DPECO 2025 Kohler Report T2W4 (8/5 - 14/5)

Wage growth was 3.4% annually, slightly higher than economists expected but in line with the RBA’s forecasts. Real wages have also turned positive. Based on this, which of the following is the best explanation for the RBA’s decision to proceed with a rate cut?

• Since inflation expectations are stable and real wages are no longer falling, a rate cut can support employment without risking demand-pull inflation.

• Wage growth above expectations always leads to increased cost-push inflation, so the RBA must raise interest rates to prevent overheating.

• ) A rate cut is necessary because higher wages reduce consumption, which dampens aggregate demand and causes deflation.

• he return to positive real wages suggests that inflation is accelerating and monetary policy must remain contractionary.

Trump’s reversal on tariffs, has reduced the average US import tax from around 30% to 14%. What is the most likely economic impact of this policy reversal?

• It will immediately improve terms of trade for developing countries by reducing non-tariff barriers on manufactured exports

• A lower average tariff causes currency appreciation, reducing competitiveness of domestic producers in all sectors.

• It reduces uncertainty in global trade, which may improve investor confidence and reduce the likelihood of recession.

• Since 14% is still above the WTO average, trade volumes are unlikely to recover, and long-run growth will fall.

Average real wages are above zero “for the first time in a couple of years.” What is the most accurate implication of this for households and economic policy?

• Positive real wage growth supports household purchasing power, potentially increasing consumption and shifting AD rightward.

• Real wages above zero guarantee price stability, so monetary policy must now become contractionary to avoid overheating.

• Rising real wages cause higher net exports by reducing inflation and increasing competitiveness in foreign markets.

• Real wage growth is unrelated to policy outcomes because nominal wages determine household well-being in the short run.

The misery index (inflation + unemployment) is currently below average. What is the most accurate interpretation of this indicator in relation to Australia’s current macroeconomic performance?

• A low misery index reflects an improved economic situation, as inflation has fallen without a corresponding rise in unemployment

• A low misery index always indicates a trade deficit, since lower unemployment leads to greater imports.

• A declining misery index suggests fiscal policy should tighten to avoid overheating the economy.

• Since inflation and unemployment are both falling, it signals falling aggregate demand and impending deflation.

The global share market has recovered nearly 90% of the losses triggered by the announcement of tariffs on Canada, Mexico, and China. Which of the following best explains why markets might rally despite high tariffs still being in place?

• Tariffs on imports automatically boost global stock markets by increasing corporate profits through reduced competition.

• Investors expect tariff revenues to be redistributed via government subsidies, increasing consumption and investment.

• A high average tariff of 30% increases global terms of trade, which explains the strong rebound in equity markets.

• Financial markets often respond to expectations and sentiment, so the easing of uncertainty can drive rallies even when trade barriers remain.

The Aussie dollar rose above 64 US cents, alongside increases in iron ore and oil prices. What is the most likely economic link between these two developments?

• A stronger currency causes higher import prices, which explains why iron ore and oil prices increased simultaneously.

• Australia’s currency often appreciates when commodity export prices rise, as foreign demand for Australian dollars increases to pay for exports.

• Currency appreciation always reduces net exports, regardless of changes in commodity markets or terms of trade.

• Oil and iron ore are not significant in determining the value of the Australian dollar, which depends mostly on consumer sentiment.

The new US–UK trade deal is described as having minimal benefits, and Australia is not expected to gain much. Based on IB trade theory, what is the most accurate explanation for this limited impact?

• The agreement reduces transaction costs, which automatically leads to long-term dynamic gains in GDP for all countries involved.

• Since the US and UK are both large economies, any agreement between them guarantees absolute gains for small open economies like Australia.

• The deal is likely focused on marginal sectors or symbolic cooperation, offering few efficiency gains through comparative advantage.

• Tariff reductions always increase trade volumes proportionally, so Australia should expect large spillover benefits from the deal.

Crude oil prices have fallen by almost 25% over the past year. Which of the following is the most likely short-run macroeconomic effect of this trend for a net oil-importing country like Australia?

• A fall in oil prices always leads to a depreciation of the domestic currency due to worsening terms of trade.

• Cheaper oil raises the general price level by increasing consumer demand, leading to imported inflation.

• Reduced oil prices decrease export revenues and reduce national income through negative multiplier effects.

• Falling oil prices reduce production costs, which may shift the short-run aggregate supply curve to the right and reduce inflationary pressure.

The Australian dollar rose slightly against the US dollar following global interest rate developments and news from the UK and Norway. What is the most plausible explanation for this movement?

• The increase in the AUD suggests a worsening trade balance as Australians import more luxury goods.

• The rise in the exchange rate was driven by tariffs, which increase domestic demand for foreign currency.

• Currency appreciation is only determined by changes in foreign direct investment, not interest rates or speculation.

• Market participants may anticipate relatively higher interest rate returns in Australia, increasing demand for the Australian dollar.

Australia's dwelling approvals are at their lowest in 13 years, despite population growth. What is the most likely macroeconomic implication of this trend?

• Falling housing approvals indicate higher productivity, allowing the economy to grow without inflation.

• Reduced approvals mean lower consumption and higher imports, causing a balance of payments deficit.

• A fall in dwelling approvals increases the government’s capital expenditure and raises employment.

• Persistent housing undersupply could constrain long-run aggregate supply and increase long-term price pressures.