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QUESTION 1 In a situation where monetary policy is changed the transmission mechanism will depend on (A) changes to the structure of the economy over time. (B) asset and wealth values of high-income households. (C) the substitutability of imports and domestic goods and services. (D) whether households and firms respond by saving more now or later.
QUESTION 5 Assume the hypothetical economic scenario shown. This stimulus has not been published for copyright reasons. Based on this scenario identify the economic management required (ceteris paribus). (A) (B) (C) (D) Reduce oil price inflation by providing a short-term subsidy to the business sector. Reduce overseas cost inflation pressures by delaying government spending. Reduce wage inflation and price pressures by decreasing the cash rate. Reduce expected inflation by introducing an inflation target range.
Difficulty: B
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Paper 1
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2020
QUESTION 8 Excerpt from the Reserve Bank of Australia�s Statement on Monetary Policy The increase in interest rates � the first in five years � is necessary to help sustain non-inflationary growth into the future ... Although the timing of the move has been influenced by the latest rise in US interest rates the move itself is driven by the marked turnaround in Australia�s domestic economic conditions. Good growth is expected to continue into the foreseeable future aided by a gradual pick-up in the world economy. Household spending has increased strongly over the past year and should continue to do so in the present climate of rising incomes and confidence. Identify the most likely outcome of the movement in interest rates discussed in the statement. (A) Household consumption levels in Australia would continue to rise. (B) Production pressures in the Australian economy would decrease. (C) The Australian economy would be moved from its equilibrium. (D) The Australian dollar would depreciate against the US dollar.
QUESTION 9 Consider the following data. � Employment in public administration and education has risen by 2.5 percentage points. � Employment in recreation and retail has fallen by 2.3 percentage points. Which statement correctly identifies the economic problem and the response required? Economic problem Policy response Resources are underutilised fiscal policy should be contractionary. monetary policy should be expansionary. aggregate supply policies should be used. Cyclical economic activity is slowing Structural unemployment has decreased Total unemployment has fallen demand management should be neutral.
QUESTION 12 (9 marks) Hypothetical data and economic information is provided. Index Business and consumer confidence New vehicle sales Australia Australia 20- 1400 10-1 Business confidence 1200 S 1000 07 = 2 800 �~10- = S 600 [o; 207 400 �a0 r | | | | 200 | | | | | YI Y2 Y3 Y4 �5 Yi �2 Y3 Y4 �5 Year Year RESERVE BANK OF AUSTRALIA: � Current cash rate Is 3.5% Analyse the data and economic information to explain the impact on the household sector of a 75 basis point cash rate decrease from the current cash rate (ceteris paribus). Provide two reasons to justify your answer.
QUESTION 2 The results of a cash rate decision are a reduction in interest payments on debt and an increase in the amount of income available for households and businesses. Which channel of the transmission mechanism 1s this cash rate change an example of? (A) savings and investment (B) asset prices and wealth (C) sector income (D) cash flow
QUESTION 6 Which country would be most likely to experience a longer time lag in economic growth following a cash rate change (ceteris paribus)? (A) acountry where marginal propensity to consume is 0.7 (B) acountry where marginal propensity to import is 0.7 (C) acountry where marginal propensity to invest is 0.7 (D) acountry where marginal propensity to save is 0.7
QUESTION 12 (13 marks) Use Sources 4-7 in the stimulus book to evaluate the extent to which monetary policy is the appropriate policy lever to improve economic prosperity for Australian low-income households.
QUESTION 5 Assume there is an increase in Australians preferring to rent rather than buy their own home. The effect on the transmission mechanism would be (ceteris paribus) (A) achange to how the transmission mechanism is channelled. (B) a decrease in the effective size of the transmission mechanism. (C) quicker interest rate changes so banks maintain their profit levels. (D) ashorter time frame for the cash rate to be transmitted throughout the economy.
QUESTION 7 Australia�s monetary policy is less effective when the economy is (A) (B) (C) (D) recovering because excess production capacity limits employment growth. in a trough because the average propensity to save is high due to lower consumer confidence. in a downturn because political considerations discourage potential reductions in the cash rate. booming because businesses are concerned that interest rates will rise so they reduce their investments.
QUESTION 8 Assume a central bank is concerned that house prices have increased in the past year. Which situation would be most likely to encourage the central bank to increase the official interest rate? (A) Inflation increases from below 1% and housing approvals continue to rise. (B) There is a short-term increase in house purchases causing current consumption to fall. (C) There is a continuous increase in both house prices and consumer debt relative to wage growth. (D) The housing price index increases in capital cities and does not change in other populated areas.
QUESTION 9 Which policy mix is the most appropriate in the following scenario? � Annual consumer price index movement: (Y ) 100 to (Y ) 102. � Nominal gross domestic product movement: (Yo) $9.3 billion to (Y ) $9.5 billion. * Non-accelerating inflationary rate of unemployment: (Yo) 4.5% to (Y ) 4.0%. * Dwelling approvals have fallen slightly from Yq to Yj. (A) expansionary monetary and fiscal policy (B) neutral monetary and fiscal policy stance (C) expansionary monetary policy and neutral fiscal policy stance (D) neutral monetary policy and fiscal policy that contracts the economy
QUESTION 10 This content has not been published for copyright reasons. Based on this hypothetical inflation data for Australia which economic management response would be appropriate at Date A? (A) (B) (C) (D) reduce international interest rates to control imported inflation no response because domestic inflation is within target range reduce the budget deficit to improve local economic forces increase interest rates to slow domestic inflation
Difficulty: C
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Paper 1
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2022
QUESTION 13 (12 marks) The data represents a hypothetical economic situation. Country B: Exports and imports with the major trading partner Year-on-year percentage change in value 6 | | ~~ Key 5 | | HB Exports 4 Imports | 3 | Percentage NO 0 y | 7 | �2 I | | 2013 2014 2015 2016 2017 2018 2019 2020 2021 Central bank interest rates 6 Major trading partner poorer er em ee em em ee ne nn an nana ar a ar ae ann a aaa arr aera ae ee ee 7 Percentage Oo nm I I l l ! I l l l l l | l l I I l l ! | ! ! ed Country B SS 2017 2018 2019 2020 2021 Interpret the trend in Country B�s trade balance to draw a conclusion about whether its own or the major trading partner�s interest rates will have a greater effect on Country B�s economic growth. Assume the exchange rate of Country B is fixed.
QUESTION 14 (28 marks) Sources 1�7 in the stimulus book present the Australian economy in a fictional setting. Analyse Sources 1�7 to evaluate the costs and benefits of changing the monetary policy stance from the perspective of Australian households.
QUESTION 3 A movement in the cash rate from 3% to 4.5% is equal to (A) 0.15 percentage points. (B) 150 basis points. (C) 150 per cent. (D) 15 per cent.
QUESTION 5 Assume the government significantly increases excise taxes on fuels to encourage more electric vehicles. How will this initiative affect the Australian economy? (A) increase domestic-based inflation (B) increase the supply of electric cars (C) raise employment in the Australian car industry (D) raise transportation costs of fruit and vegetables
QUESTION 8 If the Reserve Bank of Australia increases interest rates relative to our trading partners it will cause (ceteris paribus) (A) adepreciating effect on the exchange rate. (B) areduction in the federal budget deficit. (C) an inflow of foreign financial capital. (D) a decrease in export prices.
QUESTION 10 The data shows an economic scenario over a three-year period. Nominal GDP (¢ billion) Budget surplus ($ billion) Which economic policies would improve this situation? (A) raising the age pension and increasing income taxes (B) selling government assets and reducing retirement age (C) increasing retirement age and decreasing health expenditure (D) increasing job seeker payments and decreasing income taxes
QUESTION 12 (4 marks) Assume the graph represents a recent event experienced by the Australian economy that required economic management. Price level Yo Yep Real GDP Explain a likely cause and short-term effect of the event.
QUESTION 13 (8 marks) Assume that the economy is at point A on the economic cycle and the Australian Government is considering its fiscal policy response. Real GDP Time Explain what is happening with income tax receipts at point A and whether income tax should be reduced.
QUESTION 6 Identify the sign of external instability in the Statement on Monetary Policy ceteris paribus. (A) (B) (C) (D) increases and decreases in the exchange rate lifting disposable income and consequent spending China�s higher demand for exports and commodity prices effects of the cash rate reduction on households and local businesses
QUESTION 8 Which of the following best represents the effect of the Reserve Bank of Australia reducing the cash rate? (A) return on investments reduced cost of investing increased (B) house repayments reduced housing borrowing increased (C) spending decreased rate of savings increased (D) inflation reduced import prices increased
QUESTION 10 Identify the graph that shows the expected immediate effect of the transmission mechanism on real GDP following an increase in interest rates. (A) (B) Average P price level p Average price level Real GDP (C) (D) Average P price level p Average P price level P 2 Q: Real GDP Real GDP
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