SUNWAY COLLEGE

2017 Task 9 & 10,

INSTRUCTIONS:

1. Analyze the case studies and prepare relevant answers to the questions given.

2. You will be writing your answer to the questions (Questions 1 to 4) in an exam/test condition
on the date given below. The exam/test will be closed book.

3. Exam/test duration: ONE HOUR and 5 minutes

4. Assessment Mode: INDIVIDUAL ASSESSMENT

5. Date of test: Monday 31 July 2017

6. Exam/test time: 4.30 pm to 5.35 pm

7. Please be reminded that NO INFORMATION AND MATERIALS are allowed to be brought into
the exam hall.

Subject Learning Outcomes (SLO) assessed:

1. Display understanding to make informed predictions about the operation of the economy.

2. Illustrate and demonstrate economic impacts using models and key economic data.
Case Study: Article 1.

Australia set for first current account

surplus in forty years.
February 27 2017 by: Myriam Robin

Australia could be set to post its first current account surplus since the mid-1970s this year, as
soaring commodity prices, rising export volumes and a narrower net income deficit work to
push the balance into the black.

On Tuesday, the Australian Bureau of Statistics will release fourth-quarter current account
figures, which are expected to show a deficit – as has been the case during most of Australia's
history – but a much narrower one than in previous quarters.

According to economists at UBS, this expected marked narrowing of the deficit is expected to
lay the groundwork for the country to report a rare surplus in early 2017.

A current account surplus would likely give additional support to the Australian dollar, which
has already risen strongly against a basket of currencies since the start of the year.

"The current account is extremely significant to the dollar," said Commonwealth Bank of
Australia chief currency strategist Richard Grace.

Countries or regions which run current accounts surpluses – like Japan, Switzerland or the
eurozone – have far more expensive currencies than those who do not, low interest rates
notwithstanding.

"Current account balances are much more of a long-run determinant of currency valuations
than interest rate differentials," Mr Grace said.

Firmly in sight

Countries that run current account surpluses have, by definition, more money going into the
economy than leaving it, so they do not need higher interest rates to attract capital. Countries
that run current account surpluses are also often seen as lower risk places to invest by global
investors.

In a note released on Friday, UBS' economists argue a current account surplus for Australia is
firmly in view. They expect this to flow through to the currency, which they forecast to stay at
around US78¢ for the rest of the year.

Several components of the current account – which is comprised of the net balances of several
measures of Australia's trade relations with the rest of the world – have moved to or close to
surplus in recent weeks.
In December, Australia enjoyed its largest trade surplus on record as the prices of its two key
commodity exports – iron ore and coal – soared. Year-on-year a deficit of $4 billion turned
into a $3.5 billion surplus.

At the same time, Australia's net income deficit narrowed from 2.8 per cent of GDP in the
fourth quarter of 2015 to 1.5 per cent of GDP in the third quarter of 2016.

Taking the trade and income accounts together, the current account deficit has moved from 5.5
per cent of GDP in the last quarter of 2015, its largest deficit since 2009, to around 1 per cent
of GDP in the fourth quarter of 2016, the smallest deficit since 1980.

The boom effect

During the first quarter of 2017, UBS economists, led by Scott Haslem, believe these factors
have only solidified.

"The more recent commodity spike should see the trade surplus rocket to around $4-5 billion
in quarter one, or 3 per cent of GDP. For the current account, while there is a one-third income
offset as higher profits partly flow to foreigners, it will still probably hit a first quarter surplus,
the first since the 1970s, a massive 6 per cent GDP swing over the past year or so."

During the peak of the mining boom in the early 2000s, Australia's current account remained
stubbornly in deficit. But that boom laid the groundwork for today's soaring export volumes.

"Through the commodity price boom in 2004, 2005 and 2006, Australia set about process of
building new mines and increasing the supply of coal, iron ore and LNG," said Mr Haslem.
"What you're seeing with today's surpluses is not only a factor of prices, but significant growth
in volumes."

And on the income side, global interest rates are far lower than they were during the last mining
boom, meaning the Australian government pays far less to service its federal deficit.

UBS isn't the only one to point out the improving of the current account. CBA's chief economist
Michael Blythe wrote this month that "significant progress towards surplus is concealed in the
'headline' numbers".

Unlike countries like Japan or Switzerland, UBS noted, Australia's improving current account
may not last. Commodity prices are expected to unwind in the second half of 2017, meaning
Australia's record trade surplus is expected to recede.
Case study: Article 2.

Australian dollar 'could go as high as US85¢'

Vesna Poljak July 18 2017 - 5:17PM

The Australian dollar appears poised to rise to US80¢ soon, buoyed by the dual forces of a
domestic economy where the mood is becoming decidedly more upbeat, just as financial
markets are losing faith in the prospects for more US interest rate rises.

The currency hit a more than two-year high on Tuesday after the Reserve Bank of Australia
minutes showed the board holds a more hawkish view of the economy's neutral rate than
consensus suggests, sending the currency to a high of US79.07¢ for a US1¢ intraday jump.
Earlier, the euro broke through the critical $US1.15 level for the first time in more than a year.

"I keep talking to people who are so bearish on Australia and they're blind to the actual numbers
coming out," said Greg Gibbs, head of Amplifying Global FX Capital. "The market's not
particularly long the currency and dismissive of some fairly positive data coming out of
Australia."

That is changing. Mr Gibbs said there's a "strong risk" that US80¢ if not US85¢ levels are
achieved. That's not just because the RBA might have to consider the case for interest rate hikes
sooner than market pricing implies.

"The US drives the equation as well; you've got [Janet] Yellen last week, the inflation numbers
are horrible, then you've got the politics side of it and that could really become a kicker for the
[US] dollar. The market confidence around the politics could fall over," he said.

"As soon as the market feels that rate rises aren't really on the agenda," the US dollar appears
more vulnerable. Dr Yellen's statement last week that low inflation could be more persistent
than the Fed first thought has undercut forecasts for further hikes in the world's largest economy

"Why would you be raising rates if you're going to start this quantitative easing unwind? The Fed has
gone on ice before, they went on ice for all of 2015," Mr Gibbs recalled.
"The inflation outlook is not as rosy as the Fed would have us believe," agreed Gareth Berry, a foreign
exchange and rates strategist at Macquarie in Singapore.

"That alone will allow Aussie-US to crack that upper limit on the range. The trigger could come
in the form of next week's FOMC statement, if not before. Meanwhile, the US dollar is going
to weaken further the higher Eurodollar goes," he said.

If the Australian dollar gets to US80¢ "and that is possible, it would become fair game once
more to reflect on the currency strength and ask whether it's justified by fundamentals. So far
the fundamentals are there now given the iron ore price."

Iron ore rallied 1.6 per cent to $US66.81 a tonne on Monday.

Richard Grace, chief currency and rates strategist at Commonwealth Bank of Australia, sees
the only risk to his forecasts as being the currency getting there sooner than expected. CBA's
Australian Commodity Price Index in US dollar terms is up 10 per cent since the middle of
June.

"If commodity prices are going up, you've got income coming into the Australian economy.
That's helping things, you've got a trade surplus, all these factors are supporting a higher
Australian dollar," he said.

CBA has a year-end forecast of US76¢ rising to US78¢ in the first quarter of next year and
"eventually" back to US80¢.

Mr Gibbs speculated that RBA governor Philip Lowe's views on the Australian dollar were
consistent with his predecessor Glenn Stevens, who presided over the era of Australian dollar
parity with the US dollar.

The RBA has resisted any pointed commentary on the currency in its latest statements, saying
in Tuesday's minutes only that "an appreciating exchange rate would complicate this
adjustment" in reference to the post-mining boom.

"The view around the currency probably hasn't changed dramatically, if there's a harder view
it's around the debt levels," Mr Gibbs said. "The RBA would love the Aussie to be lower for
policy reasons but this is a fairly broad [US] dollar move underway."

Asked in September 2016 in his exit interview with The Australian Financial Review whether
the currency was appropriately valued, the former governor said: "I think it was too high, it
wasn't responding enough to the fundamentals in the economy. When we thought that, we said
that."

-End of article-
Answer all the following questions.

1. Refer to Article 1:

a. Identify the movement of Australia’s current account balance movement from

year 2015 to year 2016. (2 marks)

b. Account for trends in Australia’s current account balance in 1(a). (4 marks)

c. Discuss possible benefits of having current account surplus. (4 marks)

2. Refer to Article 2:

a. Use appropriate diagram to illustrate the forecast movement of Australian

Dollar in year 2018. (2 marks)

b. Explain the one reason for movement in 2(a) as mentioned in the article.
(2 marks)
c. Based on “strong risk that US80 if not US85 levels are achieved” as mentioned
by Mr Greg Gibbs, discuss the possible risk Mr. Gibbs was anticipating.
(4 marks)

3. Outline the major macroeconomic objectives of government. Using examples, explain

how these macroeconomic objectives may sometimes complement one another.
(6 marks)

4. Mystery Question. (12 marks)

(To be answered during assessment task day)

-End of Questions-