Term 1 SA test

Question 1

exchange rate

Answer 1

the value of a currency in comparison to another currency

Question 2

floating exchange rate

Answer 2

when the value of a currency is determined by demand and supply

Question 3

trade weighted index (TWI)

Answer 3

The average value of the AUD compared to Australia’s major trading partners currencies, weighted according to their significance

Question 4

Factors affecting the demand for and supply of AUD

Answer 4

• financial flows
• trade flows
• economic conditions

Question 5

Factors affecting the demand for and supply of AUD - Financial flows

Answer 5

Level of Australian interest rates relative to overseas interest rates
- High domestic rates attract foreign investment,
creating higher demand for AUD
- Low domestic rates incentivise saving funds in
overseas banks, creating a high supply of AUD
Investment opportunities
- High opportunities domestically support high demand
for AUD
- High foreign opportunities create a high supply of
AUD
Speculation
- If there is an expectation of future appreciation, there
may be high demand for AUD
- If there is an expectation of a future depreciation
investors may sell AUD, increasing supply

Question 6

Factors affecting the demand for and supply of AUD - trade flows

Answer 6

Exports
- High demand for domestic exports leads to high
demand for AUD
Imports
- High demand for imports results in high supply of AUD
Commodity prices and terms of trade
- Improvements in commodity prices and terms of trade
increase the value of exports, causing high demand
for AUD
- A decrease in commodity prices and terms of trade
decreases the value of exports, causing high supply of
AUD

Question 7

Factors affecting the demand for and supply of AUD - economic conditions

Answer 7

Expansionary period
- Upturn in domestic and/or international business cycle
may increase demand for Australia’s exports, creating
high demand for AUD
Contractionary period
- A downturn in the domestic and/or international
business cycle may decrease demand for Australia’s
exports, creating a high supply of AUD
Tastes and preferences
- Affect demand of Aus exports and imports, and
therefore the demand and supply of the AUD

Question 8

Changes in exchange rate - appreciation

Answer 8

An increase in the exchange rate of one currency in terms of another
Occurs when demand increases and/or supply decreases

Question 9

changes in exchange rate - depreciation

Answer 9

A decrease in the exchange rate of one currency in terms of another
Occurs when demand decreases and/or supply increases

Question 10

fixed exchange rate

Answer 10

When the government or RBA officially sets the exchange rate for an economy

Question 11

clean float

Answer 11

pure demand-supply model with no central bank intervention (only exists in theory)

Question 12

dirty float

Answer 12

a flexible exchange rate but managed to a certain extent

Question 13

managed exchange rate

Answer 13

Any official intervention by a government in setting the exchange rate

Question 14

Advantages of a flexible over fixed rate

Answer 14

More accurately reflects international competitiveness which encourages free trade
Dutch disease: a boom in one export causes an appreciation in exchange rates making other industries less competitive

Question 15

Disadvantages of flexible over fixed rate

Answer 15

volatile or sudden changes cause future transactions to become uncertain, which heavily influences speculative investment
Depreciations may cause inflation, as imports are more expensive and this price increase can be reflected in the domestic interest rate

Question 16

Direct intervention by RBA on exchange rates

Answer 16

The RBA buys/sells foreign exchange when the AUD goes either too high or too low
If AUD is too high the RBA sells AUD reserves to increase supply, and decreases its value
If the AUD is too low, the RBA buys AUD reserves to increase demand and increase its value

Question 17

Indirect Intervention by RBA on exchange rates

Answer 17

Monetary policy: Interest rates set by the RBA have a secondary function of changing the interest rate between Australia and overseas

Question 18

Effects of fluctuations in exchange rates on the economy - Positive Impacts of Appreciation

Answer 18

Cheaper imports may cause lower import inflation as prices are lower
Cheaper imports encourage allocative efficiency of resources resulting in a long term shift to more competitive industries
Cheaper imports mean consumers and firms can buy a greater quantity of products due to increased purchasing power, therefore improving living standards and lowering input costs
Valuation effect on debt decreases interest servicing costs on foreign debt and the overall AUD value of foreign debt

Question 19

Effects of fluctuations in exchange rates on the economy - Negative Impacts of Appreciation

Answer 19

Exports are more expensive, and we expect a fall in the quantity demanded, leading to a long term loss of investors, causing slower economic growth
Cheaper imports may cause domestic firms to lose competitiveness which may increase unemployment
Valuation effect on assets

Question 20

Effects of fluctuations in exchange rates on the economy - Positive Impacts of Depreciation

Answer 20

exports are cheaper, so we expect an increase in quantity demanded causing a long term increase in investment and economic growth
More expensive imports may cause domestic firms to increase competitiveness which may increase employment
Valuation effect on assets

Question 21

Effects of fluctuations in exchange rates on the economy - negative Impacts of Depreciation

Answer 21

Imports are more expensive, which may cause imported inflation
More expensive imports decreases living standards and increases input costs due to decreased purchasing power
Valuation effect on debt

Question 22

aggregate demand

Answer 22

the total demand over a period of time

Question 23

aggregate demand formula

Answer 23

AD=C+I+G+(X-M)

Question 24

consumption

Answer 24

spending by households, contributes to ~60% AD

Question 25

Factors that influence consumption levels

Answer 25

interest rate levels, a person’s income level, MPC and the distribution of income

Question 26

investment

Answer 26

spending by firms to increase productive capacity.

Question 27

factors that influence investment levels

Answer 27

the cost of inputs, interest rates, profit levels, business expectations, tax rates and government policy

Question 28

Government spending

Answer 28

spending by local, state and federal governments.

Question 29

factors that influence government spending

Answer 29

policy objectives of the government (such as lower inflation and unemployment) and the general state of the economy

Question 30

Net exports

Answer 30

expenditure by foreigners on domestically produced goods/services (exports) minus expenditure on foreign goods/services (imports).

Question 31

factors that influence net exports

Answer 31

the global business cycle, exchange rate and commodity prices

Question 32

aggregate supply

Answer 32

the total productive capacity of an economy when all factors of production are fully utilised over a period of time

Question 33

equilibrium

Answer 33

I + G + X = S + T + M

Question 34

the simple multiplier

Answer 34

The simple multiplier refers to the extent to which an initial change in autonomous expenditure is multiplied to give or result in a larger change in the equilibrium level of national income

Question 35

MPC formula

Answer 35

MPC = 𝚫C/𝚫Y

Question 36

multiplier formula

Answer 36

K = 1/(1-MPC) | K x change of income = new income

Question 37

sources of eco growth in Aus

Answer 37

consumption by households, investment by business, government spending, net exports, technological change, labour productivity, capital productivity, education, R&D, access to more resources, immigration, 3 p's - productivity, participation, population, natural resources, labour, capital

Question 38

positive effects of economic growth

Answer 38

Higher GDP per capita improves living standards and economic development Increased employment opportunities Increased confidence due to high growth rates Improvement in budgetary position Increased innovation more export revenue higher levels of saving

Question 39

negative effects of economic growth

Answer 39

Investment in new capital may cause short-term structural unemployment May lead to higher inflation as higher AD pushes up prices Worsened BOGS and increased CAD Increased income inequality as high income earners disproportionately benefit from increased economic growth Increased negative externalities due to conflict between growth and sustainability as the use of natural resources fuels short term growth, but threatens long term growth

Question 40

ecologically sustainable development

Answer 40

the growth rate with economic benefits without environmental destruction development that meets the needs of the present without compromising the ability of future generations

Question 41

increase in AS

Answer 41

Capacity constraint is the point at which the economy approaches full employment and cannot grow any further In the long run, AS must increase to match AD, because if it doesn’t then further AD will simply cause inflation

Question 42

unemployment

Answer 42

people willing and able to work, actively seeking work, but unable to find employment

Question 43

labour force

Answer 43

working age population who are employed or unemployed

Question 44

working age population

Answer 44

labour force + people in the working age bracket that aren’t actively seeking work

Question 45

participation rate

Answer 45

labour force/working age population | the percentage of people in the working-age population that are in the labour force

Question 46

unemployment rate

Answer 46

Unemployment rate: unemployed/labour force x 100 | the percentage of people in the labour force who are unemployed

Question 47

trends in unemployment

Answer 47

Unemployment has increased due to COVID and the participation rate has fallen Higher unemployment was experienced from mid 1970s onward due to high microeconomic reforms and structural changes within the Australian economy Casualisation of the workforce has increased, increasing underemployment

Question 48

types of unemployment

Answer 48

cyclical, structural, seasonal, frictional, hidden, long term, underemployment

Question 49

cyclical unemployment

Answer 49

unemployment caused by a contraction in economic activity and aggregate demand. This generally occurs in the short-term during periods of economic downturn

Question 50

Structural unemployment

Answer 50

structural (long-term) changes causing workers to become redundant or displaced. occurs when there is a mismatch between the jobs that are available and the people looking for work. Could result from a lack of required skills or the available jobs are a long way from job seekers, likely to face long term unemployment

Question 51

frictional unemployment

Answer 51

people who are temporarily unemployed as they move between jobs, or when people transition into and out of the labour force

Question 52

seasonal unemployment

Answer 52

certain work at certain times of the year can create unemployment that changes with seasons. Occurs at different points over the year because of seasonal patterns that affect jobs

Question 53

Hidden unemployment

Answer 53

Those who are unemployed for more than 12 months and who have given up actively seeking work. Occurs when people are not counted as unemployed in the formal ABS labour market statistics but would probably work if they had the chance

Question 54

long term

Answer 54

unemployed for more than 12 months. This can be linked to structural unemployment if a reskilling process is not undertaken

Question 55

underemployment

Answer 55

part-time or casual workers who would like to work more hours than they are currently offered

Question 56

Causes of unemployment

Answer 56

Economic growth levels - demand for labour is derived demand Annual rate of economic growth must exceed the sum of the rate of productivity growth and labour force increases Rising participation rates Fiscal policy and monetary policy Structural change

Question 57

natural rate of unemployment

Answer 57

the level of unemployment at which there is no cyclical unemployment

Question 58

NAIRU

Answer 58

the lowest unemployment rate which can be sustained without an increase in inflation

Question 59

main groups affected by unemployment

Answer 59

Young people Face high rates of unemployment due to the lack of experience, skills or education. In 2019, the unemployment rate for people aged 15-19 was 7% higher than the national unemployment rate Aboriginal and Torres Strait Islanders Have high rates of unemployment around 3-4 times the national average Specific Regions Such as country areas in Australia, where there are limited jobs available Migrants Often have limited English skills, may find it harder to obtain work, and hence experience higher unemployment

Question 60

economic costs of unemployment

Answer 60

Opportunity cost Economy is losing the opportunity of working to full capacity Lower living standards Lower purchasing power, disposable income and living standards Loss of skills May result in a rise of structural unemployment Government costs Increase social welfare and less taxation revenue Lower wage growth Greater supply of workers means firms can offer lower wages, which may also lead to increased income inequality as lower skilled workers may find it harder to negotiate wage rises Intergenerational poverty

Question 61

social costs of unemployment

Answer 61

Increased inequality Increased inequality can lead to increased mental health issues, crime rates, alcohol abuse and family tensions Low self esteem and dignity People may experience reduced motivation which can lead to hidden unemployment

Question 62

inflation

Answer 62

Sustained increase in the general price level over a period of time, usually over one year

Question 63

headline inflation

Answer 63

Most commonly used rate Found using CPI measures changes in the prices of a selected regimen of consumer goods and services over time by using price index numbers Inflation rate = [(current CPI - Previous CPI)/Previous CPI] x100 Doesn’t measure all goods and services Lags (doesn’t reflect current performance)

Question 64

underlying rate

Answer 64

Headline Rate - Volatile Factors Unusual movements can distort understanding of inflation More accurate and preferred

Question 65

government inflation goals

Answer 65

``` RBA sets target of 2-3% over the business cycle on average Avoid hyperinflation Extremely rapid inflation where prices escale quickly : over 50% per month Decreases the real value of money Decreases purchasing power Increases cost of living Avoid deflation Price levels decline Anticipate lower prices in future Consumers save rather than spend Decreased aggregate demand Decreased economic activity May lead to a recession ```

Question 66

causes of inflation

Answer 66

demand inflation cost inflation inflationary expectations imported inflation

Question 67

demand inflation

Answer 67

Demand side source When increases in aggregate demand exceed increases in aggregate supply demand increases faster than production can, resulting in shortage of goods, consumers compete, increasing prices and causing inflation Usually occurs during a boom Causes Any increase in aggregate demand - consumption, investment, government spending, net exports

Question 68

inflationary expectations

Answer 68

Consumers expect higher inflation so planned purchases brought forward, spending increases in the short term, increase demand-pull inflation

Question 69

cost inflation

Answer 69

Supply side Occurs when production costs rise, forcing firms to increase their prices to preserve profit margins Production costs increase, firms produce fewer goods and services at any price, aggregate supply falls Factors that make production costs increase Wages Cost of raw materials, equipment, or services

Question 70

imported inflation

Answer 70

Inflation due to an increase in the cost of imports Overseas sector If AUD is comparatively weak and inflation is high overseas, the cost of imported raw materials and equipment rises, increases productions costs for firms, increasing prices

Question 71

negatives of inflation

Answer 71

Constraint on economic growth in the long term Distorts consumer spending and saving decisions - increase short term spending which decreases long term growth When inflation is too high, contractionary monetary policy or fiscal policy is implemented, decreasing demand, reducing economic growth Reduction in international competitiveness With high inflation, cost of Aus products and inputs increases, exports decrease and import spending increases, decreasing our international competitiveness and causing a deterioration of trade balance and current account, reduces AD Depreciation of Exchange Rate Inflation reduces real value of money, so AUD is worth less, leading to currency depreciation Inflation undermines investor confidence, decreasing demand for AUD resulting in currency depreciation

Question 72

benefits of inflation

Answer 72

Avoids deflation Deflation usually comes with low economic growth and high unemployment Consumers delay spending, waiting for prices to drop further, dampening AD Relationship to Unemployment Indirect effect Strong correlation between high inflation and low unemployment

Question 73

effect of inflation on income earners

Answer 73

Loss of purchasing power High inflation worsens income distribution Skill Levels As prices rise, workers seek higher wages. The higher the skills and qualifications, the more bargaining power to get higher wages as they are harder to replace Income is redistributed from low to high skilled workers Income Type Indexed - automatically adjusted to inflation e.g. pensions and welfare recipients Fixed - don’t adjust to inflation

Question 74

effects of inflation on borrowers and lenders

Answer 74

Lenders Negative impact receive a certain percentage of their savings each period, as the general price levels rise, these interest repayments are worth less Borrowers Positive impact Interest repayments are worth less Borrowers technically are paying back less money

Question 75

effects of inflation on real asset owners

Answer 75

Real Assets - physical assets that have worth e.g. property, land, commodities Inflation causes the monetary value of assets to rise, making their owners wealthier

Question 76

effects of inflation on firms

Answer 76

The effect inflation has on firms depends on the type of firm or market Benefits monopolies as there are no alternatives Import competing firms will suffer as consumers can buy cheaper foreign alternatives

Question 77

effects of inflation on government

Answer 77

Benefits from increased taxation revenue Government expenditure increase cost of providing public goods becomes higher Welfare payments are more expensive

Question 78

lorenz curve

Answer 78

A graphical representation of income distribution. A 45° upward sloping line indicates the line of perfect equality

Question 79

gini coefficient

Answer 79

Measure of income distribution calculated by using the lorenz curve = Area A/(Area A+B) coefficient of 0 represents perfect inequality The higher the coefficient, the more inequality in an economy

Question 80

Income

Answer 80

money and other benefits received by individuals in return for the factors of production, such as land, labour, capital and enterprise. It also includes social welfare or transfer payments

Question 81

bilateral exchange rate

Answer 81

measures the value of a unit of domestic currency relative to another currency

Question 82

real gdp calculation

Answer 82

(nominal GDP/1) x 100/CPI

Question 83

Sources of income as a percentage of household income

Answer 83

``` Wages and salaries ~ 55.8% Profits ~ 18.5% Rent, interest and dividends ~ 11.5% Social benefits~ 8.6% Other ~ 5.6% ```

Question 84

Progressive taxation

Answer 84

the more you earn the more you pay - reduces inequality

Question 85

Proportional tax

Answer 85

doesn’t reduce equality as it takes a standard proportion of income from all

Question 86

Regressive tax

Answer 86

impacts lower income earners more than high income earners

Question 87

Transfer payments

Answer 87

such as age pensions, unemployment benefits and more exist to protect those who cannot earn a sufficient amount of income for themselves

Question 88

wealth

Answer 88

the value of assets owned by individuals, including property, consumer durables, and financial assets.

Question 89

sources of wealth

Answer 89

Accounts held with financial institutions (5.8%) Owner occupied property and other property (56.7%) Superannuation (17.8%)

Question 90

dimensions and trends of income inequality

Answer 90

Gender In Aus there is a 14% pay gap between men and women Women are more likely to have to take time off work for children, preventing them from earning more Age Income varies over a person’s life due to experience and skills Younger people typically earn lower incomes due to less experience People over 60 find it more difficult to gain employment as they approach retirement age and may receive lower pay Occupation Jobs with higher skill levels generally pay higher and those with successful businesses Ethnic Background Those with limited english skills often have difficulty in obtaining skilled work where proficient english is required Family Structure Single parents have a low weekly income, whereas couples without dependent children have the highest income

Question 91

economic benefits of inequality

Answer 91

incentive effect: people will seek to increase skills, education, productivity and geographical mobility if they are motivated to earn more Encourages entrepreneurialism: people are willing to accept investment, risk, and innovation for higher profits Higher Savings: higher incomes lead to more savings, which may result in less reliance on overseas borrowing, which may improve CAD

Question 92

social benefits of inequality

Answer 92

Incentivises community values: including hard work, the importance of skills, education and dedication

Question 93

economic costs of inequality

Answer 93

Overall utility is not increased: due to the law of diminishing marginal utility, when high income earners earn more they find less utility from this increase in income Consumption and Economic Growth decreases: higher income earners have a lower MPC compared to low income earners, hence adding less to AD Government Welfare: increases with increased income inequality

Question 94

social costs of inequality

Answer 94

Class division: increased income inequality can cause tension and conflict, and a possible poverty cycle and discrimination Decreased Well being: less economic development for lower income earners can affect health outcomes or crime rates

Question 95

nominal gdp

Answer 95

the dollar value of the goods and services produced in a time period, which depends on the volume of what was produced and the prices of what was produced

Question 96

nominal gdp calculation

Answer 96

(value yr 2 - value yr 1)/value year 1 x100

Question 97

real gdp calculation

Answer 97

𝚫volume/volume yr1 x100

Question 98

factors that affect AS

Answer 98

labour, capital and productivity

Question 99

income distribution data

Answer 99

``` highest 20% : 42% lowest 20%: 6% second 20% : 20% middle 20%: 17% fourth 20%: 23% ```

Question 100

wealth distribution data

Answer 100

``` highest 20% : 64% lowest 20%: 1% second 20% : 5% middle 20%: 11% fourth 20%: 20% ```

Question 101

private costs

Answer 101

the expenditure by producers on resources to produce output and by consumers in buying g/s

Question 102

social costs

Answer 102

the cost imposed on society as a result of private costs

Question 103

private benefits

Answer 103

profits made by producers and satisfaction gained from consumption by consumers

Question 104

social benefits

Answer 104

positive effects of private production on the community

Question 105

market failure

Answer 105

where the price/market system fails to take into account social costs and benefits

Question 106

private good

Answer 106

excludable - those that are unable to pay form them are excluded from enjoying them rival - if a good is consumed by 1 person, it is unable to be consumed by another

Question 107

public goods

Answer 107

non-excludable - people can't be excluded from using them | non-rival - one person's consumption doesn't affect another's

Question 108

free riders

Answer 108

individuals that benefit from the good or service whether they pay for it or not

Question 109

renewable resources

Answer 109

can be used repeatedly and replaced naturally

Question 110

non-renewable resources

Answer 110

supply is finite - it can't be replaced fast enough to keep up with consumption of it

Question 111

government policies for environmental issues

Answer 111

``` carbon tax emissions trading scheme minerals resource rent tax paris agreement emissions reduction fund renewable energy target snowy mountains hydro scheme ```

Question 112

real gdp

Answer 112

the national output of goods and services adjusted for changes in inflation over time