than 16% were lowered to 16%, targeting
specifically the Textiles, Footware and Clothing industry. Similarly, the Australian
government signed ChAFTA in 2015, as the 5% tariff on Chinese manufactured goods was
abolished. as well as providing over 5000 working holiday visas to Chinese workers.
53) Describe the impact of global protectionist policies on Australian consumers and
firms. (3)
- Consumers Protectionist policies such as EUCAP  subsidy of 20% of income
decreases cost of production passed on as lower price for consumers in Australia
higher purchasing power high standard if living.
- Producers protection decreases the international competitiveness as Australia firms
cannot compete with the lower price lower market share revenue
Policies such as the EU Common Agricultural policy, which provides EU farmers with
20$ subsidy of their income, effectively reduces the international competitiveness of
Australian agricultural exports, as Australian firms are unable to produce agricultural goods
at such low costs, thereby reducing their market share, revenue and in turn, profitspotentially leading to closure.
However, this may positively impact consumers as they are able to gain access to cheaper
imports, improving their standard of living and hence, quality of life.
54) Discuss the impact of trade liberalisation in Australia on the quality of life for
Australian residents. (3)
- Reduction in trade barriers increase access to foreign goods and services at lower
prices as they no longer face barriers. Designed to increase price of imports greater
range of products
- Trade liberalisation increases allocation of resources growth of efficient
individual jobs creation in the LT
- Can increase ST u/e (structural) as inefficient industries close- PMV: 50,000 jobs loss
as the result of PMV closing down in 2015.
- Degradation of the environment as foreign businesses enter domestic economy,
they might exploit natural resources, especially in developing economies reduces
quality of life.
Trade liberalisation has brought multifaceted impacts on the quality of life for Australian
residents. Firstly, the reduction/ removal of trade barriers by the Australian government has
resulted in access to foreign imports at lower prices, as they no longer face barriers to trade
such as tariffs that are designed to increase the price of these imports. Furthermore, they will
also be able to benefit from a wider range of consumer choice as a greater variety of imports
are able to enter the economy, thereby improving quality of life.
However, trade liberalisation has also led to the closure of inefficient industries within
Australia, namely the PMV industry in 2015 as over 50,000 experienced structural
unemployment, as Australia could no longer compete with manufacturers in South East Asia.
This negatively impacts the disposable income of residents, reducing their quality of life
significantly. Liberalisation may lead to the exploitation of natural resources by foreign
economies, leading to deterioration of the natural environment, bringing rise to
environmental issues such as pollution and land degradation, severely impacting the quality
of life in Australia.
55) Explain how changes in the cash rate impact general interest rates in the economy. (2)
- DMO & transmission mechanism
- An increases in the CR IR as banks aim to keep profit margin. Vice Versa
A change in the cash rate impacts general interest rate and in turn, the economy through the
transmission mechanism. An increase in the cash rate is passed onto consumer by banks as
banks seek to maintain profit margins in the fact of higher borrowing costs. On the other
hand, a decrease in the cash rate is passed onto consumers by banks as they seek to remain
competitive, and to retain customers.
56) Explain how the RBA would respond to falling levels of aggregate demand in the
economy. (3)
- Expansionary MP- involves decreasing CR to stimulate AD.
- Achieved through buying CGS in the overnight money market increases money
supply downward pressure on CR lowers interest rate as banks moves to remain
competitiveness.
- Disincentivise saving, and encourages C+I, and increases AD (C+I+S+(X-M)). This
is then furthered through the transmission mechanism, which includes: S-I; Cash
flow; Asset price; exchange rate channel.
The RBA will conduct expansionary MP in response to falling of AD in the economy. This
would involve purchasing Commonwealth Government Securities from banks, thereby
increasing the money supply and placing downward pressure on the cash rate. This would be
passed onto consumers in the form of lower interest rates as banks wish to remain
competitive, ultimately stimulating AD by encouraging borrowing for the purpose of
consumption and investment, as well as discouraging savings due to lower returns. This will
boost the level of AD in the economy as AD (eqn).
57) Describe the limitations of monetary policy in achieving Australia’s economic
objectives. (5)
- Liquidation trap:
o As the CR reaches closer to 0 bound limit its effectiveness decreases, as
consumers do not change spending/borrowing behaviour on such incremental
changes. CR currently in 0.1%.
- Time lag Impact VS implementation
o There is a 6–18-month time lag from changes in CR to changes in AD. As
consumers takes time to change behaviour
o Necessitates pre-emptive MP that it will raise interest rates before inflation
becomes a problem. The RBA monitors economic indicators each month to
decide whether it needs to adjust interest rates
- Blunt/ instrument
o MP is a non-target policy, meaning it cannot target AD components
Monetary policy faces an impact time lag of 6-19 months, meaning changes to the cash rate
do not immediately impact the economy, as consumer sentiment takes time to change. This
necessitates pre-emptive monetary policy, reducing the effectiveness of the RBA in achieving
price stability (2-3%) and sustainable growth (3-4%).
Furthermore, it is also limited by the liquidity trap- hence, as the cash rate approaches 0%, its
effectiveness is diminishing, undermining its ability to stimulate the economy in times of
recession, depicted by the inability to the current 0.1% cash rate in preventing a 07% decline
in growth in 2020.
Thirdly, MP is also considered to be a blunt instrument, being able to target specific
component of aggregate demand as well as sectors of the economy that may potentially be
hindering growth, or contributing to inflationary pressures. This is as different sectors of the
economy have differing levels of interest rate sensitivity/ elasticity. Hence, a change in the
cash rate will impact all components of aggregate demand, even if inflationary pressures are
derived from one ponents, thereby limiting its ability to achieve its economic objectives.
58) Outline two arguments in favours of a more decentralised wage determination system.
(2)
- A decentralised system means wages becomes the outcome of productivity
workforces is incentivised to increase productivity, output, skills and education
through the phenomena of the incentive effect.
- Flexibility of labour force during period of low growth, employers can negotiate
lower wages instead of laying off.
A more decentralised wage determination system incentivises the labour force to become
highly skilled, more productive and mobile, as well as taking more risks through the
incentive effect. This is because wages are now tied to productivity, rather than inflation.
This will improve the AS of the economy, perpetuating long term economic growth.
Furthermore, a more decentralised wage determination system will also lead to greater
flexibility of the workforce, especially in periods of low growth, where employers can simply
reduce working hours rather than dismissing workers, thereby supporting employment in the
economy.
59) Account for the role of education, training and employment program in achieving
Australia’s economic objectives. (4)
- Ed, training, emp programs are implemented as part of FP, utilised to increase skills
and improves human capital thereby achieving eco objectives of growth and
unemployment.
- PaTH (2016-17) $752m investment that combines subsidies and training
requirement; this includes optional 4–12-week internship and a $1000 payment to
employer for each intern, as well as $6500-$10,000 for hiring decreases u/e
- 2019-20 $525m into ‘delivering skills for Today and Tomorrow’ package creates
80,000 apprenticeships, and the upskilling of the labour force, and promotes EG and
employment (Can also improve DOI).
Education, training and employment programs are implemented as part of fiscal policy,
utilised by the govt to boost levels of skills and education levels in the economy, thereby
achieving economic objectives such as full unemployment and an equitable distribution of
income.
The Prepare, Trial and Hire Program (PaTH) 2016-17 is a $752M training and employment
program for youth, combining training obligations with incentives for employers. Under the
policy, Jobseekers have the option to complete a 4–12-week internship placement, as well as
an $1000 payment to employers for taking each intern. Employers are also provided with a
wage subsidy of $6500-$10,000 for employing a participant of the program. Although the
policy was designed to assist 120,000 youth, it assisted 60,000 in upskilling and finding
employment, thereby contributing to the objective of full employment.
Similarly, the 2019-20 $525M “delivering Skills for Today and Tomorrow” package
involved the creation of over 80,000 apprenticeships to target skills shortages, providing
unskilled workers with the training to secure a higher level of income, thereby supporting the
movement towards a more equitable distribution of income.
60) Analyse the impact of Fair Work Australia in the distribution of income in Australia.
(4)
- 1- outline what FWA is/ element of FWA; 2- positive/ negative impact on
distribution; 1- causality;
- The Fair Work Australia (2009/10) is the current industrial relation system in
Australia, and involves the establishment of the FWC etc.
- It introduced minimum wage ($22.33) and National Employment Standard
provides a minimum safety net for low-income earners, thus improving DOI
o BOOT test protects low-income earners with low bargaining power, ensures
they are not exploitered during negotiation.
- However enterprise bargaining is supported by FWA, meaning higher income
earners with a higher bargaining power experiences higher wage growth, in
comparison to low income earners with low bargaining power.
Fair Work Australia is the current industrial relations framework for the Australian labour
market, based on a decentralised wage determination system, where wages are tied to
productivity, rather than inflation. The Fair Work Act 2009 consists of 122 Modern
awards, and encourages collective bargaining for enterprise agreements, where employees
of a firm agree on wages and working conditions with their respective employer.
The Fair Work Act provides a safety net for low-income earners that are not part of an
award for a certain industry, consisting of the minimum wage of $20.33/hr- the highest in
the world, as well as the National Employment Standard. Hence, the Fair Work Act
marginally improves the distribution of income in Australia.
However, as low-income earners tend to have low bargaining power, their ability to
negotiate higher wages are undermined, whereas high income earners often have their
incomes indexed to inflation, effectively maintaining their real incomes. Therefore,
overall Fair Work can be seen to have a negative impact on the distribution of income.
61) What is the structure of Australia’s BoP? (2)
- BoP is based on a double entry system of credit/debits. Consists of 2 major
components- the CA and KAFA. Under a floating exchange rate. These two accounts
equal to 0
- The current account records transactions involving trade of goods or services recorded
by the BoGS, and income flows in NPY and NSY. While The KAFA records
transactions involving financial flows, capital flows, investment, and forex etc.
The balance of Payments of Australia is based on a double entry system of credits and debits,
and consists of two major components- the CA and KAFA. The CA records transactions
involving trade of G/S as well as earned and unearned income flows. However, the KAFA
records transactions involving financial and capital flows. The CA and KAFA together, with
the net error emissions, offset each other to equal 0.
62) Account for recent trends in the direction of Australia’s trade and financial flows. (4)
- Trade: increased trade flow to China due to complementary nature. Shifted away from
EU, Japan and USA.
o Export to China have increased from 5.75% in 2000 to 39.1% in 2020CHAFTA
- Financial Flow: financial flows from US, UK and Belgium (increased investment by
10% growth into AUs last 5 yrs) & increased investment from southeast Asia through
AANZFTAs
The direction of Australia’s trade has been highly concentrated towards China over the last 2
decades, mainly due to their complementary relationship, as China relies on Australia’s iron
ore and coal exports for infrastructure projects, while Australia relies on their demand for
export income. In fact, exports to China has increased from 5.74% of total exports in 20000
to 39.1% in 2019, through the signing of ChAFTA etc.
On the other hand, Australia’s inward financial flows are mainly from the US, UK and
Belgium respectively, with Belgium recording a 10% growth in its investment into Australia
in the last 5 years. However, Australia has also experienced an increase inward FDI from
South-East Asian economies in recent years due to their growing relations with Australia
through trade agreements such as the AANFTA.
63) Analyse the impacts of changes in international borrowing and foreign investment on
Australia’s BoP. (4)
- 2- illustrating positive/ negative impacts of IB on BOP; 2- illustrating positive/
negative impacts of IB on BOP
- Distinguish between IB and FI IB refers to foreign debt undertaken by an economy.
Whereas foreign investment refers to foreign equity in Australia.
- As Aus continues to increase international borrowing to finance govt deficit etc.
KAFA inflows will increase. However, the NPY account of the BoP will experience
greater debit as foreign debt has interest repayments.
- A similar process occurs for foreign investments- increases KAFA, NPY debits in the
form of profit/ dividend payment will increase CAD- worsening BoP (MIB).
International borrowing refers to foreign debt undertaken by an economy, whereas foreign
investment refers to foreign equity, or the foreign purchase of Australia’s assets.
As Australia continues to undertake further international borrowing to finance government
deficit etc, KAFA inflows will increase. However, in turn, the net primary income account of
the CA will experience greater debits as foreign debt incurs interest repayments that must be
paid. This will lead to a sustained NPY deficit and hence, a worsened CAD.
The same applies for foreign investment in the form of equity/shares, which will also
contribute to higher KAFA inflows through FDI and portfolio investment. This will also lead
to greater NPY debits in the form of dividends/ profits, sustaining a greater NPY deficit and
hence, CAP.
64) Outline the term award within the context of Australia’s industrial relations
framework. (2)
- A legally binding set of minimum conditions/ standards that all employees in a
specific industry are entitled to.
- In Australia, 10 NES and 10 industry specific standards. All under FWA framework.
Awards within the context of Australia’s industrial relations framework refers to a legal set of
minimum conditions/ standards and wages that employees in a specific industry are entitled
to. However, if employees are not covered by an award, they are entitled to 10 National
Employment Standards and the minimum wage, which acts as a safety net for these workers.
65) What is the purpose of the national employment standards. (3)
- Define 10 minimum employment entitlements provided to all employees.
- Explaining the purpose ensure a safety net for all individuals and maintains a
reasonable standard for working conditions and quality of life.
- E.g. minimum working hours of 38 hours and 4 weeks of paid annual leave.
National employment standards refers to a set of 10 minimum employment entitlements that
have to be provided to all employees in the Australian workforce. These include entitlements
related to maximum weekly hours, parental, annual and long service leave etc. This,
alongside the minimum wage under the Fair Work Act 2009 acts as the safety net for
employees, enduring a reasonable standard of quality of life.
66) Account for recent trend in Australia’s balance of payments:
- 44 years of CAD that moved into a surplus in 2019. This has come from a surge in
LNG exports to China, improving the BoGS balance. As well as increase in national
savings, where NPY deficit improved from -3% of GDP on average to -0.3%.
67) Evaluate the effectiveness of recent labour market policies in achieving their
objectives. (5)
Labour market policies in Australia are implemented through fiscal policy, and are often
target to improve employment and the distribution of income in Australia. The 2019-20
$525M “Delivering Skills for Today and Tomorrow” package involved the creation of over
80,000 apprenticeships to target skill shortages, providing unskilled workers with the training
to boost the level of employment in the economy. This policy has been relatively effective,
with the unemployment averaging at 5.2% from 2019-20, despite slowing economic growth
in the Australian economy.
Furthermore, the $4bn JobMaker Hiring Credit in the 2020-21 budget has been implemented
in response to soaring levels of unemployment during the COVID_19 pandemic. This
involves a maximum 12-month payment of up to $200 a week to employers who hire those
on JobSeeker or Youth Allowance aged 16-35. However, although estimated to assist over
450,000 young jobseekers over a 4 year period, the JobMaker credit has been ineffective with
less than 1000 jobs been subsidised by March 2021. This was a result of a lack of eligibility,
as a large proportion of the unemployed fall outside the 16-35 age bracket. Hence, this policy
has been ineffective thus far in achieving greater employment levels in the economy.
68) Account for the recent trends in Australia’s balance of payments. (2)
Australia’s current account, despite a 44-year trend of sustaining a deficit, has transitioned
into a surplus as of the June qtr 2019. This was driven by a record BoGS surplus of $19.9bn,
driven by China’s demand for Australia’s coal and iron has increased as a result of its
construction-focused stimulus strategies. The CAS has been maintained.
69) Define deregulation
Partial or complete removal of govt regulation restricting the operation of market forces,
such as the removal of a price floor for spirits.
70) Assess the validity of the Pitchford thesis for Australia’s balance of payments. (3)
- Pitchford thesis is based on the consulting adult’s theorem, which suggests that a
sustained CAD is not detrimental to an economy but rather beneficial if driver by the
private sector as individuals invest in areas to improve growth such that they generate
profits.
- Despite CAD, Australia sustained 29 years of consecutive growth, whilst a CAD may
lead to a debt trap cycle, Australia has maintained a triple A credit rating, and thus the
Pitchford thesis is valid with regard to the Australian economy.
The Pitchford thesis, based on the Consenting Adults Theorem, suggests that a sustained
CAD is not detrimental to the economy but rather, could be beneficial if it is the result of
private sector borrowing. This is because the private sector is assumed to take calculated risks
and is profit motivated, utilising foreign capital to benefit the aggregate supply and hence,
long term economic growth of the economy. In the context of Australia’s balance of
payments, the Pitchford thesis is seen to be mostly valid, as Australia has successfully
achieved 28 years of economic growth, as well as trends of price stability and full
employment despite sustaining a CAD of 3-6% of GDP for 44 years. However, one critique
of this theory would be the onset of the GFC, where a crisis in private sector borrowing
contributed to a global recession and in turn, a slowdown in Australia’s economy.
71) Discuss the effectiveness of recent fiscal policy in achieving external stability:
- +ve: Fiscal consolidation movement towards a surplus to pay off debt, between
2015 to 2020, aim of decreasing net public foreign debt to 0% by 2030 improves
external stability
- -ve: adoption of high aggressive fiscal injections in response to COVID increases
foreign borrowing, and budget deficit of $106bn  increased NFD to 40% of GDP,
and worsens GDP.
- CAD estimated to be 2.25% of GDP in 2023/24.
Fiscal policy has been relatively ineffective in achieving the external stability for Australia in
recent years. In terms of reducing NFD as a % of GDP, the government has adopted the
process of fiscal consolidation since 2011. This involves reducing levels of G and increasing
T to reduce government debt, with the goal of achieving 0% net debt by 2030. Howeveer, in
response to the COVID-19 pandemic, the government has invested over $250bn for
economic stimulus, driving the budget outcome to a deficit of $213.7bn or 11% of GDP in
2020-21. This is estimated to increase net debt to 34.2% of GDP in 2022, which will worsen
the NPY deficit and hence, negatively impact the current account as a % of GDP, worsening
external stability in the long term.
However, Fiscal policy has also positively impacted external stability through policies such
as the Instant Asset Write-off Scheme, which allows 99% of businesses to claim deductions
for the total cost of assets in 2020-21. This has positively impacted the level of investment in
the economy, stimulating AD and AS and hence, improving international competitiveness of
Australian businesses. Thereby supporting greater BoGS performances and hence, a
sustained CAS- improving external stability.
72) Why is monetary policy the best suited macroeconomic policy to manage inflation?
- Government doesn’t specifically target inflation,
- Explain the mechanism of macroeconomic policy through cash rates.
MP, which utilises the cash rate and market interest rates, is best suited to manage inflation
due to the fact that these mechanisms can directly manipulate the availability of credits in the
economy by altering borrower and lender behaviour, hence having a profound impact on the
level of inflation in Australia. It is superior to Fiscal Policy as contractionary FP to control
inflation will involve higher rates of taxes or reduced spending, which will contribute to
worsened standard of living.
73) Explain the effectiveness of government policy is limited by global influences. (2)
- As Australia is an open-economy/ highly integrated it is influenced by financial
contagions. EG. During COVID, Australia experienced decrease in economic growth,
resultantly, macroeconomic policy consequently seeks to improve growth (counter
cyclical) this reduces the government’s ability to achieve other objectives.
The effectiveness of government policy in particular, fiscal policy can be limited by global
influences. This is because the global economy, through financial contagion can impact
domestic economy in the form of lower economic growth and unemployment. As seen in the
GFC or COVID-19. In response to these downturns, the government are often influenced to
compromise the achievement of other objectives such as external stability. This was seen in
2020, where the govt used a total of $507bn stimulus, reaching a 40% debt as % of GDP,
thereby contributing to worsened external stability as NPY debits in the form of interest will
increase.
74) Explain how fiscal policy can achieve sustainable economic growth. (2)
- Sustainable economic growth is growth rate of 3-4% in the medium to long term.
- Expansionary FP to increase AD (multiplier effect); Infrastructure development plan
Fiscal policy is a macroeconomic tool designed to influence levels of aggregate demand to
achieve economic objectives such as sustainable economic growth of 3-4%. It can bolster
growth by taking an expansionary stance, which involves increasing govt expenditure and
reducing taxes to boost growth. On the other hand, it can also slow down excessive growth
through a contractionary stance, reducing govt expenditure and increasing taxes. Its injections
into the economy are amplified through the multiplier effect.
75)
-
Contractionary monetary policy decreases inflation, explain links; This will
decrease growth and increase unemployment.
To increase growth to 3-4%, expansionary fiscal policies should be implemented
this increases growth and decrease unemployment
Little targeting of distribution of income- eg. Microeconomic reforms (training
programs) should be implemented to improve DOI increases growth in the LT;
decreases cost-push inflation and unemployment.
A suitable policy mix would involve implementing contractionary MP to reduce levels of
inflation, which currently sits at 4.2, and hence outside the target range of 2-3%. This will be
effective as the higher cash rate will discourage borrowing for the purpose of consumption or
investment, thereby lowering inflation. However, despite contractionary MP, expansionary
FP should be implemented to boost levels of economic growth which also sits outside the
range of 3-4% at 2.4%. Through increased govt expenditure which will increase AD through
the multiplier effect. This is because MP is deigned to solely target inflation, which FP faces
the task of managing greater income stability.
Furthermore, to target the high Gini Coefficient of 0.405, and the unemployment rate of
6.7%, the govt should implement microeconomic reforms such as training or education
policies in order to up-skill workers and hence, boosting their employability and income,
thereby addressing the unequal distribution of income in the economy.
76) Outline the term ‘The tragedy of the Commons’. (2)
Refers to the situation where because some goods do not have clearly defined property rights,
individuals act in their interests leading to exploitation and potentially depletion. This occurs
due to market failure, ie. Price mechanism does not account for social costs.
77) Distinguish between public, private and merit goods. (2)
Public goods refers to goods that produce positive externalities in the economy, and are often
under-supplied in the economy. However, public goods are those that are non-excludable and
non-rival in nature. Often provided by the government as a result. Private goods are those that
have clearly defined property rights and are thereby excludable and rival in nature.
78) Explain why individual economies little economic incentives have to act
independently to improve ecological sustainability. (4)
- Difficult to change to sustainable methods, and the problem requires collective action.
- A movement towards ecologically sustainable practices at the cost of economic gains,
and may reduce international competitiveness.
Govt policies such as the introduction of the ‘Fuel Quality Standards Act’ in 2000 has been
effective in achieving ecologically sustainable development in Australia. The policy involved
the ban on leaded petrol by 2002, leadig to a reduction in air lead levels by 50% in 2 years.
Similarly, the Carbon tax in 2014 involved charging $23/tonnes on busiensses emitting over
250,000 tonnes of CO2 annually. This resulted in a reduction in emissions by 4% from 201214, and generated $6.6bn revenue for the government. However, these policies have often
been limited by conflicts with other economic objectives such as growth, as well as political
constraints, this was evident with the carbon tax, which was repealed in 2014 due to concerns
related to inflation (electricity price increased by ~10%) and higher costs of production for
major businesses.
79) What is the role of automatic stabilisers in the government’s policy mix. (2)
- Discretionary component of fiscal policy, including transfer payments and the
progressive taxation system. Used as a countercyclical tool to smooth out the
fluctuations of the business cycle.
Automatic stabilisers are a class of non-discretionary fiscal policy tools that respond directly
to changes in the economy without govt intervention. Stabilisers such as welfare payments
help to increase consumption during periods where unemployment is rising, thereby
stabilising economic growth in the economy and acting in a countercyclical manner.
80) Analyse the impacts on the economy of a government financing a budget deficit
through private sector borrowing. (3)
- Sale CGS in domestic market decreases money supply, leading to the crowding out
effect- where the increase in IR would decrease private investment and ultimately
decreases AD.
- On the other hand, the crowding in effect may occur, which is where government
financing a deficit and subsequently stimulating growth through increase in investor
confidence (people have a positive outlook) increases investment and AD.
When the govt finances a budget deficit through the sale of govt bonds in the domestic
market, the total monetary supply is reduced- decreasing access to capital and driving up
prices in the form of interest rates. This crowding out effect may reduce access to debt as
higher prices disincentive firms and consumers, leading to a reduction in borrowing and
correlated investment or consumption. Such a fall in the components of AD will lower
economic growth. However, investment in the domestic economy may also lead to the
“crowding out effect” where govt spending incentivises private incensement in the areas of
govt spending, thereby increasing AD and economic growth.
81) Account for recent (2014 onwards) trends in the Australian govt’s fiscal policy stance
and explain its impact on Australia’s external stability.
Between 2014 and beginning of the COVID-19 pandemic, the govt maintained a continuous
program of fiscal consolidation and a generally contractionary fiscal stance. This was due to
the liberal party’s understanding of the ‘debt and deficit’ crisis, where they aimed to reduce
the amount of public debt.
In terms of external stability, this reduced net foreign debt as a % of GDP as the rate of
public debt per GDP stabilised at 23% between 2015 and 2019. However, due to the recent
COVID-19 pandemic, public debt has ballooned from 24% of GDP to 32% between 2019-20.
This increase in public debt will worsen NFD and will lead to greater servicing costs,
creating outflows on our NPY and therefore a worsened CAD as a % of GDP.
82) Outline the long run impact of Australia’s trade liberalisation policies on household.
(2)
- Through trade and nationals specialising the volume and variety of G&S available
increases, this ultimately increases the utility and living standards of the society.
- Competition reallocates resources to more efficient industries, which in the long term
increase demand for labour decreases unemployment.
The removal of barriers to free trade or trade liberalisation will help to reduce the costs of
imports, reducing imported inflation and therefore increasing the purchasing power of
Australian households. Moreover, in the long tern the increasing prevalence of efficient
industries will increase GDP, and as employment is a derived demand, households should see
greater access to employment.
83) Describe the domestic economic impacts of one multilateral agreement that Australia
is Party to. (3)
- CP-TPP- signed in 2018, representing 22% of Australia’s total trade volume.
Covered 98% of tariff reduction for Australia’s agriculture export, and Japan agreed
to accept an additional 6000 tonnes of rice per year.
- This would significantly increase the demand for Australian agriculture product as a
decrease in tarif level increases its international competitiveness. Translating to an
increase in demand for Australian export ultimately decrease the rate of
unemployment as labour is a derived demand.
- Eventually, CP-TPP is estimated to contribute to $15.4bn to the Australian economy
by 2030, representing an potential increase in overall improvement in living
standards. However, a reduction in tariff levels on foreign exports may also result in
short term structural unemployment if Australia’s companies lacks competitiveness
Australia’s membership of ANZ-ASEAN is an important Multilateral agreement that links
Australia and New Zealand to the bulk of Southeast Asia. This benefits Australia in terms of
commodities and services exports to economies reliant on iron ore and other raw materials. It
further benefits Australia through lower import costs of manufacturer consumer goods in
which these economies specialise, reducing imported inflation and benefiting households.
-
84) Outline the rationale for trade liberalisation and discuss the impacts of a quota on
certain imported goods on the domestic economy (5)
- The rationale behind trade liberalisation follows Ricardo's theory of competitive
advantage where individual economies specialise in the production of what they have
the lowest opportunity cost in and trade with other nations in order to maximise
allocative efficiency with the world's limited resources.
- An import quota is a protectionist policy that limits the quantity of imports into the
domestic market, the higher the quota, the more goods allowed in. A lower import
quota will benefit the domestic economy as domestic suppliers are guaranteed some
market share, thus protecting domestic employment. However import quotas can
worsen the overall quality of life as consumers are forced to purchase more expensive
goods and services as imports are blocked, thus negatively affecting the domestic
economy.
- Moreover, the decrease in competition arising from increased import quotas can also
result in excess inflation which can distort economic decision making, a negative
effect on the domestic economy.
Trade liberalisation, or the removal of artificial barriers to free trade is based on the principle
of comparative advantage, whereby certain economies may have a specific advantage or
ability to produce a certain g/s in a more efficient manner. By removing trade barriers,
economies are able to specialise in areas that they are most efficient, such as Australia’s
specialisation in commodities due to the significant resource endowments. A quota, on the
other hand, is a protectionist policy that creates a numerical limit on the importation of a
certain g/s. this may benefits an economies infant industry by helping to reduce the market
share of foreign competitors, thereby allowing new companies to compete and reach
economies of scale. However, a quota also reduces the supply of certain imports in an
economy, driving up the scarcity of these products and increasing price. Overall, this may
lead to a rise in demand-pull inflation, reducing purchasing,
85) Describe the rationale for regulating industries. (2)
- Avoid market failure/ reduce negative externalities
- Maintain workplace standards economic, social, political rights. eg. Minimum
wage.
Regulating industries refers to the imposition of government controls on the free operation of
the market mechanism. This is mostly done to avoid the negative externalities created by
market failure where the market is unable to accurately account for the social costs of certain
actions- thus creating unintended negative consequences for society. therefore the govt
regulates the market to reduce these consequences, such a air and water pollution.
86) Outline the main changes that were made during the deregulation of Australia’s
financial market in the 1980s. (3)
- Floating of the AUD
- Introduction of 16 foreign banks
- Adoption of market-based interest rates
- Increase prudential supervision
Three main changes occurred during the deregulation of Australia’s financial market. Firstly,
the government floated the Australian dollar, allowing the exchange rate to be determined by
market forces. Secondly, the govt ended the monopoly of domestic banks by allowing 16
foreign banks to operate in the Australian economy. Finally, the govt increased prudential
supervision through the creation of specific departments in charge or holding banks to
guidelines around risk.
87) Explain the effects of microeconomic reforms on two macroeconomic indicators. (4)
- 2- identifying the effect of TWO macro indicators (unemployment, inflation etc)
- 2- explaining the effects
The deregulation of Australia’s banking system involved the removal of a domestic
monopoly on monetary supply through the issuance of licence to 16 foreign banks. This
microeconomic reform greatly reduced the cost of capital and therefore acted as a large
bolster to the Australian economy. Firstly, the decreased cost fo capital helped to increase
rates of borrowing which drove an increase in consumption and investment increasing AD
and therefore economic growth. Secondly, the decreased cost of capital reduced cost-push
inflation as firms spent much less repaying servicing costs. This also helped to drive down
total inflation in the economy.
88) Outline the purpose and characteristics of the HDI. (2)
- HDI measures economic development, calculated between 0 (no development) and 1
(maximum development)
- Characteristics: life expectancy at birth; GNI per capita; educational attainment (mean
years of schooling);
The HDI is a standardised indicator that acts as a global measure of standards of living and
quality of life. The number, between 0 and 1, is based on three measures, GNI per capita, life
expectancy at birth and mean years of schooling.
89) Distinguish between developing economies and emerging economies. (2)
- Developing economies have low industrialisation, development, and low GDP, may
feature political instability. E.g. Uganda.
- Emerging economies have high GDP, increasing economic growth and improving
level of development. E.g. China.
A developing economy refers to an economy with low levels of industrialisation, limited
economic infrastructure and generally low GDP per capita. While an emerging economy
often refers to a nation with high level of GDP growth, high levels of industrialisation and
rapidly improving economic infrastructure. Many times a developing economy will also have
volatile economic growth and political instability, while an emerging economy will have high
economic growth and relative political stability.
90) Analyse the strategies used by an economy OTHER than Australia to respond to changes in
-
-
-
the international business cycle (5)
Growing adoption of David Ricado’s 1817 comparative advantage model led to a significant
increase in economies adopting free trade policies, pursuing trade liberalisation, particularly
throughout the 20th Century. China responded to the growing liberalisation of nations amidst
the 1970s and 80s by enacting the Open Door Policy and establishing SEZs in coastal areas to
expand export markets and improve trade with Hong Kong and Shanghai. The enablement of
low-cost trade culminated in high demand for Chinese exports, contributing greatly to the 10%+
average real GDP growth on average during the 2000’s.
In order to combat the rapid deceleration of global growth during the GFC, China implemented
expansionary monetary policy, decreasing interest rates 5 times from September 2008, reducing
the cost of borrowing, increasing consumption, and hence increasing aggregate demand
(C+I+G+X-M) to stimulate economic activity. Additionally, China implemented expansionary
discretionary fiscal policy, providing stimulus packages worth around US$600bn injected into
the economy, effectively increasing consumption and aggregate demand, and restoring
economic growth, evidenced as economic growth increased to 10.3% in 2010.
As a result of a slowdown in global supply chains, and a severe downswing in the IBC from
forced lockdowns surrounding the Covid-19 pandemic, China experienced a severe decline in
economic growth of -6.8% in the first quarter of 2020. In response, the Chinese government
implemented heavily expansionary fiscal policy, whereby an approximate total of USD $1.4
trillion would be injected into the economy on a digital infrastructure public spending program,
as well as double down on its Made in China 2025 and China Standards 2035 initiatives. The
injection into the economy boosts up the government expenditure component of aggregate
demand, as well as allowing for increased employment opportunities, placing upwards pressure
on consumption and investment. As such, the infrastructure stimulus packages have contributed
to China’s bouncing back from the one negative quarter of growth and not experience a
technical recession, seeing growth rapidly increase to 15.3% upon implementation.
In recent years, the Chinese govt has implemented an increasingly aggressive stance in its
response to the international business cycle. In the last 30 years the govt implemented
microeconomic reform in the from of SEZ, which allowed for an attachment to the international
business cycle through increased TNC investment. Furthermore, in recent years, the govt has
adapted expansionary fiscal policy in order to respond to the downturns in economic growth
and exports created by the GFC and most recently COVID-19. Finally, the govt has
implemented the microeconomic one belt one road scheme in order to connect to the rest of
the global economy- responding to the recent rise in protectionist policies and slowdown in the
west.
91) Outline two structural causes of Australia’s current account deficit. (2)
- S-I gap
- Narrow export base
Australia’s long tern CAD is in part the result of the savings and investment gap, where
national savings are insufficient to meet domestic demand for capital. Leading to demand for
foreign capital that is later repaid as an outflow on the NPY. Secondly, Australia lacks
international competitiveness in producing manufactured goods (i.e. consumer goods). This
results in large demand for foreign imports, thereby resulting in worsened BoGS and CA.
92) Describe the impact of a high CAD on a country’s credit rating, and hence its rate of
economic growth. (3)
- Impact of high CAD on credit rating- decrease the credit rating.
- Impact of CAD/ decreased credit rating on growth representative of greater risk
involved in investing/ lending money to a country decreases investors’
confidence decreases I, AD then eco growth
A high CAD is often evidence of high amounts of debt and related outflows in a nation’s
economic transactions. If a CAD gets too severe, international rating agencies may
downgrade a nation’s credit rating, which acts as a measure of a country’s ability to repay
debt. If a credit rating gets downgraded, international investors and banks may see investment
or loans to the country as riskier, increasing interest rates to offset risk, and therefore
increasing the price of capital. This would lower the desire to borrow funds, lowering
consumption and investment and therefore lowering AD and economic growth.
93) Outline the structure of Australia’s balance of payments. (2)
- Two main accounts CA & KAFA. CA=KAFA
- Definition of each
o CA is BOGS + NPY+ NSY non reversible transactions
o KAFA is KA +FA, reversible transactions
Australia’s BOP acts as a measure of the transactions into the out of an economy in two main
accounts. Firstly, the CA is a measure of tangible, non-reversible transactions while the
capital and financial account is a measure of intangible reversible transactions. For exampleinvestment into Australia.
94) Describe the role of the RBA in influencing external stability. (3)
- Relevance/ Aim does not directly influence external stability have an indirect
impact.
- Positive price stability (low 2-3% inflation) promotes international
competitiveness improved BoGS and CAD as a % of GDP.
- Negative increase IR positive IR differential attracts FDI increases servicing
costs, which worsens net foreign debt as a % of GDP.
While the RBA doesn’t specifically focus on improving external stability, their important role
in influencing inflation and unemployment can have corollary effects on external stability.
Firstly, the RBA benefits external stability by keeping inflation low and stable between 2-3%,
which keeps export prices from rising, maintaining international competitiveness and
benefitting the BoGS, Alternatively, if the RBA increases interest rates they might increase
foreign investment into Australia, thereby creating greater inflows on the KAFA, worsening
NPY outflows and the CAD.
95) Explain 2 limitations of fiscal policy in achieving Australian govt economic
objectives. (2)
- Political constraints (carbon tax)
- Time lag (medium implementation lag) slow to respond
- Global influences (COVID-growth)
Fiscal policy is generally limited by political constraints, whereby a government may be
unable to implement effective fiscal policy that achieve objectives because they have
alternative political objectives. Secondly, fiscal policy is limited by a 1year implementation
time in between yearly budgets- which slows down immediate responses to economic
scenarios.
96) Discuss two impacts of running a budget deficit in a closed economy. (4)
Running a budget deficit, which refers to govt spending greater than taxation revenue in a
closed economy without access to foreign markets and capital has a variety of impacts.
Firstly, a budget deficit might accompany an increase in govt spending or consumption from
lower tax rates thereby increasing AD and economic growth. These impacts are amplified by
the lack of ability for funds to leave the economy through imports or other outflows (since its
closed it doesn’t have access to the international market). Secondly, financing a budget
deficit without access to foreign debt may lead to the crowding out effect where the govt
reduces the domestic monetary supply, thereby increasing interest rates. In doing so the govt
will reduce borrowing and related consumption, lower AD and economic growth.
97) Outline two policies from the recent budget, and assess their likely impact on
Australia’s economic performance. (4)
The most recent 2021/2022 budget has focused on increasing economic growth following the
COVID-19 pandemic. Firstly, the govt has removed restrictions on superannuation, allowing
all workers to be paid super. This will reduce the savings and investment gap thereby slowing
reducing external stability pressure from increasing debits on the NPY component of CA,
which allows higher level of investment- thus promoting aggregate supply and related
economic growth. Secondly, the $15.2bn additional investment into 10 yr $110bn
infrastructure scheme acts as a typical injection into AD where govt spending will shift AD to
the right, increasing economic growth. Moreover, the supply improvements occurring due to
infrastructure improvement will help AS and create long term economic growth.
98) Describe the main source of wealth in Australia.
- Property holdings (houses and household contents)
- Financial assets (shares, bank, deposits etc)
- Superannuation
99) Explain why the distribution of wealth is more unequal than that of income. (2)
Wealth, which refers to the monetary value of assets held at a point in time, is often more
unequal than income since it is accumulated across a long period of time, and most often
accumulated by those with a high income. This leads to those with higher incomes creating
long term wealth as well as older citizens having more time to accumulate greater wealth.
1) Analyse the reasons why globalisation has resulted in increased inequality within
countries, but has to some extent decreased inequality between countries. (5)
Globalisation, which refers to the increased integration of economies and economic
institutions has generally led to a decrease in global inequality. This has largely occurred as
the result of developing and emerging economies specialising in certain industries such as
manufacturing. In doing so they have used increase trade revenue from developed nations to
increase national DGP and decrease global gaps. However, this improvement in national
revenue has almost entirely occurred in areas with significant exposure to foreign economies
such as those in coastal regions. For example, in China the eastern seaboard has become
extremely wealthy due to large global connections and ports in places like Shenzhen while
the rural interior of the nation has largely missed out, creating national inequality.
2) Explain two limitations of monetary policy in achieving the economic objectives. (2)
- Medium impact lag- 6-18 month to influence economic activity
- Blunt instrument can’t target specific components of AD
- Has a 0 limit bound/ liquidity trap
MP is generally limited as a blunt tool, whereby changes in the cash rate are unable to
directly impact the economy as it relies on consumers and firms to take out increased debt
and spend it in the economy to create change. Secondly, this particular issue also leads to an
impact time lag where changes in the cash rate requires the transmission mechanism to be
effective, creating a long term delay in MP ability to impact the economy at a point in term.
3) Explain, using a diagram, how the RBA manipulates the money supply to influence
interest rates in the domestic economy. (4)
Through the cash rate corridor, the RBA is able to set the cash rate target in between the rate
at which they loan out and deposit funds. This takes effect in the domestic money market
where the RBA sells or buys Commonwealth Government Securities, which changes the
supply of cash in the economy. A greater supply of cash will lower the cash rate and hence
interest rates of banks as they can lower their prices due to lower input costs,
4) Analyse the effects of falling interest rates on economic growth and the
unemployment rate, assuming that the economy is operating at full employment. (4)
A decrease in interest rates allows for an increase in borrowing from both firms and
consumer as debt falls in price. Overall, this increases consumption and investment, driving
an increase in AD thereby allowing for an increase in economic growth. However, falling
interest rates also increase rates of import consumption, driving a decrease in net export and
therefore a fall in AD. In terms of unemployment, increased AD tends to increase the derived
demand for employment thereby decreasing the unemployment. But as the economy is
operating at full employment (i.e. there is no cyclical unemployment), economic growth
would only increase inflation without having any effect on decreasing unemployment as there
is no excess capacity for the economy to operate (i.e. this relationship can be illustrated by
the Philips curve).
5) Outline the impact of inflation on Australia’s trade and investment flows (2)
- Increased domestic inflation decreases international competitiveness decreases
exports and worsens the trade flows
- High inflation (above 2-3%) increases uncertainty around prices decreases investor
confidence and investment flows. Alternatively, if there is low and sustained inflation,
then investor confidence increases
Inflation refers to an increase in domestic prices, which increases the price of exports for
foreigners. This reduces a nations’ international competitiveness, thereby decreasing trade
outflows. While inflation tends to also increase investment inflows as foreign investors tries
to take advantage of higher prices and greater returns.
6) Describe the impact of high inflation rates on the distribution of income and wealth
within the economy. (2)
High rates of inflation tend to worsen distribution of incomes as it worsens real income
for those on fixed wages, which are disproportionately poorer compared to high income
individuals who often have wages fixed to inflation. Moreover, inflation worsens the
distribution of wealth as it drives up the price of assets which are almost entirely held by
high income individual.
7) Analyse the impacts of a sustained period of low inflation on Australia’s economic
performance. (3)
- Removes volatility in prices- which may distort investor confidence and increases
income (particularly for LT purposes of improving productive capacity)
o //Or// increases international competitiveness of exports improves ext. stab
- Low inflation bears no incentive to bring forward consumption people delay
consumption decreases AD and short term economic growth worsens eco
performance.
A sustained period of low inflation may benefit the economy as it allows the govt to
implement expansionary economic policy without fear of creating undue inflationary
pressure. On the other hand, low inflation over a long period of time will likely to reduce
consumption as people delay psending due to a lack of significant incentive to consume.
8) Distinguish between a ‘clean’ and ‘dirty’ float. (2)
A clean float refers to when a central bank allows an exchange rate to be determined entirely
by the forces of supply and demand. Alternatively, a dirty float differs where the central bank
allows the exchange rate to be largely determined by supply and demand but occasionally
intervenes in the market to change the exchange rate.
9) With example, explain two disadvantages of the floating exchange rate system. (3)
A floating exchange rate can increase he volatility of a floating exchange rate as it can be
based on foreigner’s perception of the domestic economy or attitude towards specific
political events. Hence- leads to distorted economic decision-making people lack certainty in
the price of future exchange rates. This can be evident in 2009-10, where the AUD lost 1/3 of
its value due to the outbreak of GFC, then appreciating to USD$1.10 in 2011- reflecting the
high level of volatility for international investors. Furthermore, the floating exchange rate can
result in financial risks for investors, therefore firms allocate substantial resources to make
predictions for exchange rate movements. This represents the opportunity costs of higher
volume of investment and AD, leading to potentially lower economic growth.
10) Discuss the impact of as sustained depreciation in the Australian dollar on the balance
of payments and economic growth in Australia. (5)
A depreciation of the AUD has various effects on all areas of the BoP and is generally
beneficial for economic growth. Firstly, in terms of CA a depreciation lowers the price of
Australian exports, increasing its international competitiveness and export revenue- thus
improving the BoGS. Secondly, due to the valuation effect, a depreciation might worsen the
net primary income account as foreign debt becomes more expensive in the face of a weaker
AUD. While however, this effect is minimal as 95% of Australia’s debt is denoted in AUD
terms. in terms of KAFA, a depreciation makes it cheaper for foreigners to invest in
Australia, thereby allowing for an increase in credits on the KAFA, while also increasing the
financial obligations of Australia, hence worsening NPY component of CA. Finally, an
improvement in both exports and investment helps to increase AD, thereby creating an
improvement in economic growth which may be offset in the future by increasing servicing
costs due to foreign investment.
11) Outline two of the national employment standards in the Australian labour market. (2)
- Annual leave of 4 weeks for annual leave (FT); PT- on a pro rata basis
The national employment standards acts as a baseline set of requirement for all employees
has a variety of protection. One NES includes stipulating the maximum weekly working
hours of 38. Another NES includes the right to annual leave. Full time and part time workers
are entitled to 4 weeks of annual leave based on their ordinary hours of work.
12) Explain the impacts of a centralised wage determination system on the level of
economic activity. (3)
A centralised labour determination system refers to a market where the govt maintains a
significant role in deciding wages and standards for employees across the economy. In the
short term this improves the level of economic activity as it benefits the lower income earners
(i.e. who has a higher MPC), and thus increases AD and economic growth. However. since
wages were determination by the govt rather than productivity, the centralised labour system
limited aggregate supply and therefore constrains long term economic growth.
13) Describe a situation in which Fair Work Australia will resolve an industrial dispute
and evaluate the effectiveness of Fair Work Australia in resolving such disputes. (5)
As part of the Fair Work act 2009, the government established the fair work tribunal in order
to resolve industrial disputes and issues between employers and employees. One scenario in
which this might occur is when an employer fails to fulfill the NES. Whereafter an employee
might complain to the Fair Work tribunal to have a minimum wage paid or annual leave
given through the process of negotiation; arbitration; mediation. Generally, the FWA is
somewhat able to limit the power of employers effectively by giving employees an
understandable and clear route to dispute contracts and other issues. Overall, this may act as
an effective deterrent against employers breaking FWA standards. However, the fair work
tribunal is often slow and inefficient leading to many individuals being out of work for long
periods of time while they undergo disputes, which limits the desire for people to complain
and therefore the effectiveness of the act as a whole.
14) Distinguish between a newly industrialised economy and a transition economy. (2)
- A newly industries economy are experiencing high levels of growth as result of
industrialisation, which has seen from a shift from agricultural towards manufacturing
based production.
- A transition economy is an economy shifting from a centrally planned to a market
based system.
A newly industrialised economy generally refers to an economy which has recently
undergone a shift from agrarian and agricultural industries to manufacturing and urban
production. Alternatively, a transition economy is one that’s in the process of moving from a
centrally planned economy to a market or mixed market-based economy. This differs as often
the economy is already heavily industrialised and just needs to reduce govt controls.
15) A US govt gives a subsidy to its farmers. Explain the likely impact of this policy of
firms and households in Australia. (4)
A subsidy refers to a payment offered by a govt to producers in order to offset the cost of
production and lower the price of their goods. If implemented in the US agricultural market it
may positively benefit households in Australia by lowering the cost of agricultural imports
into Australia, increasing purchasing power and quality of life. however, as Australia is a
direct competitor with the US in terms of agricultural goods, a subsidy will reduce the
competitiveness of Australian goods both domestically and in the international market. This
then reduces revenue for these firms and may lead to a reallocation of resources away from
efficient production to other areas if the economy if they were unable to compete. Further,
this may incentivise innovation in order to regain competitiveness, thereby increasing
customer choice and living standards of households.
16) How could recent changes in global attitude towards free trade (including events
within the last twelve month) affect the Australia economy. (4)
Generally, the years following the GFC has seen the growth of extreme nationalist and
protectionist policies that are likely to limit the extent of free trade growth. Most recently,
changes such as BREXIT have reduced the strength of international institutions like the EU,
leading to the reinstatement of protections and the slowdown of trade. Comparatively, recent
trade tensions between the US and Chinese economy incited by former President Trump’s
imposition of a 15% tariff on all aluminium M and 25% tariffs on steel M originating from
Canada, the EU and China has limited free trade. This increase in protectionism encouraging
retaliatory tariffs has resulted in the contagion effect on Australia due its trade relations to
both economies. Consequently, an estimated $36 bn drop in GDP is expected to occur over
the next 5 years, with approx 60,000 jobs lost, and a reduction in wages by 2.4%. As such, it
is evident that a reduction in free trade is detrimental to the Australian economy.
17) Define the term “Gross World Product”. (1)
- Total summation of the goods and services produced in the global economy over a
period of time, converted to a common unit of measurement (e.g. USD)
18) Outline the factors affecting the supply of Australian Dollars. (2)
- Based on those who sell AUD.
o Aus purchase imports
o Aus purchasing foreign assets
- Look at factors that influence the outlined two. i.e. international competitiveness,
investor confidence, interest rate differentials.
19) Explain why the elderly and the youth face barriers to employment that are not faced
by middle-aged adult workers. (2)
- Elderly: less likely to have up to date skills such as technology knowledge in
comparison to middle aged workers. Additionally, they are nearing retirement.
- Youth: lack of skills and experience due to decrease time in workforce
20) Account for recent trend in Australia’s unemployment rate.
- u/e peaked at 7.4% in June 2020 due to COVID-19, decreased growth and decreased
demand for g/s decreased derived demand for labour.
- u/e has subsequently decreased (currently 4.6%- July 2021 figure) due to increased
govt expenditure and wage subsidies etc. Note that this is pre latest lockdowns in
VIC, NSW and ACT. So this number should increase again.
21) Outline three factors which impacts the balance of goods and services. (3)
- Change in domestic growth
- Improvement in ToT improves BoGS
- Change in IBC increased growth increases demand for Australian exports
22) Outline one recent trend in inflation over the last few years. (1)
- In June 2020- deflation to -0.3%. the CPI excluding volatile items fell from 2.1% in
Jan 2020 to 0.4% in mid-late 2020.
- COVID increased u/e, Y, C decreased AD and demand-pull inflation
23) Explain why the underlying inflation is the most accurate method of measuring
inflation. (2)
- 1- define underlying inflation refers to the rate of inflation that removes one-off
price changes caused by volatile g/s, while headline does not remove volatile items
-
1-Justify accuracy better reflection of market forces of supply and demand.
24) Distinguish between a ‘pegged’ and ‘managed flexible peg’ exchange rate system. (2)
- 1- pegged currency is fixed against another currency (or asset), usually on a daily
basis on the central bank, so there is no reliance on market forces.
- 1- managed flexible peg central bank sets a target band (usually daily), however,
the currency can fluctuate within the band based on market forces.
25) Outline two key elements of Australia’s policy of trade liberialisation since the 1980s.
(2)
- 1973- Whitlam govt cut tariffs across the board by 25$.
- 1991 industry statement: tariffs between 5-15% cut to 5%.
- Signing FTAs- Aus currently have 12 bilateral FTAs
26) distinguish between the cash rate and the general interest rate. (2)
- CR- cost of borrowing and return on saving between RBA and banks in the STMM
- IR- cost of borrowing and return on saving between banks of consumer sin the
general economy.
27) Account for 1 recent trend in Australia’s economic growth rate. (2)
- Identify a trend: -7% in June 2020 to 1.1% in June 2021
- Account/ explain: strong govt expenditure/ FP increased AD
28) Explain how changes in technology and efficiency impact economic growth. (2)
- Impact on growth: increased technological change increases productivity and
technical efficiency increase in economic growth.
- Explanation/ causality: drives AS, which will increase output and growth/
29) Describe the positive effects of economic growth. (3)
- 2 effects:
o Increased real income increases quality of life
o Indicative of lower cyclical unemployment
- Causal link- increases AD
30) Explain how economic policy may be used to respond to a period of negative
economic growth. (3)
- Expansionary MP decreased CR results in decreased IR decreases cost of
borrowing- increases C&I, increases AD and economic growth.
- Expansionary FP increased govt expenditure, increases AD. E.g. infrastructurealso jobs increases Y and C and AD.
31) Explain the concept of free riders
- People that reap the benefits of public goods without having to pay, often lead to
tragedy of the commons.
- 1- how does it lead to market failure- distorts resource allocation
32) Explain the concept of negative externalities and relate it to the issue of climate
change
- 1-define negative externalities
-
Refer to private/ social costs- firms only consider private costs and do not account for
social costs lead to dead weight lost, and products been over produced.
Explanation to climate change- pollution and fossil fuels creates CO2 emission, which
is a negative externality leads to the enhanced green house effects increased
global warming.
33) Explain the relative costs and benefits of using market based mechanisms and
regulating to achieve environmental sustainability
- Market based:
o Positive- manipulating S&D which leads to a more efficient allocation of
resources
o Negative- accounting for social costs can lead to increased cost of productionwhich is often passed on to consumers as increased inflation.
 E.g. carbon tax- electricity and increased almost 10% within 6 months
- Regulations:
o Positive- legally binding
o Negative- may undermine the maximum potential output as some economic
activities are abolished
34) Define ‘globalisation and outline one ‘driver’ of globalisation. (2)
- Define- globalisation refers to increased integration between individual economies, to
facilitate a global economy.
- Driver- technology; trade liberalisation; TNCs; financial deregulation
35) Outline three reasons for difference between nations. (4)
- Internal- resource endowments- institutional factors- bank security, corruption;
cultural factors
- External- nature of the global financial system/ global trade system
36) Analyse the impacts of globalisation on economic development in an economy other
than Australia. (5)
- Negatives: TNCs situated in SEZs in coastal and urban areas increased inequality
between urban and rural areas
- Negative: Increased production from globalisation and trade increased pollution
worsened environmental sustainability decreases economic development. E.g.
China had 11/20 most polluted cities in 2004.
- Positive: increased globalisation and increase TNCs , trade etc increases output and
income increases GNI per capita increases HDI over time.
- Positive: integration increases corporation to better achieve ESD i.e. China signed
the Paris agreement improves environmental sustainability and development.
37) Distinguish between income and wealth
- Income is a flow concept, which mis measured over a period of time. This is the
return on factors of production. E.g. labour that an individual receives.
- Wealth is a stock concept, measured at a point in time. Looks at the value of asset
ownership
38) Explain the economic benefits of income inequality
- Incentive effect- encourages workers to increase productivity, skills, risk taking etc.
 improves income and increases AS and growth in LT.
-
Increased national savings due to high Y earners having a higher MPS decreases SI gap, improves external stability as it improves the current account.
39) Analyse two policies that can be used to improve the distribution of income in
Australia.
- Policy 1: increased tax free threshold allows low Y earners to retain a greater
proportion of Y. E.g. 2012 increased from $6000 to $18200.
- Labour retraining programs increased skills of unemployed, particularly low
income earners, which decreases the disparity in income levels, hence improves the
distribution of income. E.g. 2016/17- PaTH, which however, only 59% of
apprenticeships was filled youth unemployment decreased but was still above
average.
- Minimum wage/ centralisation/ strengthen of safety net disproportionately helps
low y earners relative to high y earners. However, this increases structural
unemployment and can worsen DOI
40) Inflation rate is 20%; growth rate is 10% in yr 1 and 10.9% in yr 3; unemployment
decreased from 89% to 3.5%; CAD is worsening from -4% GDP to -5.5% GDP .
Suggest an appropriate monetary policy stance for this economy. (4)
- Specifically reference stats given!
- Contractionary (i.e. increasing the cash rate)
- 1- Monetary policy acts countercyclically, and would be useful in slowing down the
economy.
- 1- currently 20% which is outside the target band of 2-3%. Inflation is the primary
objective of MP, it acts as an anchor point to the establishment of MP. Increase CR
will increase the cost of borrowing for the purpose of consumption, leading to
decreased demand for G&S thereby lowering prices.
- 1- Eco growth- increased from 10-10.9% (higher than the sustained rate of 3-4%)increases savings as eco growth increase, this increases leakages out of the economy
and decreases econ growth.
- u/e- 3.5% can be assumed that it is at or nearing full employment, and any further
expansionary policies will only contribute to inflationary pressure.
- CAD- Contractionary= increase C/R IR differentials attracts KAFA inflows =
increase in NPY outflow worsens CAD
41) Cash rate 0.25%; growth rate 2/7%; inflation 0.2%; unemployment 5.5%. Evalute the
likely effectiveness of MP in this economy at achieving the objectives of high growth,
low unemployment and price stability. (5)
- The stance is expansionary
- Eco growth, u/e, would improve effective
- Decreases inflation close to deflation- effective in improving it but not necessarily
into the target band of 2-3%.
- Mention limitation- Liquidity trap- when it approaches zero-bound limit it becomes
less effective. Further, MP is more effective in contractionary stance than
expansionary stance.
42) Explain the link between a CAD and a CAFA surplus under a floating exchange rate.
(4)
- 1- Define the relationship CA+KAFA= CAD offset by KAFA surplus
-
2- Under a floating ER, S/D interact to determine the value of the Aus dollar (i.e.
supply of AUD equals to the demand of AUD. & BOP= double entry system (every
inflows matches a corresponding outflow)
Supply of AUD= Made up of outflows; Demand for AUD= inflows. Supply= import,
K+Y outflows; Demand= X,K+Y inflows
By rearranging, (X-M)+(Y inflows- Y outflows)=K inflows- K outflows, thereby
forming the structure of the BoP
o Hence displaying the role of: BoGS+NPY+NSY=KAFA
o CA=KAFA
43) Analyse the impact of changes in the value of the dollar on the components of the
BoGS. (4) talk about both CA and KAFA
- 2- Appreciation
o  lowers the international competitiveness of exports lowers X revenue,
worsens BoGS and CAD.
o  Price of Aus assets becomes more expensive, and lowers KAFA inflwos
- 2- depreciation
o Over time- increases international competitiveness and increases X revenue,
improves BoGS and CAD.
o Increase price of foreign assets- decreases KAFA outflows
44) Explain how market failure causes the misallocation of scarce resources in Australia.
(3)
- Define market failure- situation where the price mechanism fails to take into account
social costs and benefits of producing goods.
- Demerit goods are under-priced (since social costs are not encountered), making them
often overproduced. This distorts resources allocation.
45) Explain the positive and negative externalities that could arise if the govt built a new
airport in the Sydney region. (4)
- Job creation due to infrastructure
- Increase econ activity due to increased tourism (Easier access)
- Negative- noise and air pollution
- Negative- land degredation
46) Outline one reasons that could explain inequality of income within a nation. (2)
- Inequality of opportunity + periods of recession worsens DOI perpetuates
inequality in DOW (as high income earners earn most benefits from purchasing
assets.
47) Explain the way in which microeconomic reform can reduce income and wealth
inequality. (4)
- Define MER Long term policies that aims to resolve the underlying structural
issues within the economy by improving the efficiency, productivity and
competitiveness of industries.
- 2- income policy Vet, PaTH, JobMaker increases skills of low-skilled workers
increased opportunity for higher and stable income reduces inequality.
- 2- wealth policy Superannuation currently 10%, expected to improve to 12%.
This improves wealth inequality.
48) Explain the impact of microeconomic reform on the economic objective of full
employment. (4)
- Define MER
- Policy 1 infrastructure
- Policy 2
- Policy 3 (-ve) trade liberialisation job losses in inefficient industries, however in
the LT increases employment
49) Analyse the effects of a 2.5% increase in the national minimum wage by the FWA on
the labour market. Assume the minimum wage is above the equililbaium rate. (3)
- 2.5%
- Increases disposable income higher AD and economic growth
- Increased cost push inflation as labour costs increases increases u/e as employers
cut labour to reduce costs.
50) Identify and account for the trend in the tablec(1990-80% to 2005-20%) of changing
percentage of Australia’s employees covered by award. (2)
- Decentralisation employees are now engaging in more enterprise bargainng as they
seek for higher wages.