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VICEconomics2025

VCE Economics 2025

Walkthrough of the 2025 VCE Economics exam: all 15 multiple-choice answers with reasons, a mark-by-mark map of Section B with the report's averages, worked answers on direct provision, price elasticity of supply, full employment, terms of trade, the budget deficit and AD policies, and the errors VCAA flagged.

Marks
80
Time
120 min
Authority
VCAA
Updated
Open the official PDF Official marking notes

A walkthrough of the 2025 VCE Economics examination. It gives the answer and a short reason for all 15 multiple-choice questions, maps every Section B question with its marks, topic and the average mark from the VCAA report, and works through six of the harder written questions: public goods and direct provision, price elasticity of supply, full employment, the terms of trade, the budget outcome and the strengths and weaknesses of aggregate demand policies.

How to use this page

  • Questions are from the 2025 VCE Economics examination, copyright Victorian Curriculum and Assessment Authority (VCAA), listed on the VCAA Economics examinations page. Each question is summarised here in our own words; open the official examination PDF for the full wording, the coffee bean graph, the terms of trade data and the RBA extract.
  • Answers and guidance are our own responses, written to the marking guidance in the 2025 Economics external assessment report (Word document). They are not copies of the report's sample answers. Multiple-choice answers match the report's key, and the percentage in brackets is the share of students who chose the correct option.
  • Study design. This paper was set on the current VCE Economics study design (2023 to 2027), so every question is examinable. Several Section B questions ask about "the past two years" or the 2025-26 Budget: when you practise, use the most recent data you have, but learn the reasoning shown here.

Structure and timing

The paper is 80 marks in 2 hours of writing time, plus 15 minutes reading time, with a scientific calculator allowed.

  • Section A (15 marks): 15 multiple-choice questions, one mark each.
  • Section B (65 marks): 7 compulsory written-response questions of 5, 6, 14, 12, 7, 12 and 9 marks, each split into parts worth 2 to 6 marks.

That is 1.5 minutes per mark. A sensible plan: about 15 minutes on Section A, then about 98 minutes on Section B at 1.5 minutes per mark (3 minutes for a 2-mark part, 4 to 5 minutes for a 3-mark part, 6 minutes for a 4-mark part, 7 to 8 minutes for a 5-mark part and 9 minutes for a 6-mark part), leaving about 7 minutes to check that each answer hits its command term. Use reading time on the Section B stimulus (coffee graph, terms of trade figures, budget deficit estimate and RBA statement) and decide which current data you will quote.

Section A: Multiple choice

Q1
What economics is mainly about. Answer: B - how to satisfy unlimited human wants with limited productive resources (the basic economic problem of relative scarcity). (92%)
Q2
When allocative efficiency occurs. Answer: D - when market forces allocate resources so that economic welfare is maximised. A describes intertemporal efficiency and B describes technical efficiency. (79%)
Q3
What makes price elasticity of demand greater. Answer: A - more substitutes make consumers more responsive to a price change. A small share of income (C) and necessity (D) make demand less elastic. (75%)
Q4
A supply curve for computers with price rising from P1 to P2. Answer: B - the move is along the supply curve, so the supply curve has not shifted and the cause must be an increase in demand. D would shift supply itself. (64%; 29% chose D.)
Q5
Employed 200 000 of a labour force of 300 000 in 2023; 400 000 of 500 000 in 2024. Answer: B - unemployment rate =100300≈33.3%= \tfrac{100}{300} \approx 33.3\% in 2023 and 100500=20%\tfrac{100}{500} = 20\% in 2024, so it fell. (68%)
Q6
Which is not an aggregate supply factor. Answer: D - slower overseas growth reduces demand for exports, an aggregate demand factor. Oil prices, supply chain disruption and technology all affect costs or productive capacity. (65%; 26% chose A.)
Q7
A regressive tax. Answer: B - it takes a larger proportion of income from low-income earners than from high-income earners. (77%)
Q8
An example of an automatic stabiliser. Answer: C - company tax receipts rising because the economy is growing faster happen without any government decision. A and D are discretionary, and B is monetary policy. (80%)
Q9
The RBA raising interest rates while the government cuts spending. Answer: C - both are contractionary, so aggregate demand falls, easing inflation but raising unemployment. (63%; 21% chose A.)
Q10
Raising aggregate demand when the economy is close to capacity. Answer: D - "close to" capacity means there is still some slack, so output, employment and prices can all rise. (52%; 20% chose A and 19% chose C.)
Q11
What would most likely appreciate the Australian dollar. Answer: D - higher Australian interest rates relative to other countries attract capital inflow and raise demand for the dollar. The other three would tend to depreciate it. (80%)
Q12
The role of speculators in the exchange rate. Answer: A - they buy or sell currency according to expected future movements. (76%)
Q13
What net foreign debt is. Answer: C - borrowings Australia owes to foreign lenders less what Australia has lent overseas. A describes foreign equity, not debt. (93%)
Q14
Import price index 100 and export price index 200. Answer: A - TOT=XPIMPI×100=200100×100=200\text{TOT} = \tfrac{\text{XPI}}{\text{MPI}} \times 100 = \tfrac{200}{100} \times 100 = 200. (43%; 32% chose B, forgetting to multiply by 100, and 17% chose C.)
Q15
Effect of lower tariffs on imports. Answer: D - import prices fall and the quantity of imports rises. (90%)

What this paper assessed

Averages are from the VCAA report's mark distribution tables.

Question 1 (5 marks): market failure and public goods

  • 1a (2 marks) Outline the characteristics of public goods. Average 1.4 of 2.
  • 1b (3 marks) Using an example, explain why government direct provision may address market failure. Average 1.4 of 3.

Question 2 (6 marks): the global coffee bean market

  • 2a (3 marks) Explain the move from E1 to E2 on the graph (demand up, supply down; price rises from 100 to 250 USD and quantity falls from Q1 to Q2) using two non-price factors. Average 2.0 of 3.
  • 2b (3 marks) Explain why the price elasticity of supply for coffee beans is likely to change over time. Average 1.3 of 3.

Question 3 (14 marks): domestic macroeconomic goals

  • 3a (2 marks) Outline what "strong and sustainable" means for the economic growth goal. Average 1.5 of 2.
  • 3b (3 marks) Explain why imports are subtracted in AD=C+I+G+X−MAD = C + I + G + X - M. Average 1.7 of 3.
  • 3c (3 marks) Examine, with reference to cost inflation, how the 2025 cyclones and floods affected the goal of low and stable inflation. Average 2.2 of 3.
  • 3d (6 marks) Evaluate how far full employment was achieved over the past two years and the impact on living standards. Average 3.3 of 6.

Question 4 (12 marks): terms of trade and protection

  • 4a (2 marks) Define "terms of trade". Average 1.3 of 2.
  • 4b (2 marks) Outline one factor that could explain the rise in the index from 89.4 (September quarter 2024) to 91.0 (December quarter 2024). Average 1.0 of 2.
  • 4c (3 marks) Explain one effect of that change on low and stable inflation. Average 1.3 of 3.
  • 4d (5 marks) Analyse one short-term and one long-term effect on Australian resource allocation of the United States reintroducing tariffs on Australian exports. Average 2.4 of 5.

Question 5 (7 marks): monetary policy

  • 5a (2 marks) Outline one weakness of monetary policy, other than being a "blunt instrument", in achieving strong and sustainable growth. Average 1.2 of 2.
  • 5b (5 marks) Analyse the RBA's stance over the past two years and its effect on full employment and living standards. Average 3.0 of 5.

Question 6 (12 marks): budgetary policy and AD policies

  • 6a (2 marks) Describe one reason the actual 2025-26 deficit may be smaller than the estimated 42.1 billion dollars. Average 0.9 of 2, the lowest average mark of any part.
  • 6b (4 marks) Predict how one discretionary stabiliser in the 2025-26 Budget is likely to affect strong and sustainable growth. Average 2.5 of 4.
  • 6c (6 marks) With an RBA statement on global uncertainty and US tariffs as stimulus, analyse the strengths and weaknesses of aggregate demand policies in achieving low and stable inflation. Average 2.3 of 6.

Question 7 (9 marks): aggregate supply policies

  • 7a (5 marks) Analyse the likely impact of the government's skilled immigration policy response (set against caps on immigration and international students amid housing pressure) on aggregate supply and low and stable inflation. Average 2.9 of 5.
  • 7b (4 marks) Discuss how one market-based environmental policy affects intertemporal efficiency over time. Average 2.5 of 4.

Worked practice questions (exam-style)

Worked example

Question 1 (3 marks): Direct provision and market failure

Based on Question 1b (3 marks). Using an example, explain why the government producing a good or service itself can correct a market failure.

Model answer.

  1. Market failure. Market failure occurs when free, competitive markets allocate resources inefficiently, so community welfare is not maximised. Merit goods such as schooling create positive externalities (a more skilled, healthier workforce), but buyers weigh only their private benefit, so the market under-allocates resources to them.
  2. Direct provision. Direct provision means the government itself funds and runs the service from tax revenue, for example operating public schools that charge no or low fees. This is different from a subsidy, a tax or a regulation.
  3. Why it corrects the failure. Because the service is supplied free or cheaply, output rises towards the socially optimal quantity that includes the external benefit. More resources are allocated to education, moving the allocation closer to allocative efficiency.

Marker's note: the report said many students treated any government intervention as direct provision and gave subsidies, taxes or regulation as examples, which earned nothing. It also stressed that the example did not have to be a public good: schools and hospitals (merit goods with positive externalities) were valid. Full marks needed all three links: market failure, direct provision with an example, and how it moves resources towards efficiency.

Worked example

Question 2 (3 marks): Price elasticity of supply over time

Based on Question 2b (3 marks). Explain why the price elasticity of supply of coffee beans is likely to change over time.

Model answer.

  1. Define PES. Price elasticity of supply measures how responsive quantity supplied is to a change in price: PES=%ΔQs%ΔP\text{PES} = \tfrac{\%\Delta Q_s}{\%\Delta P}. If PES is below 1, supply is relatively inelastic.
  2. Name the factor. Coffee has a long production period: new plants take years to bear fruit and each harvest is seasonal, so in the short run growers cannot quickly lift output when the price rises. Supply is relatively inelastic.
  3. Explain the change over time. Over time growers can plant more trees, adopt faster-maturing varieties and better farming technology, and improve storage so beans can be held back and released when prices rise. Production time shortens and stocks become available, so quantity supplied becomes more responsive to price: PES rises (supply becomes more elastic) over time.

Marker's note: the report said many students wrote about price elasticity of demand, listed non-price supply factors (which shift supply rather than change its elasticity), or just restated the law of supply. High-scoring answers defined PES, named a PES factor such as production time, durability or spare capacity, and said clearly whether elasticity would rise or fall.

Worked example

Question 3 (6 marks): Has full employment been achieved?

Based on Question 3d (6 marks). Evaluate how far Australia achieved full employment over the past two years, and the impact on living standards.

Model answer (data as quoted in the VCAA report for late 2025; update it for your year).

  1. The goal. Full employment is the lowest unemployment rate consistent with low and stable inflation: cyclical unemployment is removed and unemployment is at the non-accelerating inflation rate of unemployment (NAIRU), estimated at around 4.25%, or roughly 4 to 4.5%.
  2. The data. Unemployment rose from about 3.6% in early 2023 to about 4.5% by September 2025, while participation stayed strong, so the economy absorbed many new job seekers.
  3. Not achieved early in the period. In 2023 unemployment was below the NAIRU. A labour market that tight added to wage and demand pressure when CPI inflation was far above the 2 to 3% target, so in that sense full employment was "over-achieved" and inconsistent with low inflation.
  4. Largely achieved since. Through 2024 and 2025 unemployment moved into the NAIRU range while inflation fell back towards the target, which suggests the economy was operating close to full employment. A qualification: underemployment and underutilisation mean the headline rate may hide some spare capacity, and the gains have not been fully inclusive.
  5. Living standards. With most people who want work employed, household incomes and access to goods and services (material living standards) are supported, and fewer people bear the stress and stigma of unemployment (non-material living standards). The earlier very low unemployment, however, came with high inflation that eroded real incomes.
  6. Judgement. The goal was not met in 2023 but has broadly been achieved in 2024 and 2025, with some slack still hidden in underemployment.

Marker's note: the report criticised answers that simply said "inside 4 to 4.5% means achieved, below it means not achieved" without explaining why unemployment below the NAIRU is a problem (wage pressure, skill shortages, inflation). Strong answers used data on the trend, made a clear judgement, and linked the outcome to living standards.

Worked example

Question 4 (7 marks): The rise in the terms of trade

Based on Questions 4a, 4b and 4c (2, 2 and 3 marks). Australia's terms of trade index went from 89.4 (September quarter 2024) to 91.0 (December quarter 2024). Define the terms of trade, give one reason for the rise and explain one effect on inflation.

(a) Definition. The terms of trade compare the prices Australia receives for its exports with the prices it pays for imports, expressed as an index:

TOT=export price indeximport price index×100\text{TOT} = \frac{\text{export price index}}{\text{import price index}} \times 100

It measures relative prices, not the value (price times quantity) of trade and not net exports.

Size of the change.

91.0−89.489.4×100≈1.8%\frac{91.0 - 89.4}{89.4} \times 100 \approx 1.8\%

so a given volume of exports bought about 1.8% more imports than in the previous quarter.

(b) One factor
A rise in world commodity prices (for example iron ore) would lift the export price index relative to the import price index, since Australian exports are concentrated in commodities, raising the ratio. A fall in production costs among trading partners, lowering the import price index, would also work.
(c) Effect on low and stable inflation
If the rise came from higher export prices, mining firms earn more for the same volume of exports. Higher profits raise investment and, through wages and dividends, household income and consumption, so aggregate demand rises. If the economy is near capacity this adds to demand inflation and makes it harder to keep inflation within the 2 to 3% target.
Final answer
the TOT index rose about 1.8%, most plausibly from higher commodity export prices, which would add to aggregate demand and demand inflation.
Marker's note
the report said 4b and 4c were answered poorly because students could recite the definition but did not understand that the TOT is a ratio of price indexes. It recommended not using the exchange rate to explain or apply the TOT unless asked. Other valid routes for 4c: cheaper imported consumer goods lowering the CPI, or cheaper imported capital lowering cost inflation.
Worked example

Question 6 (2 marks): Why the actual deficit could be smaller

Based on Question 6a (2 marks). Describe one reason the actual 2025-26 budget deficit might turn out smaller than the estimated 42.1 billion dollars.

Model answer.

  • The Budget's estimates rest on forecasts of growth, employment and inflation. If the labour market is stronger than forecast (unemployment lower than expected), more people earn taxable income, so personal income tax receipts are higher than estimated.
  • Fewer people claim unemployment benefits, so welfare outlays are lower than estimated. Higher receipts and lower outlays, working through the automatic stabilisers, produce a smaller actual deficit.

Final answer: stronger than expected economic conditions raise tax receipts and cut welfare outlays automatically, shrinking the deficit below the estimate.

Marker's note: this part had the lowest average mark of any part on the paper (0.9 of 2). The report said students should assume differences between estimated and actual outcomes come from automatic stabilisers, not from the government changing its policies mid-year. Answers that explained headline versus underlying budget balances, or wrote about the current account, missed the question.

Worked example

Question 6 (6 marks): AD policies in a time of global uncertainty

Based on Question 6c (6 marks). With global uncertainty from US tariffs and geopolitical events, analyse the strengths and weaknesses of aggregate demand policies (monetary and budgetary) in achieving low and stable inflation.

Model answer.

  1. Goal. Low and stable inflation means CPI inflation of 2 to 3% on average over time.
  2. Monetary policy strength. The RBA can change the cash rate at any meeting with no implementation lag, and it is independent of government. When global conditions shift suddenly, it can respond quickly (for example, holding rates if imported cost shocks threaten to lift inflation expectations, or easing if a global slowdown threatens to push inflation below target).
  3. Monetary policy weakness. It works on demand inflation through its transmission channels, but uncertainty weakens those channels: if confidence is low and households are heavily indebted, rate cuts may be saved or used to repay debt rather than spent. It also cannot directly offset cost inflation from tariffs or supply disruption abroad.
  4. Budgetary policy strength. Budget measures can be targeted at particular groups or prices. Energy bill rebates, for example, directly reduce a CPI component while supporting households hurt by uncertainty, and the automatic stabilisers cushion aggregate demand at once if a global downturn raises unemployment.
  5. Budgetary policy weakness. Discretionary measures face long implementation lags (Budget cycle, parliament, delivery) and political constraints, so by the time they take effect the global shock may have changed. Spending increases can also add to demand inflation if the economy is near capacity.
  6. Overall. Monetary policy is the quicker, more flexible tool in uncertain times, while budgetary policy is better for targeted support; neither can fully control inflation that originates offshore.

Marker's note: the report said most students ignored the "period of global economic uncertainty" context, many discussed only one of the two AD policies, and many simply described how each policy works. No marks were given for operation alone: each point had to be a strength or weakness tied to the inflation goal.

Common errors students made

  • Q1a: describing consequences (free riders, under-production) rather than the characteristics non-rivalry and non-excludability, and saying non-excludable means "everyone can access it" rather than non-payers cannot easily be excluded. Some gave public schools, hospitals or transport as public goods.
  • Q1b: treating subsidies, taxes or regulation as direct provision, and assuming the answer had to be about public goods.
  • Q2a: explaining the adjustment from E1 to E2 through disequilibrium (not required) and not stating that equilibrium price rose and equilibrium quantity fell; confusing quantity supplied with equilibrium quantity.
  • Q2b: answering about price elasticity of demand or about non-price supply factors, and not saying whether elasticity rises or falls over time.
  • Q3a: just quoting the 3 to 3.5% real GDP target without explaining "strong" and "sustainable".
  • Q3b: saying imports are subtracted because the money leaves the country, rather than because import spending is already counted in C, I and G and AD measures spending on Australian-made output only.
  • Q3d: treating the 4 to 4.5% range mechanically, without explaining why unemployment below the NAIRU matters.
  • Q4a: defining the TOT as the value of exports against imports, or as net exports.
  • Q4b and Q4c: using the exchange rate to explain or apply the TOT; the report recommends avoiding it unless the question asks.
  • Q4d: claiming protection leads to a more efficient allocation in the long run (that is an argument for trade liberalisation), and writing about Australian tariffs on US goods instead of US tariffs on Australian exports.
  • Q5a: giving the inability to target sectors (that is the blunt instrument point the question excluded), and claiming monetary policy has a long implementation lag (it has an impact lag).
  • Q5b: judging the stance by comparing the cash rate with earlier rates rather than with the neutral rate (about 3 to 3.5%), so missing that the stance stayed contractionary despite the cuts; omitting any transmission mechanism; over-writing on living standards.
  • Q6a: assuming the government changed policy mid-year, explaining headline versus underlying balances, or confusing the budget with the current account.
  • Q6b: analysing the measure only through aggregate supply, and not naming a specific 2025-26 Budget initiative.
  • Q6c: ignoring the global uncertainty context, covering only one AD policy, and describing how policies operate instead of their strengths and weaknesses.
  • Q7a: saying aggregate supply falls because migration was capped (skilled migrants still arrive and add to productive capacity), and focusing on house prices, which are not in the CPI.
  • Q7b: giving only one effect when "discuss" needs more than one, and writing about preserving coal, oil and gas for the future rather than moving to low-emissions production.

How to use this paper

Sit it in one block: 15 minutes reading, then 2 hours writing, with about 15 minutes for Section A. Before marking, list the current data you used (unemployment, NAIRU estimate, cash rate against the neutral rate, CPI, a named Budget measure) because Questions 3d, 5b, 6b and 7a all rewarded specific, recent evidence. Then mark each part against the report's high-scoring criteria, paying most attention to the command terms: "outline" and "define" need precise definitions, "analyse" and "evaluate" need a chain from policy or event to AD or AS to the goal, and "discuss" needs more than one side. Redo the lowest-scoring parts relative to their marks (6c, 2b, 4c and 6a) until each link is explicit.

Use this paper well

  1. Sit the paper under exam conditions (120 minutes, 80 marks).
  2. Mark yourself against the official VCAA marking notes.
  3. Compare against the Economics hub to find the syllabus dot points this paper tested.

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