Section A: Multiple Choice Questions (20 marks)

Instructions

Choose the alternative A, B, C, or D that bests answers the question Mark your choice on the multiple choice answer sheet provided

Use the following data to answer questions 1 and 2. Assume that the following            economy is in a disequilibrium position and the level of activity will either increase or decrease until equilibrium is reached.

C=800, I=200, G=250, M=300, S=100, T=150, X=250 (all in $b)

1. What would happen to the level of income and employment in this economy?

(A) Income would rise and employment would increase

(B) Income would fall and employment would increase

(C) Income would fall and employment would decrease

(D) There would be no change in the level of income or employment

2. What would be the value of net exports or the contribution of the international sector?

(A) -$200b

(B) -$50b

(C) $300b

(D) $250b

3. Which of the following is a major aim of Microeconomic Reform?

(A)   strengthen barriers to entry of new firms into markets

(B)   improve the efficiency of supply

(C)   slow structural change

(D)   encourage monopolies

4. An improvement in the terms of trade means:

(A) the current account moves into surplus

(B) the current account moves into deficit

(C) exports will buy more imports

(D) exports will buy less imports

5. The value of the Australian dollar moves from $A = $0.52 US to

$A = $0.58 US. Other things being equal:

(A) Australia's exports to the USA will fall

(B) US investment in Australia will rise

(C) Australia will import fewer goods from the US

(D) both (b) and (c)

6. What is the structural component of the budget?

(A) the amount borrowed from the Reserve Bank

(B) the result of fluctuations in the business cycle

(C) the government’s discretionary fiscal policy stance

(D) the headline budget outcome

7. The RBA’s ‘interest rate corridor’ in the cash market refers to:

(A) the difference between the cash rate and the RBA’s lending rate

(B) the difference between the RBA’s lending rate and deposit rate

(C) the difference between the cash rate and the RBA’s deposit rate

(D) the RBA’s target cash rate

8. Which of the following is an indicator of internal stability in the economy?

(A) the CPI

(B) imports as a percentage of total sales in Australia

(C) net foreign debt as a percentage of GDP

(D) the current account deficit as a percentage of GDP

9. The hidden unemployed are part of:

(A) the labour force

(B) the unemployment rate

(C) the non economically active population

(D) the number officially unemployed

Use the following table to answer question 10.

10. During the period 2013 to 2015 the labour force participation rate is:

(A) Increasing

(B) Increasing, then decreasing

(C) Decreasing

(D) Unchanged

11. Which of the following is an example of a non discretionary fiscal policy?

(A)   Decreasing interest rates during a boom.

(B)   Increasing interest rates during a recession.

(C)   Deliberately increasing a budget deficit during a recession.

(D)   Increasing taxation payments during a boom.

12. An appreciation of the Australian Dollar would benefit:

(A) Overseas students studying in Australia.

(B) Foreign firms wanting to build a factory in Australia.

(C) Foreign buyers of Australian exports.

(D) Foreign investors with savings deposits in Australia.

13. An example of microeconomic reform in Australia includes:

(A) Labour market reform.

(B) Deregulation of industries.

(C) Tariffreductions.

(D) All of the above.

14. The Non Accelerating Inflation Rate of Unemployment (NAIRU) is:

(A) Equal to the natural rate of unemployment.

(B) Part of hidden unemployment.

(C) Caused by cyclical unemployment.

(D) Lower when structural unemployment is increasing.

Refer to the information in the table below to answer question 15.

15. The Terms of Trade:

(A) Improved from Year 2 to Year 3

(B) Deteriorated from Year 1 to Year 2

(C) Improved from Year 1 to Year 3

(D) Improved from Year 1 to Year 2

16. What action could the Reserve Bank of Australia take in order to reduce the rate of inflation?

(A)  Raise its interest rate corridor and decrease the cash rate

(B)  Raise its interest rate corridor and increase the cash rate

(C)  Lower its interest rate corridor and decrease the cash rate

(D)  Lower its interest rate corridor and increase the cash rate

17. During an economic recession, automatic stabilisers tend to:

(A)     Reduce government receipts and expand economic activity

(B)      Reduce government receipts and contract economic activity

(C)      Increase government receipts and expand economic activity

(D)     Increase government receipts and contract economic activity

18. Which of the following policy mix alternatives represents the use of counter - cyclical policy during a recession?

(A) An increased budget deficit and reduced cash rate

(B) An increased budget deficit and increased cash rate

(C) A decreased budget deficit and reduced cash rate

(D) A decreased budget deficit and increased cash rate

19. If autonomous investment increases by $20b and the MPC is 0.8 then the economy’s equilibrium level of income will:

(A) Increase by $4b

(B) Increase by $16b

(C) Increase by $20b

(D) Increase by $100b

20. The Reserve Bank of Australia’s goal of price stability is to achieve:

(A) An average inflation rate of 2-3%

(B) An average core inflation rate of 2-3%

(C) An average headline inflation rate of 2-3%

(D) The Non Accelerating Inflation Rate of Unemployment

Section B: Short Answer Questions (30 marks)

Answer all questions in the spaces provided on the examination paper.

Question 21 (10 marks)

Use the information below which shows selected statistics for a hypothetical economy to answer the questions that follow.

The above economy is a large importer of oil and the world oil price has risen to US$90 per barrel.

A. Describe the change in the business cycle for this economy from years 1 to 4. (1)

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B. List a term to describe the trend in both the CPI and Unemployment. (1) _________________

C. Use the available evidence to explain why inflation is increasing in this economy. What type of inflation has occurred? Explain! (3)

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D. Use the available evidence to explain why unemployment is increasing in this economy. What type of unemployment has occurred? Explain! (3)

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E. Outline an appropriate policy response for the government of this economy that would simultaneously deal with all the current economic problems being experienced. (2)

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