External Stability

Which of the following options are the key measures of external stability?

• Foreign debt as a % of GDP, fiscal balance as a % of GDP and the exchange rate.

• International competitiveness, exchange rate and the trade weighted Index.

•  Current account balance as a % of GDP, net foreign liabilities as a % of GDP and the

  exchange rate.

• Net foreign equity as a % of GDP, fiscal balance as a % of GDP and the terms of

  trade.

Which of the following can be a positive impact on Australia’s external stability?

• The trade war between the USA and China

• Deterioration in Australia’s terms of trade

•  Higher level of economic growth and/or aggregate demand in the Australian economy

•  Increase in Gross World Product (GWP)

Multiple choice activity

Which of the following factors has mainly contributed to improvements in the current account

surplus balance in 2019?

• A steady appreciation in the value of the Australian dollar

• A reduction in the price volatility in the global commodities market

• A surge in exports boosted by both higher export prices and volumes in commodities such as

  coal and iron ore

• A surge in imports boosted by higher rates of economic growth in Australia’s domestic

  economy

Which of the following components of the current account is traditionally the largest contributor

to Australia’s CAD and negatively impacting on external stability?

• Goods

• Services

• Secondary Income

• Primary Income

Which of the following could lead to a deterioration in the structural component of Australia’s

current account deficit?

• An increase in net foreign liabilities.

• A decrease in portfolio investment by foreign firms.

• A decrease in export volumes due to a weakening global economy.

• An increase in imports resulting from an improvement in the terms of trade.

There is a downturn in the economy of a major importer of Australian goods and services.

Which of the following is most likely to occur?

• A depreciation of the Australian dollar

• An appreciation of the Australian dollar

• A revaluation of the importer’s currency

• A devaluation of the importer’s currency

A government has changed the method of financing its budget deficit. Instead of borrowing from

the domestic private sector, it will now borrow from overseas.

All other things being equal, what is the most likely impact of this change on the domestic

economy?

• The foreign debt will decrease.

• The budget deficit will decrease.

• Current account deficit will increase.

• Domestic borrowing costs will increase.

Which of the following government economic policies is most likely to improve Australia’s

external stability?

• Expansionary fiscal policy

• Expansionary monetary policy

• Increased regulations in the labour market

• Microeconomic reform towards increasing productivity

Examine the following table depicting the value of the $A against the $US:

YR USD AUD

1 1.00 0.68

2 1.00 0.84

Which of the following is the most likely impact on Australia’s external stability as a result of the

change in the value in the Australian dollar relative to the US dollar above?

• The debt servicing costs would fall improving Australia’s external stability.

• Exports revenue would increase improving Australia’s external stability.

• The debt servicing costs would increase worsening Australia’s external stability.

• Foreign investment in Australia would increase and improve Australia’s external stability.