HSC Economics Question Thread

[RuiAce]

on the note of tariffs, how would i do this one, its different from the usual ones

Here you just need to consider what the change is.

Without the tariff: The world price is set at $10, so reading along the line P=10 we see that the amount of shirts imported is 400-100 = 300
With the tariff: The tariff moves the price up to $15, so reading along the line P=15 we see that the amount of shirts imported is 300-200 = 100

So observe, that the implementation of the tariff reduces the amount of shirts imported by 300 - 100 = 200

200 * $10 = $2000

[hermansia12]

on the note of tariffs, how would i do this one, its different from the usual ones

Just follow the same procedure;

So if the tariff increases to $15, at the demand there is only 300 demand as opposed to 400 at world price. Therefore there has been a decrease of 100 due to the tariff. -> Less sales

Then the loss of profit would = (15*300)-(400*10) = $500

[Deng]

Wait, Rui has 2000 and Hermansia has 500 ?

[RuiAce]

Wait, Rui has 2000 and Hermansia has 500 ?

Which is scaring me...

Except I dug up the paper and checked my answer with BOSTES's...
It came from 2011.

[hermansia12]

Which is scaring me...

Except I dug up the paper and checked my answer with BOSTES's...
It came from 2011.

No use Rui's answer. I made a mistake because I used my old answers from when I did this one and its wrong. Sorry about the confusion! I remember this question got my economics class arguing for the whole lesson and I haven't changed it from my old notes

You definitely multiply via the world price because its what the world would've earned on the goods- not the added tariff market price

[birdwing341]

Hello

Can someone please explain the process of a sterilised intervention in the foreign exchange market and why the sale/purchase of foreign currency needs to be offset by a purchase/sale of CGS?

[Giraffes are tall]

Awesome, thanks hermansia and Deng!

[Deng]

Can someone explain to me the importance of cash outcome, i know how the accrual and cash accounting methods work i just dont understand the purpose of it etc

[isaacdelatorre]

Hello

Can someone please explain the process of a sterilised intervention in the foreign exchange market and why the sale/purchase of foreign currency needs to be offset by a purchase/sale of CGS?

Hey there birdwing,

A sterilised intervention in the foreign exchange market is basically "dirtying the float" it is a direct intervention of the RBA who enters the forex market and buys and sells currency in order to alter the exchange rate. This requires reserve assets in other currencies in order to buy and sell AUD.
E.g. In 2008, when the AUD depreciated against the USD, the RBA purchased $3.3bn of AUD to appreciate the dollar

Although I'm not exactly sure what you mean by "why the sale/purchase of foreign currency needs to be offset by a purchase/sale of CGS?" using monetary policy is an indirect way of influencing the exchange rate. I don't think that they are meant to be used concurrently to offset each other; but I might be wrong here

Hope this helps

[birdwing341]

Hey there birdwing,

A sterilised intervention in the foreign exchange market is basically "dirtying the float" it is a direct intervention of the RBA who enters the forex market and buys and sells currency in order to alter the exchange rate. This requires reserve assets in other currencies in order to buy and sell AUD.
E.g. In 2008, when the AUD depreciated against the USD, the RBA purchased $3.3bn of AUD to appreciate the dollar

Although I'm not exactly sure what you mean by "why the sale/purchase of foreign currency needs to be offset by a purchase/sale of CGS?" using monetary policy is an indirect way of influencing the exchange rate. I don't think that they are meant to be used concurrently to offset each other; but I might be wrong here

Hope this helps

Hey Isaac,

Thanks for your reply, but I may not have been clear enough in my original post. Let me try to clarify further This is what Riley Textbook says.

Direct intervention by the RBA in the foreign exchange market has potential implications for domestic liquidity and the stance of monetary policy. Intervention by the RBA in the foreign exchange market can be ‘sterilised’ to offset its effects on domestic liquidity and interest rates, or ‘unsterilised’, with the intervention allowed to affect domestic liquidity, interest rates and the stance of monetary policy:
Sterilised foreign exchange market intervention occurs when the Reserve Bank offsets its transactions by buying or selling the equivalent amount of government securities, leaving the monetary liabilities of the Reserve Bank unchanged. For example, a sterilised sale of foreign currency involves the RBA selling foreign currency, which takes Australian dollars out of the financial system, but it then buys sufficient government securities to inject the same amount of Australian dollars back into the financial system. There is thus no change in the domestic money supply or domestic interest rates.

I'm confused about the second section, where it says 'the RBA sells foreign currency, which takes dollars out of the financial system', as I don't quite understand why that's the case I did some research and thought I understood it, but then I read over this and it didn't make sense to me.

My question, then, is why does the RBA take dollars out of the financial system when it sells foreign currency?

Sorry for the confusion (and thanks for your help)

[hermansia12]

Sterilised foreign exchange market intervention occurs when the Reserve Bank offsets its transactions by buying or selling the equivalent amount of government securities, leaving the monetary liabilities of the Reserve Bank unchanged. For example, a sterilised sale of foreign currency involves the RBA selling foreign currency, which takes Australian dollars out of the financial system, but it then buys sufficient government securities to inject the same amount of Australian dollars back into the financial system. There is thus no change in the domestic money supply or domestic interest rates.[/i]

I'm confused about the second section, where it says 'the RBA sells foreign currency, which takes dollars out of the financial system', as I don't quite understand why that's the case I did some research and thought I understood it, but then I read over this and it didn't make sense to me.

My question, then, is why does the RBA take dollars out of the financial system when it sells foreign currency?

Sorry for the confusion (and thanks for your help)

Hi Birdwing,

The RBA has a reserve of assets (such as foreign currency) which it uses in sterilized intervention. If the RBA sells its foreign currency, then the buyers will give $AU to RBA in exchange for the foreign currency. This means that the supply of $AU is reduced in the world market which is akin to taking dollars out of the financial system which will have an indirect effect on the exchange rate.. The acquired $AU can be used in its normal method of implementing monetary policy (Buying/selling gov. securities)

Hope this helps

[onepunchboy]

hey!
Can anyone help explain the concept of NAIRU to me? its still a bit confusing... I get that its the point where there are no cyclical unemployment and only structural etc... but what does it mean when unemployment is " BELOW" the NAIRU and why does a lower NAIRU increase the economys capacity to grow without increasing inflation?

[hermansia12]

hey!
Can anyone help explain the concept of NAIRU to me? its still a bit confusing... I get that its the point where there are no cyclical unemployment and only structural etc... but what does it mean when unemployment is " BELOW" the NAIRU and why does a lower NAIRU increase the economys capacity to grow without increasing inflation?

NAIRU is the non-accelerating inflation rate of unemployment, it just explains that even at full employment, there is still structural, seasonal and frictional employment (like you mentioned). This rate of unemployment is known as the natural rate of unemployment.
There is also a relationship between unemployment and inflation. If the unemployment rate is above the natural rate of unemployment (i.e unemployment has increased) then consumers will have less propensity to spend, therefore prices will go down as aggregate demand falls. This means that inflation and economic growth will fall (there is also a fall in wages as there is a lot more supply of labour but less demand). However, if the unemployment rate has improved (i.e moved below the NAIRU) then the consumers will have more to spend so aggregate demand increases and economic growth occurs. However, due to this effect inflation also grows generally as suppliers raise prices. I think your article was talking about how wages also increase if unemployment is below the NAIRU as there is a higher demand for labour but less supply (overdemand to meet increased consumer demand). Suppliers will raise wages in order to attract more employees so the wage growth will dampen domestic inflation.

Hope this helps

[onepunchboy]

thank you so much , that explanation helped alot me understand it heaps better

[birdwing341]

Hi Birdwing,

The RBA has a reserve of assets (such as foreign currency) which it uses in sterilized intervention. If the RBA sells its foreign currency, then the buyers will give $AU to RBA in exchange for the foreign currency. This means that the supply of $AU is reduced in the world market which is akin to taking dollars out of the financial system which will have an indirect effect on the exchange rate.. The acquired $AU can be used in its normal method of implementing monetary policy (Buying/selling gov. securities)

Hope this helps

Ahhhh so the taking AUD out of the world market is equivalent to taking money out of the financial system (is that just an assumption for high-school economics or does it hold true in real world as well?) That makes much more sense - was just confused about what is counted as the financial system Thanks!!