NSW INDEPENDENT TRIAL EXAMS – 2012
ECONOMICS Yr 11 PRELIMINARY EXAMINATION
MARKING GUIDELINES
Section I
1
A
2
D
3
C
4
A
5
B
6
C
7
D
8
A
9
B
10
C
11
B
12
C
13
D
14
D
15
A
16
B
17
B
18
A
19
D
20
C
Section II
Question 21(a) Outcomes assessed: P1, P8
Criteria
Marks
1
 Correctly draws the market demand curve for surfboards from the demand schedule
Suggested answer: Students should plot at least three points for the demand curve by using the information
in the table e.g. 300 surfboards are demanded at a price of $400, 200 surfboards are demanded at a price of
$600 and 100 surfboards are demanded at a price of $800.
Question 21(b) Outcomes assessed: P1, P11
Criteria
Marks
2
 Sketches in general terms the relationship between price and the quantity demanded for
surfboards as price increases and decreases
1
 Outlines a limited relationship between price and the quantity demanded for surfboards
when price either increases or decreases
Suggested answer: According to the law of demand, as the price of a good increases the quantity demanded
of the good will fall. As the price of the good falls the quantity of the good demanded will increase. This
holds true for the demand for surfboards: as the price of surfboards increases from $400 to $800 the
demand for surfboards decreases from 300 to 100; and as the price of surfboards decreases from $800 to
$400 the demand for surfboards increases from 100 to 300.
Question 21(c) (i) Outcomes assessed: P1, P8, P11
Criteria
Marks
1
 Provides the correct term for a change in supply caused by an increase in the price of
surfboards
Suggested answer: The change in the price of surfboards from $600 to $700 causes the quantity supplied of
surfboards to change or increase from 200 to 250. This change is referred to as an extension or expansion in
supply.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 1
Question 21(c) (ii) Outcomes assessed: P1
Criteria
Marks
2
 Provides characteristics and features of TWO or more factors which affect the price
elasticity of supply of surfboards
1
 Provides characteristics and features of ONE factor which affects the price elasticity of
supply of surfboards
OR
 Identifies rather than describes TWO factors which affect the price elasticity of supply
of surfboards
Suggested answer: The price elasticity of supply is the responsiveness of the quantity supplied given a
change in price. There are a number of factors which affect the price elasticity of supply of surfboards:
 Time periods:
o The market period is a period of time in which producers of a product are unable to change the
quantity produced in response to the price change.
o The short run is a time period in which manufacturers of surfboards can vary the variable factors of
production e.g. labour.
o The long run is a time period in which manufacturers of surfboards can change all factors of
production, including fixed factors e.g. the purchase of a new and larger factory to meet an increase
in demand.
 The ability of the firm to hold stocks or inventories: if the surfboard manufacturer has additional stock
on hand, they can respond to the increase in price relatively quickly.
 Excess capacity: if the current operational procedures are operating at less than full capacity, the
surfboard manufacturer can increase the output of surfboards by using their existing manufacturing
capacity more intensively.
Question 21(d) Outcomes assessed: P1, P2
Criteria
Marks
3–4
 Demonstrates a clear, concise understanding of how non-equilibrium market situations
for surfboards can be resolved through the operation of the price mechanism
1–2
 Sketches in general terms how non-equilibrium market situations for surfboards can be
resolved through the operation of the price mechanism
Suggested answer: At a price above market equilibrium ($600) the quantity supplied exceeds the quantity
demanded. There is therefore a surplus of surfboards above this price since supply exceeds demand. This
non-equilibrium (or disequilibrium) outcome will be resolved through the operation of the price
mechanism. Firms selling surfboards will decrease the price from the higher price (for example $700)
towards the market equilibrium price of $600. As a result, supply will contract and demand will expand
until equilibrium is established in the market for surfboards.
At a price below equilibrium ($600) the quantity demanded of surfboards exceeds the quantity supplied. At
this price there is a shortage of surfboards in the market. To address the shortage in the market, price will
increase from the lower price (for example, $500) towards the equilibrium price of $600. As a result supply
will contract and demand will expand until equilibrium is established.
At equilibrium where the demand for surfboards equals the supply of surfboards, there will be no tendency
for the equilibrium price ($600) and the equilibrium quantity of surfboards (200) to change.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 2
Question 22(a) Outcomes assessed: P1
Criteria
Marks
1
 Correctly defines the term interest rate
Suggested answer: An interest rate refers to the annual percentage cost of borrowing funds in financial
markets. An interest rate could also be defined as the annual percentage return paid to savers for depositing
their funds in a financial institution.
Question 22(b) Outcomes assessed: P1, P2, P6
Criteria
Marks
2
 Correctly identifies and provides points of detail about the role of the Reserve Bank in
influencing the cash rate
1
 Provides ONE point or ONE detail about the role of the Reserve Bank in influencing
the cash rate
Suggested answer: A daily target is set for the cash rate by the Reserve Bank in the cash market. The cash
market is where large financial institutions can deposit or borrow cash overnight. The Reserve Bank
influences the cash rate through its open market operations of buying and selling Commonwealth
Government Securities (CGS) in the cash market. The cash rate can be changed by the Reserve Bank if it
acts to change the stance of monetary policy. For example, if it wishes to ease the stance of monetary
policy it will purchase existing CGS on issue, which will increase the amount of cash in the Exchange
Settlement Accounts held by banks and other institutions with the Reserve Bank. This will lead to an
increase in liquidity and a fall in the cash rate or the cost of borrowing funds overnight in the cash market.
Question 22(c) Outcomes assessed: P1, P2, P3, P5
Criteria
Marks
2
 Correctly outlines TWO factors that influence the level of interest rates in Australia
1
 Demonstrates some understanding of ONE factor that influence the level of interest
rates in Australia but does not explain these factors by relating cause and effect
Suggested answer: Three main factors that determine or influence interest rates in Australia include the
demand and supply of loanable or available funds in financial markets; the stance of monetary policy by
the Reserve Bank; and the extent of inflationary expectations. The level of interest rates is generally
influenced by the interaction between the demand and supply of loanable funds in financial markets. If
economic growth is at trend of between 3% and 4%, the demand for funds will increase and this will put
upward pressure on the level of interest rates as there will be increased demand to borrow funds for
spending. However if economic growth is below trend the demand for funds may fall resulting in a lower
level of interest rates as lenders try to encourage more borrowing.
The stance of monetary policy by the Reserve Bank will influence the level of interest rates through
changes in the cash rate, which is the benchmark short term interest rate in the economy. If there is a rise
in the cash rate and a tightening of the stance of monetary policy this will put upward pressure on the
level of interest rates in Australia. Conversely if there is a fall in the cash rate and an easing of the stance
of monetary policy this will put downward pressure on the level of interest rates in Australia.
The rate of inflation and inflationary expectations can also influence the level of interest rates by raising
the nominal rate of interest. Since the nominal interest rate is equal to the real interest rate plus
inflationary expectations, any rise in the inflation rate and inflationary expectations would result in higher
nominal interest rates charged by lenders. This would occur because lenders would want to maintain the
real rate of interest or return for lending funds at a time when higher inflation would be reducing their real
returns.
Another factor which could be explained is the influence of risk and the global cost of borrowing funds
which can also influence the level of interest rates. A rise in the risk of lending through increasing loan
defaults, or a rise in the cost of raising capital in offshore financial markets would put upward pressure on
the level of market interest rates in Australia.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 3
Question 22(d) Outcomes assessed: P1, P2, P3, P5
Criteria
Marks
5
 Identifies correctly the relationship between an easing of monetary policy and the
impact on the Australian economy by providing a thorough analysis of cause and effect
4
 Identifies correctly the relationship between an easing of monetary policy and the
impact on the Australian economy but presents some analysis of cause and effect
3
 Identifies correctly the relationship between an easing of monetary policy and the
impact on the Australian economy but presents a limited analysis of cause and effect
2
 Demonstrates some understanding or a limited understanding of an easing in monetary
policy and the impact on the Australian economy
1
 States the meaning of an easing of monetary policy but provides a very limited analysis
of the impact of such an easing on the Australian economy
Suggested answer: An easing of monetary policy occurs when the Board of the Reserve Bank makes a
decision to lower the cash rate in the cash market by setting a lower cash rate target. The Reserve Bank
could implement a lower cash rate by purchasing existing Commonwealth Government Securities (CGS)
from financial institutions in the cash market. These institutions would sell CGS to the Reserve Bank and
receive cash deposits in return in their Exchange Settlement Accounts which would increase liquidity and
lower the cash rate in the cash market. A lower cash rate would lead to lower market interest rates in the
financial sector as banks and other financial intermediaries would pass on the lower cost of borrowing to
their customers in an attempt to increase demand for their lending products such as credit cards, business
loans, personal loans and mortgage loans. This would occur because of competition between financial
intermediaries in selling their products to market participants.
The objective of an easing of monetary policy by the Reserve Bank would be to stimulate spending by
lowering the cost of borrowing for individuals, households, businesses and governments. This would be
done to support economic growth and employment creation if the economy was growing below trend and
the rate of unemployment was rising. Lower market interest rates would increase the availability of cash to
households and businesses through lower debt servicing payments (e.g. mortgage payments) and encourage
more spending. In addition lower borrowing costs would encourage consumers and businesses to use more
credit in financing the purchase of goods and services. Lower interest rates would also lower the cost of
borrowing for investment purposes by businesses.
An easing of monetary policy that leads to lower interest rates would be expected to stimulate spending on
financial assets such as shares and real estate, thus helping to support a rise in asset prices and wealth. A
lower level of interest rates in Australia is also likely to put downward pressure on the exchange rate as the
returns to foreigners for lending or investing funds in Australia would be lower. This might lead to lower
demand for Australian dollars in the foreign exchange market and a depreciation in the exchange rate. This
would increase the competitiveness of exports and industries that competed against imports such as
manufacturing, retailing and tourism.
Overall an easing of monetary policy has an expansionary impact on economic activity in Australia.
However lower interest rates which lead to increased spending and higher economic growth could also be
expected to raise inflation and inflationary expectations in the medium to longer term through higher wages
and prices. However the Reserve Bank conducts monetary policy through the use of an inflation target of
2% to 3% over the economic cycle to contain inflation and inflationary expectations in the medium term
and sustain economic growth without higher inflation.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 4
Section III
Question 23 Outcomes assessed: P1, P3, P6, P8, P10
Criteria
 Integrates economic terms, concepts, issues, relationships and theory in an appropriate
context
 Uses knowledge to develop a logically-sequenced answer that highlights in detail the
characteristics and features of market structures
 Demonstrates factually precise and extensive knowledge of the nature of competition
in markets characterised by oligopoly and monopoly
 Provides concise definitions of economic terms and applies concepts and relationships
in an appropriate context
 Uses knowledge to develop a logically-sequenced answer that highlights the
characteristics and features of market structures
 Demonstrates factually correct and appropriate knowledge of the nature of competition
in markets characterised by oligopoly and monopoly
 Provides clear definitions of economic terms and sound discussion of economic
concepts and relationships
 Refers to knowledge to develop an answer about some general features of market
structures
 Demonstrates some correct knowledge of the nature of competition in markets
characterised by oligopoly and monopoly
 Provides basic definitions of some economic terms, concepts and relationships
 Uses generalised knowledge to develop an irrelevant or inappropriate answer about the
features of market structures
 Demonstrates minimal knowledge of the nature of competition in markets
characterised by oligopoly and monopoly
 Utilises some appropriate terminology to communicate economic information
 Develops no logical sequence in the answer
 Demonstrates a lack of knowledge about the features of market structures and the
nature of competition in markets characterised by oligopoly and monopoly
Essay plan:
Marks
17–20
13–16
9–12
5–8
1–4
There are a number of different types of market structures. The four main market structures are perfect
competition, monopolistic competition, oligopoly and monopoly. Each market structure is classified
according to the number and size of firms, the type of product produced and the ease of entry or exit into
or out of the industry. Within each market structure the extent to which a firm can exercise market power
will in turn influence the price of goods or services and output. This degree of market power is dependent
on the degree of competition in the market or industry in which firms operate. To determine the type of
market structure economists use the following features to classify different market structures:
 The number of firms in an industry and their relative size: this is an important determinant of the nature
of competition. The fewer firms that are in an industry, the more aware firms are about other firms
operating in the industry. The size of the firm will impact on how the industry operates. If there are
several large firms in any one industry, these firms will tend to have more control over the market,
including price. If there are many small firms then one firm will not be able to dominate the industry, as
there are numerous competing firms.
 The nature of the product being sold: products tend to be classified as homogeneous (i.e. identical
products) or differentiated (i.e. goods which differ slightly from each other). Firms which differentiate
their product, often through aggressive marketing techniques such as advertising and promotion tend to
have more market power through customer and brand loyalty than firms which sell a homogeneous
product.
Question 23 continues on the next page
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Question 23 continued
 The ability of firms to enter or exit an industry: different industries have a range of financial, legal and
technical factors which in combination will impact on entry conditions for firms into an industry. If
entry conditions are strong or high (such as the capital needed for establishment) then the industry is
more likely to be dominated by a few large firms operating in the industry. Where entry factors into an
industry are relatively easy, there tends to be a large number of small firms, with no one firm
dominating the industry.
An oligopoly is a market structure in which a few large producers compete against each other in a
particular industry. There may also be several small producers in an oligopoly market, but these producers
have a small market share and very little market power. The industry is characterised by high barriers to
entry making it difficult for firms to enter the industry and compete with the firms which dominate the
industry. Such entry barriers may include capital requirements, technology, and government licensing to
operate. Examples include car manufacturing and banking.
In an oligopoly each producer tends to be interdependent on each other. The sales of one producer will
depend on the price it is charging for a good or service and on the price charged by other producers in the
market. Each firm in this market is competing for their market share. In an oligopolistic market, non-price
competition based on product differentiation is a significant feature of this market structure. Advertising is
used to differentiate a firm’s product and gain additional market share.
Under an oligopoly one of the firms may become a price leader due to its dominance in the market. This
firm over time may be the most efficient in the industry, the largest or the most powerful and is likely to
initiate price changes, and other firms may follow, (price followers). Examples of oligopolies in Australia
can be found in retail banking and the retail grocery market. In the retail grocery market there are two
dominant players in Woolworths and Coles, but there are also several minor players (e.g. Aldi, Franklins
and IGA).
If an industry is classified as a monopoly, then the firm is the industry. There is only one supplier of the
good or service and there are few close substitutes. The key feature of a monopoly is the existence of
barriers to entry of new firms into the industry. These barriers may have been due to government legislation
restricting competitors to enter an industry. For example, for a long time in NSW there was only one
supplier of electricity to the market. Alternatively the barriers may be due to the existence of a natural
monopoly where a firm may have control over the source of a raw material or when a firm can achieve
economies of scale and can supply the market at lower per average costs than two or more firms can, such
as the supply of electricity, water and gas.
Assuming there is no close substitute for its product, a monopoly firm which supplies the market has a
significant amount of power over the price at which a product can sell. The firm cannot set both the price
and the quantity that will be sold (output), as the consumer will determine how much of the product will be
purchased at a particular price. However, the firm is still subject to the law of demand: when prices rise
there will be a decrease in demand. The extent of the decrease in demand will often depend on the price
elasticity of demand for the good or service. However, in the absence of competition the monopolist has
significant market power over price or output but not both.
In Australia, Australia Post is an example of a monopoly in so far as it has sole right to the delivery of any
article which carries a postage stamp. However with changes in technology (e.g. the use of email and
Internet websites) and competition from couriers in the parcel business, Australia Post has been subject to
increased competition. Also the Australian Competition and Consumer Commission (ACCC) enforces the
Competition and Consumer Act 2010 to prevent the abuse of market power by firms in oligopolistic and
monopoly industries. The ACCC also carries out price surveillance functions of firms with large market
power. It can also make access declarations to allow new firms to enter markets that are natural monopolies
such as electricity and telecommunications to increase competition.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 6
Question 24 Outcomes assessed: P1, P2, P3, P5, P7, P8, P10
Criteria
 Integrates economic terms, concepts, issues, theory and relationships in an appropriate
context
 Explains the main components of the Australian workforce such as the employed and
the unemployed and distinguishes between full time and part time employment
 Explains what is meant by the labour market and indicates the demand and supply of
labour and equilibrium wages and employment on a labour market diagram
 Discusses the factors that affect the demand for labour both in macroeconomic and
microeconomic terms
 Synthesises own knowledge to develop a logically sequenced answer on factors
affecting the demand for labour and how these have changed in recent years in
Australia
 Provides concise definitions of economic terms and applies concepts and relationships
in an appropriate context
 Explains the main components of the Australian workforce such as the employed and
the unemployed and distinguishes between full time and part time employment
 Explains what is meant by the labour market but does not indicate the demand and
supply of labour and equilibrium wages and employment on a labour market diagram
 Discusses the factors that affect the demand for labour and attempts to differentiate
between macroeconomic and microeconomic factors
 Develops a logically sequenced answer on recent trends in the demand for labour in
Australia and how these have changed in recent years
 Provides clear definitions of economic terms and sound discussion of the main
components of the Australian workforce
 Outlines what is meant by the labour market
 Develops a logical sequence in the answer
 Outlines the factors that affect the demand for labour, but does not differentiate
between macroeconomic and microeconomic factors
 Attempts to explain recent trends in the demand for labour in Australia
 Utilises some appropriate terminology to communicate economic ideas
 Attempts to develop a logical sequence in the answer
 Attempts to explain the main components of the Australian workforce and what is
meant by the labour market
 Attempts to outline the factors affecting the demand for labour
 Demonstrates minimal appropriate knowledge on recent trends in the demand for
labour in Australia
 Utilises some appropriate terminology to communicate economic ideas on the labour
market
 Develops no logical sequence in the answer
 Attempts to explain the main components of the Australian workforce and factors
affecting the demand for labour
 Demonstrates a lack of knowledge on recent trends in the demand for labour in
Australia
Marks
17–20
13–16
9–12
5–8
1-4
Question 24 continues on the next page
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 7
Question 24 continued
Essay plan:
As at June 2012 the Australian workforce totalled 12,123,300 persons (i.e. males plus females). The
Australian workforce is made up of full time employed persons (8,065,500 persons), part time employed
persons (3,435,000 persons) and the unemployed (622,800 persons) i.e.
Australian workforce = Part time employed + Full time employed + Unemployed
The ABS reported the number of people employed decreased by 27,000 to 11,500,000 in June 2012. The
decrease in employment was driven by a decrease in full time employment, which was down by 33,500
people. This decrease saw full time employment reach a total of 8,065,500 people in June 2012. This was
offset by an increase in part time employment, up by 6,600 persons to 3,435,000 persons.
The total workforce was 12,123,300 persons in June 2012 and this represented a participation rate of
65.2% of the working age population. The 622,800 persons classified as unemployed represented 5.1% of
the Australian workforce in June 2012. This was an increase of 7,200 from the previous month.
One of the most recent trends in the Australian economy is the emergence of labour skills shortages in
particular industries and occupations where the supply of specialist labour skills has not kept pace with
the overall demand for these skills. Examples include trades skills and professional skills.
Labour is the contribution of people to the production process and is an important factor of production. In
return for its contribution to production, labour is paid wages as a source of income. For employers the
payment of wages represents the cost of using labour in production. The labour market refers to the
demand and supply of labour leading to an equilibrium wage and quantity of employment.
In Australia the labour market consists of employees who offer their labour skills in return for the
payment of wages and employers who demand labour to fill job vacancies at differing wage rates. Better
students would include a diagram of the labour market for a certain industry or occupation to illustrate the
determination of the equilibrium wage rate and level of employment.
Both macroeconomic and microeconomic factors can affect the demand for labour. Macroeconomic
factors are economy wide factors such as the level of economic activity. Labour is a derived demand and
the greater the demand for production the greater the demand for labour. Fluctuations in the business
cycle will impact on the demand for labour and periods of high economic growth will increase the
demand for labour while downturns and recessions will reduce the demand for labour.
The demand for labour is cyclical and in June and July 2012 there was a slight increase in cyclical
unemployment from 4.9% to 5.1% because of subdued activity in some sectors of the economy such as
retailing, manufacturing and building and construction.
Microeconomic factors occur at the firm or industry level and include the output of the firm, the
productivity of labour and the cost of other inputs. At a microeconomic level the demand for labour is
also a derived demand and the level of output of the firm or industry is the main factor influencing the
demand for labour. A high level of sales will lead to an increase in production (output) and therefore will
require increases in inputs, including labour.
High sales of minerals to Asia, has seen a huge increase in the demand for labour in the mining industry.
So much so that overseas labour is being considered to meet the demand. Retail sales have declined with
the uncertain economic conditions post GFC and this has reduced the demand for labour in this sector.
The high Australian dollar and reduced discretionary spending has also impacted on the manufacturing
sector and Ford announced recently that it intends to reduce its workforce in its two Victorian plants by
440 workers. Toyota retrenched some of its workforce earlier in 2012 because of the falling demand for
its new vehicles. Darrell Lea Chocolates will also be forced to retrench staff if it cannot sell its operations
as a going concern.
Question 24 continues on the next page
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 8
Question 24 continued
Other firms which have decreased their workforces include Mitsubishi and Blue Scope Steel in response
to lower demand for their products in Australia.
(These increases and decreases in the demand for labour could be shown on a labour market diagram).
The demand for labour is also influenced by the productivity of labour. Labour productivity depends on
the quality of labour, which is influenced by education, training, skills, and the level of motivation. If
labour productivity increases, less labour may be required to complete the same amount of work. The
move to enterprise bargaining as the main form of wage negotiations has seen large increases in labour
productivity and a reduction in the demand for labour in the short term. This may be disguised in
industries which are experiencing increased sales. In the long term, however, higher labour productivity
will increase the demand for labour if it is cheaper than other factors of production such as capital.
The demand for labour is also related to the cost of other inputs. If the cost of labour is relatively high
then firms will substitute capital for labour in the production process. The same occurs if capital is more
expensive than labour. This will depend on the ease with which capital can be substituted for labour.
Labour is an expensive resource and the costs include both wage and non-wage outcomes. The demand
for capital can also be influenced by the rate of interest which makes borrowing for investment more
expensive if interest rates rise. There is a move within industry to abolish penalty rates for labour and
many enterprise agreements are refining working conditions to improve productivity and reduce labour
costs. Some labour intensive firms that were operating within Australia, especially in the TCF industry,
have decided to substitute overseas labour for Australian labour and these firms have either moved some
of their operations offshore or outsourced some of their operations offshore.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 9
Section IV
Question 25 Outcomes assessed: P1, P2, P3, P5, P6, P7, P8, P10
Criteria
 Demonstrates a clear and concise understanding of the main institutions that regulate
Australia’s financial markets
 Demonstrates a clear and concise understanding of the role and functions of the
Reserve Bank, APRA, ASIC and Treasury in regulating Australia’s financial markets
 Integrates an extensive and appropriate range of economic terms, with relevant
concepts, relationships and theory
 Synthesises own knowledge to develop a sustained, logical and well-structured
response to the question
 Demonstrates an understanding of the main institutions that regulate Australia’s
financial markets
 Demonstrates an understanding of the role and functions of the Reserve Bank, APRA,
ASIC and Treasury that regulate Australia’s financial markets
 Consistently applies appropriate economic terms, relevant concepts, relationships and
theory
 Uses own knowledge to develop a logical and structured response
 Demonstrates some understanding of the main institutions that regulate Australia’s
financial markets
 Demonstrates some understanding of the role and functions of some institutions such
as the Reserve Bank, APRA, ASIC and Treasury that regulate Australia’s financial
markets
 Applies appropriate economic terms, concepts, relationships and theory
 Uses own knowledge to develop a coherent response
 Sketches in general terms the role of some institutions that regulate Australia’s
financial markets
 Sketches in general terms the role and functions of some institutions such as the
Reserve Bank, APRA, ASIC and Treasury that regulate Australia’s financial markets
 Uses some appropriate economic terms, concepts and relationships
 Uses own knowledge to develop a generalised response
 Refers to some institutions that regulate Australia’s financial markets
 Lists some aspects of the role and functions of some institutions such as the Reserve
Bank, APRA, ASIC and Treasury that regulate Australia’s financial markets
 Uses some economic terms and/or concepts
 Presents a limited response
Essay plan:
Marks
17–20
13–16
9–12
5–8
1–4
The regulation of Australia’s financial markets is important to ensure financial stability in the economy.
Financial stability supports economic growth and rising living standards because it protects the value of
people’s savings, ensures the liquidity, solvency and stability of major financial institutions such as banks,
and promotes trust and confidence between various parties in their financial dealings.
Financial markets such as primary and secondary debt and equity markets perform the important function
of allocating saving for investment which is essential for economic growth. The Australian financial system
consists of financial markets and important financial institutions such as banks, mutual funds, merchant
banks, superannuation funds and the Australian Securities Exchange (ASX) which operate in these
markets.
The four institutions of the Reserve Bank of Australia (RBA), the Australian Prudential Regulation
Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Australian
Treasury regulate Australia’s financial markets. Each institution has specific responsibilities in the
Australian financial system and together they comprise the Council of Financial Regulators which oversees
the stability of the Australian financial system.
Question 25 continues on the next page
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 10
Question 25 continued
The Reserve Bank of Australia (RBA), Australia’s central bank, has responsibility for the conduct of
monetary policy and the maintenance of financial system stability, including stability of the payments
system. The Reserve Bank has strong regulatory powers in the payments system, which is exercised by the
Payments System Board within the Reserve Bank. The RBA remains the only institution which is able to
provide emergency liquidity support to intermediaries in the event of any threats to the stability of the
financial system. The Payments System Board has the tasks of controlling risk, and promoting efficiency
and competition in the payments system.
The Reserve Bank of Australia uses its powers and responsibilities to reduce the likelihood of financial
instability in the Australian financial system including financial markets. The Reserve Bank’s functions
include the following:
 It attempts to create a low and stable inflation environment to maintain the purchasing power of money
and protect the value of savings. This is done through the conduct of monetary policy which uses an
inflation target of 2% to 3% over the economic cycle to support non-inflationary economic growth.
 It monitors the health of the financial system through the assessment of financial and economic data
such as credit growth, inflation and asset prices.
 It ensures that the payments system is safe and robust through the regulatory powers of the Payments
System Board of the Reserve Bank.
 The Reserve Bank can use (in extreme cases) its own balance sheet to provide emergency liquidity
support to a financial institution whose lack of liquidity may threaten financial system stability.
 It participates in the Financial Stability Board of the Bank for International Settlements (BIS) to develop
new procedures for preventing global financial instability.
The Australian Prudential Regulation Authority (APRA) is the prudential supervisor of banks and other
financial institutions and was established in 1998 based on the recommendations of the Wallis Report
(1997). APRA is responsible for the supervision of all deposit taking institutions (DTIs) such as banks and
non-bank financial intermediaries (NBFIs) including life and general insurance companies and
superannuation funds. State governments undertake supervision of building societies, credit unions and
friendly societies. APRA applies a set of prudential standards such as capital adequacy and liquidity to the
institutions it regulates. APRA monitors the balance sheets and financial position of DTIs closely and
regularly by imposing stringent reporting requirements on such institutions to ensure they are meeting the
prudential standards set and enforced by APRA.
The Australian Securities and Investments Commission (ASIC) is responsible for market integrity,
consumer protection and dispute resolution across the entire financial system including investment, futures,
insurance and superannuation products. It is basically a regulator of financial markets and corporate
behaviour in the financial system. ASIC is a statutory body with functions such as the issue of Australian
company numbers (ACNs) and certificates of incorporation; the processing of annual company returns; and
the enforcement the Corporations Law which deals with corporate activities including finance, accounting,
takeovers and prospectuses.
The Australian Treasury has responsibility for advising the Australian government on financial stability
issues and for the legislation and regulatory framework that underpins the financial system. It provides
advice to the Australian government on policy processes and reforms designed to promote a secure
financial system and sound corporate practices; remove impediments to competition in product and
services markets; and safeguard the public interest in terms of consumer protection and foreign investment
in Australia.
Question 25 continues on the next page
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 11
Question 25 continued
The four institutions of the RBA, APRA, ASIC and the Treasury form the Council of Financial Regulators,
which meets regularly to discuss and co-ordinate policies for the prudential supervision of the Australian
financial system. The Council also has a role in advising the Australian government on the adequacy of
Australia’s financial system architecture in light of ongoing developments such as the Global Financial
Crisis in 2008 and the European sovereign debt crisis between 2010 and 2012. The Council comprises two
members from each of the four member agencies, with the governor of the Reserve Bank being the
chairman of the Council.
The Global Financial Crisis in 2008–09 caused enormous dislocation in global financial markets resulting
in a disruption to the flow of credit in wholesale financial markets, and a general rise in the cost of credit
due to a re-pricing of risk by banks and other major credit providers. Another impact of the Global
Financial Crisis was extreme volatility and instability in global financial markets and asset prices such as
equities. The crisis was precipitated by widespread borrower defaults on sub-prime mortgage loans in the
USA and then the collapse of many major financial institutions.
The Reserve Bank publishes an annual Financial Stability Review and has noted in recent years the strength
of the Australian financial system and the stability of financial markets due to the strong regulatory
oversight provided by the Council of Financial Regulators. This in turn has supported public confidence in
the ability of the Australian financial system to withstand financial shocks from abroad.
At the global level, meetings of the G20, the Financial Stability Board of the BIS and the Basel Committee
on Banking Supervision are reviewing the regulatory structure of the global financial system to minimise
the risk of another Global Financial Crisis. Measures canvassed include a strengthening of bank capital and
liquidity requirements, improvements in accounting standards and possible regulation of ratings agencies.
These measures are designed to reduce systemic risk in global financial markets. If these policies are
implemented successfully they could reduce the risk of future financial contagion being transmitted to
Australian financial markets and undermining confidence and slowing economic and employment growth.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 12
Question 26 Outcomes assessed: P1, P2, P5, P6, P7, P8, P10
Criteria
 Demonstrates a clear and concise understanding of the Federal Budget process
 Demonstrates a clear and concise understanding of the role of the Federal Budget in
affecting the allocation of resources and the redistribution of income in the Australian
economy
 Integrates an extensive and appropriate range of economic terms, with relevant
concepts, relationships and theory
 Synthesises own knowledge to develop a sustained, logical and well structured
response
 Demonstrates an understanding of the Federal Budget process
 Demonstrates an understanding of the role of the Federal Budget in affecting the
allocation of resources and the redistribution of income in the Australian economy
 Consistently applies appropriate economic terms, relevant concepts, relationships and
theory
 Uses own knowledge to develop a logical and structured response
 Demonstrates some understanding of the Federal Budget process
 Demonstrates some understanding of the role of the Federal Budget in affecting the
allocation of resources and the redistribution of income in the Australian economy
 Applies appropriate economic terms, concepts, relationships and theory
 Uses own knowledge to develop a coherent response
 Sketches in general terms the Federal Budget process
 Sketches in general terms the role of the Federal Budget in affecting the allocation of
resources and the redistribution of income in the Australian economy
 Uses some appropriate economic terms, concepts and relationships
 Uses own knowledge to develop a generalised response.
 Refers to the Federal Budget process
 Lists some aspects of the role of the Federal Budget
 Uses some economic terms and/or concepts
 Presents a limited response
Essay plan:
Marks
17–20
13–16
9–12
5–8
1–4
Two of the main economic functions of the Australian government include the reallocation of resources
and the redistribution of income through taxation and government expenditure in the Australian economy.
Along with the stabilisation of economic activity according to changes in the business cycle, these
functions are implemented in the Australian government’s annual budget which is an estimate of revenue
and expenditure for the forthcoming financial year.
The allocative function of government involves discretionary changes to government expenditure and
taxation to improve the efficiency of resource allocation in the economy. The redistributive function is
generally achieved through the systems of progressive taxation and transfer payments (e.g. unemployment
benefits and pension payments) where the Australian government attempts to achieve a more equitable
distribution of income and wealth.
Changes to the Australian government’s fiscal policy stance are announced and implemented through the
budget process. Fiscal policy is implemented through the use of fiscal instruments which are changes in
government expenditure and revenue. They are represented by rates of taxation, rates of transfer
payments and levels of government expenditure of various types in priority areas which reflect the
government’s spending priorities and policy platform. The spending and revenue plans of the government
are announced through the annual government budget. The budget brings the revenue and spending sides
of the government’s finances together and shows whether these finances are in surplus, deficit or balance
for the year.
Question 26 continues on the next page
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 13
Question 26 continued
The broader context for setting fiscal policy centres around the concept of ‘fiscal sustainability’ where the
budget position is allowed to vary according to changes in economic conditions. This means achieving
budget surpluses when growth is positive but using budget deficits to support the economy when
economic growth deteriorates. When devising fiscal policy, the Australian government will attempt to
avoid large and persistent budget deficits, as sustained budget deficits can have a negative effect on the
economy because they reduce national saving, which in turn reduces investment in new capital goods,
which is an important source of long run economic growth.
The Australian government’s medium term fiscal strategy is designed to ensure fiscal sustainability while
allowing the flexibility to respond to fluctuations in the economic outlook.
In the 2012–13 budget papers the Commonwealth government announced that the primary objective of
fiscal policy was to maintain the budget in a sustainable position from a medium term perspective. This
the government argues has become particularly important in the current period of global uncertainty
where sovereign governments particularly in the Euro Area have large budget deficits and public debts
which have reduced national saving.
The 2012–13 budget affirmed the government’s commitment to the medium term fiscal strategy which
requires the budget to be in surplus over the medium term. The 2012–13 budget projects a return to
surplus in the underlying cash balance of $1.5b (0.1% of GDP) or in accrual terms, a fiscal surplus of
$2.5b (0.2% of GDP). This is despite an expected deficit in the 2011–12 budget of –$44.4b (–3% of
GDP) in the underlying cash balance and –$42b or –2.8% of GDP in terms of the fiscal balance.
The budget can influence resource allocation through changes in the taxation system and changes in
spending decisions. Changes in tax rates and the types of taxes levied will impact on how resources are
allocated between various types of production. Furthermore, changes in the level and direction of
government expenditure can also affect resource allocation to various sectors of the economy. Over recent
years the Commonwealth Budget, has introduced a range of spending priorities in areas such as
education, health and hospital reform, infrastructure investment, climate change and renewable energy
and energy efficiency.
Some of the major policy decisions in the 2012–13 budget increased spending in priority areas which will
change resource allocation in the Australian economy. One policy was spreading the benefits of the
resources boom by increasing the maximum rate of Family Tax Benefit Part A by $300 per annum for
families with one child and $600 per annum for families with two or more children from July 1st 2013.
This policy will reallocate resources from the government to the low income household sector. Another
measure was the implementation of the first stage of a National Disability Insurance Scheme to provide
support for people with a significant and permanent disability which is estimated to cost $84m in 2012–
13 and $1b over the four years to 2015–16. Funding was also provided for the government’s Aged Care
Reform package, including initiatives to increase home care services and staff and support for people with
dementia. These measures are expected to increase payments by $55m in 2012–13 and $284m over the
four years to 2015–16.
In terms of the distribution of income, Australia’s system of progressive taxation of personal income
requires each person to pay a higher percentage of their gross income in tax as they earn more income.
This progressive tax can provide the revenue base from which the government can fund transfer payments
such as pensions, job search allowances and family benefits. This enables the government to redistribute
income from high income earners to low income earners. This tax is structured so that lower rates of
taxation are applied to low levels of income with a tax free threshold being allowed to the lowest of
income earners.
Question 26 continues on the next page
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 14
Question 26 continued
The tax base has been broadened to include other taxes on income and wealth rather than just depending
on personal income tax as a source of government revenue. Company owners are made to pay corporate
income tax (at a rate of 30%) on the profits made by their enterprises. A fringe benefits tax regime was
also introduced in the mid 1980s and applied where benefits are paid to workers in the form of company
cars, expensive holidays and expense accounts. Capital gains tax was also introduced in 1985 to tax real
capital gains from shares and real estate.
A Tax Reform Road Map was presented with the 2012–13 budget and contained plans for future tax
reform such as an increase in the Superannuation Guarantee levy from 9% to 12% and a planned
reduction in the company tax rate. A Minerals Resource Rent Tax (MRRT) was introduced from July 1st
2012 and is imposed on the profits made by companies from the use of non-renewable resources such as
iron ore, coal and natural gas. It is to be levied at a rate of 30% on the super profits of companies
exceeding $75m in value. Over 300 large mining companies will be affected by the imposition of the
MRRT. The revenue from the MRRT will be used to fund regional infrastructure programmes and tax
concessions for low income families.
A carbon tax was also introduced on emissions of carbon dioxide by the largest polluting companies.
From July 1st 2012 all taxpayers with incomes up to $80,000 received a modest tax cut with most people
receiving at least a cut of $300 per year to assist with the cost of living impact of the carbon price. From
July 1st 2012 the tax free threshold was more than tripled from $6,000 to $18,200 and the Low Income
Tax Offset (LITO) reduced to $445. Low and middle income families were also assisted in the 2012–13
budget by increases in government payments as part of the Clean Energy Future household assistance
package.
Transfer payments in the form of pensions, job search allowances and family benefits have been used to
provide income support for targeted groups such as single parents, large single income families, the
unemployed and the disabled. These groups generally receive the lowest incomes in the Australian
economy and this type of income support helps to raise the household income received by households
with the lowest incomes.
Other elements of the government’s redistributive policy are incorporated into the social wage such as
government spending on public health, education, housing, transport and community services. This
provides a broader coverage for the support given through the social welfare safety net, particularly for
families where the welfare of dependent children is at stake. This assistance is administered through
subsidised goods and services such as public health and medical services, public housing, public transport
and public education. For example in the 2012–13 Commonwealth Budget a number of measures were
announced to build a productive workforce including a $1.75b National Partnership Agreement on skills
reform and an investment of an additional $225.1m in Jobs Education and Training, Child Care Fee
Assistance, and $101m of new skills measures to improve the quality of skills and support for mature age
workers.
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 15
NSW INDEPENDENT TRIAL EXAMS – 2012
ECONOMICS Yr 11 PRELIMINARY EXAMINATION
MAPPING GRID
Question
Section I
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Section II
21(a)
21(b)
21(c)(i)
21(c)(ii)
21(d)
22(a)
22(b)
22(c)
22(d)
Section III
23
24
Section IV
25
26
Marks
Outcome(s) assessed
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
P1
P1, P2
P1, P11
P1, P11
P1, P2
P1, P11
P1, P11
P1, P2
P1, P2
P1, P2, P3, P11
P1, P5, P8
P1, P2
P1, P2, P11
P1, P3, P8
P1, P2, P3, P5
P1, P7
P1, P3, P11
P1, P6
P1, P2, P3, P11
P1, P2, P11
1
2
1
2
4
1
2
2
5
P1, P8
P1, P11
P1, P11
P1
P1, P2
P1
P1, P2, P6
P1, P2, P3, P5
P1, P2, P3, P5
20
20
P1, P3, P6, P8, P10
P1, P2, P3, P5, P7, P8, P10
20
20
P1, P2, P3, P5, P6, P7, P8, P10
P1, P2, P5, P6, P7, P8, P10
NSW Independent Trial Exams 2012 – Economics Yr 11 Preliminary Examination: Marking Criteria - Page 16