TEACHER: __________________________

NAME: ____________________________

VCE ECONOMICS SAC 2

Unit 1: Area of study 2: Economic Issues-
 Sustainable Economic Growth
 Low Inflation

16 May 2012

TEST STRUCTURE & ALLOCATION OF MARKS:

Comprises of three sections A, B & C:

Section Type of question Number of Number of marks Marks awarded

questions
A Multiple Choice 10 10
B Short Answer 7 30
C Case Study 5 20
Total: 60

INSTRUCTIONS:

Reading time: 5 minutes

Writing time: 65 minutes
Exam conditions apply. (1 mark deduction for talking)
Complete all questions in the space provided.
Section A: MULTIPLE CHOICE
Circle the response you think is most correct.

1. The calculation of Australia’s Gross Domestic Product (GDP) is likely to be an inaccurate measure of
Australia’s living standards. Which of the following combination of factors may help to explain why?

i. the value of household production may not be included

ii. the value of exports is excluded
iii. it is impossible to calculate the value of services
iv the value of some production must be estimated
v. the value of voluntary and charity work may be excluded
A. i, iv and v
B. i, iii and v
C. ii and iii
D. iii, iv and v

2. In which of the following situations has inflation occurred?

A. The Consumer Price Index fluctuated during the year, but by the end of the year it was 105.
B. No change was recorded in the Consumer Price Index, but the total cost of completing the survey
increased by 3.2%.
C. The Australian Bureau of Statistics recorded the Consumer Price Index at 110, after it had been 114
in the previous year.
D. The Consumer Price Index was recorded at 107 in one year, and at 109 in the following year.

3. Deflation is bad for an economy because:

A. When deflation is occurring the government will be forced to increase interest rates.
B. People will tend to delay larger purchases while prices are falling.
C. Deflation will often coincide with a period of severe economic shortages.
D. During a period of falling prices, consumers tend to clear stock from the shelves too quickly.

4. Australia’s productive capacity may be increased by:

A. the depletion of oil reserves in Australia.

B. an increase in labour productivity.
C. the ageing of the Australian population.
D. interest rate increases.

5. The inflation rate in Australia may increase if:

A. the Australian dollar appreciates

B. the savings rate increases
C. the unemployment rate increases
D. the level of consumer confidence increases

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 6. A low inflation rate is an economic priority for the Australian Government because:

A. low inflation helps to maintain the purchasing power of Australian households.

B. low inflation encourages people to borrow money.
C. low inflation is associated with a high Australian dollar.
D. low inflation promotes savings.

7. If the inflation rate in Australia was above 3%, the most appropriate policy response of the
Australian Government would be to:

A. increase spending on infrastructure such as roads and rail networks

B. lower the tax rates on investment income
C. decrease the Goods and Services Tax (GST)
D. increase the cash rate

8. Which of the following would be least likely to increase a country’s rate of growth?

A. Increased investment levels and the expansion of capital resources

B. Farming methods resulting in better soil management and fertility
C. Increased concern over environmental matters and Aboriginal land claims (which have reduced
access to natural resources)
D. The accelerated application of new technology in industry

9. If an economy is in the recession phase of the business cycle:

A. The rate of employment increases

B. The rate of unemployment increases
C. The rate of investment increases
D. GDP increases

10. One way of achieving an increase in labour productivity is to

A. find a way for employees to use each work hour more effectively
B. pay your employees a higher wage rate
C. ask employees to work extra hours each week
D. encourage workers to move interstate or overseas to find work.

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Section B: SHORT ANSWER QUESTIONS

1. Explain two (2) reasons why you believe it is important for an economy to continue to experience
economic growth.

4 marks
2. Distinguish between material and non-material living standards.

2 marks
3. Select one (1) aggregate demand factor and one (1) aggregate supply factor from the list below and
explain how each would affect the rate of economic growth in Australia.
i. Extreme weather conditions in Australia
ii. Decreased consumer confidence
iii. Increased labour force participation rates
iv. Lower interest rates

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 8 marks

4. Define what is meant by sustainable economic development and discuss one government policy
initiative that may help promote sustainable development.

4 marks

5. Explain two (2) ways how an economy may experience an increase in economic growth AND a fall in
living standards?

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 4 marks

6. Explain two (2) important limitations of using GDP as a measure of economic growth and general
living standards.

4 Marks

7. Give an example of one (1) type of microeconomic reform policy and explain how it is intended to
affect the rate of economic growth in Australia.

4 marks

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Section C: CASE STUDY
RBA focus too much on inflation
April 18, 2012

ONE of Australia's largest superannuation funds says the Reserve Bank of Australia (RBA) should consider
more than inflation when it considers interest rate policy.

Industry Funds Management chairman Garry Weaven said today the RBA's approach to inflation, which
was adopted under previous governor Ian MacFarlane and former federal treasurer Peter Costello, was
now "totally inappropriate".

"It is very hard to get the balance right, but consistently now for many years the Reserve has had far too
much focus on inflation only and not enough on employment and economic prosperity generally, which is
their requirement under the Act," Mr Weaven told ABC Radio today.

"It seems to be still unduly influencing the Reserve in its policies."

The central bank sets monetary policy - by managing cash interest rate levels - with the aim of keeping
inflation within a target band of two to three per cent over the course of the economic cycle.

Inflation, as measured by the consumer price index, was 3.1 per cent in calendar 2011.

The RBA's preferred measure of underlying inflation, which removes volatile price movements, was at 2.6
per cent.

Treasurer Wayne Swan said he disagreed with Mr Weaven.

"What I do is, I support the Reserve Bank implementing its current charter," he told ABC Radio.

"It takes its decisions independently of the Government and that is as it should be."

Mr Weaven said Australia's cash rate was high compared to other advanced economies, placing pressure
on business.

Australia's cash rate of 4.25 per cent compares to base rates of 0.125 per cent in the US, 0.1 per cent in
Japan and 0.5 per cent in the UK.

"We do have signs of real weakness in retail and manufacturing, but more importantly in a way we have
very high interest rates by international standards," Mr Weaven said.

"High interest rates push the currency high and that is very, very bad for manufacturers, tourism and some
other industries."

He said lower interest rates could help depreciate the Australian dollar, which is currently above $US1.03,
and reduce the pressure on exporters.

"That would be a very good thing overall for the economy," Mr Weaven said.

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 1. Explain two (2) reasons why the Australian government is keen to maintain a low inflation
environment?

4 marks
2.
a. List two (2) limitations of the CPI as a measurement of inflation.

2 marks

b. State and discuss how one (1) factor or event may cause the headlining CPI to be
overstated.

2 marks

Please refer to the article for the next three questions.

3. The article states, “Mr Weaven said Australia's cash rate was high compared to other advanced
economies, placing pressure on business.”
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 a. Define the ‘cash rate’.

1 mark

b. Discuss one (1) reason why a high cash rate puts pressure on Australian businesses and
predict what impact this pressure on businesses may have on Australia’s economic growth.

4 marks

4. The article says that Australian interest rates are high compared to interest rates in other countries.
Suggest a reason why Australia’s interest rate is relatively high and examine why this could be
considered to be an advantage for Australia.

3 marks

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 5. The article states, “High interest rates push the currency high and that is very, very bad for
manufacturers, tourism and some other industries."
a. Define exchange rate.

1 mark

b. Explain how a ‘high currency’ can negatively impact Australia’s tourism industry and
subsequently economic growth

3 marks

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