tme2013_exam-answers.pdf

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Multiple Choice

B1

A2B3

D4

A5

B6

D7A8

D9

B10

C11

C12B13

C14

A15

B16

A17B18

C19

B20

Short Answers

Question 21

The business cycle refers to the fluctuations in the level of economic growth over a period of(a)time where periods of strong growth are followed by periods of dampened economicactivity.

Natural resources(b) Labour Capital Enterprise

If the budget is balanced and the economy is in equilibrium, leakages equal injections.(c)Therefore, investment must be $35 billion for injections to be equal to $45 billion inleakages.

Injections, the items that add to the flow of money in the circular distribution of income, and(d)

leakages, the items that remove money from this distribution are linked by the concept ofequilibrium. This refers to the tendency in the circular flow of income model for the sum oftotal injections and sum of total leakages to settle upon the same value. Whenever totalleakages are greater than total injections, there will be a downturn in economic activity as thecircular flow of money in the economy is reduced. In this model, as economic activity falls,total leakages from the economy will also fall as consumers have less income to save,purchase imports or have collected as taxes. Leakages will continue to fall by this processuntil it equals the amount of injections at which point, the flow of money in the circular modelbecomes constant and the economy returns to stable equilibrium. The converse is true whentotal injections exceed total leakages.

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The Market Economy 5th Edition Workbook Preliminary Practice Exam


Question 22

Unemployment refers to a situation in which individuals of working age (15 years and over) are(a)willing and able to work and are actively seeking employment but are unable to find any.Labour resources in an economy are under utilised as a result.

Two groups are:(b)

Those who are willing and able to work but have been discouraged from actively seekingit (hidden unemployment)

Those who have part time or casual jobs but would like to work more hours in a week(underemployment)

An upturn in the business cycle is likely to increase the incomes of individuals in the economy(c)and as a result, increase the sale and consumption of goods and services. Increased salesrequire matching increases in production and so, firms will need more employees. Since thedemand for labour is greater, an upturn in the business cycle would result in greater levels ofemployment and hence, a falling rate of unemployment.

Technological advancements could increase the automation of production processes that(d)previously used labour resources. This would make such labour resources redundant leadingto a greater mismatch between the skills demanded by employers and those possessed bythese now unemployed workers. The result would be greater levels of structural unemployment.Changing patterns of consumer demand could see the demand for particular goods orservices decline substantially and others increase. This would increase the level of structuralunemployment in these declining industries.

The increased participation of women in the workforce is one reason for higher part time work(e)if some women prefer part-time work to allow them to balance work with other responsibilitiessuch as family commitments. Technological advancements have made part-time work morefeasible in some industries, in allowing many employees to work part-time from home. Part-time and casual employment has also increased as employers have recognised its advantagesin providing greater flexibility in worker arrangements. During busy times, they can increasethe hours of their staff and reduce them during quieter periods without the need to hire new

workers or let go of current ones. In addition, employers are not required to provide as manynon-wage benefits to part-time and casual workers which also accounts for the greatercasualisation of the workforce.

Question 23

Two channels through which a government can intervene in a market economy include:(a)

Using spending and taxation measures to manipulate market prices and henceconsumer demand.

Producing certain goods and services itself, through public trading enterprises.

In a pure market or(b) laissez-faire economy, the majority of economic decisions are made by

individuals and firms who are both motivated by self-interest. The answers to the economicproblems of what to produce, how much to produce, how to produce and how to distributeare determined entirely by the market forces of demand and supply as brought together by theprice mechanism. Most resources are owned by the private sector and people are able to seekand obtain wealth without the government intervening or affecting their business and individualactivities. Additionally, this system is underpinned by the notions of consumer sovereignty,private ownership of property and the freedom of enterprise.


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Australia, an open economy with a small population can be contrasted with neighbouring(c)economies in the Asian economic region. In terms of size, Australias economy is quitesignificant within the Asian region as the 4thlargest economy after China, Japan and India. Interms of growth, Australias average annual rate of 3.2% over the past three decades hasbeen notably slower than most Asian economies. China, India and Indonesia over the sameperiod, have experienced rates exceeding 7.5%. This reflects the differences betweenAustralia and these other economies in terms of their state of industrialisation. Quality of lifeas measured by factors such as the quality of education, healthcare and per capita incomesare significantly greater in Australia than in all other Asian nations. Australias HDI value of0.977 is much greater than that of Japan (0.884), China (0.663) and India (0.519). In 2011,Australias unemployment rate was similar to some Asian countries such as Japan. However,lower rates were recorded in the fast growing economies of China and Korea. Australia, as anindustrialised economy has tended to have a relatively equal distribution of income (asmeasured by the gini coefficient) compared with industrialising economies such as China. The

Australian government has more in common with the roles played by the governments in EastAsia including Japan, Korea and Singapore in focusing on limited government intervention.This can be contrasted with the more planned economies of China and India which havetraditionally had governments intervene in markets to achieve desired outcomes.

Question 24

A budget deficit refers to the budget outcome in which planned government expenditure(a)exceeds planned government revenue.

Some such the factors include:(b)

Improvements in Australias economic growth following a recovery from the globaleconomic downturn are expected to increase income taxation revenue.

New taxes such as the Minerals Resources Rent Tax are expected to further raise taxationrevenue

The cap on expenditure growth applied by government to constrain increases ingovernment expenditure

From 2009-10 to 2010-11, the budget deficit narrowed marginally. This means fiscal policy(c)had a mildly contractionary effect on economic growth compared with the year before.

The two main instruments the government can use to create a more equitable distribution of(d)income are progressive income taxation and social welfare payments. By taxing higherincome earners more heavily than lower earners and redistributing the revenue obtainedthrough social welfare payments to lower socio-economic groups, the government canreduce income inequality. Additionally, the government also has a role in providing servicessuch as health and education that improve the opportunities available to and living standardsof lower income earners.

Global financial markets may constrain the governments ability to conduct economic policy,(e)particularly in open economies like Australia that operate under a floating dollar as it meansthat the Australian economy and government are under constant scrutiny from overseas

investors. This is has tended to result in Australia committing to lower budget deficits and astronger commitment to microeconomic reform in order to maintain foreign investorconfidence. Lobby groups also influence government policy by petitioning the government forboth small-scale and large-scale economic reforms that will best further the interests of theindividuals and groups of people that they represent. Finally, the media can indirectly influencegovernment policy by determining which issues are to face public scrutiny and how they willbe presented to the public. This influences public perception of government policies whichcan pressure governments to make certain decisions that they might otherwise not make.

The Market Economy 5th Edition Workbook Preliminary Practice Exam


tme2013_exam-answers.pdf

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