vce economics units 3 & 4 practice written examination...an energy drink is a beverage...

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Published by QATs. Permission for copying in purchasing school only.

NAME: ____________________________

VCE®Economics

UNITS 3 & 4 Practice Written Examination

Reading time: 15 minutes Writing time: 2 hours

Structure of book

Section Number of questions Number of questions to be answered Number of marks

A 15 15 15 B 6 6 65 Total 80

x Students are permitted to bring into the examination room: pens, pencils, highlighters, erasers,

sharpeners and rulers. x Students are NOT permitted to bring into the examination room: blank sheets of paper and/or

correction fluid/tape. x No calculator is allowed in this examination.

Materials supplied

x Question and answer book of 29 pages. x Answer sheet for multiple-choice questions. x Additional space is available at the end of the book if you need extra paper to complete an

answer. Instructions

x Write your name in the space provided above on this page and on the multiple choice answer sheet.

x All written responses must be in English. At the end of the examination

x Wrap the answer sheet for multiple-choice questions around this book.

Students are NOT permitted to bring into the examination room mobile phones and/or any other unauthorised electronic devices.

QATs VCE®Economics Practice Written Examination Units 3 and 4

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Published by QATs. Permission for copying in purchasing school only. 2

Section A: Multiple-choice questions Answer all questions in pencil on the answer sheet provided for multiple-choice questions. Choose the response that is correct or that best answers the question. A correct answer scores 1; an incorrect answer scores 0. Marks will not be deducted for incorrect answers. No marks will be given if more than one answer is completed for any question. Question 1

Which of the following is not a characteristic of a perfectly competitive market?

A. Products are only differentiated by price and quality.

B. Low start-up costs.

C. It is easy for firms to move land, labour and capital between competing uses.

D. Consumers have perfect information about the good/service being sold.

Question 2

Which of the following factors would not result in a rise in the price of rice?

A. A cyclone in China, where much of the world’s rice is produced.

B. A rise in the price of quinoa, seen as a substitute for rice in many Western countries.

C. A fall in the price of soy sauce, a condiment which many people like to have with their rice.

D. The development of new technology which allows rice to be harvested faster.

Question 3

Which of the following factors will result in a movement along the demand curve to the right in the market for motorcycles?

A. A fall in the price of motorcycle helmets.

B. A fall in the cost of leather (used to make the seats of motorcycles).

C. A fall in productivity in motorcycle factories.

D. A rise in wage costs paid to motorcycle factory workers.


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Question 4

Which of the following is not an injection in the circular flow model of income?

A. Consumption

B. Investment

C. Exports

D. Government spending

Question 5

Which component/s of Aggregate Demand will be impacted by a government decision to raise the level of welfare payments e.g. the aged pension?

A. G1

B. G2

C. Both G1 and G2

D. Neither G1 nor G2

Question 6

Which of the following is least likely to occur during a recovery (upturn) in the business cycle?

A. A fall in the level of unemployment.

B. A rise in the number of job advertisements.

C. A rise in the rate of inflation.

D. A fall in the level of import spending.


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Question 7

According to the following information taken from the ABS website (www.abs.gov.au), what is the

annualised rate of inflation for March 2017?

A. 2.1%

B. 2.0%

C. 0.5%

D. 1.8%

Question 8

What does a participation rate of 65% indicate?

A. 65% of those people looking for work are able to find a job.

B. 65% of the population is in the labour force.

C. 65% of the population 15+ in age is employed.

D. 65% of the working age population is willing and able to work.


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Question 9

According to the following hypothetical data, what is happening to the rate of inflation over the period shown?

Quarter Consumer Price Index 1 100 2 101 3 102 4 103

A. It is rising.

B. It is falling.

C. It is staying the same.

D. More information is needed to answer this question.

Question 10

The table below provides hypothetical data from a country’s current account. What is the balance on the country’s capital and financial account?

Sub-account Balance ($B) Balance on merchandise trade -15

Net secondary incomes -10 Services imports 20

Primary incomes credits 5 Primary incomes debits 25

Services exports 10

A. A deficit of $30B.

B. A surplus of $30B.

C. A surplus of $55B.

D. A deficit of $55B.


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Question 11

Which of the following is an example of indirect taxation?

A. Company tax

B. The tobacco excise

C. The aged pension

D. Personal income tax

Question 12

Which of the following would have an impact on the budget outcome which is different to the other three?

A. A fall in commodity prices.

B. The occurrence of many natural disasters (such as bushfires) across Australia.

C. Cuts to the cash rate by the Reserve Bank of Australia (RBA).

D. Higher rates of unemployment.

Question 13

If the inflation rate was 6%, what is the most likely course of action the RBA would undertake?

A. Buy $A in the foreign exchange market.

B. Increase liquidity in the overnight money market.

C. Decrease liquidity in the overnight money market.

D. Sell $A in the foreign exchange market.


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Question 14

Which of the following is not considered a weakness of budgetary policy?

A. It is unable to target particular sectors of the economy.

B. Since most policies are announced in the May budget, budgetary policy can be relatively inflexible.

C. The budget process is subject to political hurdles which can prevent or slow policy implementation.

D. Budgetary policy is prone to political bias and undue influence from lobby groups.

Question 15

What will a loosening of monetary policy tend to raise?

A. Economic growth, unemployment and inflation.

B. Economic growth and unemployment, but not inflation.

C. Unemployment and inflation, but not economic growth.

D. Economic growth and inflation, but not unemployment.


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Section B: Written responses Answer all questions in pen in the spaces provided. Question 1 (9 marks)

An energy drink is a beverage containing stimulant drugs, usually caffeine, which is marketed as improving a person’s alertness. They often also contain sugar or other sweeteners.

a. Describe how one factor could lead to a decrease in the demand for energy drinks. 2 marks

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b. Describe how the market for energy drinks will move to a new equilibrium following the decrease in demand. 2 marks

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c. Define ‘price elasticity of demand’. What is the formula for calculating PED? 2 marks

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d. Explain the likely price elasticity of demand for international holidays. Justify your answer by referring to one factor influencing price elasticity of demand. 3 marks

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Question 2 (12 marks)

a. Fully explain what is meant by an efficient allocation of resources. 2 marks

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b. Distinguish ‘allocative efficiency’ from ‘dynamic efficiency’. 2 marks

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c. Explain why competitive markets are more likely to achieve either ‘allocative efficiency’ or ‘dynamic efficiency’ (choose one). Use a real-life example of an Australian market (such as the point-to-point passenger transport market, banking, the car market or another market of your choosing) to illustrate the link between competition and the type of efficiency you have selected. 4 marks

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d. Explain, using an example, why common access resources are an example of market failure. Identify and explain one form of government intervention that has been utilised to address this form of market failure. 4 marks

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a. Define ‘Aggregate Demand’ and ‘Aggregate Supply’. 4 marks

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b. Explain how an appreciation of the Australian dollar is likely to impact:

i. Aggregate Demand 2 marks

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ii. Aggregate Supply 2 marks

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Source: http://www.rba.gov.au/chart-pack/au-gdp-growth.html

a. Define the goal of ‘strong and sustainable economic growth’. 2 marks

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b. Describe the level of economic growth in Australia over the past two years. Use evidence from the chart to support your answer. 2 marks

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c. Explain how one unfavourable demand factor may have impacted Australia’s achievement of the goal over the past two years. 3 marks

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d. One of the reasons for pursuing strong and sustainable economic growth is to lower the unemployment rate. Explain the link between economic growth and unemployment and explain how unemployment impacts living standards. 4 marks

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e. Explain how the level of interest rates in Australia may have impacted Australia’s achievement of the goal of full employment over the past two years. 4 marks

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a. Explain the impact of weak economic growth in Australia on the current account balance. 2 marks

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b. Explain one reason for Australia’s structural Current Account Deficit. 2 marks

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c. Explain the potential impacts of trade liberalisation on the level of economic growth in Australia. 4 marks

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a. Explain the difference between ‘automatic’ and ‘discretionary’ stabilisers of the budget, using examples to illustrate your answer. 4 marks

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b. In relation to monetary policy, explain the difference between the ‘savings and investment’ channel and the ‘cash flow’ channel. 3 marks

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c. Explain how taxation reform can be used to improve Australia’s international competitiveness. 3 marks

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d. Explain how immigration policy can be used to achieve the goal of low inflation. 3 marks

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Extra Space

Clearly number all responses

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END OF QUESTION AND ANSWER BOOK


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Multiple choice answer sheet NAME: ___________________________________

Shade the best answer to each question in pencil. If you make a mistake, you must completely erase it.

A B C D

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Solution Pathway

NOTE: This task is sold on condition that it is NOT placed on any school network or social media site (such as Facebook, Wikispaces etc.) at any time.

NOT FOR PRIVATE TUTOR USE.

Below are sample answers. Please consider the merit of alternative responses.

Section A: Multiple-choice questions

A B C D

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Section B: Written responses Question 1a 1 mark = identifying a relevant demand factor. 1 mark = describing the impact of the factor. Increasing concerns about the negative health impacts of some of the ingredients in energy drinks such as caffeine or sugar (perhaps fuelled by media reports) will make consumers less willing to purchase energy drinks at every price, thus causing a decrease in demand. Question 1b 1 mark = identifying a surplus being created and the need for prices to fall. 1 mark = referring to the contraction in supply and expansion in demand. A decrease in the demand for energy drinks will create a surplus at the previous price. Therefore, firms will reduce prices to clear excess stock. This will cause a contraction in supply and expansion in demand until a new equilibrium is created with a lower price and lower quantity. Question 1c 1 mark = defining ‘price elasticity of demand’. 1 mark = identifying the formula for calculating PED. Price elasticity of demand is the responsiveness of quantity demanded relative to a change in price. It is calculated by the formula: PED = % change in quantity demanded

% change in price Question 1d 1 mark = identifying elastic demand for international holidays. 1 mark = identifying a factor causing demand for international holidays to be elastic. 1 mark = explaining why the factor causes demand for international holidays to be elastic. International holidays have elastic demand. This is because of the proportion of income which international holidays take up for consumers. International holidays are very expensive, so consumers are more likely to notice price changes, as well as care about these price changes. E.g. a 10% rise in the price of a holiday costing $5000 is $500, a significant amount of money for households which they could use to buy other things. Therefore, consumers are likely to be very responsive to price changes e.g. a rise in price will lead to a contraction in demand of a greater proportion.


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Question 2a 1 mark = basically defining an ‘efficient allocation of resources’. 1 mark = comprehensively explaining what is meant by an ‘efficient allocation of resources’. An efficient allocation of resources is when scarce resources (land, labour, capital) are allocated in a way that maximises the satisfaction of society’s wants and needs (social welfare). Opportunity cost will be minimised, no alternative allocation of resources can improve social welfare, and it will be impossible to make anyone better off without making someone else worse off. All four types of efficiency (allocative, productive, dynamic and inter-temporal) should be at a maximum. Question 2b 1 mark = defining ‘dynamic efficiency’. 1 mark = distinguishing ‘allocative efficiency’ from ‘dynamic efficiency’. Allocative efficiency is achieved when resources are allocated in a way that maximises the satisfaction of society’s wants and needs (social welfare). Dynamic efficiency is a measure of how quickly an economy can reallocate resources to achieve allocative efficiency in response to changing economic conditions. Thus, the difference is that allocative efficiency is concerned with how many wants/needs are satisfied at a point in time, whereas dynamic efficiency is concerned with how quickly it takes the economy to reallocate resources when society’s wants/needs change. Question 2c 2 marks = theoretically explaining the link between competition and the selected type of efficiency. 2 marks = using a real-life Australian example to illustrate the theoretical links. Perfect competition describes a hypothetical situation where there are many firms (due to low barriers to entry) which compete fiercely on price alone (due to the absence of any product differentiation). Whilst perfect competition does not exist, the closer a market comes to perfect competition the more efficient the market is expected to be. Competitive markets are more likely to achieve allocative efficiency because firms must respond to what consumers buy/do not buy in order to make a profit (consumer sovereignty). They must also try to sell their products at the lowest price in order to maximise market share, thereby ensuring maximum access for consumers. The banking industry in Australia is an example of an oligopoly, with the ‘Big 4’ banks having more than 80% market share and branding playing an important role. With less competition, banks have been accused of having higher interest rates and bank fees than what would be the case in a more competitive market. As a result, some consumers cannot afford home loans and therefore are unable to purchase houses. Thus, a lack of competition has resulted in less wants/needs being satisfied i.e. lower allocative efficiency. Competitive markets are more likely to achieve dynamic efficiency because if firms are not responsive to changing consumer tastes and preferences, then one of the many other competing firms will step in and


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produce a good/service which better caters to consumers’ new wants/needs and therefore steal customers in a bid to maximise profits. The point-to-point passenger transport market has become more competitive in recent times with the introduction of Uber and other ride sharing apps. A person only needs a roadworthy car, licence and police check to become a driver. Thus, it is much easier for a driver to enter the market then in the past where expensive taxi licences created a high start-up cost. This means that it is easy for more drivers to enter the market when consumer demand for point-to-point passenger transport increases e.g. New Year’s Eve. The introduction of surge pricing provides incentive for more drivers to work during peak periods. Thus, we can see that the market is now more responsive to changing levels of demand for rides, thus increasing dynamic efficiency. Question 2d 1 mark = describing the characteristics of common access resources. 1 mark = describing an example of common access resources. 1 mark = explaining why common access resources are an instance of market failure. 1 mark = describing an example of government intervention to address this form of market failure. Common access resources are characterised as being non-excludable (it is impossible to prevent non-payers from consuming the resource) and rivalrous (one’s consumption of the resource leads to less of the resource being available for others). Fish in open water are an example of a common access resource. In a free market it is not possible to stop individuals/firms from catching fish in open water, but when they catch these fish there are less fish leftover for others. This leads to market failure because self-interested, profit driven firms will try to catch as many fish as possible. This will lead to an over-consumption of fish (in other words, an over-allocation of this resource to production). These practices are unsustainable in that they may allow current needs and wants to be satisfied, but they prevent future needs and wants from being satisfied due to depleted fish stocks. This therefore reduces inter-temporal efficiency. In 2015, the Victorian government banned commercial netting in Port Phillip Bay. Making this particularly damaging form of fishing illegal has helped to allow fish stocks to replenish and reduce current consumption of fish to a sustainable level, so that future generations will still have access to this common access resource. Thus addressing the market failure. Question 3a 2 marks = defining Aggregate Demand. 2 marks = defining Aggregate Supply. Aggregate Demand refers to total spending on Australian made goods and services over a period of time (year). Aggregate Demand is equal to private consumption spending + private investment spending + government spending + export spending – import spending (AD = C + I + G + X – M). Aggregate Supply refers to the total production of goods and services by Australian firms over a period of time (year). This is influenced by firms’ willingness and ability to produce.


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Question 3bi 1 mark = explaining the impact on exports and imports. 1 mark = describing the impact on AD. When the Australian dollar becomes worth more in foreign currency, Australian-made goods and services become less internationally competitive (in terms of price) in both overseas and domestic markets. Overseas, foreigners will purchase fewer Australian exports (X) because they become more expensive (in foreign currency). Domestically, Australians will buy more imports (M) because they become cheaper (in Australian dollars). Since AD = C + I + G + X – M, a fall in X and rise in M leads to a decrease in AD. Question 3bii 1 mark = explaining the impact on the cost of imported capital. 1 mark = describing the impact on costs of production and AS. Australian firms tend to import capital. When the Australian dollar appreciates, imported capital becomes cheaper (in Australian dollars). Therefore, firms’ costs of production fall. With lower costs of production and higher profitability, firms become more willing and able to produce, causing an increase in AS. Question 4a 1 mark = basically defining strong and sustainable economic growth. 1 mark = comprehensively defining strong and sustainable economic growth. The government’s goal of strong and sustainable economic growth is for the fastest rate of increase in the production of goods and services (consistent with strong employment growth) that does not cause inflationary, external or environmental pressures. Economists suggest that a rate of increase in real GDP of 3-3.5% per year is strong and sustainable. Question 4b 1 mark = describing the level of economic growth over the correct time frame (past two years). 1 mark = using accurate numbers and units from the chart. Over the past two years (2016 and 2017), Australia has generally experienced weak economic growth. According to the chart, annual growth has been between 2% and 3% over 2016 and 2017. Question 4c 1 mark = identifying an accurate demand (AD) factor. 1 mark = explaining how the factor has impacted AD via the relevant component/s. 1 mark = explaining how the factor has impacted Australia’s achievement of the goal. Growth in China has slowed in recent years.


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Slower growth in China, Australia’s number one trading partner, means that Australia experiences slower growth in exports (X). E.g. coal, education. Slower growth in X leads to slower growth in AD. Firms notice slower growth in sales and therefore lift production at a slower rate. As such, the rate of economic growth has declined below 3% as shown in the chart, making the goal harder to achieve. Question 4d 2 marks = explaining the link between economic growth and unemployment. 2 marks = explaining how unemployment impacts living standards. If economic growth does not exceed productivity growth, it will not cause an increase in the derived demand for labour. In turn, if employment growth is not outstripping growth in the labour force, then unemployment will rise. Living standards refers to how well-off a nation is overall, comprised of material (how many goods and services can be consumed) and non-material (quality of life aspects unconnected to material possession) living standards. Unemployed people move on to welfare (unemployment benefits), which pays less than the full-time minimum wage. With a fall in disposable income, they cannot consume as many goods and services, lowering material living standards. Unemployed people may also feel a sense of worthlessness, stigma and social isolation associated due to being unemployed, thereby damaging their quality of life, lowering non-material living standards. Question 4e 1 mark = defining the goal. 1 mark = identifying the current low interest rate environment. 2 marks = explaining the impact of the factor on the goal. Full employment is achieved when there is no cyclical unemployment associated with weak AD, and the unemployment rate is as low as possible without going below the Non-Accelerating Inflation Rate of Unemployment (NAIRU), thought to be around 5%. Interest rates (the cost of credit and reward for saving) are currently low, with the cash rate sitting at 1.5%. Low interest rates result in a rise in private consumption spending (C) because it is cheaper for households to make new purchases on credit, payments on existing loans fall (causing a rise in discretionary income) and there is less incentive to save. Private investment spending (I) also rises because it is cheaper for businesses to purchase capital on credit. With C and I rising, Aggregate Demand (AD) rises. With higher AD, firms notice rising sales and therefore lift production. This increases the derived demand for labour, causing cyclical unemployment to fall. This is helping to lower the unemployment rate closer to 5%, helping to achieve the goal. Question 5a 1 mark = explaining the impact of weak economic growth on international transactions. 1 mark = linking the answer to the current account balance.


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Weak economic growth indicates weak domestic spending. This results in less spill over spending onto imports. It also means that there is a smaller gap between investment and savings, resulting in less borrowing from overseas to fund investment, creating fewer interest repayments. As a result, there is a fall in imports (goods and services debits) as well as interest repayments going overseas (primary incomes debits), causing the cyclical CAD to fall. Question 5b 1 mark = describing one reason for Australia’s structural CAD. 1 mark = linking the answer to the current account balance. Australia has a savings-investment imbalance. Australian households do not save enough to fully fund business investment. This imbalance must be filled by foreign funds. Therefore, Australian firms must go overseas to borrow (or often Australian banks borrow from overseas at the wholesale level to relend in Australia). This leads to a build-up of foreign debt. This debt must be repaid with interest. Interest repayments going overseas are recorded as primary incomes debits. This leads to a deficit in the balance on primary incomes and as a result, an ongoing structural CAD (where debits exceed credits for current transactions i.e. goods, services, primary incomes and secondary incomes). Question 5c 1 mark = describing the nature of trade liberalisation. 1 mark = explaining the short-term impact of trade liberalisation. 2 marks = explaining the long-term impact of trade liberalisation. Trade liberalisation refers to the movement towards free trade, progressively lowering protectionist measures that restrict the movement of goods and services into Australia from other countries. It involves cutting tariffs, reducing subsidies and signing free trade agreements e.g. with China in 2015. In the short-term, imports penetrate the local market because they have fewer protectionist measures imposed on them and their relative price falls, resulting in a fall in domestic sales. As imports (M) rise and AD falls, so too does real GDP. Thus, economic growth falls. In the long-term, the resources freed up by failed inefficient industries (e.g. car manufacturing) will be reallocated to industries where Australia has a comparative cost advantage (those where we are relatively more efficient). This causes a rise in allocative efficiency. Also, the discipline imposed on firms from foreign competitors forces Australian firms to take measures which improve productivity, such as updating technology. With improved efficiency and lower production costs, firms become more willing and able to produce and there is an increase in Aggregate Supply. This puts downwards pressure on prices and causes an expansion in AD and rise in real GDP. Thus, economic growth rises. Question 6a 1 mark = defining automatic stabilisers. 1 mark = defining discretionary stabilisers. 1 mark = using an example to illustrate automatic stabilisers. 1 mark = using an example to illustrate discretionary stabilisers.


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Automatic stabilisers are built-in aspects of the budget which operate counter-cyclically without the need for any direct action by the government. For example, during a recession the level of unemployment will rise. As a result the government will receive fewer personal income tax receipts (due to lower incomes) and pay greater welfare outlays (due to more people requiring unemployment benefits). As a result, the budget will move towards deficit automatically. Discretionary stabilisers are deliberate decisions by the government to change receipts or outlays in a counter-cyclical way. Cutting the company tax rate is a discretionary stabiliser as it is a deliberate decision by the government to change a receipt (company tax) in a counter-cyclical way. In this case, it is being done to stimulate AD at a time when AD is low. Question 6b 1 mark = defining the savings and investment channel. 1 mark = defining the cash flow channel. 1 mark = clearly articulating the difference between the two channels. The savings and investment channel describes how a fall in interest rates will create more incentive for households to buy goods and services on credit, since the effective cost (including interest repayments) has fallen. This causes a rise in private consumption spending (C). There will also be less incentive for households to save. It will also create more incentive for businesses to purchase capital on credit, since the effective cost has fallen. This causes a rise in private investment spending (I). A rise in C and I leads to a rise in Aggregate Demand. The cash flow channel explains how a fall in interest rates will lower the minimum repayments required on variable interest rate loans. Therefore, households with mortgages will have a higher discretionary income, enabling them to lift private consumption spending (C). Businesses will have improved cash flow, leaving them more funds to spend on private investment spending (I). A rise in C and I leads to a rise in Aggregate Demand. Thus, the difference between the two is that the savings and investment channel relates to the impact on households and firms potentially taking out new loans, whereas the cash flow channel relates to the impact on households and firms with existing loans. Question 6c 1 mark = demonstrating an understanding of international competitiveness. 1 mark = describing an example of how taxation reform can be used to improve international competitiveness. 1 mark = fully explaining how the policy lifts international competitiveness. International competitiveness can be defined as Australian firms being able to compete with foreign firms (in both the Australian and overseas market) in terms of price and quality. International competitiveness can be achieved when Australian firms improve their product quality or reduce costs in order to offer lower prices to consumers. In 2017 the government have reduced the company tax rate for firms earning up to $50 million. With a reduced rate of company tax, Australian firms are more able to invest (due to greater retained profits) and also more willing (because the incentive for doing so – retained profits – has risen). Investment in capital should increase productivity, enabling firms to lower costs of production and


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therefore offer lower prices to consumers. As a result, the relative price of Australian made goods and services will fall compared to foreign made goods and services. Therefore, Australian firms will become more internationally competitive in terms of price. Question 6d 1 mark = defining the goal. 1 mark = describing Australia’s immigration policy. 1 mark = explaining how the policy impacts the goal. Low inflation is achieved when there is a rise in the general price level of 2–3% per year on average over the course of the business cycle (measured by changes in the CPI). Australia has an immigration target, which is the desired annual level of immigration to Australia (just under 200,000 people). The majority (70%) of these migrants are skilled migrants who work as one of the approximately 200 occupations listed on the Skilled Occupations List (professions and trades which are currently in shortage in Australia). An increase in supply of skilled labour alleviates skills shortages, thus preventing excessive wages growth. In addition, since skilled migrants bring skills, innovation and potentially world’s best practice, labour productivity is likely to rise. Therefore, there should be a slower rise in wage costs, meaning firms do not need to raise prices by as much to maintain profit margins i.e. cost inflation will fall. Low inflation will be easier to achieve.

vce economics units 3 & 4 practice written examination...an energy drink is a beverage...

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