Preparing for theWACE Stage 3 Exam

Steven KempSchool of Economics

Curtin University

CCI/ETAWAStudent Economics Forum

2011

Economics 2011You need to . . .

1. Know the Syllabus in 3A and 3B – textbook theory and concepts account for around 60 – 80% of the paper

2. Use models in your answers

3. Be aware of current economic conditions & events – around 20 – 30% of the paperRemember that the exam paper was written before July

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

3A: International Economics• Pattern of Australia’s trade• The terms of trade• The balance of payments• The exchange rate• Foreign liabilities

• Foreign debt• Foreign investment

Australia’s Exports

Source: Bankwest Economic Snapshot

3B – Macroeconomic TheoryMacroeconomics is about 2 things1.Explaining long term economic growth2.Explaining short run fluctuations in economic activity – the business cycle

Australia

Australia

What caused the large fall in the March quarter 2011?

3B – Macroeconomic TheoryYou 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 . . .

3B – Macroeconomic Policy• Key macroeconomic objectives

–Sustainable rate of economic growth –Full employment/Natural rate of

unemployment –Price stability

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

3B – Macroeconomic Policy

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

3B – Macroeconomic Policy

• Microeconomic Reform– Examples– Productivity– Economic efficiency– Impact (use AD/AS model)– Strengths/weaknesses

3B – Macroeconomic Policy

Current Macroeconomic Performance and Policy

Stance

World Growth

Source: RBA

Australia - GDP GrowthQuarterly % Annual %

March 2011 -1.2 1.0

Dec 2010 0.8 2.7

Sept 2010 0.0 2.5

June 2010 1.4 3.2

Inflation

CPIExcl

VolatileWeight.Median

TrimmedMean

June qrt 0.9 0.5 0.9 0.9

June 2011 3.6 2.5 2.7 2.7Mar 2011 3.3 2.6 2.2 2.3

Dec 2010 2.7 2.5 2.2 2.2Sept 2010 2.8 3.0 2.3 2.4

Unemployment

Trend Un Rate %

June 2011 4.9Mar 2011 4.9

Dec 2010 5.1Sept 2010 5.2June 2010 5.2

Exchange Rate

Balance of Payments

Budget Balance

Monetary PolicyDate Change in Cash

Rate - % pointsNew Cash Rate

Target %

3 Nov 2010 +0.25 4.755 May 2010 +0.25 4.507 Apr 2010 +0.25 4.253 Mar 2010 +0.25 4.002 Dec 2009 +0.25 3.754 Nov 2009 +0.25 3.507 Oct 2009 +0.25 3.258 Apr 2009 -0.25 3.00

Last Year’s Exam

• The exam highlighted certain areas of the syllabus that are not well understood:The terms of tradeAutomatic stabilisers in fiscal policyThe link between the current account and the

financial account in the balance of paymentsThe aggregate demand/aggregate supply

model

Common Errors 1. Poor understanding & application of basic

models• Agg Expenditure (45o model)• Agg Demand & Agg Supply• foreign exchange market – D($A)/S($A)

2. Confusion over the CAD, foreign debt, foreign investment

Every Year’s Exam

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

Section 1

Section 1

7. 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.

14. 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.

Section 1

Section 1

17. 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

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.

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

Section 2

Section 329. 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)

Section 329. 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)An increase in world oil prices would . . .

A depreciation of $A would . . .

Section 329. (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?

Australian Economy Be aware of the state of the economy –

key developments & trends Key indicators

GDP Unemployment Inflation $A CAD Cash rate Budget deficit

2011 – Key Developments?