VCE-ECON-U34 E3.1 Practice Exam 3: Question Paper

A) Countries only trade goods where they have absolute advantage
B) Countries specialise in producing goods where their opportunity cost is lowest and trade for the rest — both countries gain from specialisation and exchange
C) Trade always improves terms of trade
D) Only rich countries benefit from trade

A) Australia exports more than it imports
B) Australia’s domestic investment exceeds domestic saving — the shortfall is financed by borrowing from abroad
C) Australia has a budget deficit
D) Australia’s imports of services exceed exports of goods

A) Capital flows and foreign direct investment
B) Trade in goods and services, primary income (investment income, wages) and secondary income (transfers)
C) Only merchandise trade
D) Foreign exchange reserve changes

A) Reduce the price of Australian exports to foreign buyers
B) Increase the price of imports for Australians and reduce the price of Australian exports in foreign currencies → improve competitiveness → improve trade balance over time
C) Raise Australia’s terms of trade
D) Reduce Australia’s foreign debt burden

A) Exchange rate movements
B) International commodity prices — particularly the prices of Australia’s resource exports (iron ore, coal, LNG) relative to its manufactured and consumer imports
C) Domestic inflation
D) Interest rate differentials

A) The exchange rate falls by more than 10%
B) The sum of the price elasticities of export demand and import demand exceeds 1 in absolute value
C) Interest rates are low
D) The trade balance is initially in surplus

A) Australian investors buying foreign assets
B) Foreign investors establishing or acquiring businesses in Australia — creating an ongoing economic relationship with managerial influence
C) Foreign investors buying Australian government bonds
D) The RBA’s foreign exchange reserves

A) Trade in goods and services
B) Cross-border capital flows — including FDI, portfolio investment, financial derivatives and reserve assets
C) Government budget surplus or deficit
D) Changes in the exchange rate

A) Drawing down foreign exchange reserves
B) Net capital inflows — foreign investment in Australia (FDI and portfolio investment) exceeding Australian investment abroad
C) Government borrowing from foreign governments
D) Reducing trade in goods

A) A country must always run both current account and budget deficits simultaneously
B) A government budget deficit may cause or worsen a current account deficit — as government borrowing reduces national savings, increasing the gap between investment and saving
C) Australia’s deficits are always equal
D) Twin deficits only apply to developing countries

A) Exchange rates are determined by trade flows
B) In the long run, exchange rates adjust so that the price of a common basket of goods is equalised across countries — ‘the law of one price’
C) Interest rate differentials determine exchange rates
D) PPP explains only commodity prices

A) Interest rates are always equal across countries
B) Exchange rates adjust so that returns on comparable assets are equalised across countries after accounting for expected exchange rate movements
C) Countries with higher interest rates always have stronger currencies
D) Central banks always equalise interest rates

A) It prevents foreign investment in Australia
B) It creates large income payments to foreign investors (dividends, interest) that flow out of Australia — a structural primary income deficit contributing to the CAD
C) It reduces Australia’s exchange rate
D) It directly reduces GDP

A) They only affect developing countries
B) They raise domestic prices, protect inefficient industries, invite retaliation, reduce competition and innovation, and reduce overall economic efficiency
C) They always lead to trade wars
D) They have no effect on employment

A) Protecting all domestic industries
B) Reducing trade barriers with partner countries → expanding market access for Australian exporters; lower prices for consumers; promoting specialisation and trade in services
C) Eliminating all imports
D) Fixing exchange rates between partner countries

A) USA, UK, Germany and France
B) China (by far the largest), Japan, South Korea, the USA and India — reflecting Australia’s geographic position in the Indo-Pacific
C) New Zealand, UK and Canada only
D) ASEAN nations primarily

A) High agricultural exports suppress manufacturing
B) A resource export boom appreciates the exchange rate, making other tradeable sectors (manufacturing, tourism, agriculture) less internationally competitive
C) High inflation accompanies resource booms
D) Resource revenues reduce government incentive to tax

A) Only tourism
B) Education, tourism, financial services, professional services and transport — collectively Australia’s second-largest export category after resources
C) Only financial services
D) No services exports are significant

A) Natural resources always benefit resource-rich countries
B) Countries with abundant natural resources may experience weaker economic development — due to Dutch disease, governance failures, revenue volatility, and underinvestment in human capital
C) Australia suffers from the resource curse
D) Resources only benefit developing countries

A) Government decree
B) Supply and demand in the foreign exchange market — flows related to trade, investment, speculation and carry trade
C) RBA fixing the rate
D) Agreement with trading partners

Explain the theory of comparative advantage and evaluate its relevance to Australia’s international trade patterns.

Describe Australia’s current account and explain the relationship between the current account and national saving and investment.

Explain the factors that determine the Australian dollar’s exchange rate against the US dollar.

Evaluate the arguments for and against Australia imposing tariffs on imported goods.

Explain the concept of the terms of trade and its significance for Australia’s economic performance.

Describe the main features of Australia’s trade policy framework and evaluate Australia’s engagement with free trade agreements.

Explain what is meant by Australia’s ‘net foreign liabilities’ and assess whether they are a concern.

Explain the relationship between the exchange rate and Australia’s trade balance. How does the J-curve effect apply to Australia?

Extended Response 1: Australia’s Trade and CAD

Extended Response 1: Australia’s Trade and CAD (a)
Assess whether Australia’s persistent current account deficit (CAD) represents a structural economic problem or is simply a reflection of beneficial capital inflows.

Extended Response 1: Australia’s Trade and CAD

Extended Response 1: Australia’s Trade and CAD (b)
Explain how Australia’s export composition makes its economic performance particularly sensitive to developments in China.

Extended Response 2: Exchange Rates

Extended Response 2: Exchange Rates (a)
Explain how the Australian dollar’s exchange rate is determined and assess the impact of exchange rate movements on different sectors of the Australian economy.

Extended Response 2: Exchange Rates

Extended Response 2: Exchange Rates (b)
Evaluate Australia’s decision to allow its exchange rate to float freely rather than peg it to another currency.