DPECO 2025 Kohler Report T2W3 (1/5 - 6/5)

The Aussie dollar has recently risen to its highest level for the year, but this is largely due to a weaker US dollar as investors “continue to pull cash out of America.” Which of the following best explains this phenomenon using exchange rate theory?

• Capital outflows from the US reduce demand for the US dollar on foreign exchange markets, leading to depreciation of the US dollar and relative appreciation of the Australian dollar.

• Rising US tariffs lead directly to higher US interest rates, which attracts more capital inflow, strengthening the Australian dollar in the process.

• An increase in American exports automatically weakens the US dollar, resulting in higher global demand for the Australian dollar.

• A depreciation of the US dollar has no effect on the value of the Australian dollar unless accompanied by a change in Australia’s inflation rate.

Tesla's April sales in Australia fell by 76%, while BYD's increased by 127%, yet petrol-powered SUVs still dominate top sales. What economic concept best explains consumer preference in this context?

• Consumers may perceive electric vehicles as having a higher opportunity cost or lower utility relative to petrol SUVs, reflecting changing marginal benefit.

• The fall in Tesla’s sales is a direct result of higher income taxes, reducing the availability of subsidies for petrol vehicles.

• BYD’s increase in sales implies that monopolistic competition reduces consumer choice and prevents product differentiation in the automotive market.

• Tesla’s sales are falling because the price elasticity of demand for all electric vehicles is perfectly inelastic in the short term.

Markets have rebounded significantly (13% on Wall Street, 11% in Australia) despite the fact that tariffs have not yet taken full effect and no trade talks are underway. What might explain this apparent disconnection between policy fundamentals and investor behaviour?

• Rising tariffs increase long-run productivity, which is quickly capitalised into stock prices, improving investor sentiment.

• Investor optimism may be driven by speculative expectations, leading to overvaluation of equities despite unresolved trade policy risks.

• Investors respond only to central bank interest rate changes, so trade policy does not significantly affect short-run stock market trends.

• Markets always rise when there is policy uncertainty, because firms increase their supply in anticipation of future demand growth.

The price of oil fell 3% after OPEC+ increased production despite signs of weakening global demand. Based on this, which economic principle best explains the drop in oil prices?

• Oil prices always fall when the global economy is in recession, regardless of changes in production.

• An increase in oil production signals higher long-run marginal costs, which reduces efficiency and forces prices down.

• Demand for oil is perfectly inelastic in the short run, so changes in supply have no significant impact on price.

• A supply increase in the face of unchanged or falling demand puts downward pressure on prices due to excess supply.

Trump’s proposed 100% tariff on foreign-produced films, including those made in Australia, is intended to protect domestic film production. Which of the following best evaluates this policy using IB trade theory?

• A tariff on film imports raises government tax revenue without impacting consumer welfare or industry competition.

• Imposing tariffs on imported films protects domestic producers but may reduce efficiency and provoke retaliatory trade measures.

• Tariffs are necessary when a country has absolute advantage in a sector, as they help preserve cultural identity and national values.

• This policy will automatically reduce Australia’s terms of trade by making all of its exports less competitive in the global market.

Despite a strong Labor election win and improved political stability, the ASX All Ordinaries index fell 1%—in part due to Westpac’s profit decline and falling oil prices. What explains why the market reacted negatively?

• Markets react positively only to changes in monetary policy, so political elections have no measurable effect on stock prices.

• Political certainty reduces risk premiums, so the decline must be due to irrational investor behaviour and not economic fundamentals.

• A fall in bank profits leads directly to inflation, which decreases investor willingness to hold financial assets.

• Investors respond not just to political outcomes but also to firm-level performance and global commodity trends, which may outweigh domestic political stability.

Building material prices fell for the first time since 2012, especially timber and steel, due to reduced demand. How does this information relate to broader inflationary trends?

• A drop in material costs automatically causes monetary expansion, as central banks lower interest rates to support housing markets.

• Reduced demand always leads to demand-pull inflation, so central banks must increase interest rates to counteract housing speculation.

• Falling input prices reduce production costs, which can ease inflationary pressure and support the Reserve Bank’s target range for CPI.

• Falling material prices are unrelated to overall inflation, which is only influenced by consumer goods, not producer inputs.

Apple expects to lose A$1.4 billion in a quarter due to new tariffs, despite earning A$56 billion in the last quarter. From an IB Economics perspective, what does this suggest about the impact of tariffs on large multinational firms?

• Apple’s high profits eliminate any risk from trade barriers, so tariffs have no effect on firm-level or macroeconomic outcomes.

• Tariffs reduce a firm’s fixed costs, but raise variable costs, leading to higher productivity and long-term efficiency gains.

• While tariffs increase production costs, large multinationals can often absorb short-term losses due to high profit margins and scale.

• Tariffs primarily hurt domestic monopolies, so Apple’s losses suggest it is no longer a competitive firm in global markets.

Despite global economic uncertainty and trade slowdowns, more than 5 billion people are expected to fly this year. Yet, Corporate Travel Management downgraded its earnings forecast. How might this contradiction be explained?

• An increase in global travel automatically reduces profits for airlines, as it leads to excess competition and falling prices.

• Rising passenger numbers indicate that trade has recovered fully, so corporate travel firms should have increased earnings.

• Travel firms experience declining demand during global booms due to the higher opportunity cost of leisure spending.

• Business and leisure travel respond differently to economic cycles; leisure travel may continue growing even as business travel slows.

US firms increased their imports ahead of Trump’s tariff implementation, leading to a short-term increase in overseas spending, followed by a shrinking economy. What economic explanation best fits this behaviour?

• Higher imports always reduce GDP directly, regardless of business investment or government spending trends.

• Imports are counted as government expenditure, so when firms import more, public debt rises and slows growth.

• Firms accelerated purchases to avoid higher input costs, temporarily increasing imports and aggregate demand before contraction due to tariff effects.

• Trade restrictions boost productivity immediately, but they raise structural unemployment, which explains the GDP contraction.