SECTION A Question A4

This section contributes 25 per cent to the total marks for this examination. Answer “The trend estimate for total new capital expenditure fell 0.6% in the June quarter
the questions in the examination script books provided 2018.”

Each question in Section A is worth 5 marks Australian Bureau of Statistics, Private New Capital Expenditure and Expected
Expenditure, Australia, June 2018
Suggested time allocation: 30 minutes
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5625.0Main%20Features2
Jun%202018?opendocument&tabname=Summary&prodno=5625.0&issue=Jun%20
2018&num=&view=
Question A1
Use the Keynesian two-sector 450- line diagram to explain how the Australian
Distinguish between the national accounting aggregates of Real Gross Domestic economy is likely to adjust in the short-run to the estimated decline in total new
Product, Real Gross Domestic Income and Real Gross National Income. capital expenditure in Australia referred to in the quotation.
(5 marks)
(5 marks)

Question A2 Question A5

Distinguish between the nominal exchange rate and the real exchange rate and Compare and contrast three measures of inflation commonly used in Australia.
outline how each of these can be expressed or quoted.
(5 marks) (5 marks)

Question A3

Explain why some observers of the Australian labour market argue that the measure
of unemployment provided by the Australian Bureau of Statistics understates the true
unemployment rate.
(5 marks)

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 SECTION B Question B2

There are three questions in this part. You must answer ALL three questions.
Each question contributes 25 per cent to the total marks for this examination.
This section contributes 75 per cent to the total marks for this examination.
Answer the questions in the examination script books provided.
Suggested time allocation: 30 minutes per question.
“The savings ratio has gone off a cliff since the global financial crisis, hitting a 10
year low of 1 per cent in June, despite spending growing in 12 of the 17 consumption
categories in the quarter, including food and recreation.
Perhaps spending is a little too strong at present, said Commsec chief economist
Craig James. It is an issue to watch.”
The Sydney Morning Herald 5 September, 2015
https://www.smh.com.au/business/the-economy/economy-surges-as-australia-s-
savings-ratio-hits-10-year-low-20180905-p501vd.html

Question B1
“The Australian dollar had depreciated a little over the course of 2018, but remained
in the fairly narrow range observed over recent years on a trade-weighted basis.
Members observed that this had reflected offsetting effects on the exchange rate
from higher commodity prices, on the one hand, and the decline in Australian bond
yields relative to those in other major markets, on the other hand.”
(a) Using the aggregate demand-aggregate supply framework, explain how the
Australian economy is likely to respond in terms of output, inflation and
unemployment, in both the short-run and the long-run, to the decline in the savings
ratio highlighted in the quotation.
(10 marks)

Minutes of the Monetary Policy Decision of the Reserve Bank Board, 6 November
2018
https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/2018-11-06.html

(a) In the light of this statement, develop and use demand and supply curve analysis
for the Australian dollar exchange rate to explain how higher commodity prices, on
the one hand, and the decline in Australian bond yields relative to those in other
major markets, on the other hand, could each have influenced the Australian dollar
exchange rate.
(b) Explain and use the Solow-Swan model of economic growth to consider the
implications for the rate of economic growth in Australia of the decline in the savings
ratio highlighted in the quotation.
(15 marks)

(15 marks)

(b) If the United States Federal Reserve System continued to increase the official
interest rate in that country causing a depreciation of the Australian dollar and an
increase in the rate of inflation in Australia, use a diagram to explain how the
Reserve Bank would achieve the desired change in both the target and the actual
cash rate.

(10 marks)

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Question B3 Question B3 continued

(a) Consider the following 4 sector Keynesian model.

Y = PAE = C + I + G + X – M (b) “The importance of national savings is that it provides the resources to allow for
investment to occur”.
C = 1300 + 0.8 Yd
Explain this statement and derive national savings as the sum of private-sector
Yd = (Y – T) savings and public-sector savings. Must the equality of national savings and
T = 100 + 0.1Y investment continue in the open economy?

I = 1200 (15 marks)

G = 1100

X = 270

M = 100 + 0.1Yd

Where:

Y is real output (GDP)

END OF EXAMINATION
Yd is disposable income (Y – T)

T is taxation

I is private sector investment expenditure

G is government expenditure

X is expenditure on exports

M is domestic expenditure on imports

Find the equilibrium level of output in the economy represented by this model. What
is the value of the autonomous expenditure multiplier?

If potential output is 10, 270, by how much would the government need to increase
expenditure to change the equilibrium level of output to be equal to potential output?

(10 marks)

Question B3 continued over page

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