Economics

1. If there is an increase in the number of international students studying at
Australian universities, this will be reflected in the Circular Flow of Income as:
a. An increase in imports.
b. Higher business investment.
c. An increase in exports.
d. None of the above.
2. A budget deficit, ceteris paribus, results in:
a. injections into the Circular Flow being greater than leakages from it.
b. unsustainable government debt.
c. inflation.
d. A contraction of economic activity.
3. An depreciation of the exchange rate will, ceteris paribus, cause:
a. Investment to increase.
b. Import purchases to rise.
c. A fall in equilibrium GDP.
d. Net exports to increase.
4. In a closed economy, the Marginal Propensity to Consume is 0.75 and the
marginal tax rate is 0.2. The Expenditure Multiplier is:
a. 4.
b. 5.
c. 0.4.
d. 0.2.
5. The value of the Expenditure Multiplier fails if:
a. Households decide to increase their savings.
b. People buy more imports.
c. The government imposes a new tax.
d. All of the above.
6. If the Reserve Bank of Australia (RBA) buys government securities on the
open market then, ceteris paribus:
a. ESA funds belonging to the private banks will increase.
b. ESA funds belonging to the private banks will decrease.
c. ESA funds will not change.
d. The cash rate will rise.
7. Hidden unemployment refers to:
a. people claiming unemployment benefits illegally.
b. all people who are unemployed.
c. those unemployed who cannot readily be measured as such.
d. workers who have recently been made redundant.

8. If domestic inflation exceeds foreign inflation, an economy’s currency will,
ceteris paribus:
a. appreciate in value.
b. become worthless.
c. depreciate in value.
d. cease to be traded.
9. Bonds are:
a. A share of ownership in an incorporated company.
b. Used by the RBA to manipulate the money supply.
c. Only issued by the Federal government.
d. All of the above.
10.The Capital Account of the Balance of Payments records:
a. Proceeds from the sale of exports and purchase of imports.
b. Infrastructure spending by the public sector.
c. Migration flows between countries.
d. International purchases and sales of assets.

QUESTION 1 (15 marks)

a) What are 3 macroeconomic goals? (3 Marks)

b) Outline the 3 ways by which an economy’s GDP can be measured (3 marks)

c) Identify and outline one alternative measure of social welfare. How is it
different to GDP? (2 marks)

d) To what type of economic system does the business cycle relate? List two
reasons why economies are usually subject to business cycles. (3 marks)
The National Accounts of a small open economy reveal the following data for the
2013-2014 financial year:
0 Consumption expenditure of $10 billion;
0 Savings of $2 billion;
0 Planned (and actual) Investment expenditure of $3 billion;
0 Government expenditure of $5 billion;
0 Taxation of $4 billion;
0 Exports of $1 billion; and
0 Imports of $2 billion.
Based on the above information, answer questions e) – g).
e) Calculate total leakages and total injections for this economy. (1 mark)
f) Is this economy in equilibrium? Explain. (2 marks)
g) What is this economy’s GDP in financial year 2013-2014? (1 mark)
QUESTION 2 (10 marks)
a) Distinguish between frictional, cyclical and structural unemployment. (3
marks)
b) What is Full Employment? Does it necessarily mean that the economy is at its
physical limit in terms of resource use? (2 Marks)

c) Circle the correct word in the sentence below. (1 Mark)
The official rate of unemployment as calculated by the Australian Bureau of
Statistics tends to overestimate/underestimate the actual amount of people out
of work?
d) Why would consumers be concerned about inflation? (1 Mark)
e) What is the difference between cost push and demand pull inflation? (3
Marks)
QUESTION 3 (15 marks)
Assume that Australian businesses have become more confident about the
future, resulting in increased investment in the economy. This is depicted in
Figure 1 below.
Figure 1
AE
AE2= C+I2

AE1 = C+I1

Al l
xI I
l l
I l
I I
I I
ix l I
I l
I I
x I I
f.” \\ I
z 450. I->I
0 Y1 Y2 Y
a) Explain why the increase in investment from l1 to l2 in Figure 1 has a larger
effect on real GDP (Y). What is this effect called? (2 marks)

In this economy, assume that Consumption=500+0.8Y and the new level of

Investment Expenditure (I2) is $2oom.

b) Write out the Aggregate Expenditure function for this economy. (1 Mark)

c) What is the equilibrium level of GDP output (Y2) for this economy? Show your
working. (2 marks)

d) Assume now that the government undertakes new expenditure in the higher
education sector worth $1oom. Write out the new equation for Aggregate
Expenditure. (1 mark)

e) What is the new level of equilibrium GDP? Show working. (3 marks)

f) Calculate the size of the multiplier. (2 marks)

Assume that the equilibrium level of GDP which you calculated in e) above is

$400 million below Full Employment GDP.

g) What is this situation called? (1 Mark)

h) What type of policy could the government use to bring the economy to the
Full Employment level of GDP? Quantify this change. (3 marks)

QUESTION 4 (15 marks)

a) What are the 3 basic functions of money? (3 Marks)

b) What type of monetary system does Australia have? Explain your answer. (2
Marks)

c) Who creates the bulk of the Australia money supply? What is the name of the
process by which this is done? (2 Marks)

d) What are 2 reasons why people demand money? (2 Marks)

e) If a bond has a price of $100 and pays an annual income of $10, what is the
yield of the bond? (2 Marks)

f) If the demand for bonds fell, what would happen to this yield? (1 Mark)

9) Outline three main functions of the Reserve Bank of Australia (RBA). (3
marks)
QUESTION 5 (15 marks)

a) What is the primary objective of the RBA’s monetary policy? (1 Mark)

b) Outline 2 arguments for and 2 arguments against inflation targeting, as it is
currently conducted by the RBA. (4 marks)

0) Assume that in February 2014 the RBA announces a reduction in the cash
rate in response to continued sluggish growth in the domestic economy.
Explain and illustrate the process by which the RBA makes this occur using
the two diagrams below. Label your curves. (4 marks)

Interest M81 Interest Y1
Rate Rate
MD
ESA Funds Time

d) Explain why a cut in the Cash Rate may affect investment expenditure and
equilibrium GDP. Illustrate this on the 2 diagrams below. (4 marks)
Interest AE
Rate
AE1
I1 [/2551
Investment GDP
Question 5e) relates to the following headline which appeared on page 1 of the
Australian Financial Review on Friday 13 December, 2013.
Amid global risks, sober Stevens
talks $A down and budget debate up
e) In the related article, the Governor of the RBA, Glenn Stevens, “…indicated he
wants a dollar closer to U885¢…”. What does the phrase ‘talk the value of the $A
down’ mean and why would the Governor be doing this? (2 Marks)
f) What can a central bank do when conventional Monetary Policy does not
work as currently demonstrated by the US Federal Reserve and the Bank of
England? (2 Marks)
QUESTION 6 (15 marks)

a) Explain the concept of Crowding Out as it relates to Fiscal Policy. (3 Marks)

b) With Australia’s monetary system, is Crowding Out likely to be a problem?
Explain your answer. (3 Marks)

The 2013-14 Australian Federal Government budget outcome is expected to
be a $47 billion deficit.

c) In terms of the Circular Flow of Income, what does this deficit represent? (1
Mark)

d) What is the impact on GDP of such a budget outcome? Explain your answer.
(2 Mark)

e) Some of this Federal budget deficit is referred to as ‘structural’. What does
this mean? (2 marks)

f) Some of this Federal budget deficit is due to higher expenditure to support
Australian citizens who have become unemployed due to lower GDP growth.
What is the term used to describe this impact? (1 Mark)

g) Can the Australian government ever run out of money? Explain your answer.
(3 marks)

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