Year 11 Economics

Semester I Examination 2004

Name: _______________________________________________

Date: 22nd June 2004

Time: 11.50 a.m. – 2.00 p.m.
Duration: Two hours plus ten minutes reading time.
You may make notes on your own paper during the reading time.
Instructions to Candidates
1. Answer all questions in the spaces provided in this booklet.
You will have 10 minutes to read the paper. You must not write in your script book or
question booklet or on your multiple-choice answer sheet during this reading time but
you may make notes on the scribbling paper provided.
Approved dictionaries and calculators may be used.
Instructions for answering multiple-choice questions
• Complete your answers in either blue or black pen.
• Select the alternative J, K, L or M that best answers the question. Fill in the
response oval completely
Sample: 2 + 5 =
J. 2 K. 4 L. 7 M. 9
J. K. L. M.
If you think you have made a mistake, put a cross through the incorrect answer and
fill in the new answer.
J. K. L. M.
 Multiple Choice Answer Sheet

Candidate’s Name ________________________________________________

Q.1. J. K. L. M.

Q.2. J. K. L. M.

Q.3. J. K. L. M.

Q.4. J. K. L. M.

Q.5. J. K. L. M.

Q.6. J. K. L. M.

Q.7. J. K. L. M.

Q.8. J. K. L. M.

Q.9. J. K. L. M.

Q.10. J. K. L. M.

Q.11. J. K. L. M.

Q.12. J. K. L. M.

Q.13. J. K. L. M.

Q.14. J. K. L. M.

Q.15. J. K. L. M.
 Multiple Choice Questions
(All Questions one mark each)

Q.1 In a planned economy, the question of ‘For whom to produce?’ is determined

primarily by
J. the sale of resources for income payments in competitive markets.
K. the distribution of production to members of the community based on social
customs.
L. government distributing goods and services to low-income earners.
M. government centrally setting wages and prices as part of an economic plan.

Q.2 The economy represented in the following diagram is currently operating at point
F.

If the economy moves to point A, there is

J. no opportunity cost.
K. an opportunity cost of 60 telephones.
L. an opportunity cost of 40 fax machines.
M. an opportunity cost of 60 fax machines.

Q.3 Under conditions of monopolistic competition

J. firms use both price and non-price competition.
K. firms face a perfectly elastic demand curve.
L. one firm dominates the market.
M. barriers to entry are high.

Q.4 An economy that uses the market to allocate resources

J. ensures that resources are allocated according to the needs of consumers.
K. ensures that consumers can buy whatever quantity they want.
L. ensures equality of income for all consumers.
M. uses prices to allocate resources.

Q.5 In a perfectly competitive market

J. firms advertise heavily to differentiate their products.
K. firms are faced with a perfectly inelastic demand curve.
L. there are high barriers to entry.
M. all firms are relatively small in relation to the market and they are ‘price takers’.
Q.6 The diagram below shows two production possibility curves (PPCs) for an
economy.
Which of the following is true in relation
to the diagram above?

J. The shift from A to B on PPC1

represents improved technology.
K. The shift from C on PPC2 to B on
PPC1 represents increased
unemployment.
L. The shift from B on PPC1 to C on
PPC2 represents economic growth.
M. The economy has more resources at
B than at A.

Q.7 The following table gives the benefits and costs of four possible projects that are
proposed for South Australia. If a cost–benefit analysis is used as the basis of
economic decision-making, the project chosen by you, as Premier of South Australia
would be

Project Private Private External External

Benefits Costs Benefits Costs
$m $m $m $m
A 250 50 60 10
B 160 30 60 10
C 500 300 50 60
D 400 200 60 60

J. Project A.
K. Project B.
L. Project C.
M. Project D.

Q.8 An example of hidden unemployment occurs where

J. the skills of the unemployed do not match the skills required in available jobs.
K. workers have been laid off by factory closures.
L. there is a rise in the rate of unemployment as the rate of inflation falls.
M. the unemployed no longer seek work because of a deterioration in the job market.

Q.9 Which market structure is characterised by a few relatively large firms and high
barriers to entry?
J. Oligopoly
K. Monopoly
L. Pure competition
M. Monopolistic competition
Q.10 A feature of pure competition is
J. barriers to entry facing new firms.
K. homogeneous products.
L. wide variations in prices between firms.
M. a limited number of producers with large monopoly power.

Q.11 The term ‘real wage’ refers to the buying power of the wage when
J. the inflation rate and tax rates are taken into account.
K. the inflation rate is taken into account.
L. the effect of interest rate changes is taken into account.
M. tax rates and government transfer payments are taken into account.

Q.12 In a capitalist economy the question of how to produce is resolved primarily by

J. government regulations and controls.
K. private producers who aim to minimise their production costs.
L. households that aim directly to satisfy their wants.
M. public sector firms that take social interest into account.

Q.13 The circular flow model shows

J. how all economic systems operate.
K. how sectors of a market economy interact.
L. that real flows are not equal to money flows.
M. that most investment is carried out by households.

Q.14 Which government policy is likely to reduce the inequality of income

distribution?
J. Decreasing the level of tax rates for high income earners
K. Increasing the tax-free threshold on income
L. Increasing the level of tax on essential services
M. Decreasing the level of tax on luxury items

Q.15 The diagrams

below represent
changes in the foreign
exchange market for
Australian dollars.

All other things being

equal, which of the
diagrams best
represents the initial
impact of a significant
fall in exports?
 Short Answer Questions
Q.1 What is the economic problem?
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Q.2 What are the three fundamental questions that all economies must answer?
In your response, outline how a “free market”, a “planned” and a “traditional”
economy answer the fundamental questions differently.
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Q.3 What is meant by the term “economies of scale”? What are the benefits of
economies of scale to General Motors Holden? Use a numerical example in your
answer.
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 Going Green is in the Bag
A new survey shows that more Australians are refusing to use plastic bags
to carry their supermarket shopping and are making an effort to recycle.
The first reusable shopping bag offered by one of Australia’s largest
supermarket chains was sold out ahead of its official launch. More than
18,000 Green Bags — designed to carry the same amount as three plastic
bags — were purchased nationally during their first week on sale.
“If everyone shopping at these stores bought a Green Bag, we’d reduce
the number of plastic bags being used by more than one billion a year —
that would have real benefits for Australia’s environment,” stated John
Dee, of environment group Planet Ark.
Source: Adapted from the Sunday Mail, 16 March 2003, p. 13, accessed
from www.newstext.com.au

Q.4 (a) Using examples, distinguish between a private benefit and an external benefit
of reusable shopping bags.
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Q.4 (b) State two ways in which the government might encourage greater use of
reusable shopping bags.
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Q.4 (c) State how the following may limit the usefulness of the cost–benefit approach
in deciding whether or not to introduce reusable shopping bags.
(i) Measurement.
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(ii) Time-frame.
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Q.5

Q.5 Using the concept of elasticity, explain the advantages for producers who
differentiate their product. Draw a diagram to support your answer.

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Q.6

http://news.bbc.co.uk/1/hi/business/3719081.stm

Chinese banks told to sue debtors

China's banks should sue the firms and people whose bad debts are
destabilising the banking system, the country's top financial regulator
says.

Liu Mingkang, head of the China Banking

Regulatory Commission, used an Asian
Development Bank meeting in South Korea to
urge his charges to "get tough".

"You have got to sue your customers, to enhance

a credit culture," he said.

Correspondents say the idea is anathema1 to Chinese bankers, despite bad debts
of more than $200bn.

According to international credit rating agency Standard & Poor's, non-performing

loans at the four big state banks - between them holding 80% of loans - could
amount to more than 40% of the overall loan book. Most of the defaulting
debtors are state firms - and some are senior
individuals in China's hierarchy and their families.
In addition, China's legal system has a poor
record when it comes to this kind of case.

Off the boil?

Mr Liu's urging forms part of the authorities'

attempts to shift some of the imbalances in
China's breakneck expansion. 2003 saw the
economy grow at 9.1%, with investment in fixed assets up 47% in the first three
months of 2004 on the previous year. According to Stanley Fischer - former
International Monetary Fund number two and now vice-chairman of Citigroup -
that spelled serious trouble for the banking Mr Liu is keen for banks to
system. "It is inconceivable that those rates of modernise
investment can be efficient," he told investors at
the ADB meeting.

The distended2 state of the banking system is one result and needs to be fixed
before 2007, when China's commitments to the World Trade Organisation mean it
has to open up much of the banking sector to foreign competition. It has already
injected US$45bn into the Bank of China and the China Construction Bank.
Another $65bn could be on the way to bail out the banks, the Observer said on
Sunday.

Q.6 (a) What is the crisis in China’s banking system? What is “guan xi” and how is it
related to this crisis? Use examples from the article above in your response.
1
Totally unthinkable
2
sick
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Q.6 (b) How is the government of China attempting to improve the health of China’s
banks? Why is the Chinese government undertaking these actions? Use examples
from the article above in your response.
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Q.7
China signals a yuan peg U-turn
http://news.bbc.co.uk/1/hi/business/3719081.stm

China may loosen its exchange rate system,

the official in charge of running the policy
has said.

China's leaders have resisted pressure from the

US, IMF and the G7 wealthy nations to end the
yuan's peg to the dollar, until now.

"We don't think the fixed system is good. We

think that a floating system is good," said Guo Shuqing in an interview with the
Financial Times. The peg - at 8.28 to the dollar - keeps China's exports cheap on
world markets. Mr Guo is director general of the State Administration of Foreign
Exchange, and deputy governor of the central bank, the People's Bank of China.

China's U-turn

The Bush Administration blames the currency peg for contributing to the loss of
nearly 3 million US industrial jobs during the past four years. Republicans and
Democrats have stressed the issue as they slug it out to win the White House in
November's presidential election.

China's leaders, including President Hu Jintao, have rejected the accusation that
the currency peg is unfair, stressing the need for stability. However, Beijing
agreed to send a team to the US to study the technical aspects of a policy shift
last autumn, and state newspapers have carried stories saying that officials were
studying the pros and cons of a change.

But it remains unclear if Beijing was seriously investigating a new policy or

merely seeking to defuse pressure.

Mr Guo said it was not clear if the yuan was undervalued, indicating that the
currency would not necessarily appreciate when it is allowed to fluctuate more
freely, the newspaper said.

China's foreign exchange reserves rank among the largest in the world, at
$440bn.

Speculative capital has poured into China, averaging $12bn a month in the first
quarter of 2004, as currency traders have bet on a yuan revaluation.

Q.7 (a) The Yuan is fixed at 8.28 Yuan = $US1. If a Chinese company exports a
DVD player and sets the price at 400 Yuan for the DVD player, how much will the
importer in the USA pay?
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Q.7 (b) If the Yuan is “floated” and the currency settles at a new exchange rate of 7
Yuan = $1 US, how much will the importer in the USA pay?
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Q.7 (c) The Bush administration has argued China has deliberately undervalued the
Yuan. Why would Hu Jintao undervalue the Yuan?
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Q.7 (d) “Speculative capital has poured into China, averaging $12bn a month in
the first quarter of 2004, as currency traders have bet on a yuan revaluation.”

Why would currency speculators buy the Yuan?

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Q.8 “City DVD” sell popular DVDs. They present you with the following data they
have collected over the last six months. “P” refers to the price charged for a DVD;
“Q” refers to the number of DVDs sold per week in the period indicated.

Price Quantity Revenue

$20.00 900 $18,000

$21.00 875 $18,375
$22.00 850 $18,700
$23.00 825 $18,975
$24.00 800 $19,200
$25.00 775 $19,375
$26.00 750 $19,500
$27.00 725 $19,575
$28.00 700 $19,600
$29.00 675 $19,575
$30.00 650 $19,500
$31.00 625 $19,375

Q.8 (a) Graph this data (see next page) (2 marks)

Show the revenue lost and gained when price decreases from $29 to $28.
Price elasticity of demand is defined as

( (Q2 – Q1)
Q1 )
(
(P2 – P1)
P1 )
Q.8 (b) Calculate the price elasticity of demand for DVDs when the cost of a DVD
falls from

(i) $22 to $21

(ii) $31 to $30

(iii) $29 to $28

(3 marks)
Q.8 (c) Advise the owners of “City DVD” on the optimum price for DVDs that
maximises revenue for the business.
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Q.9 What is “superannuation”? Why is the Australian Government increasing
compulsary superannuation to 12% of gross income by 1st July 2006? In your answer
make reference to the Balance of Payments.
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Q.10

Main Features
April 2004

EMBARGO: 11:30 AM (CANBERRA TIME) 13/05/2004

APRIL KEY FIGURES (adapted)
Mar 2004 Apr 2004 Mar 04 to Apr 04 Apr 03 to
Apr 04

Trend
Employed persons ('000) 9,632.2 9,653.7 21.5 2.1%
Unemployed persons ('000) 580.3 579.2 -1.1 -7.6%
Not in the labour force 5819.9 5831.3

Q.10 (a) What is meant by the term “labour force”?

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Q.10 (b) Calculate the unemployment rate from the data for April 2004
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Q.10 (c) Calculate the labour force participation rate from the data for April 2004
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Q.10 (d) What is meant by the term “labour force participation rate”?
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Main Features Mar
2004

6401.0 Consumer Price Index,

Australia
EMBARGO: 11:30 AM (CANBERRA TIME) 28/04/2004

MARCH QTR KEY FIGURES

% change % change
Dec Qtr 2003 to Mar Qtr 2003 to
Weighted average of eight capital Mar Qtr 2004 Mar Qtr 2004
cities
Food 1.8 3.3
Alcohol and tobacco 1.1 4.2
Clothing and footwear -1.4 -0.8
Housing 0.9 4.3
Household furnishings, supplies and -0.6 0.2
services
Health 3.2 6.5
Transportation 0.7 -1.4
Communication 0.1 1.1
Recreation -1.1 -2.0
Education 7.6 7.8
Miscellaneous 1.3 3.0
All groups 0.9 2.0
All groups excluding Housing 0.9 1.4

Q.11 (a) What was the inflation rate in the year ending 30th March 2004?
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Q.11 (b) What is meant by the term “weighted average” and how does this apply in
the calculation of the Consumer Price Index?
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______________________________________________
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Q.11 (c) In the period March 2000 to March 2004, which capital city experienced the
highest rate of inflation? Show your calculations in the space below.

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______________________________________________
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SELECTED TABLES FROM CONSUMER PRICE INDEX,
AUSTRALIA (CAT. NO. 6401.0)
1 ALL GROUPS, Index Numbers(a)
Weighted
average
of
eight
capital
Period Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra cities
2000
March 125.8 124.7 125.5 126.8 123.1 125.3 124.4 124.9 125.2
June 127.0 125.6 126.4 127.6 124.0 126.5 125.7 125.9 126.2
September 131.6 130.4 131.3 132.3 128.6 131.3 130.0 130.7 130.9
December 132.2 130.8 131.6 132.5 128.8 131.2 130.6 131.1 131.3
2001
March 134.0 132.2 132.7 134.1 129.6 132.1 130.7 132.2 132.7
June 135.0 133.0 134.0 135.1 131.4 133.4 132.2 133.4 133.8
September 135.4 133.6 134.2 135.3 131.5 132.8 132.5 133.2 134.2
December 136.6 134.8 135.8 136.6 132.6 133.9 133.5 134.9 135.4
2002
March 137.9 136.0 137.1 137.7 133.7 135.2 133.8 135.6 136.6
June 138.8 136.9 138.1 139.1 134.6 137.0 135.0 137.2 137.6
September 139.6 137.8 139.2 140.3 135.8 137.5 135.4 138.1 138.5
December 140.4 139.0 139.9 141.5 136.4 138.0 136.2 139.2 139.5
2003
March 142.1 140.9 141.8 144.6 137.4 140.0 137.5 140.7 141.3
June 142.2 140.9 141.8 144.3 137.4 140.8 137.9 140.7 141.3
September 142.4 141.8 143.3 145.4 138.6 141.1 137.8 141.9 142.1
December 143.6 142.1 144.2 146.2 139.2 142.0 138.5 142.9 142.8
2004
March 145.0 143.5 145.4 147.7 139.6 143.0 139.0 143.9 144.1
(a) Base of each index: 1989-90 = 100.0

This document published 28 April 2004

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