2025 HSC Economics: Worked Solutions

Worked solutions to the 2025 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 2025 Economics exam pack, together with the marking guidelines. The answers below are checked against those guidelines. The explanations are our own.

---

Section I: multiple choice

Answer key

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

The reasoning

1. Shared currency. A. Two countries adopting a common currency form a monetary union, the deepest of the standard integration levels. A free trade area only removes barriers between members, and a trade agreement does not touch currency at all.

2. Accelerating globalisation. C. Cheaper energy lowers transport costs, one of the enabling conditions for global supply chains. Every other option is a barrier. Reduced labour mobility, dearer communication and higher tariffs all slow integration.

3. Development indicators. D. A developing economy has low literacy rates; an advanced economy has high life expectancy. Read the table by matching the extremes first. That resolves most of these grid questions in seconds.

4. Budget component falling in a downturn. B. Indirect tax revenue falls because consumption falls. Unemployment benefits rise in a downturn and public sector borrowing rises to cover the shortfall, so both of those move the other way. The automatic stabiliser mechanism in one question.

5. Public transport as a private good. B. A private good is excludable (you must pay the fare) and rival (a taken seat is unavailable to anyone else). Being government-provided has no bearing on whether a good is public or private. That is a fact about the provider, not about the good.

6. Rationale for macroeconomic policy. C. Stabilisation and shifts in aggregate demand. Improving productivity and efficiency, and shifting aggregate supply, are the rationale for microeconomic policy. This distinction is worth a mark almost every year.

7. The multiplier. D. Work backwards from the multiplier:

k = ΔY ÷ ΔExpenditure = 50 ÷ 10 = 5
k = 1 ÷ (1 − MPC)   →   5 = 1 ÷ (1 − MPC)
1 − MPC = 0.2   →   MPC = 0.8

The distractor 0.2 is the MPS, which is what you get if you stop one step early.

8. Regional business cycle. D. Integration of economic activity across neighbouring countries. "Regional" means a region of the world, not a region within a country, which is exactly what option A is banking on you assuming.

9. Injections and leakages. C. Injections are I + G + X = 20 + 80 + 60 = 160. Leakages are S + T + M = 10 + 70 + 50 = 130. Injections exceed leakages, so income is expanding.

10. Foreign aid in the BOP. B. Unconditional aid given by Australia is a transfer with nothing received in return, so it counts as net secondary income, a debit on the current account. The capital account options are the trap: capital transfers are a narrow category, and ordinary aid is not one of them.

11. Automatic stabilisers. A. They affect the cyclical component of the budget by definition, the part driven by the business cycle rather than by policy decisions. The structural component is what remains at full capacity, and discretionary changes require a decision.

12. Market-based environmental policy. A. An emissions trading scheme uses a price signal and lets firms decide how to respond. Ceasing operations and imposing fines are regulation. A tax on electric cars would discourage the low-emission option.

13. Financial account. B.

BOGS = (150 − 130) + (60 − 50) = 30
Current account = 30 + (−50) + 10 = −10
CA + capital + financial = 0  →  −10 + 70 + FA = 0  →  FA = −$60 billion

Two traps: forgetting that the accounts sum to zero, and forgetting to include net secondary income.

14. Headline versus underlying. A. Headline rose while underlying fell. So the headline cause must be a volatile, one-off price shock (drought hitting food prices) and the underlying cause must be a genuine easing of broad cost pressure (falling freight costs). Every other row pairs two effects pushing the same way.

15. Real growth. A.

Real GDP Year 1 = 18 ÷ 0.90 = 20
Real GDP Year 2 = 22 ÷ 1.10 = 20
Real growth = 0%

Nominal GDP rose 22%, but every cent of it was inflation. The 22% option is there for anyone who skips the deflation step.

16. Net foreign liabilities. C. Net foreign liabilities combine equity and debt, netted both ways:

Owed to foreigners: 3.0 (assets they own here) + 1.8 (debt we owe) = 4.8
Owed to us:         1.2 (assets we own there) + 0.5 (debt owed to us) = 1.7
Net foreign liabilities = 4.8 − 1.7 = $3.1 million

The $4.8 million distractor is gross, not net.

17. Reducing a quota. B. Reducing a quota means allowing fewer imports, so the restriction tightens and the domestic price rises further above the world price. It does not rise all the way to the no-trade price, because the quota has been reduced rather than eliminated. Read the verb carefully: to reduce a quota is to tighten it.

18. Foreign producer revenue. B. Foreign producers still receive the world price of $20 per unit. The tariff goes to government. So their revenue changes only through the volume of imports:

Before: imports 400 units × $20 = $8000
After:  imports 200 units × $20 = $4000
Decrease = $4000

The classic error is multiplying by $30, but foreign producers never see the tariff-inclusive price.

19. Terms of trade. D. Rearrange the formula:

ToT = (export price index ÷ import price index) × 100
Export PI = ToT × import PI ÷ 100
Year 1: 110 × 100 ÷ 100 = 110
Year 2:  90 × 110 ÷ 100 = 99

20. Corrective tax. D. The optimal per-unit tax equals the vertical distance between the social cost and private cost curves at the socially optimal quantity, which is the size of the external cost. Internalising it shifts private cost onto social cost so the market produces qs rather than qm.

Where marks were lost. The calculation questions (7, 13, 15, 16, 18 and 19) carry six of the twenty marks, and every one is a formula plus one careful step. Q18 is the standout trap, because it tests whether you understand who receives the tariff.

---

Section II: short answer

Question 21 (10 marks): the global economy

(a) One role of the OECD, with a specific example (2 marks).

The OECD conducts and publishes comparable economic research and analysis across its member economies. For example, it publishes regular country surveys reviewing each member's economic performance and recommending policy reform.

Two marks: name a genuine role, and attach a concrete example. The OECD is the most under-revised institution in Topic 1, and examiners have reported students unable to name even one of its roles. Learn one properly. It collects and publishes comparable statistics and gives policy advice, and it has no enforcement power.

(b) Limitations of income as a single measure of quality of life (3 marks).

Income measures such as GNI per capita are averages, so they conceal the distribution of income. An economy with high average income may have widespread poverty alongside extreme wealth. They also exclude the non-market economy: subsistence production and unpaid household work, both substantial in developing economies. Income also ignores negative externalities and the non-material dimensions of wellbeing, including pollution, working conditions, health, education and political freedom, so an economy can raise measured income while quality of life falls.

Three distinct limitations, each explained. Listing them without explanation caps you at one or two marks.

(c) Discuss the impact of world economic development on environmental sustainability (5 marks).

Discuss requires points for and against, so structure it both ways.

Rising world economic development increases incomes and demand for goods and services, which expands production, transport and energy use. Greenhouse gas emissions rise, renewable and non-renewable resources deplete faster, and pollution and waste increase. All of this reduces the natural capital available to future generations and undermines ecologically sustainable development.

Development also improves environmental outcomes through several channels. Higher incomes raise demand for environmental quality and give governments the fiscal capacity to regulate and to fund abatement. Development spreads clean technology: China now leads the world in installed renewable capacity and electric vehicle production. Development also lowers population growth, which eases long-run resource pressure.

On balance, development has historically increased environmental degradation, but the relationship is not fixed. What determines the environmental cost of development is the growth path chosen, meaning the technology and the policy framework, rather than the level of output itself.

That final judgement is what separates 5 marks from 3.

---

Question 22 (10 marks): exchange rates

(a) One global factor causing demand for AUD to fall (2 marks).

A fall in world commodity prices, driven for example by slowing industrial demand in China, reduces the value of Australian exports. Foreign buyers then need fewer Australian dollars to pay for those exports, so demand for the AUD falls and the demand curve shifts left.

Say something global, since that is what the question asked. A domestic factor earns nothing here.

(b) How the RBA could directly influence the value of the currency (3 marks).

The Reserve Bank can intervene directly in the foreign exchange market. To support the currency it purchases Australian dollars using its foreign exchange reserves, increasing demand for the AUD and placing upward pressure on its value. To lower the currency it sells Australian dollars, increasing supply. The RBA may also "dirty the float" by accompanying intervention with a public statement, shifting market expectations. Intervention today is rare and is used to correct disorderly markets rather than to target a particular level.

The word directly is doing the work in this question. Changing the cash rate influences the currency indirectly, through capital flows, so answering with monetary policy is the mistake the question is designed to catch.

(c) Discuss the effects of a depreciation on domestic businesses (5 marks).

A depreciation makes Australian exports cheaper in foreign currency terms, so exporters gain international competitiveness, sell higher volumes and earn higher AUD revenue. Import-competing firms also benefit, because imported substitutes become more expensive and consumers switch to domestic production.

Businesses reliant on imported inputs are damaged. Capital equipment, intermediate goods and fuel all cost more in Australian dollars, which raises production costs and squeezes margins, forcing either lower profits or higher prices. Firms with foreign-currency debt face a higher AUD servicing cost.

The net effect therefore depends on a firm's exposure. An exporter using domestic inputs gains substantially, while an importer or a firm with foreign debt is worse off. There is also a timing dimension: the J-curve means the trade benefit is delayed, because import volumes are price-inelastic in the short run.

Winners and losers, with a criterion for telling which is which. Supplying that criterion is what makes it a discussion.

---

Question 23 (10 marks): unemployment

(a) Why one specific group experiences higher than average unemployment (2 marks).

Young people aged 15 to 24 experience unemployment at roughly double the aggregate rate. They have limited work experience and fewer job-specific skills, so employers prefer more experienced applicants, and they are concentrated in casual and entry-level roles, which are the first cut when firms reduce hiring.

Name a specific group and give the mechanism. "Young people are unemployed more" without the reason is one mark.

(b) One factor that may have changed the participation rate (2 marks).

The participation rate fell from 66% to 62%.

Discouraged workers left the labour force. After unsuccessful job searching, some unemployed people cease actively seeking work. Because the participation rate measures the labour force as a proportion of the working-age population, they are no longer counted and the rate falls.

(c) A possible cause of the increase in unemployment in Year 2 (2 marks).

Unemployment rose from 4.5% to 5.9% while participation fell.

A downturn in the business cycle caused cyclical unemployment. As aggregate demand fell, firms reduced output and therefore their derived demand for labour. This raised unemployment above the NAIRU of 5% and at the same time discouraged some workers out of the labour force.

Use the data you are given. Examiners reported that weaker responses on this question failed to engage with the figures. The NAIRU of 5% is stated for a reason: Year 1 at 4.5% sits below it and Year 2 at 5.9% sits above it. Say so.

(d) Two policy options to reduce the NAIRU (4 marks).

The NAIRU is made up of structural and frictional unemployment, so the policies must address those. Demand management only removes cyclical unemployment.

Government funding for vocational training and retraining reduces the mismatch between the skills of the unemployed and the skills employers require. By raising human capital it lowers structural unemployment, and with it the rate of unemployment consistent with stable inflation.

Better employment services and information reduce the time workers spend between jobs, lowering frictional unemployment. More flexible wage determination at the enterprise level allows wages to reflect productivity, which lets firms employ workers whose output would not justify a uniform award wage.

Two marks each: identify the policy, then explain how it lowers the NAIRU specifically. Proposing expansionary fiscal or monetary policy scores nothing here, because demand stimulus below the NAIRU produces inflation instead of sustainably lower unemployment.

---

Question 24 (10 marks): monetary policy

(a) The purpose of monetary policy in Australia (2 marks).

Monetary policy is the Reserve Bank's influence over the cost and availability of credit through a target for the cash rate. Its purpose is to achieve the Bank's dual mandate: price stability, defined as inflation of 2 to 3% on average over time, and sustained full employment.

Naming the target band as a number, and naming both limbs of the mandate, is what makes this two marks rather than one.

(b) How the RBA maintains the cash rate target (3 marks).

The Reserve Bank maintains the cash rate near its target through the interest rate corridor. It pays interest on Exchange Settlement balances at a rate slightly below the target, which sets a floor, because no bank will lend in the cash market for less than it can earn on deposit at the RBA. It also stands ready to lend ES balances at a rate slightly above the target, which sets a ceiling, because no bank will borrow at more than that. Banks therefore have no incentive to trade outside the corridor, and announcing a new target moves the corridor with it.

This asks about implementation, and it is the question candidates most often answer with the transmission mechanism instead. Examiners reported responses confusing the cash rate mechanism with exchange rate impacts. If you learned the older version, in which the RBA bought and sold government securities to shift the supply of ES balances, that describes the pre-2020 system. The RBA's own explainer now states it "no longer conducts daily open market operations to manage ES balances."

(c) Impacts of a decrease in the cash rate on an economy (5 marks).

A reduction in the cash rate lowers the retail lending rates passed on by commercial banks. This reduces scheduled mortgage repayments for indebted households, raising discretionary income, and lowers the cost of business credit, improving the viability of investment projects. Consumption and investment therefore rise, increasing aggregate demand and, through the multiplier, real output and employment. This operates with a lag of roughly 12 to 18 months.

A second channel runs through the exchange rate. A lower cash rate narrows the interest rate differential, reducing capital inflow and demand for the AUD, which causes a depreciation. That improves international competitiveness and raises net exports, but it also increases imported inflation.

The overall impact is expansionary: higher growth and employment, upward pressure on inflation, higher asset prices, and a weaker currency. The effect is constrained if households save rather than spend the additional income, or if banks do not pass the reduction through in full.

Five marks needs two channels and a limitation. One channel described well is three.

---

Section III: stimulus-based extended response

You answered either Question 25 or Question 26. Both required integration of the supplied stimulus.

Question 25: reasons for trends in the size and composition of Australia's Balance of Payments since 2016

Thesis. Australia's balance of payments since 2016 has been driven by a cyclical commodity price boom temporarily overwhelming a structural net primary income deficit, with the current account moving into unprecedented surplus before reverting to deficit as commodity prices normalised.

The paragraph plan:

1. Structure of the accounts. Current account = balance on goods and services + net primary income + net secondary income, financed by the capital and financial account, with the two summing to zero alongside net errors and omissions. Examiners specifically criticised responses showing limited understanding of the complete structure.
2. The trend, in sequence. Persistent deficits averaging around 4% of GDP historically, then surpluses from 2019, a record surplus in 2021, and erosion back into deficit as the terms of trade fell.
3. The cyclical driver, which is the terms of trade. Surging iron ore, coal and LNG prices lifted export values sharply, moving the goods and services balance to a record surplus.
4. The structural driver, which is the savings and investment gap. Domestic investment persistently exceeds domestic savings, financed by foreign capital. That capital accumulates as foreign liabilities whose servicing produces a persistent net primary income deficit, largely independent of the commodity cycle.
5. The composition point. The net primary income deficit is by far the largest component of the current account deficit, which shows the deficit is a servicing phenomenon rather than an inability to sell exports.
6. Judgement. The size of the balance moves cyclically with the terms of trade. The composition is structurally determined by the savings and investment gap.

What the top band needed: separating cyclical from structural causes, and quoting the stimulus figures rather than narrating them.

Question 26: how the dimensions and trends of income inequality affect the Australian economy

Thesis. Inequality in Australia is moderate by OECD standards and substantially reduced by the tax and transfer system, but its persistent dimensions impose real economic costs through reduced consumption and underinvestment in human capital, partially offset by the incentive effects that some inequality provides.

The paragraph plan:

1. Measurement. The Lorenz curve and Gini coefficient, with the Gini as area A ÷ (A + B). Sketch it. It is quick and it is explicitly rewarded.
2. Dimensions, each with a mechanism: gender (occupational segregation, career interruption, superannuation gaps), age (life-cycle income against accumulated wealth), occupation (the skill premium widening with technological change), ethnic background, family structure.
3. Trends. Inequality has generally widened, with wealth inequality widening faster than income inequality, driven substantially by housing.
4. Economic costs. Lower aggregate demand, since lower-income households have a higher marginal propensity to consume. Underinvestment in human capital where able people cannot afford education. Reduced social mobility misallocating talent. A higher fiscal burden.
5. Economic benefits. Incentives to work, save, acquire skills and take entrepreneurial risk, and higher savings funding investment.
6. The redistributive machinery. Progressive income tax, means-tested transfers and the social wage produce a Gini for final income markedly below that for private income.
7. Judgement. Distinguish inequality of outcome from inequality of opportunity. The first has an efficiency justification. The second imposes pure efficiency losses.

What examiners flagged: responses over-relied on the stimulus, narrating the data instead of arguing with it. Quote a figure, then say what it proves.

---

Section IV: extended response

Question 27: conflicts for government in pursuing Australia's economic objectives, referring to THREE separate objectives

Read the instruction. Three separate objectives is a structural requirement, not a suggestion. A response covering two is capped regardless of quality.

Thesis. Because policy instruments are blunt and fewer in number than the objectives they must serve, pursuing any one objective in Australia routinely compromises another, most acutely at present between price stability, economic growth and full employment.

Choose three conflicts and give each a mechanism and an Australian example:

• Growth against price stability. Growth beyond productive capacity generates demand-pull inflation. Contractionary policy to restore price stability deliberately slows growth.
• Full employment against price stability. The short-run Phillips curve trade-off. Below the NAIRU, wage growth accelerates and feeds into prices. The long-run Phillips curve is vertical, so the trade-off is temporary, and buying lower unemployment leaves only permanently higher inflation.
• Growth against external stability. Higher incomes draw in imports, given Australia's high marginal propensity to import, which worsens the balance on goods and services. The floating exchange rate weakens this conflict by partially self-correcting.
• Growth against environmental sustainability. Higher output raises emissions and resource depletion, contracting the production possibility frontier available to future generations.
• Growth against distribution. Growth driven by asset prices rather than wages accrues to asset owners.

Then explain why the conflicts exist. Instruments are blunt, and Tinbergen's rule means a government needs at least as many independent instruments as targets.

Close on the resolution. Demand management can only move the economy along the existing trade-offs. Supply-side reform shifts the trade-offs themselves, raising capacity so that growth and employment improve without inflation. That is the strongest available conclusion.

Examiners criticised responses here for failing to ground the conflicts in Australian examples. Every conflict needs one.

Question 28: methods of protection

Thesis. Each method of protection raises domestic production at a cost to consumers and to overall efficiency, but the methods differ materially in who bears the cost and who captures the transfer, and that is what determines their relative merit.

The plan:

1. Tariff. Draw it. Price rises from the world price to the tariff-inclusive price, domestic production expands, consumption contracts, imports fall. Producers gain area a, government collects area c as revenue, and areas b and d are deadweight loss, one a production inefficiency and the other a consumption inefficiency.
2. Quota. Identical price and quantity effects, but area c becomes quota rent accruing to licence holders instead of government revenue. Where licences are held offshore, the domestic economy forgoes that transfer entirely, so a quota can be worse for national welfare than an equivalent tariff.
3. Subsidy. In a small open economy the world price is given, so consumers keep paying it and consumption does not change. Only domestic production and the import gap move, which is why there is one deadweight loss triangle rather than two. A subsidy is therefore the more efficient method, with the cost falling on taxpayers instead of consumers.
4. Local content rules and export incentives. The first supports domestic component manufacturers at the cost of higher input prices. The second is the only method that pushes producers into foreign markets rather than defending the domestic one.
5. Effects on the global economy. Reduced trade volumes, retaliation, and disproportionate damage to developing economies whose comparative advantage lies in the agricultural and labour-intensive sectors that advanced economies protect most heavily.
6. Judgement. Rank them: subsidy most efficient, tariff next, quota least where rents leak offshore.

What examiners flagged: responses explained the methods when the question required analysis, and lacked application to the Australian context. They also praised effective diagram use, so draw the tariff and subsidy diagrams and integrate them by referring to your own labels.

---

What to do with this paper

Do it timed and closed-book before reading any of the above. Three hours, five minutes reading time. Then mark yourself against NESA's published guidelines before you look at these solutions, and classify every lost mark as knowledge, verb, data, timing or diagram. Most students find that the majority of their losses are not content, which means most of their revision is aimed at the wrong problem.

Related: The complete diagram guide · Every formula you need · What eight years of papers tell you

Questions are described rather than reproduced. The 2025 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.