Help with questions please! (1 Viewer)

[DannyT]

which of the following would result from a deterioration in the Terms of Trade?
(A) the exchange rate appreciates
(B) the current account deficit increases
(C) more exports are needed to finance the same volume of imports
(D) the export price index would rise more than the import price index

I originally chose B as I thought that the terms of trade was a major issue underlying Australia's external stability, hence a deterioration would constitute a larger BOGS deficit and in turn a larger CAD.
The correct answer was C. I thought that was a cause, not an effect of a deteriorating Terms of Trade (Just like saying a result of an increasing unemployment rate is greater numbers of people unemployed).

Also, There is a graph with price level on the y axis and real GDP on the x axis. The aggregate supply curve has been shifted towards the right and the aggregate demand curve remains unchanged.

The question asks "what changes to government economic policy would cause a shift of the aggregate supply curve towards the right?"
(A) Tax cuts for low income earners
(B) An increase in the rate of GST to 15%
(C) The new Workplace Relations "Work Choices" legislation
(D) Higher interest rates

I chose (B) as I thought that an increase in govt taxation would increase aggregate supply according to Y=C+S+T.
The answer was (C) and I am unsure why.
Have I completely missed the point?

Help is greatly appreciated.

 

[DannyT]

Perhaps I was wrong in the first question because the persistently high net Y account constitutes more of a strain on the CAD than the BOGS does.
Thanks for the help Fran! I can see that you've been studying heaps of ecos ;P

 

[DannyT]

Actually I see why the first one is wrong now...that is an effect. I just got mixed up ahhhh

 

[munchiecrunchie]

for the first MC question it is important to note that the terms of trade is a measure of PRICES - so the CAD may not necessarily increase because the drop in the price of exports may be matched by an increased volume of exports sold. (total revenue = price x quantity sold)


for the second MC question - if the govt policy shifts supply, then it is a MICROECONOMIC policy. Hence C is the most correct answer.


hope that helps you out.

 

[DannyT]

for the first MC question it is important to note that the terms of trade is a measure of PRICES - so the CAD may not necessarily increase because the drop in the price of exports may be matched by an increased volume of exports sold. (total revenue = price x quantity sold)


for the second MC question - if the govt policy shifts supply, then it is a MICROECONOMIC policy. Hence C is the most correct answer.


hope that helps you out.

Ah yes that explains it, thanks heaps for your help! =P
'supply side' economics ahhhhh haha
so if the answer was GST, it would be a shift in the D curve?

 

[Uncle]

a larger CAD?
a larger computer aided drawing?
it must conform to standard scales.

 

[blaze.bluetane]

This is my take...

Question 1
Which of the following would result from a deterioration in the Terms of Trade?

(A) the exchange rate appreciates
-> caused by an improvement in the TOT
-> less influence, little effect due to floating dollar

(B) the current account deficit increases
-> increased import prices relative to export prices seems to indicate a relative rise in DD for imports or decrease in DD for exports
-> This would cause an adverse movement, or an increase in the CAD
-> However, the price of M or X may be independent of changes in the volumes of X and M and the CAD
-> Also, increasing TOT will create greater ability to buy imports, increasing our FOD and consequently, the CAD
QUITE AMBIGUOUS [new thread? changes in TOT vs. changes in CAD???]

(C) more exports are needed to finance the same volume of imports
-> This is basically the definition of the effect of a deterioration in the TOT
-> Hence this answer is correct

(D) the export price index would rise more than the import price index
-> Basically the definition of an appreciation in the TOT
-> Hence this answer is quite obviously incorrect


Question 2
There is a graph with price level on the y axis and real GDP on the x axis. The aggregate supply curve has been shifted towards the right and the aggregate demand curve remains unchanged.
The question asks "what changes to government economic policy would cause a shift of the aggregate supply curve towards the right?"

(A) Tax cuts for low income earners
-> increase in disposable income of consumers
-> increase in consumption, Aggregate Demand [AD]
-> injection into from circular flow

(B) An increase in the rate of GST to 15%
-> decrease in disposable income of consumers
-> decrease in consumption, AD
-> leakage from circular flow

(C) The new Workplace Relations "Work Choices" legislation
-> labour productivity, competition [need to decrease cost], efficiency, flexibility
-> increase in productive capacity [AS]

(D) Higher interest rates
-> Increase in the interest repayments of the average AUS debtor [+consumer]
-> Decrease in disposable income, consumption, AD


"I chose (B) as I thought that an increase in govt taxation would increase aggregate supply according to Y=C+S+T."
Y=C+I+T+M is the Keynesian AD-AS Equality!!!

hope this helps!

 

[blaze.bluetane]

Perhaps I was wrong in the first question because the persistently high net Y account constitutes more of a strain on the CAD than the BOGS does.
;P

No I think you are correct.
We are talking about a change in the TOT causing a change in the CAD, so the magnitude is sort of irrelevant. Besides, albeit smaller, the BOGS in 2007/08 was still half the net Y deficit, and years where the BOGS is positive, the CAD is much smaller. N.B. The BOGS has fluctuated significantly since the 90's.

I am having trouble getting my head around it...

Deterioration in TOT
-> Increase in price of imports relative to exports
-> Should indicate higher DD for M or less DD for X using DD/SS diagrams
-> Which increases the size of a G+S deficit, hence increasing the CAD??

No I think...

Deterioration in TOT
-> Increase in price of imports relative to exports
-> This causes a smaller qty of imports to be sold and a higher qty of exports
-> Which decreases the size of the G+S deficit, hence decreasing the CAD??

any thoughts...?

 

[Aquawhite]

If I did economics or knew what any of that was... I'd gladly help

 

[DannyT]

munchiecruncie cleared up my uncertainties, my brain wasn't thinking when I asked these but thanks for the extra input everyone.

 

[munchiecrunchie]

so if the answer was GST, it would be a shift in the D curve?

yep. GST is taxation which comes under fiscal policy, which is a macroeconomic policy - demand side. Hence it would shift the demand curve. Note that increase GST means increased taxation, a leakage and hence it would shift AD to the left.