DPECO 2025 Kohler Report Week 9 (20/3 - 26-3)

US Federal Reserve kept interest rates on hold but confirmed expectations of two more rate cuts this year, causing US stock markets to rise and the Australian dollar to depreciate. Why would expectations of lower US interest rates lead to a weaker Australian dollar?

• Lower US interest rates make US financial assets less attractive, reducing capital inflows, weakening the US dollar, and affecting the Australian dollar.

• The Australian dollar depreciates when US rates fall, as lower borrowing costs in the US increase demand for US exports and strengthen the US dollar.

• If US interest rates fall, foreign investors shift capital to the US, leading to increased demand for the US dollar and depreciation of the Australian dollar.

• A weaker US dollar leads to depreciation of the Australian dollar, as lower US interest rates reduce global demand for all currencies.

Reserve Bank of Australia (RBA) is expected to be more cautious about interest rate cuts compared to the US Federal Reserve, as shown in the interest rate change trajectory graph. What impact could this policy divergence have on capital flows between Australia and the US?

• Higher interest rates in Australia cause domestic inflation to decrease, leading to lower demand for Australian exports and a depreciation of the currency.

• If Australian interest rates remain higher than US rates, investors may prefer Australian assets, leading to increased capital inflows and supporting the Australian dollar.

• As US interest rates fall, foreign investors shift capital to the US, decreasing demand for Australian financial assets and weakening the exchange rate.

• Interest rate differences only affect domestic investment decisions, with no impact on international capital flows or exchange rate stability.

Australian Capital Territory (ACT) has the highest ratio of workers to the entire population, 5 percentage points above the national average. What might explain this higher labor force participation rate in the ACT?

• Public sector jobs offer higher wages than private sector jobs, leading to greater productivity and overall employment in the ACT.

• The ACT has a younger population than other states, with fewer retirees, increasing the proportion of working-age individuals in the labor force.

• The higher employment rate in the ACT is due to its smaller population size, which makes fluctuations in labor market data more pronounced.

• A high concentration of government jobs provides stable employment, attracting a larger working-age population and increasing labor force participation.

Coles, Woolworths, and ALDI have increased their profit margins over the past five years, meaning they are making more profit per dollar of revenue. Given this, what does the increase in profit margins suggest about the level of competition in the Australian supermarket industry?

• Growing profit margins show that the cost of supplying groceries has fallen, allowing supermarkets to pass on savings to consumers while still increasing profits.

• Rising profit margins indicate that supermarkets have achieved greater economies of scale, allowing them to lower prices and increase consumer welfare.

• Increased profit margins mean that competition has intensified, forcing firms to innovate and reduce costs, leading to higher profits.

• A) Higher profit margins suggest that supermarkets have market power, allowing them to raise prices without losing significant customers.

Grocery prices have risen by almost 25% in the past five years, while wages have not kept pace, disproportionately affecting low-income households. What economic concept best explains why rising grocery prices impact lower-income individuals more than higher-income individuals?

• Rising grocery prices increase disposable income for low-income earners, as they now spend a larger portion of their wages on necessities rather than luxury goods.

• Higher grocery prices lead to greater consumer surplus for low-income households, as they are forced to buy cheaper alternatives and substitute away from expensive items.

• The proportion of income spent on essential goods such as groceries is higher for low-income earners, meaning they experience a greater reduction in real income when prices rise.

• Grocery price increases do not affect income distribution, as wages and prices adjust automatically in the long run to maintain purchasing power.

Australia’s supermarket industry is highly profitable by international standards, partly due to high barriers to entry, such as land acquisition, supplier access, and distribution networks. How do high barriers to entry contribute to sustained profitability for existing supermarkets?

• Barriers to entry encourage foreign supermarkets to enter the Australian market, increasing competition and lowering prices for consumers.

• High barriers to entry limit competition, reducing the likelihood of new entrants disrupting market power and allowing existing firms to maintain high profit margins.

• Higher barriers to entry mean firms must operate under perfect competition, forcing them to charge lower prices and accept normal profits.

• Barriers to entry ensure that supermarket prices remain low, as firms use their dominant position to maximize consumer welfare rather than profits.

James Hardie’s share price fell 14.5% after announcing its $14 billion acquisition of an American timber company. Why might investors be skeptical about large international takeovers, particularly in the US market?

• Investors prefer companies to focus on cost-cutting rather than expansion, as acquisitions always reduce shareholder value.

• Large international acquisitions increase financial risk and uncertainty, as firms take on higher debt and face potential regulatory and market challenges.

• Takeovers always lead to higher corporate taxes, reducing profitability and making foreign acquisitions less attractive.

• Firms expanding into the US market automatically gain a competitive advantage, ensuring profitability regardless of economic conditions.

Tesla’s share price has fallen 40%, while Chinese EV producer BYD’s share price has increased 60%, due to rising competition in the global electric vehicle market. What economic factors might explain BYD’s growing competitive advantage over Tesla?

• BYD’s rising share price means it has achieved a monopoly, eliminating competition and ensuring long-term profitability in the EV market.

• Tesla’s declining share price proves that demand for electric vehicles is falling globally, reducing profitability for all firms in the industry.

• Chinese EV manufacturers benefit from economies of scale and government subsidies, allowing them to sell vehicles at lower prices than Tesla.

• Tesla’s losses are due to exchange rate fluctuations, which have made American-produced electric vehicles uncompetitive in global markets.

Commodity markets struggled due to ongoing concerns about tariffs and trade wars. How do tariffs and trade disputes typically impact global commodity prices?

• Higher tariffs lead to higher consumer confidence, as domestic industries are protected from international competition, increasing demand for commodities.

• Trade wars have no effect on commodity markets, as global resource prices are determined by production costs rather than trade policies.

• Tariffs on key exports reduce demand, lowering commodity prices as global trade slows and supply chains are disrupted.

• When tariffs are imposed, global demand for commodities increases, as governments stockpile resources to offset higher future costs.

Annual inflation slowed from 2.5% in January to 2.4% in February, falling below the Reserve Bank of Australia's (RBA) target range midpoint of 2.5%. If this trend continues, what would be the most likely monetary policy response by the RBA?

• ) The RBA will likely increase interest rates, as lower inflation means consumer demand is strong, requiring tighter monetary policy.

• The RBA should reduce government spending, as inflation falling below 2.5% suggests excessive fiscal expansion.

• The RBA may consider cutting interest rates to support economic growth, as inflation is falling within the target range.

• The RBA will take no action, as inflation below the midpoint is not a concern unless it falls below the 2% lower bound.