Preliminary

Practice Exam

Multiple Choice
1 D 6 C 11 C 16 D
2 C 7 A 12 D 17 A*
3 A 8 A 13 B 18 A*
4 B* 9 D 14 C 19 C*
5 C 10 A 15 B 20 A
*Indicates that an enhanced answer has been provided in the section below.

Enhanced Answers
4 B The unemployment rate is calculated as:
Unemployed persons
Unemployment rate (%) =
Persons in the labour market (Employed persons plus
unemployed persons)
9,500,000
=
42,500,000 + 9,500,000
9,500,000
=
52,000,000
= 18.3%
17 A The capital gain is calculated as the sale price of an asset minus the purchase price of that
asset. In this instance:
(44,000 × $17.30) − (44,000 × $13.60)
= $761,200 − $598,400
= $162,800
18 A Equilibrium exists where injections = leakages, that is,
I+G+X=S+T+M
or in this instance as we only have the budget deficit figure we need to include this as (G − T).
Therefore:
I + (G − T) + X = S + M
I + (−$9bn) + $19bn = $33bn + $11bn
I = $44bn + $9bn − $19bn
I = $44bn − $10bn
I = $34bn
19 C This question asks for a level of output (not input) at which DesignX begins to experience
diseconomies of scale, meaning that A and B are both wrong. Diseconomies arise after output
of 8 design products, since after that time an increase in inputs of one third only produces an
increase in output of 1/8th.

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 The Market Economy Eighth Edition Workbook Preliminary Practice Exam

Short Answers
Question 21

(a) Product markets are the markets for the outputs of production (goods and services) while a
factor market is a market for any input into the production process.

(b) Market equilibrium is achieved in an individual market when quantity demanded is equal to
quantity supplied, that is, when the market clears. At this point, a consumer who is willing to
pay the market price for a good or service is satisfied, and any producer who offers their goods
or services at the market price is able to sell their product.

(c) Allocative efficiency refers to the economy’s ability to allocate resources to satisfy consumer
wants. Competition among producers ensures that they are responsive to consumer demand
and that they attempt to minimise their costs of production in order to remain competitive in
the market. A competitive marketplace ensures that production continues to increase until the
point where the value to consumers of the last good produced is equal to the cost to
producers.

(d) A monopoly occurs when there is only one firm selling the product with no market competition.
An oligopoly occurs when there are a few relatively large firms, each with a significant share of
the market. The difference is that the monopoly firm is a price setter and can set the price of
the product in order to maximise profit, while the oligopolist firm does not have the same
pricing power, competes with other firms on the prices of their products. Oligopolies also
create the scope for greater product differentiation than do monopolies.

Question 22

(a) Structural change refers to the process by which production in an economy is altered over
time, and certain products, processes of production, and even industries disappear, while new
ones emerge.

(b) A firm’s demand for labour is derived from the demand for goods and services within the
economy. In conditions where consumers demand higher levels of goods and services and
increase their discretionary expenditure, firms have an incentive to increase their levels of
output to satisfy the higher level of demand.

(c) Individuals who are classified as underemployed are those who work and are employed, but
have the desire and capacity to work more hours per week. Whilst these individuals are not
unemployed, they represent a form of under-utilised labour resources – the workers are ready
and willing to work more hours, but the conditions in the labour market mean they cannot.

(d) Higher rates of GDP growth are generally associated with falling levels of unemployment. As
shown in the figure, the rate of unemployment fell between the early 1990s and 2007, reflecting
the impact of sustained economic growth. However, there have been times more recently
when GDP growth has been so weak that the level of unemployment has been increasing,
even though the economy is still growing.

(e) Changes in labour productivity can have both positive and negative effects on the demand for
labour. In the short term, the effect of an increase in labour productivity on the demand for
labour is dependent on the level of aggregate demand. If aggregate demand is rising at a faster
rate than productivity (or productivity is growing at a slower rate than aggregate demand),
firms will need to hire more labour in order to increase production. Conversely, if the level of
labour productivity falls, then in the short term it might be necessary to hire increased labour
in the short term (and possibly increased automation in the medium to longer term). However,
if aggregate demand rises at a slower rate than productivity, this would lead to excess capacity
and a reduction in demand for labour. In the long term, economists generally believe that
higher labour productivity will make labour a more attractive input to production, and should
increase demand for labour, as firms substitute labour for other factors of production.

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 The Market Economy Eighth Edition Workbook Preliminary Practice Exam

Question 23

(a) Two channels through which a government can intervene in a market economy include:
• Using spending and taxation measures to influence market prices and hence
consumer demand.
• Producing certain goods and services itself, through public trading enterprises.

(b) A price above the equilibrium may cause excess supply, whereby the quantity supplied
exceeds the quantity the quantity demanded. In order to remove the excess supply, sellers will
offer to sell at a lower price. The fall in the price results in an expansion in demand and a
contraction in supply (movements along the curves towards the equilibrium point). This
process will continue to occur as long as there is excess supply, until the market clears, that
is, the intersection of the quantities supply and demand at a price point are equal.

(c) Australia, an open economy with a relatively small population can be contrasted with
neighbouring economies in the Asian economic region. In terms of size, Australia’s economy
is the 4th largest economy after China, Japan and India. In terms of growth, Australia’s average
annual rate of around 2.6 per cent over the past three decades has been slower than most
Asian economies. China, India and Indonesia over the same period have experienced rates
exceeding 7 per cent. This reflects the differences between Australia and these other
economies in terms of their state of industrialisation. Quality of life as measured by factors
such as the quality of education, healthcare and per capita incomes are significantly greater in
Australia than in all other Asian nations. Australia’s HDI value is greater than that of Japan,
China and India. In recent years, Australia’s unemployment rate has been higher than China,
Japan, Indonesia and Korea. Australia, as an industrialised economy has tended to have a
more equal distribution of income (as measured by the gini coefficient) compared with
industrialising economies such as China. The Australian government is similar to Japan, Korea
and Singapore in having a mixed market economy with limited government intervention. This
is in contrast to the historically planned economies of China and Vietnam which have
traditionally had governments intervene in markets to achieve desired outcomes.

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 The Market Economy Eighth Edition Workbook Preliminary Practice Exam

Question 24

(a) The government can affect the allocation of resources by firstly influencing the way businesses
and consumers behave in the market through taxation or spending measures. Secondly, a
government might even produce the goods and services itself, that is, the provision of public
goods.

(b) A government might loosen its monetary policy in order to increase the level of economic
activity. A loosening of monetary policy is achieved by placing downward pressure on interest
rates (conducted by the RBA through domestic market operations). Lower interest rates would
increase the demand for money and boost consumer and investment spending, resulting in
higher levels of economic activity. This rise in aggregate demand could further stimulate
economic activity as it can reduce cyclical unemployment. However, such a policy could be
ineffective if inflation rises rapidly, thus, a careful balance must be achieved.

(c) The budget outcome provides an important indication of the overall impact of fiscal policy on
the state of the economy. There are three types of outcomes: balanced budget, budget surplus
and budget deficit. The budget stance is the change in the budget outcome from one year to
the next. There are three possible stances: expansionary, contractionary and neutral. This
difference is illustrated on the above graph. For example, the in both 2013–14 and 2018–19
the budgets had a clear contractionary fiscal policy stance. That is, the increase in revenue is
greater than the increase in expenditure. However, the budget outcome was a deficit in one of
those years and only a very small surplus in the other. Economists generally place more
emphasis on the budget stance in order to assess the budgets impact on the economy year
on year.

(d) Global financial markets may constrain the government’s ability to conduct economic policy,
particularly in open economies like Australia that operate under a floating dollar as it means
that the Australian economy and government are under constant scrutiny from overseas
investors. This has tended to result in Australia committing to lower budget deficits and a
stronger commitment to microeconomic reform in order to maintain foreign investor
confidence. Lobby groups also influence government policy by petitioning the government for
both small-scale and large-scale economic reforms that will best further the interests of the
individuals and groups of people that they represent. Finally, the media can indirectly influence
government policy by determining which issues are to face public scrutiny and how they will
be presented to the public. This influences public perception of government policies which can
pressure governments to make certain decisions that they might otherwise not make.

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