HSC Economics Question Thread

[mylinh-nguyen]

quick question, but what should you write in those questions with 'what is meant by..'. Just the definition?

[Mathew587]

Hi!

Can anyone explain to me what service costs are and why, when there is a high level of KAFA surpluses, the CAD will widen because of these service costs?

Hey mate,
Service costs or servicing costs as they are better known is simply any cost incurred from the debits section on the NPY. It refers to any interest and costs incurred from foreign investment and loans.
I hope you remember that CAFA= -CA. This is because the CAFA account shows all "inflows" per say into the economy including FDI, direct and portfolio investment etc. And quite obviously, no ones gonna lend to us or invest in us without us paying them back the principal and interest.
This is recorded as debits in the NPY, which I also hope you know is the largest contributing part to the CAD.
Therefore that larger the CAFA, the larger the inflows, the larger the outflows due to servicing costs meaning the CAD will WORSEN.
i.e. ^ CAFA = -CAD v
Hope you got that.

[Mathew587]

Hi,

What is the difference between the net secondary income in the current account and the capital transfers in the capital account?

Use logic and reasoning cos everything in economics is connected.

[isaacdelatorre]

How does expectations of increases in US interest rates affect Australian exchange rates and balance of payments?

Hey Chloe,
Sorry for the late reply but if you or anyone is still interested; if people in Australia expect that US interest rates will increase, relative to domestic interest rates, then Australians will be more likely to put their savings into US banks in order to gain a higher return on investment (higher interest than if they put savings into domestic banks). In the short term, this will increase the supply  of Australian dollars in the fx market as people convert AUD into USD; thus causing a depreciation of the exchange rate. In the long term, US banks pay interest and principal back to Australians who will convert USD into AUD and thus cause an increase in demand and an appreciation.

For Americans, they are less likely to take out loans from their banks and instead may take out loans from Australian banks because the interest rate is relatively less than their own. To do this, they will take out the loan and convert AUD to USD for them to use, thus increasing the supply of AUD and causing a depreciation. Conversely, when the loan is paid back with interest, Americans will have to convert USD into AUD. In doing so, will increase the demand for AUD and cause an appreciation.

These transactions will inevitably affect the balance of payments because the two accounts balance to form equilibrium in a floating exchange rate situation. (money flowing into Australia + money flowing out). Depending on what the the transaction was, it will affect different accounts (loans taken out of australian banks by americans will decrease the capital and financial account - specifically portfolio investment in the financial account. In the future when it is repaid, servicing costs of interest will be paid on the current account.)
Hope this helps

Hi,

Was just wandering, is there a diagram for a revaluation of the $A?

Hey there,
I'm not too sure what you mean by "revaluation" if you could elaborate a bit more, that would help me give a better answer.
But my understanding of your question is that instead of having a floating exchange rate the government would interfere in the fx market and would evaluate the AUD value itself, in which case it would manipulate the demand for/supply of the AUD by buying and selling foreign currency. The graph for this is the same as an appreciation - it can be used to demonstrate multiple valuations of the AUD by ensuring that each curve is labelled correctly.

Hope this helps, let me know what you meant by revaluation though please

Does anyone know an easier-ish way to remember whether factors cause the AUD to appreciate/depreciate?
Thanks!

Hey Caitlin,

So firstly I would understand what causes an appreciation (increase in demand for AUD and a decrease in supply) as well as a depreciation (decrease in demand and increase in supply). Then it's not so much as memorising, but understanding, so ask yourself - what would cause an increase in demanda for the AUD, which translates to "why would overseas people swap their currency for AUD?" the first thing that comes to my head is they want our goods and services - then I think why would they want ours? maybe it's because we are internationally competitive in that market, maybe world growth is outstripping domestic growth making our imports cheaper?" this train of thought for a few other reasons is what solidifies the theory in my head, it might work for you, if not - I would try to make a list of reasons that is succinct and easy to memorise that prompts thought on the reasons why.

Hope this helps, please let me know if you need more clarification

Hi,

What is the difference between the net secondary income in the current account and the capital transfers in the capital account?

Hey there, sorry for the incredibly long wait for an answer!!

In the balance of payments, it's split into 2 sides, the current account which records all the non-reversible transactions (won't need to be paid back) and the capital and financial account recording reversible transactions. The net secondary income account is in the current account and records "net current transfers" i.e. non-market transactions. This essentially means things like unconditional aid and pensions --> things that arent a result of a previous exchange or transaction. Whereas the capital account in the capital and financial account records "capital transfers." this can be understood in a few ways; firstly capital as in funds to contribute to a project/business --> in this way it means conditional/tied aid grants. The other definition is that of non-produced, non-financial assets; including copyrights, trademarks, franchises (basically intellectual property rights.)

Hope this helps

HI,

Just had a question ? what factors determine the appreciation and depreciation of the exchange rate?

thanks

Hi Soha,

Just in terms of clarity I will just dot point them - if you need clarification as to how or what they are, please don't hesitate to ask

Appreciation - caused by an increase in demand for the AUD or decrease in supply in the fx market:
Depreciation - caused by a decrease in demand for the AUD or increase in supply in the fx market:

AUD interest rates relative to overseas interest rates
AUD investment opportunities
Market expectations
Demand for AUD exports (further affected by TOT, international competitiveness, global economic growth, tastes and preferences)
Corporate transactions

Im hoping that you might be able to extrapolate and infer the combinations of the above reasons which would cause an appreciation or depreciation - i.e. a high demand for exports because of internationally competitive exports would increase the demand for exports, increase demand for AUD and cause an appreciation.

Hope this helps

[12070]

So I've got this extended response that I need to get 100% in and have no no idea how to start.

Assess at least TWO of the key problems and issues facing the Australian economy and analyse the effectiveness of fiscal policy (in the recent budget) to address economic objectives.

I was thinking of doing economic growth and distribution of income and wealth. I'm not sure as to how to set it out and where to start and how to get everything I need with it still being concise. Anything under 100% is literally not an option though so can someone help me to plan what I need assuming I am doing economic growth and distribution of income and wealth.

Would be a great help

[hanaacdr]

Could you please explain Okun law
thank you

[dradford]

Could you please explain Okun law
thank you

Hey!

I'm not a moderator but I can offer some information on this law.. So Okun's law refers to the relationship between the U.S' economy's unemployment rate and its GNP. It states that in the situation when unemployment falls by 1%, GNP rises by 3%. However, this law only relates to the U.S economy and only applies when the unemployment rate falls between 3 and 7.5%.

Hope this helps!

[TheFreeMarketeer]

Hey, could someone please help! I need this by tomorrow if possible:

[sudodds]

Hey could someone help:

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heya! So economics wasn't my strongest subject, but I think I might be able to help you out here

For question (c) you need to consider how an upswing (or an expansion) in the international business cycle will impact domestic economic growth. What are some things that happen when the international business cycle experiences an upswing? Well;
- increase in global productivity and productive capacity
- increase in global trade activity

How do these two things impact domestic economy growth? Well;
- An increase in global productivity and productive capacity in turn results in an increase in domestic productivity, which further results in a decrease in the unemployment rate! When unemployment decreases, consumers in turn spend more (as more are now able to), injecting money into the economy and thus fuelling economic growth
- Increase in global trade activity also results in a decrease in the unemployment rate (as more people are hired to satisfy the increased demand for an economies exports). Along with this, an increase in global trade activity results in an increased demand for an economies exports, which in turn leads to increase in national output and may become an engine of growth. The expansion of a country’s foreign trade may "re-invigorate" an otherwise stagnant economy, which can lead in turn increase economic growth

For question (d) one massive cost that I can think of is increased inflation! This has a critical impact on both governments and households;
- Governments: Inflation implies an increase in the budget deficit.
- Households: Unmanaged inflation can increase the cost of living dramatically, as their purchasing power parity has decreased.

Inflation also can result in a rise in the unemployment rate, which has a critical impact on both governments and households, as for governments it can result in declining confidence and popularity (a high unemployment rate never looks good at campaign time), and for households - well that's pretty self explanatory!

Hope this helps! Can't 100% guarantee that this is all correct because I am no economics expert (if I have made an error hopefully someone smarter that me will be able to point it out!), however this is what I can remember from last year

Susie

[ana321]

HI! for "impacts of microeconomic policies on structural change in the Australian economy", would you know of any recent microeconomic policies I could talk about??

Thanks

[sudodds]

HI! for "impacts of microeconomic policies on structural change in the Australian economy", would you know of any recent microeconomic policies I could talk about??

Thanks

heya! Again, no expert here, but perhaps you could mention the recent proposed reforms to medicare, and university funding?

[kiiaaa]

hello everyone
In relation to this years budget are there any policies on external stability
thank you

[Lumenoria]

The current budget's fiscal stance is contractionary. I'm confused, because the federal expenditure exceeds that of last year. Anyone care to explain this?

[chloe9756]

How would you answer this question? Thank you!

Describe and explain the trends in Australia’ economic growth over the past 5 years (6 marks)

[isaacdelatorre]

Could you please explain Okun law
thank you

Hey there Hanaacdr,
Really sorry for the late reply; but if you are still interested Okun's law is a relationship between economic growth and unemployment which states that for the government to reduce unemployment, the rate of economic growth needs to exceed the growth in labour productivity plus the growth in the labour force through new entrants. If you think about it, what this says is that economic growth must be enough to drive an increase in demand for goods and services and thus labour;  greater than the increase of people into the work force as well as the increase to productivity as people will begin to become more efficient.

In practice, this number is around 3.5% on average in Australia - so economic growth  must be above this number to reduce cyclical unemployment.

Hope this helps