2017 HSC Economics: Worked Solutions

Worked solutions to the 2017 HSC Economics examination.

Get the paper first. These solutions describe each question rather than reproducing it, so open the official paper alongside. NESA publishes it free in the 2017 Economics exam pack. The answers below are checked against the official marking guidelines. The explanations are our own.

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Section I: multiple choice

Answer key

Q	A	Q	A	Q	A	Q	A
1	D	6	B	11	C	16	C
2	D	7	C	12	B	17	C
3	A	8	A	13	A	18	B
4	A	9	B	14	D	19	D
5	B	10	A	15	B	20	B

The reasoning

1. Benefit to transnational corporations. D. Migration laws that encourage international labour mobility let TNCs move staff between operations and recruit from a global pool. The other three options are all barriers to the cross-border movement of goods, capital or production that TNCs depend on.

2. Characteristics of a public good. D. Non-excludable and non-rival. Non-excludable means non-payers cannot be prevented from consuming it, which creates the free rider problem. Non-rival means one person's consumption does not reduce what is available to others. Both conditions must hold.

3. Time lags. A. Fiscal policy has a longer implementation lag than monetary policy. Fiscal changes require a Budget and parliamentary passage, while the RBA Board can change the cash rate at a scheduled meeting and it takes effect immediately.

Keep the two lags separate, because the question turns on it. Monetary policy has the shorter implementation lag but a substantial impact lag of roughly 6 to 18 months. Microeconomic policy has the longest lags of all on both counts, which is what makes options B and D wrong.

4. High unemployment with inflation below target. A. Both objectives point the same way, so use both instruments expansively. High unemployment calls for stimulus, and inflation below target leaves room to provide it without breaching the mandate. This is the rare case with no policy conflict, so options C and D, which pull the instruments against each other, waste that.

5. Improving international competitiveness. B. An increase in aggregate supply. Greater productive capacity lowers unit costs and reduces domestic inflationary pressure, so Australian goods become relatively cheaper in world markets. Higher Australian inflation and a higher AUD both damage competitiveness, and higher government spending raises aggregate demand without raising capacity.

6. Market-based air pollution policy. B. Firms buying and selling pollution permits. Market-based policies work through the price mechanism and let firms choose how to respond, so abatement occurs wherever it is cheapest. Fines, domestic emission targets and enforceable treaties are all forms of regulation, which mandate the outcome directly.

7. Driven by fluctuations in the business cycle. C. A decrease in company taxation receipts, which happens automatically when profits fall in a downturn. That is an automatic stabiliser. The other three options are all deliberate legislative changes to tax rates or thresholds, so they are discretionary rather than cyclical.

8. Financing a deficit by borrowing domestically. A. Upward pressure on interest rates. Government borrowing competes with private borrowers for the available pool of savings, and higher demand for loanable funds raises their price, which is the crowding out effect. Option D fails because borrowing in the domestic market does not add to foreign debt, and option B fails because selling bonds to the private sector withdraws money rather than creating it.

9. Reducing an import quota. B. Read the direction carefully, because reducing a quota means allowing fewer imports. Domestic supply is restricted, so the domestic price rises. Foreign producers lose both revenue and market share, and domestic firms produce more at the higher price, so A, C and D are all backwards.

10. Minimum requirement to receive the National Minimum Wage. A. They are legally employed. The National Minimum Wage is the floor for employees not covered by an award or enterprise agreement, so requiring award or agreement coverage inverts its purpose. Union membership has never been a condition of any wage entitlement in Australia.

11. Terms of trade moving from 115 to 105. C.

ToT = (export PRICE index ÷ import PRICE index) × 100

The terms of trade is a ratio of prices, not values, so options A and B are wrong on that ground alone regardless of their direction. A falling ratio means import prices rose relative to export prices. Option D also has the wrong direction, since rising export prices would raise the terms of trade.

This price-against-value distinction is tested most years and is worth committing to memory.

12. Ranking sources of household income. B. Returns to labour, then transfer payments, then returns to land and capital, then returns to enterprise. Wages dominate by a wide margin. Transfer payments come second because pensions and allowances reach a large share of households, while enterprise income is last, since relatively few households run a business and many of those make little or no profit.

13. Downturn in a major importer of Australian goods. A. A depreciation of the Australian dollar. Weaker foreign income reduces demand for Australian exports, and since foreign buyers must purchase AUD to pay for exports, demand for the AUD falls and the currency depreciates. Options C and D describe deliberate central bank actions under a fixed exchange rate, which is not what a downturn produces.

14. Injections and leakages. D.

Injections = I + G + X = 20 + 25 + 70 = 115
Leakages   = S + T + M = 35 + 30 + 60 = 125

Leakages > injections  →  the economy is CONTRACTING

Option A is the trap. Exports do exceed imports, but the trade balance alone does not determine the direction of the economy: you must total all three injections against all three leakages.

15. Which year has 40% unemployment and 62.5% participation. B.

Year 2: labour force = 3 + 2 = 5 million
        Unemployment rate = 2 ÷ 5 = 40%          ✓
        Participation rate = 5 ÷ 8 = 62.5%       ✓

Check Year 4, which is the designed trap: labour force = 9 + 6 = 15 million, so unemployment is 6 ÷ 15 = 40%, matching, but participation is 15 ÷ 20 = 75%, which does not. Both conditions must hold, so test both before committing.

Note also that the total population column is a distractor. Participation is measured against the working-age population.

16. CPI moving 100, 105, 110. C. Prices increase at a decreasing rate:

Year 1 to 2: (105 − 100) ÷ 100 = 5.00%
Year 2 to 3: (110 − 105) ÷ 105 = 4.76%

The absolute rise is 5 points each time, which is what makes option B tempting, but inflation is a percentage and the base is growing. This is disinflation: prices are still rising, just more slowly.

17. Balance of payments statement. C. Work out all four accounts before choosing.

Year 1: BOGS = 100 − 110 − 20 = −30
        CA   = −30 − 80 + 10 = −100
        KFA  = 20 + 75 = +95
        Net errors and omissions = 100 − 95 = 5

Year 2: BOGS = 60 − 70 − 30 = −40
        CA   = −40 − 85 − 5 = −130
        KFA  = 30 + 90 = +120
        Net errors and omissions = 130 − 120 = 10

Net errors and omissions rose from 5 to 10, so C is true. BOGS worsened rather than staying constant, the current account deficit widened rather than narrowing, and the capital and financial account surplus grew rather than shrank.

The insight the question is testing: because the accounts must sum to zero under a float, any gap between the current account and the capital and financial account is net errors and omissions.

18. Why a library book is not a public good. B. Only one person can read it at a time, which means it is rival in consumption. A public good must be both non-rival and non-excludable, so failing either test is enough. Option C actually argues the book is non-excludable, which supports the opposite conclusion.

19. Missing values with a multiplier of 2.5. D.

k = 1 ÷ (1 − MPC) = 2.5   →   1 − MPC = 0.4   →   MPC = 0.6

At Y = 0, C = 100, so autonomous consumption is 100:
C = 100 + 0.6Y

Z (Year 2, Y = 1000):  Z = 100 + 0.6(1000) = 700
X (Year 3, C = 1300):  1300 = 100 + 0.6X  →  X = 2000

Two steps that candidates often miss: reading autonomous consumption off the Y = 0 row, and recovering the MPC from the multiplier rather than being given it.

20. Exchange rate comparison. B. Convert both years to the same form before comparing.

2019: 1 USD = 1.25 AUD   →   1 AUD = 1 ÷ 1.25 = 0.80 USD
2020: 1 AUD = 0.75 USD

The AUD fell from 0.80 to 0.75 USD  →  DEPRECIATION

A depreciation makes Australian exports less expensive to American buyers, so B is correct. It also makes US imports dearer in 2020, not 2019, and makes Australian assets cheaper for US investors, so C and D are inverted.

The whole difficulty is that the two years are quoted in opposite directions. Always convert to a common base first.

Where marks were lost. Question 15 caught candidates who found a matching unemployment rate and stopped. Question 20 caught candidates who compared 1.25 with 0.75 directly without inverting. Question 11 caught candidates who read the terms of trade as a ratio of values.

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Section II: short answer

Question 21 (10 marks): protection and international organisations

(a) Why dumping can justify trade protection (2 marks).

Dumping is the export of a good to a foreign market at a price below its cost of production, or below the price charged in the home market. It can justify protection because it is a form of predatory pricing: the foreign producer sustains short-term losses to drive efficient domestic competitors out of business, and once the domestic industry has exited it can raise prices and exploit the resulting market power. Protection against dumping therefore preserves genuine long-run competition rather than obstructing it, which is why anti-dumping duties are permitted under WTO rules.

The predatory intent and the long-run consequence are what earn the second mark. "It is unfair to local producers" is one mark.

(b) The difference between subsidies and local content rules in discouraging dumping (4 marks).

A subsidy is a government payment to domestic producers that lowers their effective cost of production, allowing them to sell profitably at or below the dumped price. It works on price competitiveness. Because it operates in a market where the world price is given, the domestic price is unchanged, so consumers keep paying the world price and continue to have access to the imported good. The full cost falls on taxpayers through the Budget, and it is a transparent cost that appears as a line item.

A local content rule requires that a specified proportion of a final good be produced domestically. It works on quantity rather than price, guaranteeing domestic producers a share of the market regardless of what the dumped import costs. It imposes no direct Budget cost, since the expense is borne by firms and passed to consumers through higher prices, which makes it politically easier but less transparent.

The difference in effectiveness follows from the difference in mechanism. A subsidy must be large enough to match whatever price the dumping firm sets, so an exporter willing to sustain deeper losses can force the subsidy higher indefinitely. A local content rule is not vulnerable in that way, because it guarantees volume irrespective of price, which makes it the more reliable defence against sustained dumping. Against that, it distorts production decisions more severely, forces firms to use inputs they would not otherwise choose, and is more likely to attract WTO challenge and retaliation.

(c) Compare and contrast the roles of the IMF and the World Bank (4 marks).

Compare and contrast means similarities and differences, both explicit.

Similarities. Both were established at the Bretton Woods conference in 1944, both are global institutions with near-universal membership, and both attach policy conditions to their lending. Both promote international economic integration by giving developing and crisis-affected economies access to finance they could not raise in private capital markets, and both have been criticised for imposing conditions that reflect the priorities of their largest shareholders.

Differences of purpose. The IMF promotes global monetary and financial stability. It monitors exchange rates and macroeconomic conditions, and it lends short term to economies in balance of payments or currency crisis, as in Asia in 1997 and Greece from 2010. Its lending is stabilisation finance, intended to restore confidence and prevent contagion. The World Bank promotes long-term economic development. It lends over long horizons at concessional rates for infrastructure, health and education projects, with poverty reduction as its objective.

Differences of timeframe and instrument. The IMF addresses immediate crises with macroeconomic conditions attached, typically fiscal consolidation and monetary tightening. The World Bank funds specific projects over decades with structural and governance conditions attached.

The distinction to hold onto is that the IMF stabilises and the World Bank develops. Both contribute to integration, but the IMF does so by keeping economies solvent enough to participate in the world economy, and the World Bank by building the capacity that lets them benefit from participating.

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Question 22 (10 marks): foreign investment

(a) How the sale of an agricultural property to a foreign investor affects TWO components of the balance of payments (2 marks).

The initial sale is a capital inflow, recorded as a credit on the financial account under direct investment, since the foreign investor purchases an Australian asset.

In subsequent years, the profits earned on that property and remitted to the foreign owner are recorded as a debit on net primary income within the current account.

Two components, and the second is the one that matters. Note the timing relationship: a financial account credit today creates current account debits in every year that follows, which is the mechanism behind Australia's persistent net primary income deficit.

(b) Distinguish between direct and portfolio investment (2 marks).

Direct investment is investment that confers a lasting interest and a degree of management control, conventionally defined as an ownership stake of 10% or more. It typically involves establishing or acquiring a business and tends to be long term and relatively stable.

Portfolio investment is the purchase of financial assets, such as shares or bonds, below the 10% threshold, undertaken purely for financial return with no management control. It is far more volatile, because it can be sold and repatriated quickly in response to changing conditions.

The 10% threshold is the examinable line. The volatility difference is what makes the distinction matter for policy.

(c) Discuss the costs and benefits for Australia of foreign direct investment (6 marks).

Benefits. Australia has historically saved less than it invests, so foreign capital fills the savings and investment gap and allows a higher level of investment than domestic savings alone could fund. This raises the capital stock, productivity and productive capacity, which increases aggregate supply and the sustainable rate of growth. FDI also brings technology, management expertise and access to global distribution networks that could not be purchased separately, and it has been decisive in developing the capital-intensive mining and LNG industries where the scale of investment required exceeded domestic capacity. Employment rises during construction and operation, and the resulting activity generates company tax and royalty revenue.

Costs. Foreign ownership means profits are repatriated overseas, appearing as net primary income debits and worsening the current account. Over time this is why Australia's current account deficit has been dominated by the income component rather than the trade component. Foreign ownership also transfers control of Australian assets, which raises concerns where the assets are strategically significant, such as agricultural land, ports, energy infrastructure and water. Decisions affecting Australian employment and investment may then be made offshore according to a parent company's global priorities. Transfer pricing and profit shifting can erode the Australian tax base, so the revenue benefit is smaller than headline profits suggest. Heavy reliance on foreign capital also creates vulnerability, since a sudden loss of investor confidence can trigger capital flight, a sharp depreciation and rising interest rates.

Discussion and judgement. FDI is more beneficial than portfolio investment, because it is long term, harder to withdraw quickly, and it carries technology and expertise rather than money alone. Its costs are also real but largely a function of composition and regulation rather than of foreign investment itself: profit repatriation is the unavoidable price of using someone else's capital, while control and tax-base concerns are addressed through the Foreign Investment Review Board and transfer pricing rules. Given that Australia's domestic savings pool, even with superannuation, has not consistently matched its investment needs, foreign investment has been necessary rather than optional, and the policy question is how it is screened and taxed rather than whether to accept it.

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Question 23 (10 marks): distribution of income and wealth

(a) Distinguish between income and wealth (2 marks).

Income is a flow, being the money received over a period of time from wages, rent, interest, dividends, profits and transfer payments, measured per week or per year. Wealth is a stock, being the value of assets held at a point in time, such as property, shares and superannuation, net of liabilities.

The two are connected: income not consumed is saved and accumulates as wealth, and wealth in turn generates income through rent, interest and dividends. Wealth is far more unequally distributed than income in Australia.

Flow against stock is the distinction. Naming it explicitly earns the mark.

(b) Explain TWO ways taxation can move the Gini coefficient from 0.5 to 0.2 (4 marks).

A fall from 0.5 to 0.2 is a very large reduction in inequality, so the measures must be substantial.

A more progressive personal income tax scale. Raising marginal rates on high incomes and lifting the tax-free threshold increases the average tax rate paid by high-income earners while reducing or eliminating it for low-income earners. Because progressive taxation takes a rising proportion of income as income rises, the distribution of disposable income is compressed relative to market income, moving the Lorenz curve towards the line of equality and lowering the Gini.

Shifting the tax mix away from indirect taxes towards direct and wealth taxes. Indirect taxes such as the GST are regressive, because low-income households spend a larger proportion of their income on consumption and therefore pay a larger proportion of income in tax. Reducing reliance on the GST removes a force widening the distribution. Introducing or increasing taxes that fall on accumulated assets, including capital gains, land and inheritance, targets wealth, which is more concentrated than income, and reduces the compounding advantage by which existing wealth generates further income.

Both must connect back to the Gini and the Lorenz curve explicitly. An answer that explains progressive taxation without linking it to the measure is capped.

(c) How age and gender affect wealth inequality in Australia (4 marks).

Age. Wealth accumulates over the life cycle, so age is the largest single source of measured wealth inequality. Young people have had little time to save, typically hold minimal assets and carry education and mortgage debt, so their net wealth is low and sometimes negative. Wealth peaks in the years approaching retirement, as mortgages are paid down and superannuation balances mature, then draws down in retirement. Much of the wealth gap between a 25-year-old and a 60-year-old is therefore not inequality in a meaningful sense but the same person at different points in life.

Two effects make it genuine inequality rather than a life-cycle artefact. Asset price inflation, particularly in housing, has transferred wealth to those who already owned property and priced younger households out, so successive cohorts start further behind. And inheritance transfers accumulated wealth between generations, concentrating it in families that already hold it.

Gender. Women hold substantially less wealth than men, principally through superannuation. Lower average earnings from the gender pay gap mean lower contributions on every dollar earned. Career interruptions for caring responsibilities remove years of contributions entirely and, more damagingly, remove the compounding those years would have generated. Higher rates of part-time and casual work reduce contributions further, and women are over-represented in lower-paid industries. The result is that women retire with markedly lower superannuation balances than men, and older single women are among the fastest-growing groups experiencing housing stress and homelessness.

The two dimensions compound: an older woman who took career breaks accumulates the age disadvantage of drawing down assets and the gender disadvantage of having accumulated fewer of them.

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Question 24 (10 marks): unemployment and fiscal policy

(a) One type of unemployment present at full employment and one that is not (2 marks).

Present at full employment: frictional unemployment, being people between jobs who are searching for a new position. Structural and seasonal unemployment also persist.

Not present at full employment: cyclical unemployment, which is caused by deficient aggregate demand and is by definition eliminated when the economy operates at full employment.

Full employment means the NAIRU, not zero unemployment. That definition is what the question is really checking.

(b) Explain how unemployment affects economic growth (4 marks).

Argue the relationship in both directions, because the causation runs both ways.

Unemployment reduces growth. Unemployed labour is a productive resource left idle, so the economy operates inside its production possibility frontier and actual output falls below potential output, the gap conventionally described by Okun's law. Unemployed households have far lower incomes, so consumption falls, and since consumption is the largest component of aggregate demand this reduces aggregate demand and therefore output further, working through the multiplier. Weaker demand discourages firms from investing, which reduces the future capital stock and lowers potential growth as well as actual growth.

Long-term unemployment damages capacity permanently. Extended periods out of work cause skills to atrophy and workers to detach from the labour force, so they become effectively unemployable. This raises structural unemployment and the NAIRU, permanently lowering the economy's productive capacity rather than merely its current output. This effect, sometimes called hysteresis, is why the duration of unemployment matters as much as its level.

The Budget channel. Unemployment reduces income tax and consumption tax revenue while increasing transfer payments, worsening the Budget and reducing the government's capacity to fund the infrastructure and education spending that supports long-run growth.

The relationship also runs the other way. Growth is the primary determinant of employment, since the demand for labour is derived from the demand for goods and services. This creates a self-reinforcing cycle in either direction: falling growth raises unemployment, which lowers consumption, which lowers growth further.

(c) Contrast the use of fiscal policy at the NAIRU with its use above the NAIRU (4 marks).

Contrast means the differences must be explicit throughout.

Above the NAIRU, the economy contains cyclical unemployment and is operating below capacity, with spare productive resources available. Expansionary fiscal policy is therefore appropriate and effective: increased government spending or tax cuts raise aggregate demand, and because firms can increase output using idle capacity, the response comes as higher real output and employment rather than higher prices. The multiplier is at its largest here, since resources are available at each round of spending. Crowding out is minimal, because private investment demand is weak.

At the NAIRU, cyclical unemployment has been eliminated and the economy is operating at capacity, so the unemployment that remains is structural and frictional. Expansionary fiscal policy now meets a supply constraint: firms cannot readily raise output, so additional demand bids up prices and wages instead. The result is demand-pull inflation with little gain in real output, and any reduction in unemployment is temporary, since the short-run Phillips curve shifts as expectations adjust and the economy returns to the NAIRU at a higher rate of inflation. Crowding out is also more significant at capacity, because government borrowing competes with private investment for scarce funds.

The contrast in appropriate policy. Above the NAIRU, fiscal policy should be expansionary and directed at aggregate demand. At the NAIRU, it should be neutral or directed to consolidation, rebuilding the fiscal capacity needed for the next downturn, and any unemployment objective must be pursued through the supply side instead: infrastructure, education, training and other measures that lower the NAIRU itself.

The underlying point is that fiscal policy changes what the economy produces of its capacity above the NAIRU, and what it changes at the NAIRU is only the price level.

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Section III: stimulus-based extended response

Question 25: implications of a decline in global economic activity for Australia's economic policies

The stimulus was an RBA statement that a flexible exchange rate "helps soften the impact of external shocks on an economy, such that monetary and fiscal policy can be directed towards achieving domestic economic policy objectives", alongside a graph of Australia's terms of trade.

Thesis. A decline in global activity transmits to Australia through the terms of trade, export volumes and confidence, but the floating exchange rate absorbs a substantial part of the shock automatically, which frees monetary and fiscal policy to pursue domestic objectives instead of defending the currency. Policy is therefore less constrained than it would be under a fixed rate, though the effectiveness of both instruments now depends on the starting position.

The plan:

1. Transmission first. A global downturn reduces demand for Australian exports, lowering export volumes and, through the terms of trade shown in the graph, export prices. It also transmits through financial markets, confidence and the international business cycle. Australia's concentration in commodities and in China makes the terms of trade channel unusually powerful.
2. The exchange rate as automatic stabiliser, which the stimulus hands you. Falling export income reduces demand for the AUD, so the currency depreciates without any policy decision. That restores international competitiveness, cushions export industries and offsets part of the fall in national income. Contrast this explicitly with a fixed rate, where the same shock would require running down reserves, raising interest rates to defend the peg, and accepting a domestic recession as the adjustment mechanism.
3. Quote the stimulus and draw its implication. Because the currency does the external adjustment, monetary and fiscal policy do not have to. That is the sense in which they can be "directed towards achieving domestic economic policy objectives". This is the analytical spine of the answer.
4. Monetary policy. The RBA can cut the cash rate to support domestic demand. Doing so also narrows the interest rate differential and reinforces the depreciation, so the two effects work together. Limitation: if the cash rate is already low, the effective lower bound removes the room to act, which is precisely the position Australia reached by 2019.
5. Fiscal policy. Automatic stabilisers operate immediately as revenue falls and transfers rise. Discretionary stimulus can follow, as in 2008 and 2009. Limitations: implementation lags tied to the Budget cycle, and the fact that a terms of trade decline reduces government revenue at exactly the moment stimulus is wanted, since company tax and royalties fall with commodity prices. The Budget therefore deteriorates from both sides at once.
6. The distinction worth drawing. A terms of trade decline is partly a structural loss of national income, not merely a cyclical shortfall in demand. Demand-side policy can offset the cyclical component but cannot restore income the country is no longer earning. Attempting to fully offset a permanent income loss with stimulus produces debt without growth.
7. Microeconomic policy is the remaining response, raising productivity and diversifying the export base to reduce exposure to any single commodity or market.
8. Judgement. The float substantially reduces the burden on macroeconomic policy, which is the stimulus's point and it is correct. But policy is still constrained by lags, by the lower bound, and by revenue moving procyclically with the terms of trade.

Question 26: the role of government economic policies in achieving price stability

The stimulus was an RBA Board minute noting that "despite depreciation of the Australian dollar, inflation has declined due to a range of factors including heightened retail competition, moderation in conditions in housing markets and declines in the costs of business inputs such as fuel and utilities", with a graph of Australian inflation.

Thesis. Monetary policy is the primary instrument for price stability and has kept inflation within the target band for most of three decades, but the stimulus shows how much of the outcome is determined by factors outside government control. Policy sets the framework and anchors expectations, while competition, global input costs and structural change determine the outcome in any given period.

The plan:

1. Define price stability and the RBA's target of 2 to 3% inflation on average over the cycle. Distinguish headline from underlying inflation and explain why the trimmed mean is used.
2. Monetary policy as the primary instrument. Independence since 1996, inflation targeting since 1993, and the transmission mechanism running from the cash rate through market interest rates to consumption, investment, asset prices, cash flow and the exchange rate. Add the point that matters most: inflation targeting works largely by anchoring expectations, so credibility does much of the work before any rate change is required.
3. Now use the stimulus, which is the whole point of the question. The Board observed inflation declining despite a depreciation, which is remarkable, because a depreciation raises import prices and should be inflationary. Something else was clearly dominating. Take the three factors the minute names in turn:
   • Heightened retail competition, which is a microeconomic and structural phenomenon. New entrants and online retail suppressed margins and prices, and no policy caused it.
   • Moderation in housing market conditions, which affects both the CPI directly and consumption through the wealth effect.
   • Falling fuel and utility costs, driven by global oil markets and entirely exogenous.
4. Draw the implication. All three are outside the RBA's control, and two are global or structural rather than domestic. The stimulus is therefore evidence that monetary policy sets the framework rather than determining the outcome period by period.
5. Fiscal policy's contribution. A contractionary stance reduces aggregate demand and inflationary pressure. But fiscal policy also causes inflation directly through indirect taxes and charges, most obviously the GST's introduction in 2000, and through utility and excise decisions.
6. Microeconomic reform. The deeper contributor. Competition policy, deregulation and tariff reduction lower prices directly and raise productivity, which lowers unit labour costs and suppresses cost-push pressure. The retail competition the stimulus names is itself partly the product of decades of liberalisation.
7. Labour market policy. Enterprise bargaining ties wages to productivity, so real wages can rise without raising unit costs. Weak wage growth after 2013 was a major reason inflation ran below target.
8. The below-target problem. Use the graph. Inflation sat below the band for much of 2015 to 2020, which is also a failure of price stability, not a success. It pushed the cash rate towards zero and left little room to respond to a shock. Recognising that undershooting is a policy failure separates the strongest responses.
9. Judgement. Monetary policy has been effective at anchoring inflation around the target over the long run, but the stimulus demonstrates that in any given period the outcome is dominated by global and structural forces. Policy's real achievement is credibility and expectations, and its real limitation is that it cannot control supply-side price movements in either direction.

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Section IV: extended response

Question 27: compare and contrast the effects of globalisation on economic growth and environmental sustainability, for Australia AND one other economy

Four elements are required: two economies, and for each, growth and environmental sustainability. Then genuine comparison. Most candidates write two separate country reports and lose the top band for it.

Thesis, using China as the second economy. Globalisation delivered strong growth to both economies through very different mechanisms, Australia through commodity exports and China through export manufacturing, and imposed environmental costs on both. The contrast is that China's costs were direct and domestic, arising from the production it undertook, while Australia's were indirect, arising from the fossil fuels it sold to enable that production.

Structure by theme, not by country.

Growth: the similarity. Both grew substantially through trade integration and foreign investment, and each depended on the other, since Chinese industrialisation drove Australian commodity demand.

Growth: the contrast.

• Mechanism. Australia grew by exporting resources, exploiting a comparative advantage in natural endowment. China grew by exporting manufactures, exploiting a comparative advantage in abundant low-cost labour and moving workers from low-productivity agriculture into higher-productivity industry.
• Rate. China averaged close to 10% a year for three decades. Australia averaged around 3%, but from a far higher base, and it recorded close to three decades without recession.
• Nature. China's was catch-up growth, converging on the technological frontier. Australia's was frontier growth, which is necessarily slower.
• Vulnerability. Australia's growth is exposed to commodity price volatility and to a single dominant trading partner. China's is exposed to global demand for manufactures and to the international business cycle, demonstrated in 2008.

Environmental sustainability: the similarity. Both experienced rising emissions, resource depletion and pollution as output grew, and in both cases the market failed to price the externality.

Environmental sustainability: the contrast.

• Type of damage. China's was local and acute, with severe air, water and soil pollution imposing direct health costs on its own population. Australia's is global and diffuse, arising largely from the emissions produced when its exported coal and gas are burned overseas.
• Where the damage occurs. This is the sharpest contrast available. China bore the environmental cost of the production it undertook. Australia exported its environmental cost, since emissions from Australian coal burned in China are counted in China's national accounts, not Australia's.
• Per capita against total. China is the largest total emitter, while Australia is among the highest per capita emitters in the developed world. Which measure you choose determines who looks responsible, and saying so is worth a mark.
• Policy response. China has invested at enormous scale in renewable capacity and electric vehicles, and now leads the world in both, partly because the domestic health costs became politically intolerable. Australia's response has been weaker and repeatedly reversed, because its emissions-intensive industries are export earners rather than domestic polluters, so the political economy is entirely different.

The comparative judgement. Globalisation raised growth in both and damaged the environment in both, but the relationship between the two differed fundamentally. For China the growth and the environmental cost were the same activity, so the trade-off was direct and it became unavoidable once the costs were visible. For Australia the growth came from supplying the activity that caused the damage, so the cost was displaced onto the global commons and Australia faced no comparable domestic pressure to act. That difference in incidence explains why the policy responses diverged so sharply.

Question 28: how labour market policies can be used to achieve Australia's economic objectives

The verb is explain, so give mechanisms rather than judgements. Structure by objective, since that is what the question names.

Thesis. Labour market policies operate on the supply side, determining the skills, mobility and cost of labour, and through these they contribute to every major economic objective, most directly to full employment and price stability.

First, identify the policies. The decentralised system under the Fair Work Act 2009, enterprise bargaining, awards and the National Employment Standards, the annual minimum wage review by the Fair Work Commission, education, training and apprenticeship programs, employment services, and skilled migration.

Full employment.

• Enterprise bargaining lets wages reflect firm-level productivity, so employers can afford workers whose output would not justify a uniform award wage.
• Training and education reduce the skills mismatch, moving people out of structural unemployment.
• Employment services and better labour market information shorten job search, reducing frictional unemployment.
• Mobility measures, including qualification recognition across states, move workers to where the vacancies are.
• Together these lower the NAIRU, which is the only sustainable way to reduce unemployment.
• The tension: minimum wage settings that are too high price the least productive workers out of work, which is the equity against employment trade-off the Fair Work Commission weighs annually.

Price stability.

• The key variable is unit labour cost, being wages relative to productivity. Where enterprise bargaining ties wage rises to productivity, real wages can rise with no cost-push pressure.
• Decentralisation removed the flow-on wage claims by which a centralised system transmitted increases across unrelated industries, which was a major inflation mechanism in the 1970s and 1980s.
• Skilled migration relieves shortages in specific occupations that would otherwise bid up wages without any productivity gain.
• By lowering the NAIRU, these policies allow lower unemployment before wage pressure emerges, which relaxes the short-run Phillips curve trade-off.

Economic growth.

• Higher labour productivity raises aggregate supply and the sustainable rate of growth.
• Flexibility allows resources to move from declining to expanding industries, supporting structural change.
• Higher participation, encouraged by childcare support, flexible work and parental leave, expands the labour force and therefore potential output.

Distribution of income.

• Awards and the National Employment Standards establish a safety net protecting the low paid, and the minimum wage sets a floor.
• Against that, decentralisation widens the wage distribution, because workers with strong bargaining power gain more than those without, so labour market policy pulls in both directions on this objective and should be presented that way.
• Education and training improve mobility over the long term, which is the more durable equity instrument.

External stability. Lower unit labour costs improve international competitiveness, supporting export volumes and the balance on goods and services.

Close on the conflicts, which is what lifts an explain response. Labour market policy cannot advance every objective at once. Higher minimum wages improve distribution but risk employment. Decentralisation improves productivity and price stability but worsens distribution. And the whole instrument is structural, operating with long lags, so it cannot respond to a cyclical shock the way monetary policy can. What it determines is the environment within which the macroeconomic instruments operate.

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What to do with this paper

Do it timed and closed-book first. Mark against NESA's published guidelines before reading any of the above, then classify every lost mark as knowledge, verb, data, timing or diagram.

Two drills from this paper. Question 15 rewards checking both conditions before committing, since the trap year matched one of them exactly. Question 20 rewards converting exchange rate quotations to a common base before comparing, which is the single most reliable way to lose a mark on currency questions.

Related: 2018 worked solutions · 2019 worked solutions · The complete diagram guide · Every formula you need

Questions are described rather than reproduced. The 2017 examination paper and marking guidelines are © NSW Education Standards Authority and are available free from the NESA website. Answers verified against the official marking guidelines; explanations are our own.