VCE-ECON-U34 E7.1 Practice Exam 7: Question Paper

A) Has the lowest opportunity cost of producing a good
B) Can produce a good using fewer resources (more efficiently) than another country, regardless of opportunity cost
C) Has a current account surplus
D) Imposes lower tariffs than its trading partners

A) The current account must always be in surplus
B) The current account balance plus the capital and financial account balance (plus the balancing item) must sum to zero
C) Exports must always equal imports
D) The exchange rate must be fixed

A) Make Australian exports cheaper and imports more expensive in foreign currency terms
B) Make Australian exports more expensive for foreign buyers and imports cheaper for Australians, reducing net exports over time
C) Have no effect on trade flows
D) Automatically improve the terms of trade to infinity

A) Against the US dollar only
B) As a weighted average against a basket of currencies of Australia’s major trading partners
C) In terms of gold
D) Against cryptocurrency

A) Always raise more government revenue than tariffs
B) Restrict the physical quantity of imports directly rather than raising their price, and any revenue from quota rights may go to importers or exporters instead of government
C) Are always more efficient than tariffs
D) Only apply to agricultural goods

A) Only tariffs and quotas
B) Technical standards, licensing requirements, subsidies to domestic producers, and complex customs procedures that restrict trade
C) Floating exchange rates
D) Free trade agreements

A) Set exchange rates for member countries
B) Negotiate and enforce rules for international trade, provide a forum for negotiations, and resolve trade disputes
C) Provide foreign aid to developing countries
D) Set global interest rates

A) A country imports more from its most efficient global supplier
B) A country switches its imports from a more efficient non-member country to a less efficient FTA partner simply because the partner’s goods become tariff-free
C) Trade with all countries increases
D) A country stops trading with its FTA partners

A) Involves buying shares purely for short-term capital gain
B) Involves establishing or acquiring a lasting management interest in a foreign business, rather than simply holding financial assets for investment return
C) Never involves foreign ownership
D) Is always undertaken by governments

A) Long-term investment in physical infrastructure
B) Short-term financial flows that move quickly between countries chasing interest rate differentials or exchange rate movements, which can be reversed rapidly
C) Government-to-government foreign aid
D) Fixed exchange rate agreements

A) More imports than before
B) Fewer imports than before, reducing real national income relative to measured export volumes
C) Exactly the same volume of imports
D) Only manufactured imports

A) Protecting all domestic industries from any foreign competition permanently
B) Deliberately developing industries with export markets in mind, often combined with temporary protection while domestic firms build scale and competitiveness
C) Relying entirely on foreign aid
D) Fixing the exchange rate permanently at an overvalued rate

A) Domestic investment exceeds domestic saving
B) Domestic saving exceeds domestic investment, with the excess saving effectively lent to the rest of the world
C) The exchange rate must be fixed
D) Government spending must equal zero

A) Fixes the exchange rate permanently at one level
B) Allows the exchange rate to be mostly determined by market forces, but occasionally intervenes to influence its value
C) Has no foreign exchange reserves
D) Never intervenes under any circumstances

A) Only central banks
B) Commercial banks, multinational corporations, institutional investors, central banks and speculators
C) Only exporters
D) Only the International Monetary Fund

A) Eliminating all international trade risk
B) Allowing firms to source inputs and locate production stages across multiple countries for efficiency, but creating vulnerability to international disruptions
C) Making Australia fully self-sufficient
D) Reducing Australia’s reliance on any imports

A) Free trade agreements always preventing trade disputes
B) Trade concentration with a single major partner creating vulnerability to politically motivated trade disruption
C) Floating exchange rates causing trade wars
D) The WTO being unable to exist

A) Ignores price levels entirely
B) Adjusts the nominal exchange rate for relative price levels between countries, reflecting actual purchasing power and competitiveness
C) Is always identical to the nominal rate
D) Only applies to fixed exchange rate systems

A) Guarantee a profit regardless of market movements
B) Reduce their exposure to exchange rate risk by locking in a future exchange rate for a transaction
C) Increase their exposure to currency speculation
D) Avoid paying any tax on international transactions

A) The current account balance for a single year only
B) The difference between the value of a country’s foreign assets and its foreign liabilities at a point in time
C) The exchange rate against the US dollar
D) The government budget balance

Explain the difference between absolute advantage and comparative advantage, using a simple numerical example to illustrate why trade can still benefit a country without an absolute advantage in anything.

Explain the balance of payments and how the current account and capital/financial account are related by an accounting identity.

Explain the trade-weighted index (TWI) and why it gives a more complete picture of Australia’s exchange rate movements than a single bilateral exchange rate such as AUD/USD.

Explain what is meant by non-tariff barriers to trade and evaluate whether they are more or less economically distorting than tariffs.

Explain the difference between trade creation and trade diversion in the context of Australia’s free trade agreements.

Explain how a fixed or managed exchange rate system can become vulnerable to a speculative attack, using an historical example.

Explain how globalisation and global supply chains have affected the Australian economy, discussing both the benefits and the risks.

Explain Australia’s net international investment position (NIIP) and how it relates to Australia’s persistent current account deficit.

Extended Response 1: Trade Policy and Protectionism

Extended Response 1: Trade Policy and Protectionism (a)
Evaluate the costs and benefits of protectionist trade policy, using the history of Australian automotive industry protection and its eventual removal as an example.

Extended Response 1: Trade Policy and Protectionism

Extended Response 1: Trade Policy and Protectionism (b)
Explain how retaliatory tariffs and trade wars, such as recent US-China trade tensions, can affect a small open economy like Australia.

Extended Response 2: Foreign Investment and Capital Flows

Extended Response 2: Foreign Investment and Capital Flows (a)
Explain the difference between foreign direct investment and portfolio investment, and evaluate their relative benefits and risks for a capital-importing country like Australia.

Extended Response 2: Foreign Investment and Capital Flows

Extended Response 2: Foreign Investment and Capital Flows (b)
Explain how a sudden reversal of capital inflows (‘sudden stop’) could affect the Australian economy, and identify buffers that reduce this risk.