Questionable multiple choice (1 Viewer)

[justinium]

I was just going through some past papers for economics and found these two questions that seem debatable.

1. Under a floating exchange rate, what would persistent current account deficits tend to result in?
a) A currency depreciation and rising foreign debt
b) A currency depreciation and falling foreign debt
c) A currency appreciation and rising foreign debt
d) A currency appreciation and falling foreign debt

2. Which of the following is a possible cause of cost inflation?
a) Labour skill shortages
b) Increasing productivity
c) Depreciating Australian dollar
d) A rise in the level of consumption spending

For 1. I answered A initially and the answer said C which I understand why that could be the case in re: nature of Australia's CAD... But its a theoretical question. I think it is more likely to be (C) because a persistent CAD will mostly be due to the position on the capital/financial account with inflows being greater than outflows resulting in constant demand for a country's currency and a resultant appreciation of the currency?

For 2. I answered C but the answers says A. I recon it is C because if imported capital is integral factor of production for firms and a depreciation eventuates then then cost of imports will go up, increasing costs with a shift of the supply curve inwards... leading to cost push inflation. Particularly in regard to oil imported into Australia.


Would like to hear your answers and justification... Thanks.

 

[deswa1]

I was just going through some past papers for economics and found these two questions that seem debatable.

1. Under a floating exchange rate, what would persistent current account deficits tend to result in?
a) A currency depreciation and rising foreign debt
b) A currency depreciation and falling foreign debt
c) A currency appreciation and rising foreign debt
d) A currency appreciation and falling foreign debt

2. Which of the following is a possible cause of cost inflation?
a) Labour skill shortages
b) Increasing productivity
c) Depreciating Australian dollar
d) A rise in the level of consumption spending

For 1. I answered A initially and the answer said C which I understand why that could be the case in re: nature of Australia's CAD... But its a theoretical question. I think it is more likely to be (C) because a persistent CAD will mostly be due to the position on the capital/financial account with inflows being greater than outflows resulting in constant demand for a country's currency and a resultant appreciation of the currency?

For 2. I answered C but the answers says A. I recon it is C because if imported capital is integral factor of production for firms and a depreciation eventuates then then cost of imports will go up, increasing costs with a shift of the supply curve inwards... leading to cost push inflation. Particularly in regard to oil imported into Australia.


Would like to hear your answers and justification... Thanks.

First one is A. Look at just BOGS for example. A BOGS deficit implies that we are importing more (supplying more dollars) than we are exporting (demand for dollars). Thus the currency will depreciate. Australia's situation is slightly different but generally it is accepted internationally that a current account deficit drives a financial account surplus, not vice versa so sustained CAD's will depreciate the currency. I think Riley's textbook shows this as well from memory. Obviously the increase in debt is implied.

Second one is A. Labour skill shortages increases cost of labour which is passed directly through higher prices. I can see where you're going with C as yes, a depreciating currency will lead to higher input prices and second order cost push inflation BUT generally in the HSC, you take the most correct answer and higher labour prices causes direct cost push inflation whilst a depreciating currency indirectly causes cost push inflation.

 

[justinium]

@deswa1

Yea I tend to agree with you on the second question... (the most correct answer).

With the first question, A is not the answer and I can explain why. Firstly it is referring to 'persistent CADs' and the impact of a trade deficit while resulting in a depreciating currency with the supply being greater than demand for dollars... would not be a trend attributed to a "persistent CAD" as the BOGS tends to fluctuate frequently for most countries.

The reason why the answer is C is because persistent CADs "tend" to be a result of a structural position as seen in the Capital and Financial account. For example the reason why Australia has a persistent CAD is because of our surplus in the Financial account which is the result of our Net foreign liabilities position.... We have more money being invested into Australia than we have going abroad and this is reflected in primary income part of the current account with debits being greater than credits. Because of the relationship between a persistent CAD and a structurally persistent surplus on the financial it can be concluded that there is a greater demand for dollar than there is supply. (e.g. If investment coming into Australia is greater than that going abroad than that represents demand for $A being greater than supply.) Therefore... the most correct answer is C as there will be a appreciation as a result of a persistent CAD.

 

[deswa1]

I just used BOGS to simplify where I was coming from. From a theoretical viewpoint, the financial account surplus is derived from the current account deficit (maybe not in Australia but as a general rule it it). Just looked up Riley's textbook and he says "The tendency for countries with persistent current account deficits is for their currencies to depreciate over time". If the question asked about Australia, then yes you could bring Pitchford into this and argue that the CAD is driven by a financial account surplus leading to an appreciation but from a theoretically viewpoint, a CAD implies greater supply of dollars (income outflow) than demand (income inflow), depreciating the currency. I think the answer is wrong personally from a theoretically viewpoint and possibly right from Australia's viewpoint.

 

[get_back23]

I was just going through some past papers for economics and found these two questions that seem debatable.

1. Under a floating exchange rate, what would persistent current account deficits tend to result in?
a) A currency depreciation and rising foreign debt
b) A currency depreciation and falling foreign debt
c) A currency appreciation and rising foreign debt
d) A currency appreciation and falling foreign debt

2. Which of the following is a possible cause of cost inflation?
a) Labour skill shortages
b) Increasing productivity
c) Depreciating Australian dollar
d) A rise in the level of consumption spending

For 1. I answered A initially and the answer said C which I understand why that could be the case in re: nature of Australia's CAD... But its a theoretical question. I think it is more likely to be (C) because a persistent CAD will mostly be due to the position on the capital/financial account with inflows being greater than outflows resulting in constant demand for a country's currency and a resultant appreciation of the currency?

For 2. I answered C but the answers says A. I recon it is C because if imported capital is integral factor of production for firms and a depreciation eventuates then then cost of imports will go up, increasing costs with a shift of the supply curve inwards... leading to cost push inflation. Particularly in regard to oil imported into Australia.


Would like to hear your answers and justification... Thanks.

for the CAD one, i choose c because:
-Persistent CAD is directly related to rising foreign debt so eliminate b and d
-Persistent CAD means that there are either deficit on net primary income account, or BOGS
-If it comes from net primary, then the deficit is caused by surplus foreign investment, which increases demand for dollar, thus appreciation - answer is then c
- But then if it comes from BOGS, then there is more import spending, more supply of AUD on forex, thus depreciation, answer is then a.

zz so im no help for this one lol


2. i rkn its a for sure
- u think its c, but depreciating AUD means more cost of imports only. This is called imported inflation
- labour skill shortages are domestic increase in cost, thus is called cost inflation