Common Questions about Economics

Question 1
a. Accurately define what is meant by the Australian governments goal of low inflation (also called
stability of the Australian currency). The Australian governments goal is to keep inflation between 2 to 3
percent. This is to make sure that wages and price together to not create a cycle of inflation.
b. What is the consumer price index (CPI)? Outline how the ABS goes about constructing it. The
consumer price index is made up of a basket of goods and services sold to consumers in an economy. The CPI is
then measured by the changes in price of these goods, for example if the price of bottled water or bread which are
considered to have the most weighting in the CPI then the CPI base figure will change to become higher than it
originally was in the previous year.
c. Identify and briefly describe two important weaknesses of using the CPI as a measure of Australias
inflation rate. The CPI is a lagging indicator of inflation seeing as it is only recorded every year, this means that it is
not possible to view inflation rates during the year. The CPI also does not include the prices in the rural areas of
Australia, meaning that people in rural areas will not know what the inflation rate is for them mainly because prices in
rural areas are more than in metropolitan areas.
d. Explain how you would expect a lower inflation rate to affect each of the following.
i. The distribution of income between various groups making up Australian society and their living
standards
ii. The value of exports, imports and the size of the CAD A lower inflation rate would mean that the value of
exports would be more attractive because inflation is lower in Australia than other countries meaning prices for goods
are lower. Whereas the value of imports increase because inflation in Aus is low meaning wages growth is low
although in other countries where imports are coming from could be high meaning prices are high.
E. Explain two reasons why the federal government considers a low inflation rate to be a very important economic
goal. Low inflation means that the government is in control of the economy, if inflation does become out of control then the
economy will be destroyed very quickly. If inflation increases by 10 and wages increase by 10 then because of tax wages only
increased by 6 this will mean people can no longer afford as much goods and services. By not being able to afford as much
confidence goes down, eco growth goes down, unemployment goes up. Inflation will also cause exports to become more dear
to overseas buyers meaning they will be less attractive, this will negatively affect the current account meaning that imports will
now become cheaper deterring people from buying local aussie goods. Net imports increase and Net exports decrease
meaning that the CAD will be even larger. This cycle will continue until the economy is completely destroyed.
F.Explain how any two of the following factors would be likely to affect the achievement of low inflation in Australia.
1. The 19 per cent appreciation of the Australian dollar between 200809 and 201112 The 19 percent
increase in the AUD would mean that imports are more attractive to people in Australia this means that people may be
deterred from Australian local goods to purchase more imports. Once this occurs Australian exports will not seem as
attractive in overseas buyers eyes creating a deficit in exports and imports. This would mean that inflation would
increase due to Australian companies attempting to meet profit goals.
2. The $26 a barrel rise in the average crude oil price per barrel to around US$106 between 2010 and
2012 This would be considered headline inflation and doesnt have an affect on the government's goal of low inflation
which is measured by the CPI.

Question 2
1. Explain fully what is meant by the Australian governments goal of a strong and sustainable rate of
economic growth. The government aims to have economic growth between 3.5 and 4% each year which is seen as
both strong and sustainable. The word sustainable is used because the government is not doing actions that will
cause a lack of economic growth in the future. For example when a country has strong economic growth of 5-6%
although has to constantly cut down forests to be able to satisfy the needs of the economy.
2. (4 marks)
3. How is the rate of economic growth generally measured by the ABS? Outline two important limitations
or inaccuracies of this measure of economic growth. Economic growth has two major flaws, these being 1) a
lagging indicator, economic growth stats only come out every 2 months meaning that it is impossible to identify what is
happening inside the economy at the moment. It also doesnt count illegal transactions like drug deals and
prostitution.
4.In the long term, strong and sustainable rates of economic growth can only be achieved if there is increased
productive capacity. However, in the short term, economic growth will not occur unless the level of aggregate
demand also grows steadily.
1. Explain the meaning of the term productive capacity. This is the maximum output possible by an economy
at a certain time.

2. increased budget outlays (for example, on welfare and public infrastructure) as a percentage of GDP
from 20 to 25 per cent. This will mean that the government has received more money from taxes and have decided
to increase government expenditure. With increased government expenditure more people who are on welfare will
have increased income, allowing for them to spend more and boost consumer confidence. If public infrastructure also
increases that will mean that more people will be needed to build the infrastructure meaning that unemployment will
decrease and more people having jobs will mean the government sends less of welfare. This will also lead to more
people having an income, they will pay income tax. More income tax will then mean the government can increase
money spent on infrastructure and welfare for the next budget year.
3. Identify, define and explain how any two important supply-side factors. Choose one that has tended to
increase Australias sustainable rate of economic growth in the last four years, and one that has tended to
slow it. Illustrate the before and after effects of these factors on a labelled ADAS diagram(s). Where
possible, quote supportive statistical evidence or examples to show the cause and effect relationships.
Supply side factors can influence Australias rate of growth because they have a heavy influence on the economys
productive capacity, Aggregate supply and
the long term economic growth. An
example of economic growth slowing
because of a supply side factor is best
exemplified by the Carbon tax of July 1st
2012, the carbon tax limited the amount of
supply that could be generated by mining
companies which were a major driving
force of the Australian economy. If a limit
on supply is placed then the companies
start to make less profit and less profit
means that less tax is received which leads
to an overall smaller amount of money in
the economy. If you look at the graph you
can see that GDP growth drops from 2.5%
to around 1.8% very soon after the carbon
tax was made effective.
4.
Explain two important
economic effects that would be likely to
occur if Australias rate of economic
growth were consistently running at around 56 per cent a year. It is often mistaken that economic growth is a
good thing, Although in an economy like
Australias 5-6 per cent increases every year
can be very harmful to the standards of living.
When using economic growth figures you have
to analyse how sustainable the growth is in the
country, infrastructure needs to be able to
keep up with economic growth, as seen in
China; their cities are becoming overcrowded,
there are shortages of food and peoples living
standards compared to Australia are quite low.
In Australia there isnt enough room in our
production possibility graph for an eco growth
of 5-6%, the economy simply wouldnt be able
to sustain such an influx and that would lead to
the exact same situation as in China, India and
Brazil. Living standards would be on the
decline which would mainly originate from the
fact that Australia would consume far more
scarce resources now that eco growth was 56% than when it was meeting the 2-3% goal.
Quoting statistical evidence from table 3.8,
explain the likely impact of generally slower
rates of economic growth in 200809, 201011
and 201213 on:
unemployment and
general living standards.
5.
Quoting statistical evidence from table 3.8, explain the likely impact of generally slower rates of economic
growth in 200809, 201011 and 201213 on:
Unemployment: Slower rates of economic growth will have very little effect on natural unemployment,
however it would have a great effect on the cyclical unemployment rate. Cyclical unemployment is the demographic of
people who have been fired from their jobs because the company they work for cannot afford to employ them any

longer, this mainly because of deteriorated economic conditions in this case slow economic growth. In 2008 before
the GFC hit Australia unemployment was at 4% which means that there is virtually no cyclical unemployment and the
country is technically at 100% employment, this also correlates to eco growth at the time which was about 4.5%,
although it is very obvious to see exactly when the GFC hit from these graphs, this is because unemployment spiked
toward the end of 2008 jumping from 4% to over 5.7% in few months, corresponding with this the economic growth
dropped from 1.5% at the end of one quarter to -1.3% in another quarter. Then in 2010-2011 the economic growth
goes from negative to positive and unemployment then drops and this is during the GFC recovery period, then after
the GFC recovery period combined with the end of the mining boom the GDP growth flattens out between 2-3% and
unemployment goes on the rise between 5-6% which is inside the government goal.
general living standards. General living standards were negatively affected by the GFC in 2008-2009. Living
standards are heavily reliant on consumer confidence which is reliant on business confidence, so let's look at the
roots. During the GFC businesses had higher production costs because the price of raw materials was higher
because supply was thinning out. This meant that business had to bump the prices of their products up so they could
meet desired profit goals. This meant that consumers like you and me were not willing to pay increased prices for
goods and services so we stopped purchasing them and decided to save more. This is an example of lower consumer
confidence, this is also combined with the fact that people were concerned for the future and knew that they may be
tight on money; they may lose their job etc. This is also another incentive for people to save. People saving and not
spending may sound good but for an economy its quite the opposite, if people stop spending it brings the economy to
a grinding halt, this is because tax 14% of government earnings is from GST and sales taxes and another 22% is from
company tax, so if sales decreases and company profits decrease then the 36% of government tax is decreased
meaning that there will be a larger deficit because government revenue will be down.
6. a)Define the meaning of GDP (gross domestic product) as a statistical measure. GDP is the measure of how
large an economy is, this being the amount of goods and services produced in an economy. This allows the government to
predict what is going to happen in an economy in the future and base future policies of that. Although GDP is a lagging
indicator and is only able to be updated quarterly.
b. Suggest and briefly explain three important reasons why Australias GPI per capita rose much more slowly
than the rise in our GDP per capita. If the GPI grows at a slower rate than GDP then that means that the economy is
growing although it is not growing at a sustainable rate. This means that people are earning more money because the
economy is growing although there are other factors that are negatively affecting living standards. In 2006 where the mining
boom was occurring the economy received massive boosts; increasing wages, increased eco growth, decline in deficit etc.
Although the mining boom was having serious implications on the environment with large amounts of pollution occurring.
c.In what important ways is measuring Australias progress (MAP), as an indicator of living standards,
different to the approach used by GPI? The MAP is determining how Australia has progressed as a nation since 2002,
seeing if Australia has become a better or worse place to live since then. The MAP takes into account material and
nonmaterial living standards. While GPI shows the growth of living standards and environmental factors against the GDP
growth which shows how sustainable our economic growth is.
d. Using the graph of selected MAP indicators for Australia covering the period 1999 to 2009 (see figure 3.47),
select the two indicators that you feel are most important to Australias material living standards, and two that you
feel are most important to our non-material living standards. For each of these indicators, justify your selection and
explain what the changes imply about living standards between 1999 and 2009.
Material Living Standards
-GDP Per Capita = This is very important to material living standards because it is an indicator of how much the
average wage is, it shows how large the economy is (GDP) divisible over the population GDP/Pop. When GDP per capita is
very low then that will usually indicate that there are problems with the distribution of income in an economy. For example in
India there is a very large economy although there are over 1.25 billion people living there meaning that the wealth is not
equally spread with a GDP of only 1,498 USD.

Non- Material Living Standards

- Victims of Crime = This is a measure of victims of crime, this is an important indicator in how safe people feel when
in public places and in their homes. This is a non- material living standard because it has no correlation to numbers because
obviously some ones feelings cannot be measured although crime rates can. Just because crime rates have decreased
though it can still mean that someone feels less safe because of the media sensationalising stories of crime or terrorism.
-Greenhouse Gas Emissions = The net amount of greenhouse gasses emitted into the atmosphere has been on the
decline which means that there will be an increase of non material living standards. There has been a decline mainly because
of developments of new technology to make the production of greenhouse gasses more efficient so less gasses are emitted.
This will improve non material living standards as it will increase happiness in the population.
e.Explain how any two of the following factors would tend to affect Australias rate of economic growth:

 the cyclone and floods, such as occurred in 201011 and early 2013 Cyclones, floods and other natural
disasters negatively affect the amount of economic growth because they discourage people from spending. This was
exemplified in Queensland 2010-11 which is the part of Australia where many of our agricultural products are produced due to
its tropical climate. In Queensland cyclone Yasi wiped out a large percentage of banana crops forcing the cost of bananas to
increase due to massive amounts of supply being destroyed. This then discourage people from purchasing bananas because
the price was far too high. People would then move toward buying a substitution of bananas which may be apples or oranges
meaning that the banana farmers would lose out on a large customer base and income meaning they would have to fire
workers close down farms etc. This would then cause a chain reaction and negatively affect economic growth.

an ageing population (for example, Australia in recent decades) Ageing population is a very large concern
facing the future of Australia. The ageing population is a result of many children being born in the mid 20th century compared
to a very small amount of children being born now in the 21st century. This means that as the population that was born in the
60s and 70s gets older they must retire meaning that a large amount of tax payers have diminished and the government now
will have to pay more in pensions and receive less from taxes.
f.Explain how a slowdown in the rate of economic growth would be expected to affect any two of the
following:
1. (2 + 2 = 4 marks)
1. the unemployment rate = A slowdown in eco growth will lead to higher figures of unemployment, this means that
companies will have to make more people redundant due to the economy slowing down. This will mean that cyclical
unemployment will increase. When cyclical unemployment increases the amount of income tax which the government
receives decrease and the expenditure will also increase.
2. the inflation rate = A slowdown in eco growth would lead to inflation rates increasing because a slow in eco
growth usually comes from a lack in spending by consumers. This means that companies have to raise prices due to
slumping demand to keep up with desired profits. This will mean that people will ask for increased wages due to
higher prices. This will then start a vicious cycle of demand side inflation.
Question 3
A.Accurately define the governments goal of full employment. 100% employment in a nation is not
possible, this is because of the 5% natural unemployment that will always exist. By the goal of full employment it is
really cyclical unemployment. Cyclical unemployment being the people who have been fired from their jobs as a
result of economic downturn and are unable to find work because of the shape of the economy. The government will
make it their aim to make sure the economy does not reach a stage where there is cyclical unemployment because
cyclical unemployment can lower consumer confidence and harm the economy.
B. Briefly explain two limitations or weaknesses of Australias unemployment statistics. Australias
unemployment statistics are different to what most opinions of what unemployment is. Unemployment includes people
over the age of 15 who are actively looking for work although have no found it yet and are using centrelink. This
means that the amount of people who are over 15 and are not looking for work but using centrelink are not included in
the unemployment rate. This means that the official unemployment rate is a lot lower that the exact amount of people
who are unemployed, this makes politicians seems more attractive to voters.
C. Examine table 3.10. Use the data to calculate each of the following:
1.
2.
3.
4.

the size of the labour force 17916000

the unemployment rate 3.5%
the employment rate 96.5
the participation rate. 38% ****