M/C Qn (1 Viewer)

[lpodtouch]

Could someone please explain why the answer is C for question 7:

http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2011exams/pdf_doc/2011-hsc-exam-economics.pdf

 

[Zlatman]

Since the price of exports has reduced, export revenue will be less (in the short term). Consequently, aggregate demand will be reduced (AD = C + I + G + X - M), and so to counter this, the government can increase expenditure (G). (therefore, the answer is C)

Increasing interest rates and increasing the tax rate will have the opposite impact to what is necessary, lowering aggregate demand. (ruling out A and B)

Increasing the currency value might help, but it'll more than likely just hinder international competitiveness. (ruling out D)

That's my reasoning for C being right, anyone else have something different?

 

[Ekman]

Since the price of exports has reduced, export revenue will be less (in the short term). Consequently, aggregate demand will be reduced (AD = C + I + G + X - M), and so to counter this, the government can increase expenditure (G). (therefore, the answer is C)

Increasing interest rates and increasing the tax rate will have the opposite impact to what is necessary, lowering aggregate demand. (ruling out A and B)

Increasing the currency value might help, but it'll more than likely just hinder international competitiveness. (ruling out D)

That's my reasoning for C being right, anyone else have something different?

One problem I have with this question. I agree that the answer is C, but a deterioration in the TOT also causes a depreciation as well. Isnt that another 'economic impact', which can be addressed or countered by increasing the value of the currency?

 

[Zlatman]

One problem I have with this question. I agree that the answer is C, but a deterioration in the TOT also causes a depreciation as well. Isnt that another 'economic impact', which can be addressed or countered by increasing the value of the currency?

Yeah, now that you mention it, I'm really not sure about D. It is pretty much the opposite effect, increasing export revenue in the short term (while a lower ToT decreases it) and hindering international competitiveness in the long term (while a lower ToT improves it).

Does anyone know?

 

[Ekman]

Yeah, now that you mention it, I'm really not sure about D. It is pretty much the opposite effect, as you said.

Does anyone know?

Well A is similar to D when you think about it like that, because by increasing interest rates you cause an appreciation. So yeah....

 

[atargainz]

Well A is similar to D when you think about it like that, because by increasing interest rates you cause an appreciation. So yeah....

This is what I initially thought as well, all 3 answers make sense lol. Maybe because it's asking for 'most likely', the answer would refer to the most immediate impact/effect?

 

[Mikes]

One problem I have with this question. I agree that the answer is C, but a deterioration in the TOT also causes a depreciation as well. Isnt that another 'economic impact', which can be addressed or countered by increasing the value of the currency?

The key words here is "all other things being equal", which implies that the exchange rate doesn't change. Hence C is the most correct answer here.