ECONOMICS

Stage 3
WACE Examination 2013
Marking Key

Marking keys are an explicit statement about what the examiner expects of candidates
when they respond to a question. They are essential to fair assessment because their
proper construction underpins reliability and validity.

Copyright School Curriculum and Standards Authority 2013

ECONOMICS
STAGE 3

MARKING KEY

Section One: Multiple-choice

24% (24 Marks)

Question

Answer

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

ECONOMICS
STAGE 3

MARKING KEY

Section Two: Data interpretation/Short response

36% (36Marks)

Question 25
(a)

(i)

(12 marks)

What was the annual average percentage change (to one decimal place) in
Australias labour productivity in Period 3 (200304 to 201011)?
(1 mark)
Description
1.4
Total

Marks
1
1

(ii) Between Period 2 and Period 3, annual average multifactor productivity changed
by _____________ percentage points.
(1 mark)
Description
1.8 to 0.4 = 2.2 + or 0.1
Total

(b)

Marks
1
1

Explain why the change in labour productivity between Period 2 and Period 3 is a cause
of concern for the Australian economy.
(4 marks)
Description
Between Period 2 and Period 3, labour productivity declined from 3.1%
pa to 1.4% pa
Candidates can explain any two causes for concern.
An understanding that falling productivity leads to:
a reduction in the rate of economic growth
slower wage growth and associated effects on living standards
a reduction in the competitiveness of export and import competing
industries
possible indicator of lower investment and/or technological
improvements
possible higher inflation due to increasing costs.
Total

Marks
1

13

ECONOMICS
STAGE 3
(c)

MARKING KEY

Explain how fiscal policy and microeconomic reform can be used to increase labour
productivity.
(6 marks)
Description
Fiscal policy: (discuss any two points)
infrastructure spending to support private investment
education, training and health spending
lowering income tax to increase incentives to work
lowering company tax to increase business investment
tax incentives to increase R&D
Microeconomic reform: (discuss any two points)
Labour market reform: more decentralised system via enterprise
bargaining; wages closely related to productivity improvements.
Reduced levels of protection: resources used most efficiently;
increased allocative efficiency.
National Competition Policy: measures to increase competition and
efficiency in particular markets and industries. A comprehensive set
of reforms ranging from the establishment of the ACCC to providing
access to monopoly infrastructure for competitors in industries such
as telecommunications, electricity, airports, rail.
Tax reform: changing the tax system to promote productivity.
Labour reform the obvious area to discuss but students can successfully
answer the question with a discussion of one of the other types of
reform provided it is linked to labour productivity.
Total

Question 26
(a)

(i)

Marks

13

13

(12 marks)

Which country is Australias third largest trading partner?

(1 mark)

Description
USA
Total

Marks
1
1

(ii) With which of the countries listed in both the top 10 import markets and top 10
export markets does Australia have a trade deficit?
(1 mark)
Description
USA, Singapore, Thailand
Total

Marks
1
1

ECONOMICS
STAGE 3
(b)

MARKING KEY

Describe the factors that have contributed to Australia being a major exporter to China.
(4 marks)
Description
Candidates should discuss three factors.
Factors contributing to Australias competitiveness:
large low-cost resource deposits (iron ore, coal, natural gas) required
for Chinese economic growth
geographic proximity reduces transport costs
modern and efficient infrastructure (rail, ports, roads)
foreign investment has financed the development of export industries
highly educated workforce plus a willingness to import skilled
migrants
political stability and effective economic management; stable
economy attractive to foreign investment
Total

(c)

Marks

14

Describe the advantages to Australia of the increased linkages among the countries in
the Asia-Pacific region in recent decades.
(6 marks)
Description
Candidates should discuss a minimum of three advantages.
Advantages of increased linkages:
Trade
rapidly growing region with a rapidly increasing demand for
Australian commodity and services exports (tourism, education)
source of cheap imports; lower domestic inflation and higher living
standards in Australia
higher commodity prices have increased export revenue.
creation of free trade agreements in the region
greater specialisation, comparable advantage
Foreign investment
source of foreign investment (e.g. growing Chinese investment)
which has facilitated the growth of the Australian economy
or
Other links (immigration, cultural and diplomatic exchange)
Total

Marks

14

1-2
1
6

ECONOMICS
STAGE 3

MARKING KEY

Question 27
(a)

(i)

(12 marks)

What was the value of Australias current account balance in 200607?

Description
a deficit of $60b to $61b or $60,000m to $61,000m or $61 b.

(1 mark)
Marks
1

Total

(ii) In 201011, both the goods and services balance and the capital + financial
account balance were positive. Given that the balance of payments sums to zero,
explain how this could occur.
(2 marks)

(b)

Description
Although the Good and Services balance is positive, the current
account also includes the Income balance.
The income balance is in deficit.
Total

1
1
2

Describe and explain the relationship between the change in net capital inflow and the
change in the exchange rate from 200001 to 200607.
(4 marks)
Description
During this period there was a rapid growth in the capital and financial
account balance (200001 $18b to 200607 $61b) accompanied by a
significant appreciation of the $A (July 2001 TWI = 50, July 2007
TWI = 68).
A significant increase in net capital inflow will, other things being equal,
lead to an increase in demand for the $A and hence an appreciation of
the currency.
Total

(c)

Marks

Marks
2

2
4

Explain how changes in domestic interest rates affect the goods and services balance.
(5 marks)
Description
Candidates should discuss two affects.
Higher domestic interest rates will tend to slow down the level of
economic activity and reduce consumer demand, especially consumer
durables which often tend to be imported. This will tend to reduce the
level of imports and increase the Goods and Services Balance.
Higher interest rates will also tend to reduce the level of investment.
With many capital goods being imports this will also tend to increase
the Goods and Services Balance.
Higher domestic interest rates could increase the interest rate
differential with overseas countries, increasing the value of the $A and
therefore reducing the price of imports and increasing the price of
exports. This is likely to decrease net exports and lower the Goods and
Services Balance.
Total

Marks

13

13

1-3

ECONOMICS
STAGE 3
Section Three: Extended response

MARKING KEY

40% (40 Marks)

Question 28
(a)

From early 2012 to mid 2013, the Australian dollar was strong against most other major
currencies. Using examples, describe the impact this had on the Australian economy.
(10 marks)

(b)

(20 marks)

Description
Import/export prices and volumes: Exports will become less
competitive and imports more competitive. The CAD is likely to
increase.
Reduced flow of resources into export and import-competing firms.
Cheaper imports increase the real incomes of consumers. Domestic
firms benefit from cheaper imported capital equipment but domestic
manufacturers lose.
Contractionary effect: Overall contractionary effect on the
economy.
Monetary policy: RBA reduces the cash rate to counter the high
dollar.
Other factors
Inflation: cheaper imports lower the inflation rate and allow the RBA
to reduce the cash rate.
Foreign debt: in $A terms will fall and interest servicing costs of debt
will also decline.
Total

Marks

15

1-4

1-3

10

Explain why the value of the Australian dollar remained relatively strong in the second
half of 2012, a period that saw a significant fall in commodity prices.
(10 marks)
Description
Candidates to discuss at least three reasons.
Interest rate differential: despite recent cuts in the cash rate, a
large differential remains relative to Japan, US and Europe.
High foreign investment: Strong capital inflow to finance the mining
boom and a stable economy.
Chinas economic growth underpins demand for exports.
Weak conditions in USA and Europe increases demand for $A:
Fall in $US = rise in $AU. Australia seen as safe investment given
our relatively low public debt levels compared to Europe and USA.
As a result there has been increased demand for Australian
government bonds from overseas.
Total

Marks
14
14
1-2

1-2

10

ECONOMICS
STAGE 3

MARKING KEY

Question 29

(20 marks)

Discuss the causes and effects of Australias persistent current account deficit.
Description

Marks

Explain what a CAD is.

Describes Australias persistent CAD.
Key understanding -Australias persistent CAD is due to the investment
savings gap. Anything which increases investment and/or decreases savings
contributes to the CAD.
Candidates should discuss three causes.
Capital inflow: result of the savingsinvestment gap. This is the result of a
small domestic savings pool and growing investment requirements for
capital intensive minerals and resource industries.
or
Primary Income balance: the largest component of the CAD (averaging
34% of GDP through the 2000s). A result of high level of past foreign
investment and borrowing.
or
Strong economic growth: Australias relatively high economic growth results
in high levels of imports.
or
International competitiveness: a decline can increase the CAD. In recent
times Australias low productivity growth, higher real wages and a high $A
has tended to reduce our competitiveness.
or
Other factors: eg large budget deficits lead to decreased savings, or any
other relevant factor.
Potential effects of Australias persistent CAD

1-3

1-3

1-3

13

13

13

Key understanding - persistent CAD results in increased foreign liabilities (increased FAS)
Candidates should discuss at least three effects and acknowledge that there are positive and
negative aspects associated with these.
Foreign debt: could reach a level where foreign lenders become reluctant to
lend to Australia or demand a risk premium in interest rates.
International investor confidence: could make Australia more exposed to a
loss of international investor confidence.
Foreign debt servicing costs: through interest payments.
Foreign equity: foreign ownership of Australia: high foreign investment
associated with CADs may result in a loss of control over Australian assets.
Foreign equity servicing costs: profits and dividends
Effects of high levels of foreign investment: inflow of capital leads to high
levels of economic activity, funds resource development, transfer of new
technology, managerial experience
Total

13

13

14
20

ECONOMICS
STAGE 3

MARKING KEY

Question 30
(a)

(20 marks)

Describe the economic conditions in Australia that led to these policy stances. (8 marks)
Description
Marks
Key understanding the deficit is reducing and therefore slightly contractionary but
monetary policy is expansionary (falling cash rate)
Description of the weaker economic conditions
weak domestic economy weak domestic economy/expansionary
monetary policy. The economy growing below trend (2.5%);
1-3
unemployment rising (5.7%); low inflation (2-2.5%); weak
consumption spending, higher household savings.
high value of the $A has had a contractionary effect on the
12
economy and has especially impacted on manufacturing and service
exports.
other uncertainty in the world economy recession in Europe and
1-2
USA and a slowdown in China; mining investment has reached a
peak and is projected to fall in absolute terms; falling terms of trade
fiscal policy budget deficit falling due to the recovery of the
12
economy after the GFC (automatic stabilisers)
Total
8

(b)

Using a diagram/s, show how these policies can help the Government achieve its
internal economic objectives.
(12 marks)
Description
Policy objectives
economic growth (target 34%)
full employment (target / natural rate around 5%)
price stability target 23% over the business cycle)
Effect of policy response: basic description of how FP and MP
operate, and how they ultimately affect the governments policy
objectives. The starting point is the current weak economic conditions.
Fiscal policy: A budget deficit is where G is greater than T. This has a
multiplier effect and increases AD. Falling BD would normally have a
contractionary effect, however can have a positive effect on private
sector confidence and boost AD.
Monetary policy: Reduction in the cash rate increases C, I and NX
(better answers will discuss how this occurs through the transmission
mechanism). Multiplier effect. Increase in AD.
Diagrams (AD/AS or Keynesian): net impact of monetary and fiscal
policy is expansionary- an increase in AD and links this to the
achievement of the three policy objectives.
Total

Marks
13

16

13
12

ECONOMICS
STAGE 3

10

MARKING KEY

Question 31

(20 marks)

Describe the causes of the business cycle and the effects of the boom phase of the business
cycle on the Australian Government budget outcome, business investment and imports and
exports.
Description
Definition of business cycle: fluctuations in the level of economic activity
over time. Candidates may use a diagram showing phases of the business
cycle.
Candidates should discuss at least three factors.
Causes of the business cycle
Caused primarily by changes in aggregate demand. Changes in aggregate
supply can also causes fluctuations.
Overseas events: the level of economic activity (the business cycle) among
Australias trading partners.
Changes in investment: investment is the most volatile element of
aggregate demand. A negative or positive change in business confidence
can significantly change the level of investment
Changes in the level of consumer confidence: consumption is the largest
component of aggregate expenditure and changes in consumer sentiment
can lead to significant changes in consumption, especially discretionary
services and consumer durables.
Inappropriate or wrongly timed monetary/fiscal policy: for example
setting a high cash rate at the upper turning point and leaving it in place for
too long or applying a contractionary fiscal policy in a slowing economy.
The operation of time lags increases the chances of such policy errors.
Supply-side shocks: for example a rapid increase in oil prices or large
wage increases not matched by improvements in productivity.
Droughts and other natural disasters: can significantly impact on
Australias economic growth.

Marks
13

19

Impact of a boom
Budget outcome: the budget is likely to move to a surplus through the
operation of automatic stabilisers (increase in tax collections and a fall in
social welfare spending). Discretionary policy may be used to reduce the
level of aggregate expenditure.
Business investment: likely to be high with high levels of business
confidence and company profits, capital equipment operating close to full
capacity. However, during boom phase interest rates will be high which
may start to discourage business investment.
Imports: mainly affected by the level of domestic activity. A boom means
high levels of spending on imported consumer durables and capital
equipment.
Exports: mainly affected by the level of foreign economic activity. Any effect
here is likely to be weak. However in the boom phase inflation rises and
this will reduce our competitiveness and therefore likely reduce our exports.
Total

2
20

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