HSC Economics Question Thread

[Lumenoria]

what key things i should talk about in this essay question
Explain how movermnet in the australian dollar can affect the perfomace of the australian dollar

Hey there! I'm assuming you mean in the Australian economy? Just at the top of my mind, I would probably address how exchange rate fluctuations impact foreign equity and liabilities (so external stability), international competitiveness (i.e. dutch disease which eroded non-mining sectors in the mining boom due to sustained appreciation), impact on domestic consumption (i.e. depreciation discourages Australians from buying imports), valuation effect, debt trap scenario, imported inflation and perhaps the RBA's interventions in response to these issues. Because you have to address cause and effect for an explain question, you should probably draw on the fundamental reasons for exchange rate fluctuations in one paragraph with diagrams to illustrate this. For instance, depreciation can be caused by a decrease in demand for Australian exports or a reduction in our interest rates, and vice versa. Hope this helps!

[Lumenoria]

what key things i should talk about in this essay question
Explain how movermnet in the australian dollar can affect the perfomace of the australian dollar

Hey there! I'm assuming you mean in the Australian economy? Just at the top of my mind, I would probably address how exchange rate fluctuations impact foreign equity and liabilities (so external stability), international competitiveness (i.e. dutch disease which eroded non-mining sectors in the mining boom due to sustained appreciation), impact on domestic consumption (i.e. depreciation discourages Australians from buying imports), valuation effect, debt trap scenario, imported inflation and perhaps the RBA's interventions in response to these issues. Because you have to address cause and effect for an explain question, you should probably draw on the fundamental reasons for exchange rate fluctuations in one paragraph with diagrams to illustrate this. For instance, depreciation can be caused by a decrease in demand for Australian exports or a reduction in our interest rates, and vice versa. Hope this helps!

[Brun]

Hey there! I'm assuming you mean in the Australian economy? Just at the top of my mind, I would probably address how exchange rate fluctuations impact foreign equity and liabilities (so external stability), international competitiveness (i.e. dutch disease which eroded non-mining sectors in the mining boom due to sustained appreciation), impact on domestic consumption (i.e. depreciation discourages Australians from buying imports), valuation effect, debt trap scenario, imported inflation and perhaps the RBA's interventions in response to these issues. Because you have to address cause and effect for an explain question, you should probably draw on the fundamental reasons for exchange rate fluctuations in one paragraph with diagrams to illustrate this. For instance, depreciation can be caused by a decrease in demand for Australian exports or a reduction in our interest rates, and vice versa. Hope this helps!

This is a very comprehensive answer and covers what I would probably write. One example of a good diagram to use for this type of essay would be the 'J-Curve' which shows how a depreciation in the AUD initially leads to a worsening of the Balance on Goods and Services (BOGS), but eventually does lead to an improvement of the BOGS. You can then link this to economic growth.

[Bells_123]

I was wondering for this multiple choice question, how do you figure out if the purchasing power of consumers in the domestic economy increases or decreases? I'm a bit confused on the logic there and I feel like I'm missing something.

It's from the HSC 2016 paper 

[Lumenoria]

I was wondering for this multiple choice question, how do you figure out if the purchasing power of consumers in the domestic economy increases or decreases? I'm a bit confused on the logic there and I feel like I'm missing something.

It's from the HSC 2016 paper 

Hey,
I've answered this before so I'll just paste my answer here:

I exaggerated the numbers a bit so that the effect is a bit more clearer to recognise.

Hypothetically, say there's an economy with inflation of 200% one year then 100% the next. In this economy, the oranges are $5 at the beginning, and you have $30 in your pocket as a domestic consumer. By the end of year one, oranges are worth $15 [(100%+200%)x$5]. However, by the end of year two, oranges are worth a massive $30 [(100%+100%)x$15]. In year one, you could buy two oranges, but in year two you could only buy one. Therefore, even though inflation has decreased, your purchasing power still diminishes over these 2 years. Hence, you can extrapolate this to 2%/1%, exaggerating the numbers just made it easier to illustrate my point lol.

So, while the inflation rate HAS in fact decreased compared to the previous year, inflation is STILL occurring so the real value (purchasing power) of any given amount of money has decreased. I suppose this is true regardless of the inflation rate as long as it is positive, even if it is 0.00001%. lol

I hope this helped! x

[Bells_123]

Hey,
I've answered this before so I'll just paste my answer here:

I exaggerated the numbers a bit so that the effect is a bit more clearer to recognise.

Hypothetically, say there's an economy with inflation of 200% one year then 100% the next. In this economy, the oranges are $5 at the beginning, and you have $30 in your pocket as a domestic consumer. By the end of year one, oranges are worth $15 [(100%+200%)x$5]. However, by the end of year two, oranges are worth a massive $30 [(100%+100%)x$15]. In year one, you could buy two oranges, but in year two you could only buy one. Therefore, even though inflation has decreased, your purchasing power still diminishes over these 2 years. Hence, you can extrapolate this to 2%/1%, exaggerating the numbers just made it easier to illustrate my point lol.

So, while the inflation rate HAS in fact decreased compared to the previous year, inflation is STILL occurring so the real value (purchasing power) of any given amount of money has decreased. I suppose this is true regardless of the inflation rate as long as it is positive, even if it is 0.00001%. lol

I hope this helped! x

Thank you!!

I also had a question about unemployment and inflation - does a rising inflation rate lead to lower or higher unemployment and why?

I've heard different answers from people so I wanted to clarify.

[emily_p]

Thank you!!

I also had a question about unemployment and inflation - does a rising inflation rate lead to lower or higher unemployment and why?

I've heard different answers from people so I wanted to clarify.

An increase in inflation will lead to a decrease in unemployment. Inflation will lead to a wage price spiral, where employers will request wage rises so that they can meet their consumption expenses. The increase in wages/income will then be an incentive for those unemployed to find work as soon as possible - to take advantage of the high and increasing wages, and hence there will be less unemployment.

The Phillips Curve will show this

[Fergus6748]

An increase in inflation will lead to a decrease in unemployment. Inflation will lead to a wage price spiral, where employers will request wage rises so that they can meet their consumption expenses. The increase in wages/income will then be an incentive for those unemployed to find work as soon as possible - to take advantage of the high and increasing wages, and hence there will be less unemployment.

The Phillips Curve will show this

I can see what you are saying but ultimately an increase in inflation results in an increase in unemployment. As price inflation of goods and services will lead employees and unions to request/get wage increases to meet their consumption needs as you said, this increases the cost that a employer will have to pay each employee. However, employers are more likely to reduce their workforce or switch to more efficient capital options to keep production costs down and profits up. Unfortunately, because of this high wages is a incentive for the unemployed but because the job market is diminished, unemployment will ultimately increase.

[henrychapman]

Thank you!!

I also had a question about unemployment and inflation - does a rising inflation rate lead to lower or higher unemployment and why?

I've heard different answers from people so I wanted to clarify.

The answers you have gotten have probably confused you a little bit - both are correct to some extent however I'll try and put it in the simplest explanation.
Possibly the best way to do is break this up into short and long term impacts.
If unemployment is below the Non-accelerating inflation rate of unemployment (NAIRU) this will increase inflation. Because of economic growth, firms aren't looking for more firms new workers to enter the workforce. As such, they pay increased wages to those already in the workforce to attract the best existing labour. This therefore increases inflation. In the same way, if the government wanted to try and increase employment via macroeconomic policy, this would be successful in the short term at reducing unemployment, but over the long term wage increases won't keep up with inflation and as a result, firms will be forced to sack some of their workforce, which increases unemployment. Unemployment will return back to NAIRU.
So easiest way to remember it: growth and unemployment are interdependent on each other. An increase in growth will (generally) increase employment. Once it does this and firms are forced to compete for the best workers and thus increase their wages, this creates inflation.
However over the long term, this growth in wages cannot keep up with the wage of inflation, which increases firm costs because employees will want wages to keep going up. Forces firms to fire staff- therefore increasing unemployment.
I hope that answer was comprehensive and makes sense

[Bells_123]

The answers you have gotten have probably confused you a little bit - both are correct to some extent however I'll try and put it in the simplest explanation.
Possibly the best way to do is break this up into short and long term impacts.
If unemployment is below the Non-accelerating inflation rate of unemployment (NAIRU) this will increase inflation. Because of economic growth, firms aren't looking for more firms new workers to enter the workforce. As such, they pay increased wages to those already in the workforce to attract the best existing labour. This therefore increases inflation. In the same way, if the government wanted to try and increase employment via macroeconomic policy, this would be successful in the short term at reducing unemployment, but over the long term wage increases won't keep up with inflation and as a result, firms will be forced to sack some of their workforce, which increases unemployment. Unemployment will return back to NAIRU.
So easiest way to remember it: growth and unemployment are interdependent on each other. An increase in growth will (generally) increase employment. Once it does this and forms are forced to compete for the best workers and thus increase their wages, this creates inflation.
However over the long term, this growth in wages cannot keep up with the wage of inflation, which increases firm costs because employees will want wages to keep going up. Forces firms to fire staff- therefore increasing unemployment.
I hope that answer was comprehensive and makes sense

Thank you for all the replies! I was confused in the beginning but it makes a lot more sense now 

[ilikeapples]

I am having trouble working out this MC question from 2017 HSC: In 2019, one US dollar buys 1.25 Australian dollars. In 2020, one Australian dollar buys 0.75 US dollars.
Which statement is most correct?
A. There is no change in the exchange rate between 2019 and 2020.
B. Australian exports to the US are less expensive in 2020 compared to 2019.
C. Goods imported from the US are more expensive in 2019 compared to 2020.
D. For US investors, Australian assets are more expensive to buy in 2020 compared to 2019.

I am most confused about the conversions how do you change the ratio of dollars to better understand what is going on?
Thankyou

[ilikeapples]

Also, I was given a question on assessing the effectiveness of Monetary Policy, and the stimulus with it was based on the unintended Australian housing boom - How could I link the two together to form an essay?

[S200]

I am having trouble working out this MC question from 2017 HSC: In 2019, one US dollar buys 1.25 Australian dollars. In 2020, one Australian dollar buys 0.75 US dollars.
Which statement is most correct?
A. There is no change in the exchange rate between 2019 and 2020.
B. Australian exports to the US are less expensive in 2020 compared to 2019.
C. Goods imported from the US are more expensive in 2019 compared to 2020.
D. For US investors, Australian assets are more expensive to buy in 2020 compared to 2019.

I am most confused about the conversions how do you change the ratio of dollars to better understand what is going on?
Thankyou

Well, for US$1, they are getting AU$1.25 - 25 cents more.
Conversely, for AU$1, we are getting US$0.75 - 25 cents less.
the difference either way is the same, so I'd say that the exchange rate has not changed. Therefore A.

[emilyygeorgexx]

Well, for US$1, they are getting AU$1.25 - 25 cents more.
Conversely, for AU$1, we are getting US$0.75 - 25 cents less.
the difference either way is the same, so I'd say that the exchange rate has not changed. Therefore A.

I am pretty sure there has been a change in the exchange rate between 2019 and 2020. I think the answer's B

[Lumenoria]

I am having trouble working out this MC question from 2017 HSC: In 2019, one US dollar buys 1.25 Australian dollars. In 2020, one Australian dollar buys 0.75 US dollars.
Which statement is most correct?
A. There is no change in the exchange rate between 2019 and 2020.
B. Australian exports to the US are less expensive in 2020 compared to 2019.
C. Goods imported from the US are more expensive in 2019 compared to 2020.
D. For US investors, Australian assets are more expensive to buy in 2020 compared to 2019.

I am most confused about the conversions how do you change the ratio of dollars to better understand what is going on?
Thankyou

I agree with Emily's answer.

Value of AUD in 2019 = 1 / 1.25 = 0.8
Value of AUD in 2020 = 0.75

Thus AUD has depreciated against USD, resulting in B