SCSA Economics Economic knowledge and understanding

Answer(s) could include:
Australian economy:

• reference to severe contraction (recession) and nature of demand and supply shock from exogenous factors particularly the coronavirus
• main economic indicators and how they have changed over the year: GDP growth, unemployment, inflation, investment, exchange rate, consumer spending etc.
• reference to industries hardest hit by contraction
• global financial crises and uncertainty
• effect of slowdown of global economic growth on local economy.

Monetary policy:

• reduction in cash rate by RBA and market interest rates - expansionary
• intended effect on consumption, investment and exchange rate via transmission mechanism
• aim to support aggregate spending and create employment
• role of multiplier effect.

Fiscal policy:

• range of significant stimulus payments to households and government policy support for businesses during time of collapsing consumer spending
• reduction in government revenue and increase in expenditure
• movement to a significant budget deficit from planned budget surplus
• role of multiplier effect..

AE model:

• 45 degree line, AE on vertical axis, Real GDP on horizontal axis
• parallel AE lines demonstrating impact of recession and policy effect
• increase in equilibrium real GDP to reduce deflationary gap.

Answer(s) could include:

Monetary policy:

• overall effectiveness is likely to be poor; no guaranteed increase in aggregate spending such as, cost of borrowing and asset prices channels
• interest rates were already very low, further reductions likely to have limited impact due to low consumer and business confidence
• household debt is high making it more likely households will seek to retire debt rather than borrow
• depreciation of Australian dollar will have increased net exports despite a significant fall in world growth
• significant effect time lag.

Fiscal policy:

• more effective because government spending can increase aggregate spending directly
• government expenditure multiplier likely to be low because of low MPC
• government reluctant to go into too much debt given experience post-GFC
• other criticisms relevant to success of policies implemented in 2020.

A number of factors effect both policies, i.e. multiplier effect, expectation, and crowding out effects.

expansionary/expansion phase/upswing/recovery

＄90bn

Answers could include:

• increased net exports
• lower unemployment leading to higher household income and higher consumer spending
• increased AD: government, consumer, investment spending, increased exports.
• expansionary monetary and fiscal policies.

Answers could include:

• RBA would use expansionary monetary policy and lower the cash stance to stimulate economic activity
• The lower cash rate will stimulate economic activity via the transmission mechanism.
• This will increase GDP, lower unemployment, increase consumption and investment spending and lower AUD, causing increase in exports
• There is consideration of the multiplier and a clear reference to the model.

Answers could include:

Economic policy objectives

• price stability
• full employment
• sustainable economic growth
• equitable distribution of income
• efficient allocation of resources.

Complementary objectives

• full employment and economic growth – expanding the economy requires the employment of more resources, including labour. This complements economic growth
• efficient allocation of resources and economic growth – as the economy expands, resources become scarcer and are used more intensively and efficiently.

Conflicting objectives

• price stability and economic growth – expanding the economy will increase competition for resources, increasing the cost of resources to meet additional demand
• and equitable distribution of income could reduce economic growth through increase in welfare payments
• equitable distribution of income - gains from economic growth are likely to benefit specific groups at a cost of others
• full employment and price stability – typically, during periods of full employment inflation is generally high. Inflammatory policies are often used during periods of full employment and counteract demand-pull inflation with higher cash rates or lower fiscal spending. As a result of lower aggregate demand, higher unemployment can be expected.

Answers could include:

Methods:

• labour productivity equals GDP per worker
• multifactor productivity equals output divided by all inputs – the growth in output caused by the growth in inputs.

Impacts:

• increased productivity decreases costs of production thereby achieving price stability
• increased productivity leads to increased economic growth, rising standard of living.
• higher wages from increased productivity can impact on standard of living and equitable distribution of income
• increased productivity may have negative impacts on employment in the short run. In the long-run, productivity increases incomes, leading to an increase in jobs, lowering unemployment
• increased productivity will result in higher government revenue which can be used to improve income distribution.

The model should show:

• a rightward shift in the AD curve
• a rightward shift in the AS curve;