TEACHER: __________________________

NAME: ____________________________

VCE ECONOMICS SAC 2

Unit 1: Area of study 2: Economic Issues Sustainable Economic Growth
Low Inflation

16 May 2012
TEST STRUCTURE & ALLOCATION OF MARKS:
Comprises of three sections A, B & C:
Sectio
n
A
B
C

Type of
question
Multiple
Choice
Short Answer
Case Study

Number of
questions
10

Number of
marks
10

7
5

30
20
Total:

INSTRUCTIONS:
Reading time: 5 minutes
Writing time: 65 minutes
Exam conditions apply. (1 mark deduction for talking)
Complete all questions in the space provided.

Section A: MULTIPLE CHOICE

60

Marks
awarded

Circle the response you think is most correct.

1. The calculation of Australias Gross Domestic Product (GDP) is likely to be an
inaccurate measure of Australias living standards. Which of the following
combination of factors may help to explain why?
i. the value of household production may not be included
ii. the value of exports is excluded
iii.it is impossible to calculate the value of services
iv the value of some production must be estimated
v. the value of voluntary and charity work may be excluded
A.
B.
C.
D.

i, iv and v
i, iii and v
ii and iii
iii, iv and v

2. In which of the following situations has inflation occurred?

A. The Consumer Price Index fluctuated during the year, but by the end of the
year it was 105.
B. No change was recorded in the Consumer Price Index, but the total cost of
completing the survey increased by 3.2%.
C. The Australian Bureau of Statistics recorded the Consumer Price Index at 110,
after it had been 114 in the previous year.
D. The Consumer Price Index was recorded at 107 in one year, and at 109 in the
following year.
3. Deflation is bad for an economy because:
A. When deflation is occurring the government will be forced to increase interest
rates.
B. People will tend to delay larger purchases while prices are falling.
C. Deflation will often coincide with a period of severe economic shortages.
D. During a period of falling prices, consumers tend to clear stock from the shelves
too quickly.

4. Australias productive capacity may be increased by:

A. the depletion of oil reserves in Australia.
B. an increase in labour productivity.
C. the ageing of the Australian population.
D. interest rate increases.
5. The inflation rate in Australia may increase if:
A.
B.
C.
D.
2

the
the
the
the

Australian dollar appreciates

savings rate increases
unemployment rate increases
level of consumer confidence increases

6. A low inflation rate is an economic priority for the Australian Government

because:
A.
B.
C.
D.

low
low
low
low

inflation
inflation
inflation
inflation

helps to maintain the purchasing power of Australian households.

encourages people to borrow money.
is associated with a high Australian dollar.
promotes savings.

7. If the inflation rate in Australia was above 3%, the most appropriate policy
response of the Australian Government would be to:
A.
B.
C.
D.

increase spending on infrastructure such as roads and rail networks

lower the tax rates on investment income
decrease the Goods and Services Tax (GST)
increase the cash rate

8. Which of the following would be least likely to increase a countrys rate of

growth?
A. Increased investment levels and the expansion of capital resources
B. Farming methods resulting in better soil management and fertility
C. Increased concern over environmental matters and Aboriginal land claims
(which have reduced access to natural resources)
D. The accelerated application of new technology in industry
9. If an economy is in the recession phase of the business cycle:
A.
B.
C.
D.

The rate of employment increases

The rate of unemployment increases
The rate of investment increases
GDP increases

10.
A.
B.
C.
D.

One way of achieving an increase in labour productivity is to

find a way for employees to use each work hour more effectively
pay your employees a higher wage rate
ask employees to work extra hours each week
encourage workers to move interstate or overseas to find work.

Section B: SHORT ANSWER QUESTIONS

1. Explain two (2) reasons why you believe it is important for an economy to
continue to experience economic growth.

4 marks
2. Distinguish between material and non-material living standards.

2 marks
3. Select one (1) aggregate demand factor and one (1) aggregate supply factor from
the list below and explain how each would affect the rate of economic growth in
Australia.
i.
ii.
iii.
iv.

Extreme weather conditions in Australia

Decreased consumer confidence
Increased labour force participation rates
Lower interest rates

8 marks
4. Define what is meant by sustainable economic development and discuss one
government policy initiative that may help promote sustainable development.

4 marks
5. Explain two (2) ways how an economy may experience an increase in economic
growth AND a fall in living standards?

4 marks
6. Explain two (2) important limitations of using GDP as a measure of economic
growth and general living standards.

4 Marks
7. Give an example of one (1) type of microeconomic reform policy and explain
how it is intended to affect the rate of economic growth in Australia.

4 marks

Section C: CASE STUDY

RBA focus too much on inflation

April 18, 2012

ONE of Australia's largest superannuation funds says the Reserve Bank of Australia
(RBA) should consider more than inflation when it considers interest rate policy.
Industry Funds Management chairman Garry Weaven said today the RBA's approach
to inflation, which was adopted under previous governor Ian MacFarlane and former
federal treasurer Peter Costello, was now "totally inappropriate".
"It is very hard to get the balance right, but consistently now for many years the
Reserve has had far too much focus on inflation only and not enough on employment
and economic prosperity generally, which is their requirement under the Act," Mr
Weaven told ABC Radio today.
"It seems to be still unduly influencing the Reserve in its policies."
The central bank sets monetary policy - by managing cash interest rate levels - with
the aim of keeping inflation within a target band of two to three per cent over the
course of the economic cycle.
Inflation, as measured by the consumer price index, was 3.1 per cent in calendar
2011.
The RBA's preferred measure of underlying inflation, which removes volatile price
movements, was at 2.6 per cent.
Treasurer Wayne Swan said he disagreed with Mr Weaven.
"What I do is, I support the Reserve Bank implementing its current charter," he told
ABC Radio.
"It takes its decisions independently of the Government and that is as it should be."
Mr Weaven said Australia's cash rate was high compared to other advanced
economies, placing pressure on business.
Australia's cash rate of 4.25 per cent compares to base rates of 0.125 per cent in the
US, 0.1 per cent in Japan and 0.5 per cent in the UK.
"We do have signs of real weakness in retail and manufacturing, but more importantly
in a way we have very high interest rates by international standards," Mr Weaven
said.
"High interest rates push the currency high and that is very, very bad for
manufacturers, tourism and some other industries."
He said lower interest rates could help depreciate the Australian dollar, which is
currently above $US1.03, and reduce the pressure on exporters.
"That would be a very good thing overall for the economy," Mr Weaven said.
7

1. Explain two (2) reasons why the Australian government is keen to maintain a
low inflation environment?

4 marks
2.
a. List two (2) limitations of the CPI as a measurement of inflation.

2 marks
b. State and discuss how one (1) factor or event may cause the headlining
CPI to be overstated.

2 marks
Please refer to the article for the next three questions.
3. The article states, Mr Weaven said Australia's cash rate was high compared to
other advanced economies, placing pressure on business.

a. Define the cash rate.

1 mark
b. Discuss one (1) reason why a high cash rate puts pressure on Australian
businesses and predict what impact this pressure on businesses may
have on Australias economic growth.

4 marks
4. The article says that Australian interest rates are high compared to interest
rates in other countries. Suggest a reason why Australias interest rate is
relatively high and examine why this could be considered to be an advantage
for Australia.

3 marks

5. The article states, High interest rates push the currency high and that is very,
very bad for manufacturers, tourism and some other industries."
a. Define exchange rate.

1 mark
b. Explain how a high currency can negatively impact Australias tourism
industry and subsequently economic growth

3 marks

10