How did you go in the 2018 HSC Economics Exam? Not sure and want to double check some of your answers?

We’ve got you covered with this post outlining the answers and explanations for Sections I and II the 2018 HSC Economics Exam Paper!

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2018 HSC Economics Exam Solutions & Sample Answers

Section I (Multiple Choice) – 20 Marks

Question Solution  Explanation
1 C Labour productivity is key goal of decentralisation.
2 A The World Bank provides loans for economic development, while the  IMF provides loans for external stability. So A is corect over C.
3 A Trade agreements create trade diversions with other countries.  Therefore a free trade agreement between A and B has diverted trade  away from C, to B.
4 D A lower tax rate increases after tax profits for equity holders in a business, making them a more attractive investment. This will increase FDI inflows into a country.
5 D Buying foreign currency causes the AUD to depreciate. Decreasing the cash rate also reduces the interest rate differential and the AUD also depreciates. A depreciation is required to improve international competitiveness.
6 B Slower internet speeds are due to competing with other users for bandwidth. This is an example of rivalry as one user consuming negatively impacts another user’s ability to
7 A An increase in US interest rate will cause increased demand for USD as investors will receive a better return. This, in turn, will result in the AUD depreciating relative to the USD.
8 C Since Country A’s Lorenz Curve is initially closer to the perfect line of equality it is more equal than Country B. If Country A decreases the top marginal tax income tax rate high-income earners will pay less tax, hence reducing inequality and moving A’s Lorenz Curve closer to B’s.
9 A Australian purchase of a foreign company is recorded as a debit on the Financial account. The dividend from the company is a credit on the Current account.
10 A Under a full-time contract, based on minimum employment standards, Alex will receive 4 weeks annual leave, notice of termination, and unfair dismissal protection. Redundancy pay only occurs when you are let go by your employer due to termination without cause (e.g. your role no longer exists) and this isn’t guaranteed as it depends on the conditions of your termination.
11 D An expansionary fiscal stance involves a larger deficit or a smaller surplus. Alternatively, moving from a surplus to a deficit is also expansionary as the government spends more than it taxes. A $10BN surplus, moving to a $5BN deficit, therefore, is expansionary.
12 C The state-based system was very challenging for employers with employees in multiple states. They needed to comply with different state and federal standards. The move to a national system was around simplifying compliance for private sector companies.
13 B Government regulations such as the National Competition Policy which restrict the behaviours of firms that are monopolies are able to, therefore, increase efficiency and allow more markets to operate more freely. The key is the wording ‘can’. While MR also involves the removal of regulations (C), it doesn’t ‘require’ it (e.g. changes to the tax brackets). So, therefore, B is more correct than C.
14 C Most family businesses make small profits or losses, and the majority of workers are employed by firms, rather than running their own businesses.
15 B In Year 2, as income increases, the level of consumption is lower. Therefore the MPC is lower in Year 2. An increase in interest rates will dampen consumption and encouraging saving reducing the MPC.
16 D The TOT and TWI have improved simultaneously. This requires a strong global demand for our exports relative to our demand for imports. This will lift the TOT, while also causing AUD to appreciate.
17 B Oil prices are excluded from underlying inflation. If there is an expansion in global oil production, this reduces the cost of oil, lowering headline inflation (one-off volatile factors). While increasing the minimum wage will also increase underlying inflation (cost-push inflation), because oil prices are explicitly not included in headline inflation, B is more correct than D.
18 B The multipler is 5 in this economy. An increase of $1BN in AD will, therefore, result in an increase in YN of $5BN. At $5BN, the economy had reached the NAIRU. This doesn’t yet mean however that inflation will rise rapidly. It may in the future if there is continued economic growth. So B is more correct that D.
19 C When Country A and B form a monetary union, the overall value of the currency will be lower than Country B’s current currency value, due to A’s recession. This will mean that it will become cheaper for foreign firms to acquire assets in Country B relative to when it was not part of the monetary union.
20 C Initially, there are no imported goods. This is achieved by a quota of zero. When a tariff of $2 is implemented and the quota removed, this creates a new price of $8 in the market (WP of $6 + $2 tariff). The result is an increase in government revenue of $400 ($2 x 400-200) and decline in local producer revenue by $1400 ($3000 initially to $1600 with tariff). B is incorrect as a quota of 200 does not produce revenue for the government.

Section II (Short Answer) – 40 Marks

Question 21

a) Outline ONE cause of recent low wage growth in Australia. (2 marks)

Answers could include:

  • low inflationary expectations
  • low aggregate demand/ consumer confidence
  • declining terms of trade
  • high levels of underemployment

Sample answer:

As Australia has maintained inflation below its 2-3% target range with it currently at 1.9%, this has led to workers unable to bargain for higher wages due to the lowered inflationary expectations of the Australian economy.

b) Explain how a low unemployment rate can co-exist with a high level of underemployment. (4 marks)

Answers could include:

  • definitions of low unemployment and high underemployment
  • explanation of their co-existence

Sample answer:

The unemployment rate of an economy is the percentage of unemployed, those who do not work in any capacity but are looking for work, divided by the total labour force, those who are unemployed and employed, i.e.

Underemployment refers to workers who work part-time or casually but wish to work more hours and the rate is calculated as such:

Because of the technicalities involved, a low unemployment rate can imply that whilst there are few workers without jobs, they are not working many hours and mostly part-time or casual which therefore makes them underemployed but not unemployed. Hence this can lead to a low unemployment rate co-existing with a high underemployment rate.

c) Explain the effects of low wage growth on the Australian economy. (4 marks)

Answers could include:

  • low consumption
  • low economic growth
  • low inflation
  • reduced taxation and more welfare payments à fiscal deficit
  • low unemployment and high underemployment
  • substitution of capital for labour

Sample answer:

Low wage growth leads to low consumption as households, who predominantly earn wages, are unable to increase their consumption as they do not have the necessary funds to do so. This then further results in low aggregate demand (AD), as consumption is the largest component of AD. As a result, this reduces the level of economic growth and inflation in the economy, which as discussed earlier, will continue the cycle of low wage growth due to workers’ inability to bargain for higher wages in periods of low inflation.


Further, low wage growth will reduce the amount of income taxation revenue for the government as lower wages will mean workers are taxed at a lower marginal tax rate. In addition, low-income earners will be eligible for more welfare payments as they are provided assistance to supplement their low incomes. This could then lead to a fiscal deficit.

Question 22

a) Increased efficiency is a rationale for microeconomic reform. Define efficiency in this context. (1 mark)

Answers could include:

  • definition of efficiency

Sample answer:

Efficiency is related to productivity, which measures a production processes’ outputs given a certain level of inputs.

b) Outline why reform of a single factor market is likely to have a greater impact on the economy than reform of a single product market. (2 marks)

Answers could include:

  • distinguishing factor and product markets

Sample answer:

Reforms of factor markets include changes made with respect to factors of production such as capital, enterprise, land or labour, whilst reforms of product markets only affect finished goods or services, encompassing competition policy and trade policy. Since all products involve the use of factors of production such as labour and capital, reforms to factor markets are more impactful as they will affect multiple product markets, as opposed to simply just one specific product market.

c) Why might it be difficult to implement microeconomic reform during a period of low economic growth? (3 marks)

Answers could include:

  • long implementation and impact lag
  • structural unemployment
  • need for increased government expenditure

Sample answer:

Microeconomic reform requires a long term focus as it has a long implementation lag of several years and an even longer impact lag that could span decades. As a result, it would be ineffective in responding to short to medium term fluctuations of the business cycle, namely recessive low economic growth.

Further, microeconomic reform will leads to structural unemployment when it is implemented as workers are reallocated from inefficient industries into more efficient industries. This would increase the unemployment rate in the short run and further worsen the issue of low economic growth, hence making microeconomic reform difficult to implement.

d) Explain how labour market reforms can help government achieve the objectives of full employment and price stability in the long term. (4 marks)

Answers could include:

  • examples of labour market reforms – enterprise bargaining, retraining programs, education, efficiency of employment services
  • Long Run Phillips Curve and the NAIRU

Sample answer:

Labour market reforms include the decentralisation of wage determination through the introduction of enterprise bargaining where groups of employees are able to bargain and negotiate for higher wages based on their productivity, hence encouraging workers to gain more skills from education and training to then earn more. Furthermore, retraining programs can provide structurally unemployed workers with the necessary skills and experience to find a new job. In both cases these reforms reduce structural unemployment. To address frictional unemployment, labour market reforms can improve the efficiency of employment services, thus allowing workers a more effective process of finding new employment.


Together these policies will reduce frictional and structural unemployment, the central components of the NAIRU and hence by reducing the NAIRU, there is a long term drop in inflation, whilst ensuring full employment.

Question 23

a) Explain ONE cost and ONE benefit of globalisation. (4 marks)

Answers could include:

  • costs of globalisation – environmental degradation, increased risk of financial contagion, increasing income inequality between advanced and developing nations
  • benefits of globalisation – reduction in global poverty, increased global output, trade liberalisation, financial market liberalisation, the spread of technology, improvement in HDI

Sample answer:

Globalisation has come at a cost of increased environmental degradation. This is exemplified by the heavy use of both renewable and non-renewable resources, especially in poorer nations looking to attract foreign investment and increase their export flows. As a result, deforestation and carbon pollution has increased due to the presence of manufacturing industries who are intensive users of fossil fuel burning to meet their energy needs. These greenhouse emissions have resulted in global warming and resultant climate change.


However, globalisation has also lead to a reduction in global poverty, partly due to the increased attention and strategic direction in reducing global poverty by international organisations such as the United Nations and World Bank. As globalisation has led to trade liberalisation, the breakdown of protection policies, developing nations are now able to export more readily. With labour being a derived demand, this then allows workers in developing nations to earn higher wages and therefore lift themselves from poverty.

b) Explain how Australia has contributed to the process of globalisation. (6 marks)

Answers could include:

  • increased trade flows through trade liberalisation and signing free trade agreements
  • increased financial flows through deregulation
    • receiving foreign investment and establishment of TNCs
  • international division of labour, migration
  • increased technology, transport and communication

Sample answer:

Australia’s contribution to globalisation is exemplified in its increased trade flows. This has been promoted through Australia’s reduction in protection, notably reductions in manufacturing tariffs to 5% by 1996 and abolition of quotas and reduction in PMV tariffs to 15% by 2000. Furthermore, Australia has increasingly liberalised its trade by signing free trade agreements such as with China (ChAFTA) and with the United States (AUSFTA) as well as participating in multilateral trade agreements through the World Trade Organisation (WTO). This has led to an increase in imports in Australia, hence demonstrating globalisation through increased trade flows.


Australia has also contributed to globalisation through increasing its financial flows, highlighted by its decision to deregulate the financial system in 1983, where it floated its exchange rate and allowed foreign banks to enter into the Australian financial market. Further, by allowing banks to determine their own interest rates, this allowed the Australian financial market to become more competitive and efficient, hence facilitating its integration with foreign financial markets. This has increased the ability for financial flows, including both foreign direct investment and portfolio investment, to move in and out of Australia, hence indicative of globalisation.

Question 24

a) Calculate the unemployment rate in 2016. (2 marks)

Sample answer:

b) Calculate the rate of growth in real GDP from 2016 to 2017. (2 marks)

Sample answer:

c) Explain the relationship between net foreign debt and net foreign liabilities. (2 marks)

Answers could include:

  • outline of net foreign debt and net foreign liabilities
  • explanation of their relationship

Sample answer:

Net foreign liabilities are calculated using:

Hence, as net foreign debt, a component of net foreign liabilities, increases so do net foreign liabilities, ceteris paribus. This means the country is borrowing more from overseas and hence they increase their repayment commitments, indicated by their net liabilities.

d) Justify why the economy in the table is likely to have experienced a depreciation of its exchange rate between 2016 and 2017. (4 marks)

Answers could include:

  • Rise in inflation
  • Loss of international competitiveness
  • Higher net foreign debt
  • Lower net foreign equity

Sample answer:

The most likely reason that the economy experienced depreciation from 2016 to 2017 is their rising CPI from 100 to 105, indicative of increasing inflation. With higher inflation, domestic exporting firms would have become less internationally competitive due to rising production costs either through wages or capital costs. This is exemplified in the 100,000 increase of part-time employees whilst full time employees decreased by 80,000, as firms responded to inflated production costs by under employing staff or making them redundant, as seen in the 100,000 extra unemployed. The reduced international competitiveness therefore reduced demand for the economy’s exports, hence reducing demand for their currency, thereby depreciating it.


In addition, despite net foreign liabilities remaining constant, net foreign debt increased by $100 billion, which would have increased the amount of interest repayments made to foreign lenders. Repayments would have further increased from the higher domestic inflation rate leading to higher nominal domestic interest rates according to the Fisher equation. As more repayments were made, these represented an outflow of funds and hence would have increased supply for their currency, thereby depreciating it.


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Terry Huang completed his Bachelor of Secondary Education with a Bachelor of Commerce at the University of New South Wales. A strong believer that lessons should be engaging, relevant, and effective, his hustle and teaching approach have led to his recognition on the UNSW Faculty of Social Sciences Dean’s List for Academic Excellence, the NSW Teachers Federation Future Teacher scholarship, and the New Colombo Plan program. Terry enjoys listening to Kanye West, learning about cryptocurrency and memorising scenes from The Office.