Transcript SK Preparing for WACE Economics Exam CCI Student Economic Forum

CCI/ETAWA
Student Economics
Forum 2011
Preparing for the
WACE Stage 3 Exam
Steven Kemp
School of Economics
Curtin University
Economics 2011
You need to . . .
1. Know the Syllabus in 3A and 3B –
textbook theory and concepts account for
around 60 – 80% of the paper
2. Use models in your answers
3. Be aware of current economic
conditions & events – around 20 – 30%
of the paper
Remember that the exam paper was written before
July
3A: International Economics
• Global Markets
• Patterns & trends in world trade
• International competitiveness
• Globalisation
• Free Trade & Protection
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Comparative advantage
Demonstrate the gains from trade
Types of protection (tariffs & subsidies)
Arguments for protection & trade liberalisation
Trade agreements
3A: International Economics
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Pattern of Australia’s trade
The terms of trade
The balance of payments
The exchange rate
Foreign liabilities
• Foreign debt
• Foreign investment
Australia’s Exports
Source: Bankwest Economic Snapshot
3B – Macroeconomic Theory
Macroeconomics is about 2 things
1. Explaining long term economic growth
2. Explaining short run fluctuations in economic
activity – the business cycle
Australia
Australia
What caused the
large fall in the March
quarter 2011?
3B – Macroeconomic Theory
You must learn 2 models!
• The AE model
– Macroeconomic equilibrium
– The multiplier
• The AD/AS model
– Aggregate demand curve
– Aggregate supply curve
– Use the AD/AS model to explain the business
cycle, inflation, unemployment . . .
3B – Macroeconomic Policy
• Key macroeconomic objectives
–Sustainable rate of economic growth
–Full employment/Natural rate of
unemployment
–Price stability
3B – Macroeconomic Policy
• Fiscal Policy
– Budget Outcomes
– Automatic vs discretionary
– Expansionary/contractionary
– Impact (use AD/AS model)
– Strengths/weaknesses
– Recent Budget
3B – Macroeconomic Policy
• Monetary Policy
– The cash rate
– Transmission mechanism
– Expansionary/ neutral/ contractionary
– Impact (use AD/AS model)
– Strengths/weaknesses
– Recent interest rate changes?
3B – Macroeconomic Policy
• Microeconomic Reform
– Examples
– Productivity
– Economic efficiency
– Impact (use AD/AS model)
– Strengths/weaknesses
Current Macroeconomic
Performance and Policy
Stance
World
Growth
Source: RBA
Australia - GDP Growth
Quarterly %
Annual %
March 2011
-1.2
1.0
Dec 2010
0.8
2.7
Sept 2010
0.0
2.5
June 2010
1.4
3.2
Inflation
CPI
Excl
Weight. Trimmed
Volatile Median Mean
June qrt
0.9
0.5
0.9
0.9
June 2011
3.6
2.5
2.7
2.7
Mar 2011
3.3
2.6
2.2
2.3
Dec 2010
2.7
2.5
2.2
2.2
Sept 2010
2.8
3.0
2.3
2.4
Unemployment
Trend Un Rate
%
June 2011
4.9
Mar 2011
4.9
Dec 2010
5.1
Sept 2010
5.2
June 2010
5.2
Exchange Rate
Balance of Payments
Budget Balance
Monetary Policy
Date
3 Nov 2010
5 May 2010
7 Apr 2010
3 Mar 2010
2 Dec 2009
4 Nov 2009
7 Oct 2009
8 Apr 2009
Change in Cash
Rate - % points
New Cash Rate
Target %
+0.25
+0.25
+0.25
+0.25
+0.25
+0.25
+0.25
-0.25
4.75
4.50
4.25
4.00
3.75
3.50
3.25
3.00
Last Year’s Exam
• The exam highlighted certain areas of the syllabus
that are not well understood:
The terms of trade
Automatic stabilisers in fiscal policy
The link between the current account and the
financial account in the balance of payments
The aggregate demand/aggregate supply
model
Every Year’s Exam
Common Errors
1. Poor understanding & application of basic
models
• Agg Expenditure (45o model)
• Agg Demand & Agg Supply
• foreign exchange market – D($A)/S($A)
2. Confusion over the CAD, foreign debt,
foreign investment
Section 1
13. The graph has a marginal propensity to
consume of _______ and, therefore, a multiplier
of ________.
(a) 0.6, 2.5
(b) 0.6, 1.67
(c) 0.8, 5
(d) 0.8, 2.5
Section 1
7. A worsening current account deficit is most
likely to be a result of
(a) a decrease in economic growth.
(b) capital expansion in domestic
manufacturing plants.
(c) a positive gap between domestic savings
and domestic investment.
(d) an increase in exports.
Section 1
14. An increase in aggregate demand is likely to
result in
(a) higher prices and slower growth in real GDP.
(b) higher real GDP and higher interest rates.
(c) lower interest rates and higher inflation.
(d) higher inflation and job creation.
Section 1
17. Which one of the following is an example of
discretionary fiscal policy?
(a) a reduction in marginal income tax rates
(b) an increase in tax collections during a boom
(c) an increase in government tariff revenue
(d) a decrease in government tax revenue
Section 1
23. Which one of the following statements about
productivity is correct?
(a) Productivity growth always results from
capital investment.
(b) Labour productivity is the best measure of
productivity growth.
(c) Productivity growth is measured by increases
in the output of the economy.
(d) Productivity growth results from capital
deepening.
Section 2
Q 25 The Terms of Trade
• Most students can define the terms of
trade, but after that its good night!
• The increase in Australia’s terms of trade
– Why?
– The effects on economic activity, B of P &
the $A
Section 3
29. Consider each of the following events:
(i) an increase in world oil prices;
(ii) a depreciation of the Australian dollar.
(a) With the aid of separate AD/AS diagrams, explain
the likely effects of each event on the Australian
economy. (10 marks)
(b) Discuss the possible macroeconomic policy
options available to the Australian Government to
combat any negative effects of an increase in world
oil prices. (10 marks)
Section 3
29. Consider each of the following events:
(i) an increase in world oil prices;
(ii) a depreciation of the Australian dollar.
(a)With the aid of separate AD/AS diagrams, explain
the likely effects of each event on the Australian
economy. (10 marks)
An increase in world oil prices would . . .
A depreciation of $A would . . .
Section 3
29. (b) Discuss the possible macroeconomic policy
options available to the Australian Government to
combat any negative effects of an increase in world
oil prices. (10 marks)
What should the government do?
Australian Economy
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Be aware of the state of the economy –
key developments & trends
Key indicators
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GDP
Unemployment
Inflation
$A
CAD
Cash rate
Budget deficit
2011 – Key Developments?