NSW INDEPENDENT TRIAL EXAMS – 2012
ECONOMICS Yr 11 PRELIMINARY EXAMINATION
MARKING GUIDELINES
Section I
1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10 / 11 / 12 / 13 / 14 / 15 / 16 / 17 / 18 / 19 / 20A / D / C / A / B / C / D / A / B / C / B / C / D / D / A / B / B / A / D / C
Section II
Question 21(a) Outcomes assessed: P1, P8
Criteria / Marks· Correctly draws the market demand curve for surfboards from the demand schedule / 1
Suggested answer: Students should plot at least three points for the demand curve by using the information in the table e.g. 300 surfboards are demanded at a price of $400, 200 surfboards are demanded at a price of $600 and 100 surfboards are demanded at a price of $800.
Question 21(b) Outcomes assessed: P1, P11
Criteria / Marks· Sketches in general terms the relationship between price and the quantity demanded for surfboards as price increases and decreases / 2
· Outlines a limited relationship between price and the quantity demanded for surfboards when price either increases or decreases / 1
Suggested answer: According to the law of demand, as the price of a good increases the quantity demanded of the good will fall. As the price of the good falls the quantity of the good demanded will increase. This holds true for the demand for surfboards: as the price of surfboards increases from $400 to $800 the demand for surfboards decreases from 300 to 100; and as the price of surfboards decreases from $800 to $400 the demand for surfboards increases from 100 to 300.
Question 21(c) (i) Outcomes assessed: P1, P8, P11
Criteria / Marks· Provides the correct term for a change in supply caused by an increase in the price of surfboards / 1
Suggested answer: The change in the price of surfboards from $600 to $700 causes the quantity supplied of surfboards to change or increase from 200 to 250. This change is referred to as an extension or expansion in supply.
Question 21(c) (ii) Outcomes assessed: P1
Criteria / Marks· Provides characteristics and features of TWO or more factors which affect the price elasticity of supply of surfboards / 2
· Provides characteristics and features of ONE factor which affects the price elasticity of supply of surfboards
OR
· Identifies rather than describes TWO factors which affect the price elasticity of supply of surfboards / 1
Suggested answer: The price elasticity of supply is the responsiveness of the quantity supplied given a change in price. There are a number of factors which affect the price elasticity of supply of surfboards:
· Time periods:
o The market period is a period of time in which producers of a product are unable to change the quantity produced in response to the price change.
o The short run is a time period in which manufacturers of surfboards can vary the variable factors of production e.g. labour.
o The long run is a time period in which manufacturers of surfboards can change all factors of production, including fixed factors e.g. the purchase of a new and larger factory to meet an increase in demand.
· The ability of the firm to hold stocks or inventories: if the surfboard manufacturer has additional stock on hand, they can respond to the increase in price relatively quickly.
· Excess capacity: if the current operational procedures are operating at less than full capacity, the surfboard manufacturer can increase the output of surfboards by using their existing manufacturing capacity more intensively.
Question 21(d) Outcomes assessed: P1, P2
Criteria / Marks· Demonstrates a clear, concise understanding of how non-equilibrium market situations for surfboards can be resolved through the operation of the price mechanism / 3–4
· Sketches in general terms how non-equilibrium market situations for surfboards can be resolved through the operation of the price mechanism / 1–2
Suggested answer: At a price above market equilibrium ($600) the quantity supplied exceeds the quantity demanded. There is therefore a surplus of surfboards above this price since supply exceeds demand. This non-equilibrium (or disequilibrium) outcome will be resolved through the operation of the price mechanism. Firms selling surfboards will decrease the price from the higher price (for example $700) towards the market equilibrium price of $600. As a result, supply will contract and demand will expand until equilibrium is established in the market for surfboards.
At a price below equilibrium ($600) the quantity demanded of surfboards exceeds the quantity supplied. At this price there is a shortage of surfboards in the market. To address the shortage in the market, price will increase from the lower price (for example, $500) towards the equilibrium price of $600. As a result supply will contract and demand will expand until equilibrium is established.
At equilibrium where the demand for surfboards equals the supply of surfboards, there will be no tendency for the equilibrium price ($600) and the equilibrium quantity of surfboards (200) to change.
Question 22(a) Outcomes assessed: P1
Criteria / Marks· Correctly defines the term interest rate / 1
Suggested answer: An interest rate refers to the annual percentage cost of borrowing funds in financial markets. An interest rate could also be defined as the annual percentage return paid to savers for depositing their funds in a financial institution.
Question 22(b) Outcomes assessed: P1, P2, P6
Criteria / Marks· Correctly identifies and provides points of detail about the role of the Reserve Bank in influencing the cash rate / 2
· Provides ONE point or ONE detail about the role of the Reserve Bank in influencing the cash rate / 1
Suggested answer: A daily target is set for the cash rate by the Reserve Bank in the cash market. The cash market is where large financial institutions can deposit or borrow cash overnight. The Reserve Bank influences the cash rate through its open market operations of buying and selling Commonwealth Government Securities (CGS) in the cash market. The cash rate can be changed by the Reserve Bank if it acts to change the stance of monetary policy. For example, if it wishes to ease the stance of monetary policy it will purchase existing CGS on issue, which will increase the amount of cash in the Exchange Settlement Accounts held by banks and other institutions with the Reserve Bank. This will lead to an increase in liquidity and a fall in the cash rate or the cost of borrowing funds overnight in the cash market.
Question 22(c) Outcomes assessed: P1, P2, P3, P5
Criteria / Marks· Correctly outlines TWO factors that influence the level of interest rates in Australia / 2
· Demonstrates some understanding of ONE factor that influence the level of interest rates in Australia but does not explain these factors by relating cause and effect / 1
Suggested answer: Three main factors that determine or influence interest rates in Australia include the demand and supply of loanable or available funds in financial markets; the stance of monetary policy by the Reserve Bank; and the extent of inflationary expectations. The level of interest rates is generally influenced by the interaction between the demand and supply of loanable funds in financial markets. If economic growth is at trend of between 3% and 4%, the demand for funds will increase and this will put upward pressure on the level of interest rates as there will be increased demand to borrow funds for spending. However if economic growth is below trend the demand for funds may fall resulting in a lower level of interest rates as lenders try to encourage more borrowing.
The stance of monetary policy by the Reserve Bank will influence the level of interest rates through changes in the cash rate, which is the benchmark short term interest rate in the economy. If there is a rise in the cash rate and a tightening of the stance of monetary policy this will put upward pressure on the level of interest rates in Australia. Conversely if there is a fall in the cash rate and an easing of the stance of monetary policy this will put downward pressure on the level of interest rates in Australia.
The rate of inflation and inflationary expectations can also influence the level of interest rates by raising the nominal rate of interest. Since the nominal interest rate is equal to the real interest rate plus inflationary expectations, any rise in the inflation rate and inflationary expectations would result in higher nominal interest rates charged by lenders. This would occur because lenders would want to maintain the real rate of interest or return for lending funds at a time when higher inflation would be reducing their real returns.
Another factor which could be explained is the influence of risk and the global cost of borrowing funds which can also influence the level of interest rates. A rise in the risk of lending through increasing loan defaults, or a rise in the cost of raising capital in offshore financial markets would put upward pressure on the level of market interest rates in Australia.
Question 22(d) Outcomes assessed: P1, P2, P3, P5
Criteria / Marks· Identifies correctly the relationship between an easing of monetary policy and the impact on the Australian economy by providing a thorough analysis of cause and effect / 5
· Identifies correctly the relationship between an easing of monetary policy and the impact on the Australian economy but presents some analysis of cause and effect / 4
· Identifies correctly the relationship between an easing of monetary policy and the impact on the Australian economy but presents a limited analysis of cause and effect / 3
· Demonstrates some understanding or a limited understanding of an easing in monetary policy and the impact on the Australian economy / 2
· States the meaning of an easing of monetary policy but provides a very limited analysis of the impact of such an easing on the Australian economy / 1
Suggested answer: An easing of monetary policy occurs when the Board of the Reserve Bank makes a decision to lower the cash rate in the cash market by setting a lower cash rate target. The Reserve Bank could implement a lower cash rate by purchasing existing Commonwealth Government Securities (CGS) from financial institutions in the cash market. These institutions would sell CGS to the Reserve Bank and receive cash deposits in return in their Exchange Settlement Accounts which would increase liquidity and lower the cash rate in the cash market. A lower cash rate would lead to lower market interest rates in the financial sector as banks and other financial intermediaries would pass on the lower cost of borrowing to their customers in an attempt to increase demand for their lending products such as credit cards, business loans, personal loans and mortgage loans. This would occur because of competition between financial intermediaries in selling their products to market participants.
The objective of an easing of monetary policy by the Reserve Bank would be to stimulate spending by lowering the cost of borrowing for individuals, households, businesses and governments. This would be done to support economic growth and employment creation if the economy was growing below trend and the rate of unemployment was rising. Lower market interest rates would increase the availability of cash to households and businesses through lower debt servicing payments (e.g. mortgage payments) and encourage more spending. In addition lower borrowing costs would encourage consumers and businesses to use more credit in financing the purchase of goods and services. Lower interest rates would also lower the cost of borrowing for investment purposes by businesses.
An easing of monetary policy that leads to lower interest rates would be expected to stimulate spending on financial assets such as shares and real estate, thus helping to support a rise in asset prices and wealth. A lower level of interest rates in Australia is also likely to put downward pressure on the exchange rate as the returns to foreigners for lending or investing funds in Australia would be lower. This might lead to lower demand for Australian dollars in the foreign exchange market and a depreciation in the exchange rate. This would increase the competitiveness of exports and industries that competed against imports such as manufacturing, retailing and tourism.
Overall an easing of monetary policy has an expansionary impact on economic activity in Australia. However lower interest rates which lead to increased spending and higher economic growth could also be expected to raise inflation and inflationary expectations in the medium to longer term through higher wages and prices. However the Reserve Bank conducts monetary policy through the use of an inflation target of 2% to 3% over the economic cycle to contain inflation and inflationary expectations in the medium term and sustain economic growth without higher inflation.
Section III
Question 23 Outcomes assessed: P1, P3, P6, P8, P10
Criteria / Marks· Integrates economic terms, concepts, issues, relationships and theory in an appropriate context
· Uses knowledge to develop a logically-sequenced answer that highlights in detail the characteristics and features of market structures
· Demonstrates factually precise and extensive knowledge of the nature of competition in markets characterised by oligopoly and monopoly / 17–20
· Provides concise definitions of economic terms and applies concepts and relationships in an appropriate context
· Uses knowledge to develop a logically-sequenced answer that highlights the characteristics and features of market structures
· Demonstrates factually correct and appropriate knowledge of the nature of competition in markets characterised by oligopoly and monopoly / 13–16
· Provides clear definitions of economic terms and sound discussion of economic concepts and relationships
· Refers to knowledge to develop an answer about some general features of market structures
· Demonstrates some correct knowledge of the nature of competition in markets characterised by oligopoly and monopoly / 9–12
· Provides basic definitions of some economic terms, concepts and relationships
· Uses generalised knowledge to develop an irrelevant or inappropriate answer about the features of market structures
· Demonstrates minimal knowledge of the nature of competition in markets characterised by oligopoly and monopoly / 5–8
· Utilises some appropriate terminology to communicate economic information
· Develops no logical sequence in the answer
· Demonstrates a lack of knowledge about the features of market structures and the nature of competition in markets characterised by oligopoly and monopoly / 1–4
Essay plan: