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ECS1601 Questions& Answers

Economics (University of South Africa)

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ECS1601 –SECTION A

1.16 Which of the following statements are correct?

a. A flow variable is measured over a specific period.

b. Wealth, assets, liabilities and profit are all stock variables.
c. Stocks can change as a result of flows.
[1] All the statements are correct.
[2] a and b
[3] a and c (ANSWER 3)
[4] b and c
[5] a

1.16 The correct alternative is (3).

a. Correct. A flow variable is measured over a specific period.

b. Incorrect. Profits is a flow variable.
c. Correct. The level of water in a dam changes as a result of the inflow of water.

The diagram below shows the circular flow of income and spending between households and
firms.

1.17 Which one of the following statements is correct?

[1] Flows (2) and (3) represent income.

[2] Flows (2) and (4) represent spending.
[3] Flows (1) and (2) represent spending.
[4] Flows (1) and (3) represent spending.(ANSWER 4)

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1.17 The correct alternative is (4)

Firms spend on the factor market (Flow 1), while households spend on the goods market
(flow 3).

1.18 In the circular flow of income and spending

[1] investment results in a decrease in the volume of the income flow.

[2] taxes result in an increase in the volume of the income flow.
[3] imports result in an increase in the volume of the income flow.
[4] savings result in a decrease in the volume of the income flow.(ANSWER 4)

1.18 The correct alternative is (4)

Savings, taxes and imports are leakages from the circular flow of income and spending and
therefore result in a decrease in the volume of the income. Investment is an injection into
the circular flow and results in an increase in the volume of the income flow.

Question 1.19 is based on the following diagram.

1.19 Which flows represent taxes?

[1] C and D
[2] E and F
[3] D and E(ANSWER 3)
[4] A and B

1.19 The correct alternative is (3)

Taxes flow from households and firms to government, that is, flows D and E.

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1.20 Which of the following statements are correct?

a. Investment is the most important form of saving in the economy.

b. Financial institution acts as intermediary between those who save and those who wish to
invest.
c. Financial sector is the funnel through which investment is withdrawn from the circular
flow of income and spending.

[1] All the statements are correct.

[2] a and b
[3] b (ANSWER 3)
[4] a and c
[5] None of the statements is correct.

1.20 The correct alternative is (3)

a. Incorrect. Investment is the purchase of capital goods by firms. Remember, when

households put some of their income in an account at a bank, it represents saving and
not investment. In economics the term "investment" is reserved to indicate the
production or purchase of capital goods.
b. Correct. See section 3.5 of the textbook.
c. Incorrect. Investment is an injection into the circular flow of income and spending.

1.21 Which of the following constitute the government?

[1] national government

[2] local government
[3] provincial government
[4] All of the above (ANSWER 4)

1.21 The correct alternative is (4)

The government includes the national government, regional (or provincial) government
and the local government.

1.22 Which of the following could be considered as examples of financial institutions in

South Africa?

[1] Nedbank and Old Mutual Insurance Company.(ANSWER 1)

[2] South African Revenue Service (SARS) and the Iscor Pension Fund.
[3] National Lottery and Coca Cola Mega Millions.
[4] National Treasury and JSE Securities Exchange.

1.22 The correct alternative is (1)

Financial institutions act as links between households and firms with surplus funds and
other participants (eg firms) that required funds.

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1.23 Which one of the following is NOT a function of money?

[1] Money serves as a medium of exchange.

[2] Money serves as unit of account.
[3] Money serves as a store of value.
[4] Money serves as a stock and flow.(ANSWER 4)

1.23 The correct alternative is (4)

Money is not a stock but a flow variable. Money serves as a medium of exchange, a unit of
account and a store of value.

1.24 The modern bank note’s value of exchange

[1] is equal to its intrinsic value.

[2] is undermined by its use as a store of value.
[3] is supported by gold that the SARB vaults.
[4] is based on confidence.(ANSWER 4)

1.24 The correct alternative is (4)

The value of the modern banknote is solely based on the public’s confidence in the
government or monetary authorities to control the supply of money in such a way that its
purchasing power does not fall substantially. If too much money is created, the public will
lose confidence in its purchasing power and the perceived value of the money may collapse

1.25 The positive balance on your cheque account is

[1] an asset for you and a liability for your bank.(ANSWER 1)

[2] a liability for you and an asset for your bank.
[3] an asset for both you and your bank.
[4] a liability for both you and your bank.

1.25 The correct alternative is (1)

When a deposit is made at the bank it becomes an asset for a person who deposited it and a
liability for a bank, because they now owe the funds to the depositor.

1.26 The South African Reserve Bank

[1] is responsible for the implementation of fiscal policy.

[2] is lender of last resort for those consumers who are unable to secure a loan from
commercial banks.
[3] is co-responsible for tax collection.
[4] is responsible for the formulation of monetary policy.(ANSWER 4)

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1.26 The correct alternative is (4)

The South African Reserve Bank is responsible for, amongst others, the formulation and
implementation of monetary policy

1.27 Which of the following statements are correct?

a. Banks can create demand deposits by granting credit to their clients in the form of
overdraft facilities.
b. When a person deposits cash in a cheque account there is no immediate change in the
quantity of money.
c. When the cash reserve requirement increase, the credit multiplier increases.
[1] All the statements are correct.
[2] a and b (ANSWER 2)
[3] a and c
[4] b and c
[5] c1.27

The correct alternative is (2)

a. Correct. See Box 15-4 in the prescribed textbook .

1.28 The quantity of money available will increase when

[1] a person deposits his or her money with a bank.

[2] banks keep their reserves with the reserve bank.
[3] banks make loans that result in additional deposits.(ANSWER 3)
[4] the government keeps its funds with the reserve bank.

3. Correct. The process whereby demand deposits are created is discussed in Box 15-4 of
the textbook. Also see Activity 6(a) on page 17 of the study guide and the discussion thereof
on page 22.

1.29 If the required reserve ratio is increased, the money multiplier

[1] decreases.(ANSWER 1)
[2] remains the same, as long as banks hold no excess reserves.
[3] could either increase or decrease.
[4] increases.

1.29 The correct alternative is (1)

An increase in the cash reserve requirement of banks will reduce the credit multiplier.

1.30 The demand for money

[1] for transaction purposes is determined by income and the interest rate.
[2] for precautionary purposes is determined by income and the interest rate.
[3] for speculation purposes is determined by the interest rate.(ANSWER 3)

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1.30 The correct alternative is (3)

The demand for money for transaction purposes and for precautionary purposes is
determined by income, while the demand for speculation purposes is determined by the
interest rate.

1.31 The quantity of money demanded for precautionary purposes decreases if

[1] total output decreases.(ANSWER 1)

[2] consumer incomes increase.
[3] the interest rate increases.
[4] the inflation rate increases.

1.31 The correct alternative is [1]

If production decreases it implies a decrease in income and therefore a decrease in the

demand for precautionary balances.

1.32 Which of the following statements are correct?

a. The demand for money is a function of income and the interest rate.
b. In general terms the liquidity preference may be expressed as L = f (Y, i).
c. The supply of money is determined by demand for money and the interest rate.

[1] All the statements are correct.(ANSWER 1)

[2] a
[3] b and c
[4] a and c
[5] None of the statements is correct.

1.32 The correct alternative is (1)

a. Correct. The demand for money is a function of income and interest rate

SECTION B

2.1 Efficient resource allocation occurs when

a. enough goods and services are produced.

b. all resources are used to produce goods and services.
c. it is possible to make one person better off without making another person worse off.
d. resources are fully employed.
[1] a
[2] b and d
[3] c
[4] d

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2.1 The correct alternative is [4].

Efficient resource allocation occurs only when all resources are fully employed – when it is
impossible to make one person better off without making another person worse off.

2.2 Market failure occurs when

a. market fails to produce enough goods and services.

b. demand equals supply.
c. the market is not in equilibrium.
d. the market system is unable to allocate resources efficiently.
[1] None of the above statements is correct.
[2] a
[3] b
[4] c
[5] d

2.2 The correct alternative is [5].

In market failure, the market system is unable to achieve an efficient allocation of resources.

2.3 Government spending in South Africa is financed through

a. tax revenues collected from households and firms.

b. borrowing from the central bank, domestic market and international market.
c. income from partial and or full ownership in enterprises.
[1] All the statements are correct.
[2] a
[3] b
[4] b and c

2.3 The correct alternative is [1].

Government spending in South Africa is financed through (1) tax revenues collected from
households and firms, (2) borrowing from the central bank, domestic market and
international market, and (3) income from partial and or full ownership in enterprises.

2.4 Which of the following statements are correct?

a. The difference between government spending and borrowing is called the budget deficit.
b. If government finances part of its spending from borrowing from the central bank, it is
called inflationary financing.
c. Expansionary fiscal policy implies that taxes must increase and government spending must
be limited.
[1] All statements are correct.
[2] a and b
[3] b and c
[4] a
[5] b

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2.4 The correct alternative is (2)

a. Correct. When government purchases of goods and services exceed the tax revenue
received, it is said to have a budget deficit.
b. Correct. Inflationary financing is when government borrows from the central bank to
finance its spending.

2.5 Which one of the following statements regarding taxes is correct?

[1] Taxes which distort relative prices are not neutral.

[2] The aim of taxes is to change the behaviour of people.
[3] Equity in the tax system ensures simplicity and neutrality.
[4] In a good tax system compliance costs are equal to administration costs.

2.5 The correct alternative is (1)

Taxes which distort relative prices are not regarded as neutral. For taxes to be neutral they
should have the minimum possible effect on relative prices - i.e. they should not distort the
relative prices

2.6 A tax is

[1] regressive when everybody pays the same amount of tax.

[2] regressive when all taxpayers pay the same rate.
[3] proportional when everybody pays the same amount of tax.
[4] proportional when it is levied on goods and services at the same standard rate.

2.6 The correct alternative is (1)

It is important to remember that the distinction between the different tax systems is based
on the ratio (or percentage) of tax paid to taxable income. It is not based on the (absolute)
amount or the total amount paid in taxes. When everybody pays the same amount of tax, it
means that the lower income groups pay a greater percentage of their taxable incomes than
higher income groups, that is, the tax is regressive.

2.7 Which of the following statements are correct?

a. The statutory or legal incidence of a tax determines who ultimately bears the burden of the
tax.
b. The degree to which the burden of a tax can be shifted depends on the price elasticities of
demand and supply of the good or service in question.
c. The government prefers levying excise taxes on the consumption of goods with a high
elasticity
of demand.
[1] None of the statements is correct.
[2] a and b
[3] a
[4] b
[5] c

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2.7 The correct alternative is (4)

b. Correct. If demand is relatively elastic, the greater share of the tax burden is borne by the
seller. On the other hand, if demand is relatively inelastic, the burden of the tax falls on the
buyer.

2.8 Country A can produce 20 units of maize or 10 units of bananas. Country B can
produce 30 units of maize or 20 units of bananas. Assuming constant opportunity costs,
which of the following statements are correct?

a. Country B has an absolute advantage in the production of maize.

b. Country B has an absolute advantage in the production of bananas.
c. Country A has a relative advantage in the production of bananas.

[1] All the statements are correct.

[2] a and b
[3] a and c
[4] b and c
[5] c

2.8 The correct alternative is (2)

a. Correct. Country B produces 30 units of maize, while country A produces only 20 units of
maize.

b. Correct. Country B produces more bananas than country A – country B produces 20 units
compared to the 10 units produced by country A.

2.9 The purpose for the introduction of an import tariff is to

[1] expose local production to international competition.

[2] reduce local production and increase imports.
[3] restrict the importation of harmful products.
[4] serve as a source of income for the government.

2.9 The correct alternative is (4)

Import tariffs can be used as a source of revenue for the government. In fact, one of the main
arguments for tariff protection is to generate tariff revenue.

2.10 An increase in the supply of dollars in the South African foreign exchange market
can be caused by

[1] more South African firms purchasing capital goods from the United States.
[2] an increase in the gold price.
[3] a decrease in economic activity in the United States.
[4] more South African tourists visiting the United States

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2.10 The correct alternative is (2

[2] Correct. Since the gold price is quoted in dollars, an increase in the price of gold means
that more dollars will be earned – the supply of dollar increases.

2.11 Which one of the following is most likely to increase the demand for US dollar on
the South African foreign exchange market?

[1] A fall in the interest rates in the United States.

[2] An expected decline of the value of the rand relative to the dollar.
[3] A recession in South Africa.
[4] A decrease in international tourism.

2.11 The correct alternative is (2)

[2] Correct. An expected decline of the value of the rand relative to the dollar will increase
the demand for dollar.

2.12 When the rand/$ exchange rate changes from R7,10/$1 to R7,20/$1, the rand has

[1] appreciated against the dollar.

[2] gained against the dollar.
[3] depreciated against the dollar.

2.12 The correct alternative is (3)

When the rand/$ price changes from R7,10/$1 to R7,20/$, one has to pay more for a dollar.
The value of the rand decreased against the dollar – it has depreciated against the dollar.

2.13 A depreciation of the rand against the US dollar will lead to a decrease in

[1] the price of imported goods in South Africa.

[2] the price of South African products sold in the USA.
[3] the price of petrol in South Africa.
[4] the number of tourist from the USA visiting South Africa.

2.13 The correct alternative is (2)

When the rand depreciates against the dollar, South African products become less expensive
in dollar terms. This leads to an increase in exports. Say a consumer in the United States
wants to import a car from South Africa. The price of the car is R60 000 in South Africa. At
an exchange rate of $1,00 = R6,00, it will cost the American consumer $10 000 to import the
car from South Africa. That is, R60 000/R6. If the rand depreciates to $1,00 = R10,00, the
consumer will pay less in dollar terms, R60 000/R10 = $6 000. Similarly, South African
imports from the United States will decrease as South Africans have to pay more for a dollar.

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2.14 When the rand appreciates against the dollar

[1] export prices increase and import prices decrease.

[2] export prices decrease and import prices increase.
[3] export prices increase and import prices increase.
[4] export prices decrease and import prices decrease.

2.14 The correct alternative is (1)

See question 2.13 above.

2.15 Which of the following statements are correct?

a. When calculating GDP, goods are counted when they are purchased as inputs and when
they are sold as final goods.
b. Only transactions that represent production of new goods and services are included in the
GDP.
c. When calculating GDP using the expenditure approach, both final goods and intermediate
goods are included in order to avoid double counting.
[1] All statements are correct.
[2] a and b
[3] b
[4] b and c
[5] a

2.15 The correct alternative is (3)

b. Correct. The GDP refers to the production of goods during a particular period. Only
transactions that represent production of new goods and services are therefore included in
the GDP.

2.16 Which of the following statements are correct?

a. When prices increase, nominal GDP increases even if the production of new goods and
services does not increase.
b. An increase in nominal GDP by 7% indicates that real output has increased by 7%.
c. If nominal GDP increases by 5%, GDP at current prices will also increase by 5%.
[1] All statements are correct.
[2] a and c
[3] b
[4] b and c
[5] None of the statements is correct.

2.16 The correct alternative is (2)

a. Correct. An increase in nominal GDP could be a result of increases in the general price
level even if the production of new goods does not increase, for example

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Year General Price No of goods Nominal GDP

Increase produced (P X Q)
2004 200 1000 200 000
2005 300 1000 300 000

c. Correct. Nominal GDP and GDP at current prices are synonyms.

2.17 If there are 100 million people in the population, 50 million people are in the labour
force and 10 million people are unemployed, then the unemployment rate is

[1] 5%.
[2] 6,7%.
[3] 10%.
[4] 20%.

2.17 The correct alternative is (4)

The unemployment rate is obtained by expressing the number of unemployed as a percentage

of the labour force:

Unemployment rate =Number of unemployed persons X 100

Total labour force 1

=10/50 X 100/1

=20 %

Question 2.18 is based on the following information.

YEAR CPI
2000 100
2002 125
2004 135

2.18 Consumer prices

[1] rose by 10% from 2002 to 2004.

[2] fell by 25% from 2000 to 2002.
[3] fell by 10% from 2002 to 2004.
[4] rose by 8% from 2002 to 2004.

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2.18 The correct alternative is (4)

To calculate the change in prices the following formula is used:

% change in prices=CPI in Year 2-CPI in Year 1 X 100

CPI in Year 1

2.19 Which of the following statements are correct?

a. All transactions with the rest of the world are recorded in the balance of payments.
b. When the value of imports exceeds the value of exports, the country has a trade surplus.
c. The balance of payments is an important indicator of the state of an economy.
[1] a
[2] a and b
[3] a and c
[4] b and c
[5] None of the statements is correct.

2.19 The correct alternative is (3)

2.20 Which of the following statements are correct?

a. The best measure of the distribution of income in a country is real GDP per capita.
b. When constructing the Lorenz curve, the cumulative percentage of the population is
plotted against the cumulative percentage of income.
c. The higher the Gini coefficient, the higher the income inequality.

[1] All the statements are correct.

[2] a and b
[3] a and c
[4] b and c
[5] b

2.20 The correct alternative is (4)

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Question 1.33 is based on the diagram below, which shows the money market.

1.33 Which of the following statements are correct?

a. A change in equilibrium from E1 to E0 could be as a result of an increase in interest rate.

b. A change in equilibrium from E0 to E1 could be as a result of a decrease in income.
c. A change in equilibrium from E0 to E2 could be as a result of an increase in income.
[1] All the statements are correct.
[2] a
[3] a and b
[4] a and c (ANSWER 4)
[5] b and c

1.33 The correct alternative is (4)

a. Correct. An increase in the interest rate causes a movement along the money demand
curve. In Economics 1A we made a distinction between a movement along the demand
curve, as a result of a change in price, and a shift of the demand curve (as a result of a
change in any of the other determinants of demand). The interest rate is the price of
money, thus the movement along the demand curve.

1.34 The reserve banks can use the open market operations to

[1] issue new currency notes.

[2] control the money supply.(ANSWER 2)
[3] sell foreign exchange.
[4] influence the flow of goods and services.

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1.34 The correct alternative is (2)

The reserve bank uses open market operations, the purchase and sale of financial assets, to
control the money supply.

1.35 The purchase and sale of financial assets to and from the banks by the South
African Reserve Bank is known as the

[1] accommodation policy.

[2] credit control policy.
[3] public debt management policy.
[4] open market policy. (ANSWER 4)

1.35 The correct alternative is (4)

The purchase and sale of financial assets to and from the banks by the South Africa Reserve
Bank is known as open market policy.

SECTION C

3.1 Using the Keynesian macroeconomic models of chapters 18 and 19

[1] one can study the money market.

[2] one can predict the likely impact of fiscal policy on aggregate production and income.
[3] one can study inflation.

3.1 The correct alternative is (2).

Your understanding of the implications of the assumptions of the simple Keynesian model is
tested with these statements.

3.2 Which of the following statements are correct?

a. Total income = total production = total spending in the national accounts as well as in
macroeconomic theory.
b. In macroeconomic theory, total production is synonymous with total income.
c. According to Say, aggregate demand in the economy can never be insufficient because
supply creates its own demand.
[1] All the statements are correct.
[2] a and b
[3] a and c
[4] b and c
[5] None of the statements is correct.

3.2 The correct alternative is (4)

b. Correct. See Box 18-1 of the prescribed book.

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3.3 Which of the following statements are correct?

a. In the Keynesian model there will always be an automatic tendency towards full
employment if the economy is operating at a level of production or income below full-
employment.
b. Macroeconomic theory deals with events that occurred in the past.
c. Consumption spending can exceed income.
[1] All the statements are correct.
[2] a
[3] b
[4] c
[5] None of the statements is correct.

3.3 The correct alternative is (4)

c. Correct. Consumers can finance their spending by using past savings or credit. See for
instance the discussion of autonomous consumption. When income is zero, consumption
spending is positive. In other words, consumption spending can exceed income.

3.4 Which of the following statements are correct?

a. Induced consumption refers to the fixed part of consumption spending which does not
change as the level of income changes.
b. The slope of the consumption function is always greater than that of the aggregate
spending curve.
c. If the marginal propensity to save increases, the equilibrium level of income will increase.
[1] All the statements are correct.
[2] a and b
[3] b and c
[4] a and c
[5] None of the statements is correct.

3.4 The correct alternative is (5)

3.5 An increase in autonomous consumption will result in

[1] a movement from left to right along the consumption function.

[2] a movement from right to left along the consumption function.
[3] an upward shift of the consumption function.
[4] an downward shift of the consumption function.

3.5 The correct alternative is (3)

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An increase in autonomous consumption shifts the consumption function upwards.

3.6 If the marginal propensity to consume increases

[1] there will be a movement from left to right along the consumption function.
[2] the consumption function will shift parallel upwards.
[3] the consumption function will shift parallel downwards.
[4] the slope of the consumption function will be steeper.

3.6 The correct alternative is (4)

The slope of the C curve is determined by the marginal propensity to consume. If the marginal propensity
to consume increases, the slope of the consumption function will also increase.

Question 3.7 is based on the following equation which refers to a closed economy with
no government.

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C = 100 + 3/4Y

3.7 Which of the following statements are correct?

a. When income is zero, private savings are 100.

b. The slope of the savings function is ¾.
c. The savings function is given by S = 100 + 1/4Y
[1] None of the statements is correct.
[2] a and b
[3] b and c
[4] a and c
[5] All the statements are correct.

3.7 The correct alternative is (1)

Box 18-4 of the prescribed book deals with the relationship between consumption and saving.

3.8 If C = 50 + 0,9Y, then at an income level of 1000, savings are

[1] -100.
[2] -50.
[3] 50.
[4] 100.
[5] 900.

3.8 The correct alternative is (3)

If C = 50 + 0,9Y, the saving function is S = -50 + 0,1Y

When income is 1 000, saving will be
S = -50 + 0,1Y
= -50 + 0, 1(1 000)
= -50 + 100
= 50

3.9 Which of the following statements are correct?

a. Investment is negatively related to the interest rate.

b. If investment is dependent on the income level, it is regarded as autonomous and illustrated
graphically by a horizontal line.
c. Income is the most important determinant of the level of investment.
[1] a
[2] b
[3] c
[4] b and c

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3.9 The correct alternative is (1)

a. Correct. According to the Keynesian theory, an increase in interest rate increases the cost
of borrowing, which leads to a decrease in investment. Therefore, interest rate and investment
are negatively related.

3.10 Autonomous investment means that investment is independent of the

[1] cost of capital goods.

[2] level of income.
[3] interest rate.
[4] expected revenue to be earned from capital goods.

3.10 The correct alternative is (2)

Autonomous investment means that investment is independent of the level of income.

3.11 If total production is R180 billion and aggregate spending is R200 billion, firms
inventories will

[1] stay constant and so will output.

[2] pile up and output will increase.
[3] pile up and output will decrease.
[4] run down and output will increase.
[5] run down and output will decrease.

3.11 The correct alternative is (4)

When aggregate spending (200) exceeds total production (180), producers will experience a
decrease in inventories, which will encourage them to produce more in the following period.

Question 3.12 is based on the following information, which refers to a closed economy
without a government:

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Autonomous consumption = 200, investment spending = 400 and the marginal propensity to
save is ¼.

3.12 Which of the following statements are correct?

a. The equilibrium level of income is 800.

b. The equilibrium level of income is 2400
c. The multiplier is 4.
[1] None of the statements is correct.
[2] a and b
[3] a and c
[4] b and c
[5] All the statements are correct.

3.12 The correct alternative is (4)

Statements (a) and (b) refer to the equilibrium level of income. The formula for the
equilibrium level of income is:
Y0 =x A α

The easiest way to address this question is to divide the calculation of the equilibrium level of
income into two steps:
(i) calculate the multiplier and
(ii) determine the level of autonomous spending.

(i) The marginal propensity to save (s) is ¼, therefore the marginal propensity to consume (c)
is (1 - s) = (1 - ¼) = ¾.

α=1/(1-C)

=1/(1-3/4)

=4

(ii) A = C + I
= 200 + 400=600

Therefore

Y0 =A X α
= 4 x 600
= 2 400

Statement (b) and (c) are therefore correct.

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3.13 Which of the following statements are correct?

a. The introduction of government spending increases the size of the multiplier.

b. The introduction of taxes increases the size of the multiplier.
c. The introduction of taxes reduces the slope of the consumption function.
[1] a
[2] b
[3] c
[4] None of the statements is correct.

3.13 The correct alternative is (3)

c. Correct. Taxes reduce disposable income. Consumption reduces at every level of income,
the slope of the consumption function decreases.

3.14 Which one of the following will increase the size of the multiplier?

[1] An increase in the level of net exports.

[2] A reduction in the level of government spending.
[3] An increase in the tax rate.
[4] An increase in the marginal propensity to consume.
[5] An increase in the marginal propensity to save.

3.14 The correct alternative is (4)

4. Correct. An increase in the marginal propensity to consume means that more is respend
in each round of spending.

3.15 Which of the following statements are correct?

a. If the marginal propensity to consume increases, the equilibrium level of income will
increase.

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b. In an open economy with a government sector the sum of the marginal propensity to
consume and the marginal propensity to save is always equal to 1.
c. If the tax rate decreases, the aggregate spending curve will shift parallel upwards.
[1] b
[2] a and b
[3] b and c
[4] a and c
[5] All the statements are correct.

3.15 The correct alternative is (2)

a. Correct. If a bigger proportion is resp end, that is, if the marginal propensity to consume
increases, more additional income is generated in each round of the spending process
increasing the equilibrium level of income.
b. Correct. Although the introduction of the government and foreign sectors into the
macroeconomic model changes the slope of the aggregate expenditure function, it does not
affect the proportion of additional income that is consumed. That is, the marginal propensity
to consume is not affected. Consequently, the sum of the marginal propensities to consume
and save will always equal 1.

3.16 Given the import function Z = 300 + 2/3Y, which of the following statements are
incorrect?
a. The marginal propensity to save is 1/3.
b. The induced component is 300.
c. 2/3 is the proportion of any increase in income that is spent on imports.
[1] a
[2] b
[3] c
[4] a and b
[5] b and c

3.16 The correct alternative is (3)

c. Correct. 2/3 is the marginal propensity to import as correctly suggested in the statement.

3.17 In the open economy Keynesian model with government and the foreign sector, If
the marginal propensity to consume, c = 2/3, the tax rate, t = 5/8 and the marginal
propensity to import, m = 1/2, then the multiplier is given by
[1] 3/4
[2] 4/5
[3] 1
[4] 5/4
[5] 2

3.17 The correct alternative is (2)

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Use the following information to answer questions 3.18 to 3.20.

C = 400 + 9/10Yd
I = 500
G = 1 280
t = 1/3
X = 900
Z = 600 + 1/10Y

3.18 The equilibrium level of income is

[1] 2 080
[2] 2 480
[3] 4 960
[4] 7 360
[5] None of the above alternatives is correct.

3.18 The correct alternative is (3)

The equilibrium income = multiplier times total autonomous spending.

3.19 Autonomous aggregate spending at equilibrium is

[1] 2 080
[2] 2 480
[3] 4 960
[4] 7 360
[5] None of the above alternatives is correct.

3.19 The correct alternative is (2)

Autonomous aggregate spending at equilibrium is:

A =C +I+G+X -Z
= 400 + 500 + 1 280 + 900 - 600
= 2 480

3.20 Total aggregate demand at equilibrium is

[1] 2 080
[2] 2 480
[3] 4 960
[4] 7 360
[5] None of the above alternatives is correct.

3.20 The correct alternative is (3)

At equilibrium total aggregate demand is equal to income which was calculated in question
3.18 to be 4 960.

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SECTION D

4.1 The four components of aggregate demand are

[1] investment, government expenditure, consumption spending and net exports.

[2] consumption spending, savings, capital formation and exports.
[3] consumption spending, investment, savings and government expenditure.
[4] investment, government expenditure, capital formation and imports.

4.1 The correct alternative is (1)

The four components of aggregate demand are investment, government expenditure,

consumption spending and net exports.

4.2 Which of the following statements are correct?

a. AD and AS curves are simply summations of market demand and supply curves for
different goods and services produced.
b. The AD curve indicates the level of total expenditure at various price levels in the
economy.
c. The AS curve indicates the various levels of output which are supplied at constant prices.
[1] All the statements are correct.
[2] a and b
[3] a
[4] b
[5] c

4.2 The correct alternative is (4)

b. Correct. The AD curve indicates the level of total expenditure at various price levels in the
economy. It also shows an inverse relationship between the price level and real GDP.

4.3 In the AD-AS model,

[1] an increase in productivity is shown by a shift of the aggregate supply curve to the left.
[2] a decrease in the interest rate is shown by a rightward shift of the aggregate demand
curve.
[3] an increase in the interest rate is shown by a shift of the aggregate supply curve to the left.
[4] a decrease in imports is shown by a shift of the aggregate demand curve to the left.

4.3 The correct alternative is (2)

Question 4.3 deals with shifts of the aggregate demand and aggregate supply curves.

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Question 4.4 is based on the following diagram.

4.4 Movement from point E0 to E1 must have been as a result of

[1] an increase in interest rate.

[2] a decrease in taxes.
[3] an increase in money supply.

4.4 The correct alternative is (1)

[1] Correct. When the interest rate increases, investment will decrease due to the high cost of
borrowing. A decrease in investment will lead to a decrease in aggregate demand, which will
shift the AD curve to the left.

4.5 If real GDP increases and price level remains stable, it is likely that

[1] both aggregate demand and aggregate supply have increased.

[2] aggregate demand has increased and aggregate supply has decreased.
[3] aggregate supply has increased and aggregate demand has decreased.
[4] both aggregate demand and aggregate supply have decreased.

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4.5 The correct alternative is (1)

The key to this question is to draw the indicated movements in the AD and AS curves. For
example, in statement [1] both aggregate demand and aggregate supply increase:

4.6 The monetary transmission mechanism

[1] starts with a change in investment.

[2] is not affected by the interest elasticity of investment demand.
[3] shows how changes in the monetary sector is transmitted to the financial sector.
[4] explains how changes in interest rates influence real variables in the economy.

4.6 The correct alternative is (4)

4. Correct. The monetary transmission mechanism describes how changes in the monetary
sector are transmitted to the real sector of the economy.

4.7 Which one of the following statements about lags is correct?

[1] The decision lag is shorter for fiscal policy than for monetary policy.
[2] The implementation lag is extremely short for fiscal policy and long for monetary
policies.
[3] The recognition lag is the same for fiscal and monetary policy.
[4] The impact lag is shorter for monetary policy than for fiscal policy.

4.7 The correct alternative is (3)

The recognition lag is the same for fiscal and monetary policy.

4.8 Which of the following statements are correct?

a. Inflation means buying less with your money now than before prices increased.
b. Purchasing power of a consumer’s income is inversely related with inflation.

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c. Nominal values are obtained by dividing the real values by the price level.
[1] All the statements are correct.
[2] a and b
[3] a and c
[4] b and c
[5] c

4.8 The correct alternative is (2)

a. Correct. Inflation reduces the purchasing power of money.

b. Correct. When prices increase, the purchasing power of a consumer’s income falls and
when prices decrease, the consumer can afford more goods.

4.9 Which of the following statements are correct?

[1] If the inflation rate is lower than the nominal interest rate, it is likely that wealth will be
redistributed from the borrower to the lender.
[2] If individuals expect a further increase in inflation, they may tend to save more in
traditional forms of saving.
[3] High inflation tends to stimulate productive activity at the expense of speculative activity.
[4] If inflation results in balance of payments problems it can be overcome by allowing the
local currency to appreciate against other currencies.

4.9 The correct alternative is (1)

If the inflation rate is lower than the nominal interest rate, the real interest rate is positive and
wealth will be redistributed from the borrower to the lender.

4.10 During inflation, government realises increased revenue from taxation known as

[1] fiscal income.

[2] fiscal surplus.
[3] fiscal deficit.
[4] fiscal dividend.

4.10 The correct alternative is (4)

During inflation, government realises increased revenue from taxation known as fiscal
dividend.

4.11 Which of the following statements are correct?

a. The demand pull inflation is caused by excessive aggregate demand in relation to an

economy’s production capacity.
b. Cost-push inflation is caused by an increase in the cost of imported capital and
intermediate goods.
c. Cost-push inflation can be combated by contractionary monetary and fiscal policies.
[1] a and c
[2] a and b

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[3] c
[4] b and c
[5] All the statements are correct.

4.11 The correct alternative is (2)

a. Correct. Demand-pull inflation occurs when the aggregate demand for goods and services
exceeds the aggregate supply. This type of inflation is often described as a case of “too much
money chasing too few goods” and may be caused by expansionary fiscal and monetary
policies.
b. Correct. Cost-push inflation is triggered by increases in the cost of production.

4.12. Stagflation refers to

[1] an increase in inflation and a decrease in unemployment.

[2] a decrease in inflation and an increase in employment.
[3] an increase in the general price level and a decrease in the level of output.
[4] a decrease in the general price level and an increase in the level of output.

4.12 The correct alternative is (3)

Stagflation is when inflation is accompanied by unemployment.

4.13 Unemployment

[1] includes everybody who are willing and able to work, but do not have a job.
[2] leads to human development as well as gaining of experience.
[3] is not always a loss to society provided present labour is saved for future use.
[4] can be reduced by the availability of unemployment benefits and other social welfare
programmes.

4.13 The correct alternative is (1)

4.14 Suppose that the total labour force is 2 250 and the number of unemployed persons is
750. This gives the rate of unemployment of

[1] 0, 33%
[2] 3%
[3] 33%
[4] 2%
[5] 25%

4.14 The correct alternative is (3)

4.15 Which of the following statements are correct?

a. To combat unemployment steps must be taken to stimulate the demand for labour.
b. Stricter immigration control could help to combat the unemployment problem in South
Africa.

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c. Efforts to increase the demand for exports do not influence the domestic demand for
labour.
[1] All the statements are correct.
[2] a and b
[3] a and c
[4] b and c
[5] c

4.15 The correct alternative is (2)

a. Correct. When the demand for labour is stimulated, additional employment opportunities
are created. As this happens more people are employed resulting in a reduction of
unemployment.
b. Correct. Since rapid population increases can cause unemployment, stricter immigration
control could cut down the rate at which unemployed workers from other countries enter
South Africa and add to the existing unemployment statistics.

Use the figure below which shows the trade-off between inflation and unemployment, to
answer question 4.16.

4.16 A movement from point a to b might be caused by

[1] a decrease in aggregate supply.

[2] an increase in aggregate supply.
[3] a decrease in aggregate demand.
[4] an increase in aggregate demand.

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4.16 The correct alternative is (3).

The Phillips curve relates the unemployment rate to the inflation rate. The movement from
point A to point B shows a decrease in inflation while unemployment increased. A decrease
in aggregate demand (shown by a leftward shift of the aggregate demand curve), decreases
the price level and the level of production. The demand for labour will therefore decrease,
that is, unemployment will increase.

4.17 Which of the following statements are correct?

a. Real GDP is obtained by adjusting nominal GDP for inflation.

b. GDP per capita is calculated by dividing GDP by the number of people in the population.
c. In measuring economic growth, the production or income should be expressed in nominal
terms.
[1] All the statements are correct.
[2] a and b
[3] a and c
[4] b and c
[5] a

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4.17 The correct alternative is (2)

a. Correct. Real GDP is obtained by adjusting nominal GDP for inflation. See Box 4-2 of the
prescribed textbook.
b. Correct. GDP per capita is calculated by dividing GDP by the number of people in the
population.

4.18 Suppose that the real GDP for 2004 is 600 and 580 for 2003. Economic growth in 2004
is approximately

[1] 0,036%
[2] 2%
[3] 3,6%
[4] 20%
[5] 36%

4.18 The correct alternative is (3)

% change in GDP=(600-580) X100

580

=3.448%

Question 4.19 is based on the following diagram.

4.19 A complete business cycle is represented by movement from

[1] A to B.
[2] B to C.
[3] A to C.

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4.19 The correct alternative is (3)

Business cycle refers to the expansions and contractions in the economy over a period. A
complete cycle consists of a trough, an expansion, a peak and a downswing.

4.20 Which one of the following factors could cause an expansion in production
capacity?

[1] domestic demand.

[2] export demand.
[3] import substitution.
[4] capital deepening.

4.20 The correct alternative is (4)

"Production capacity" refers to the supply side of the economy. The first three options are all
demand factors. Capital deepening is when the production process becomes more capital
intensive.

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