exam

Question 1

price elasticity of demand

Answer 1

refers to the responsiveness of total quantity demanded of a product to a change in the price of that product. determines the slope of the curve, steepening with low elasticity and flattening with high elasticity.`

Question 2

factors affecting PED

Answer 2

degree of necessity
availability of substitutes
time period
proportion of income

Question 3

degree of necessity

Answer 3

essential services and products such as medication, rental accommodation and basic foods are fairly inelastic whereas non essential services and products such as luxury cars, holidays and entertainment are relatively elastic.

Question 4

availability of substitutes

Answer 4

large numbers of substitutes e.g multiple breakfast cereals are fairly elastic wheras unique products such as petrol tend to be inelastic

Question 5

time period

Answer 5

long term tend to be more elastic as opposed to short term, due to being able to find alternatives, substitutes and change habits, eg. choosing a heating system.

Question 6

proportion of income

Answer 6

expensive things that take up more proportion of income tend to be more elastic, as opposed to items that take up less of an income.

Question 7

Price elasticity of supply

Answer 7

refers to the responsiveness of total quantity supplied of a product to a change in the price of that product. determines the slope of the curve, with high PES flattening the curve and low PES steepening it.

Question 8

PES factors

Answer 8

Product storability
resource mobility and unused industry capacity
production time period

Question 9

product storability

Answer 9

items that are more durable and can be stored successfully without deterioration such as minerals, wheat, wool, and red wine are more elastic.

Question 10

resource mobility and unused industry capacity

Answer 10

more elastic if production levels can be readily and inexpensively changed by moving resources between industries, and is especially elastic when there is unused or spare productive capacity in an industry.

Question 11

production time period

Answer 11

inelastic in the short term and elastic in the long term

Question 12

Balance of payments

Answer 12

consisting of the current account and the combined capital & financial account, BOP summarises the economic transactions of an economy with the rest of the world. overall total amount of debits is equal to credits.

Question 13

current account

Answer 13

broken down into 4 components, net goods, net services, net primary income and net secondary income. is the difference between al receipts(credits) and payments(debits) of a current nature .

Question 14

factors affecting AD

Answer 14

disposable income
interest rates 
consumer confidence
business confidence
exchange rate
rates of economic growth overseas

Question 15

factors affecting AS

Answer 15

changes in general level of prices
quantity and quality of factors of production
cost of production
technology
productivity growth
exchange rates
climatic conditions

Question 16

factors affecting demand

Answer 16

disposable income
price of substitutes and complements
consumer preferences
interest rates
consumer confidence
population growth and demographic density

Question 17

factors affecting supply

Answer 17

changes in cost of production
technology
productivity
climate change/climatic conditions

Question 18

role in open market operations in altering interest rates

Answer 18

involves the manipulation of the liquidity in the cash rate market by the RBA through the purchasing and selling of government security

Question 19

how RBA increase interest rates

Answer 19

RBA makes an announcement stating they are going to raise the cash rate and outline the reasons why. The RBA would then set out to achieve this by selling government securities in the open markets operations. Financial institutions then transfer funds to the RBA from exchange settlement accounts. In doing so this creates a shortage of cash in the money market putting upward pressure on the cash rate, reducing the supply of cash in the market. Banks will then increase interest rates on new variable loans.

Question 20

how RBA decreases the cash rate

Answer 20

RBA make an announcement that they are decreasing the cash rate and outline the reasons why. The RBA will buy government securities from financial institutions through the open markets operations. The RBA will transfer funds to financial institutions into their Exchange settlement accounts. In doing so this creates a surplus of cash in the market putting downward pressure on the cash rate, increasing the supply of cash in the market. Banks will then lower their interest rates to encourage borrowing and reduce saving.

Question 21

methods to finance a budget deficit

Answer 21

sell bonds to RBA
sell bonds to Aus investors
sell bonds to overseas investors

Question 22

selling bonds to RBA

Answer 22

most expansionary however most inflationary due to money that wasn’t in circulation is now supplied

Question 23

selling bonds to Australian investors

Answer 23

least expansionary as places upward pressure on interest rates, which leads to crowding out in the private sector as businesses and households are less likely to spend

Question 24

selling bonds to overseas investors

Answer 24

leads to capital inflow which can place downward pressure on AUD and reduce price competitiveness of AUS exporters leading to crowding out of external sector

Question 25

methods of utilising a budget surplus

Answer 25

repay existing gov debt
invest money in financial markets
put money in funds

Question 26

net foreign debt

Answer 26

is the difference in value between what Aus has borrowed from and owes overseas (liabilities) minus what Aus has lent or invested abroad (assets)

Question 27

net foreign equity

Answer 27

represents the excess value of foreign owned Aus assets over overseas assets owned by Aus residents

Question 28

RBA buys gov securities

Answer 28

increase cash supply in money market and decrease cash rate

Question 29

RBA sell gov securities

Answer 29

decrease cash supply in money market and increase cash rate

Question 30

common access goods

Answer 30

naturally occurring goods not owned by anyone and have no market price. They are non excludable(cant prevent people from using them) and rivalrous (depletable, consumption by one person will reduce access for others)

Question 31

public goods

Answer 31

provided by government and consumed by members of the public. They are non excludable (free for all to use) and are non rivalrous (one persons consumption does not exclude another’s)

Question 32

asymmetric information

Answer 32

one party knowing more than the other in an exchange

Question 33

negative externalities

Answer 33

unintended consequence of production or consumption of goods and services that negatively impact a third party