Preparing for the WACE Stage 3 Exam Steven Kemp School of Economics Curtin University

1. Preparing for the WACE Stage 3 Exam Steven Kemp School of Economics Curtin University CCI/ETAWA Student Economics Forum 2011

2. Economics 2011 You need to . . . • Know the Syllabus in 3A and 3B – textbook theory and concepts account for around 60 – 80% of the paper • Use models in your answers • Be aware of current economic conditions & events – around 20 – 30% of the paper Remember that the exam paper was written before July

3. 3A: International Economics • Global Markets • Patterns & trends in world trade • International competitiveness • Globalisation • Free Trade & Protection • Comparative advantage • Demonstrate the gains from trade • Types of protection (tariffs & subsidies) • Arguments for protection & trade liberalisation • Trade agreements

4. 3A: International Economics • Pattern of Australia’s trade • The terms of trade • Thebalance of payments • Theexchange rate • Foreign liabilities • Foreign debt • Foreign investment

5. Australia’s Exports Source: Bankwest Economic Snapshot

6. 3B – Macroeconomic Theory Macroeconomics is about 2 things • Explaining long term economic growth • Explaining short run fluctuations in economic activity – the business cycle

7. Australia

8. Australia What caused the large fall in the March quarter 2011?

9. 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 . . .

10. 3B – Macroeconomic Policy • Key macroeconomic objectives • Sustainable rate of economic growth • Full employment/Natural rate of unemployment • Price stability

11. 3B – Macroeconomic Policy • Fiscal Policy • Budget Outcomes • Automatic vs discretionary • Expansionary/contractionary • Impact (use AD/AS model) • Strengths/weaknesses • Recent Budget

12. 3B – Macroeconomic Policy • Monetary Policy • The cash rate • Transmission mechanism • Expansionary/ neutral/ contractionary • Impact (use AD/AS model) • Strengths/weaknesses • Recent interest rate changes?

13. 3B – Macroeconomic Policy • Microeconomic Reform • Examples • Productivity • Economic efficiency • Impact (use AD/AS model) • Strengths/weaknesses

14. Current Macroeconomic Performance and Policy Stance

15. World Growth Source: RBA

16. Australia - GDP Growth

17. Inflation

18. Unemployment

19. Exchange Rate

20. Balance of Payments

21. Budget Balance

22. Monetary Policy

23. 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

24. Every Year’s Exam Common Errors • Poor understanding & application of basic models • Agg Expenditure (45o model) • Agg Demand & Agg Supply • foreign exchange market – D($A)/S($A) • Confusion over the CAD, foreign debt, foreign investment

25. 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

26. Section 1 • 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. 

27. Section 1 • 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.

28. Section 1 • 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

29. 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.

30. 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

32. 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)

33. Section 3 29. Consider each of the following events: (i) an increase in world oil prices; (ii) a depreciation of the Australian dollar. • 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 . . .

34. 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?

35. Australian Economy • Be aware of the state of the economy – key developments & trends • Key indicators • GDP • Unemployment • Inflation • $A • CAD • Cash rate • Budget deficit

36. 2011 – Key Developments?