NCEA Level 3 Economics 91403 Macro free practice questions with answers

Question 1 (15 marks) [External influences on the economy]

(a) The table shows price indexes for New Zealand’s exports and imports (illustrative figures). Then world oil prices rise, raising the price of imported fuel and goods: the import price index rises by 6%. Calculate the terms of trade index (export prices ÷ import prices × 100) before and after, and the percentage change in the terms of trade. State whether the terms of trade have improved or deteriorated.

(a) Answer: Terms of trade 104 → 98.1 (−5.7%): deteriorated

• Evidence level: Merit (calculates both indexes and the percentage change).

• Before: 1,040 ÷ 1,000 × 100 = 104.

• After: the import index becomes 1,000 × 1.06 = 1,060, so the terms of trade = 1,040 ÷ 1,060 × 100 = 98.1.

• Percentage change = (98.1 − 104) ÷ 104 × 100 = −5.7%: the terms of trade have deteriorated.

(b) Explain how this change in the terms of trade would affect New Zealand’s real national income, the current account and the goals of economic growth and price stability. Use your calculation in your answer.

(b) Answer: Terms of trade deteriorate: income, AD and the current account move down; exchange rate offsets over time

• Evidence level: Excellence (links the terms of trade to income, AD, the exchange rate and two goals).

• Achievement: The terms of trade deteriorate (import prices rise, so New Zealand has to pay more for the goods it buys), so real national income falls and the current account worsens.

• Merit: The terms of trade deteriorate (import prices rise, so New Zealand has to pay more for the goods it buys), so real national income falls and the current account worsens. The terms of trade fell by 5.7%, so incomes (Y) and spending (C) fall, shifting aggregate demand left and lowering real GDP and employment.

• Excellence: The terms of trade deteriorate (import prices rise, so New Zealand has to pay more for the goods it buys), so real national income falls and the current account worsens. The terms of trade fell by 5.7%, so incomes (Y) and spending (C) fall, shifting aggregate demand left and lowering real GDP and employment. Lower demand reduces demand for the New Zealand dollar, so the exchange rate falls: exports become cheaper overseas and imports dearer, which offsets part of the damage to the current account over time, but dearer imports raise the price level. A fall in output together with rising import prices makes the goals of growth and price stability conflict.

(c) New Zealand’s real GDP (Y) is below the full-employment level of real GDP (Yf), so there is a recessionary gap, as shown on Graph One. Then a recession in China and Australia reduces demand for New Zealand exports. On Graph One, show the effect on the economy: draw the new curve (label it AD₂), label the new real GDP (Y₂) and price level (PL₂), and label the change in the recessionary gap. State what happens to the size of the recessionary gap. Price level Real GDP AD AS Yf Y PL Graph One: The New Zealand economy with a recessionary gap

(c) Answer: AD shifts left; Y₂ < Y₁; the recessionary gap widens

• Evidence level: Achieved (shifts AD the correct way and labels the new equilibrium and the gap).