NSS EXPLORING ECONOMICS

HONG KONG DIPLOMA OF SECONDARY EDUCATION EXAMINATION

MOCK PAPER (2014 February)

ECONOMICS PAPER 1
Time allowed: 1 hour

INSTRUCTIONS

1. When told to open this book, you should check that all the questions are there. Look for
the words ‘END OF PAPER’ after the last question.

2. All questions carry equal marks.

3. ANSWER ALL QUESTIONS.

4. You should mark only ONE answer for each question. If you mark more than one answer,
you will receive NO MARKS for that question.

5. No marks will be deducted for wrong answers.

NSS Exploring Economics (Second Edition) 1 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Paper 1)
There are 45 questions in this paper. Choose the BEST answer for each question.

1. The Lantau Development Alliance (大嶼山發展聯盟) proposes to develop Lantau Island

as a commercial zone to attract mainland tourists. The completion of the Hong Kong-
Zhuhai-Macau Bridge (港珠澳大橋) will allow visitors to go to Lantau Island more
easily. The land in north Lantau can also be used to build residential buildings.

The above case is related to the ________ question(s) in economics.

A. ‘what to produce’
B. ‘how to produce’
C. ‘what to produce’ and ‘for whom to produce’
D. ‘how to produce’ and ‘for whom to produce’

2. James is going to donate blood to the Hong Kong Red Cross. Which of the following
events will increase his cost of donating blood?
A. The weather is chilly and he gets a cold after donating blood.
B. His mother usually gives him two candies after he donates. However, she only gives
him one candy this time.
C. He cannot donate blood because the nurse says that his health is not suitable to do so.
D. There are a lot of people at the blood donor centre and he has to wait for a while
before donating.

3. Which of the following statements about interest is correct?

A. Peter uses his money instead of borrowing money from others to buy a house,
therefore interest is not involved.
B. Interest implies scarcity.
C. If the interest rate increases, firms will invest more.
D. Interest does not exist in barter.

NSS Exploring Economics (Second Edition) 2 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Paper 1)
4. Phillip is the owner of a logistics company. The following shows the relationship between
inputs and outputs.

Trucks (units) Labour (units) Output (units)

5 0 0
5 5 10
5 10 25
5 15 35

According to the above table, we can conclude that:

A. the law of diminishing marginal returns applies.
B. the company enjoys economies of scale when it produces 25 units.
C. the factor income of Phillip’s contribution is called wages.
D. the company suffers from diseconomies of scale when it produces 35 units.

5. The animation industry in China has grown greatly in the past 10 years. Some well-
known works include Pleasant Goat and Big Big Wolf（《喜羊羊與灰太狼》）and
Qin’s Moon（《秦時明月》）. Many writers and artists have been trained and are
working
in the animation industry. Which of the following statements is correct?
A. Animation firms in China have enjoyed internal economies of scale.
B. The above case can raise the share of secondary production in China’s GDP.
C. Animation firms in China have enjoyed external economies of scale.
D. None of the above

6. The flower in a public park is

A. a free good because people do not need to pay to see it.
B. a public good because it is for public enjoyment.
C. ‘land' because it is not artificially made.
D. a producer good because it is an input in providing park leisure services.

7. Mary has been a cleaner at a public hospital and is paid an hourly rate. She finds a new
job at a toy factory and is now paid by a piece rate. Which of the following statements can
best describe her change?
A. Mary can enjoy a more stable income than before.
B. Mary must earn more than before.
C. Mary has a higher incentive to work hard than before.
D. Mary has a higher incentive to shirk than before.

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Mock Paper (2014 February) (Paper 1)
NSS Exploring Economics (Second Edition) 4 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Paper 1)
8. Agnès b first focused on designing clothes. Later, the firm launched a skincare and
cosmetics line. It now operates cafés as well. Which kind of expansion is this?
A. Backward integration
B. Forward integration
C. Horizontal integration
D. Conglomerate integration

9. A tutorial school has to disclose its financial accounts to the public. Which of the
following statements about the tutorial school is/are correct?
(1) The loss borne by its owners is limited to the amount of capital they have
invested.
(2) If one of the owners signs a contract with another company, other owners have to
bear the responsibility as well.
(3) If one of its owners dies, it will come to an end.
A. (1) only
B. (1) and (2) only
C. (1) and (3) only
D. (2) and (3) only

10. Which of the following factors will change the market supply of sliced beef hotpot meals?
A. Beef imported from Australia becomes cheaper because of the depreciation of
Australian dollars.
B. More people want cheese hotpots because of advertising.
C. People become richer because of rising housing prices.
D. Many tourists from the mainland of China like eating hotpot meals in Hong Kong.

11. Many tourists in the mainland of China buy milk powder in Hong Kong. Suppose people
departing Hong Kong are limited to taking only two cans of milk powder, and more
German milk powder manufacturers start selling their products in Hong Kong. Based on
the above events, we can conclude that in Hong Kong:
A. the market price of milk powder will decrease.
B. the quantity transacted of milk powder will decrease.
C. the average quality of milk powder will increase.
D. None of the above

NSS Exploring Economics (Second Edition) 5 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Paper 1)
12. Which of the following statements will lead to an increase in the price of televisions?
A. The technology for making televisions has improved.
B. More people use their smartphones to watch television programmes.
C. The government approves more free-to-air television licenses.
D. People expect the price of televisions to decrease.

Study the following news and answer Questions 13 and 14.

President Xi Jinping (習近平) had a surprise visit to a steamed bun restaurant in Beijing. He
enjoyed a lunch of steamed buns, fried pork liver and stir-fired greens, which cost him
RMB21. On the next day, locals and tourists formed long queues to order the same set lunch
(called Xi’s Combo). A restaurant representative said that the restaurant would not raise the
price for this set meal.

13. Which of the following diagrams can best illustrate the effects of the above event?

A. RMB Xi’s Combo B. RMB Xi’s Combo

S

21 S 21
D2
D1 D2
D1
0 Q 0 Q

C. RMB Xi’s Combo D. RMB Pork liver

S S1
S2
21

D2
D1
D
0 Q 0 Q

14. John said, ‘Although I need to spend three hours waiting for Xi’s Combo, it is worthwhile
as I can enjoy the lunch at the same cost as President Xi.’ John’s statement is
A. correct because all customers can enjoy Xi’s Combo at the price of RMB21.
B. correct because the restaurant has decided not to raise the price.
C. incorrect because he ignores the fact that Xi’s time cost can be very high.
D. positive because it is worthwhile to wait for Xi’s Combo.

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Mock Paper (2014 February) (Paper 1)
15. Some people have proposed reducing the number of tourists from the mainland. If the
government sets an effective quota on the number of mainland tourists, which of the
following statements are correct?
(1) There will be excess demand in the mainland for tours to Hong Kong.
(2) The average quality of tour services provided by Hong Kong travel agencies to
mainland tourists will improve.
(3) Hotel rates in Hong Kong will decrease.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

16. Recently, the cold winter in Country C has led to a poor vegetable harvest. The total
income of farmers has decreased by 20%. Which of the following statements is correct?
A. The producer surplus of farmers may increase.
B. The demand for vegetables is inelastic.
C. The prices of dishes at restaurants will decrease.
D. The consumer surplus of vegetarians will decrease.

17. In October 2011, the Hong Kong Government launched the Work Incentive Transport
Subsidy (WITS) Scheme (鼓勵就業交通津貼計劃). The aims of this scheme are to help
reduce low-wage earners’ cost of travelling to and from work, and to encourage them to
stay employed. Under this scheme, a full-rate subsidy of $600 per month will be granted
to successful applicants, regardless of their actual cost of travelling from and to work.
Which of the following conclusions about this scheme can we draw?
A. This scheme reduces income inequality by equalising income.
B. This scheme can increase the occupational mobility of low-wage workers.
C. Fewer low-wage workers will choose to work across districts.
D. None of the above

18. Which of the following is an example of divergence between private and social costs?
A. An internet traffic jam occurred during Christmas as many people tried to send
electronic cards to their friends.
B. Some famous singers post their photos on their blogs.
C. A street sleeper has enjoyed a lunch at a restaurant but has no money to pay for it.
D. A depreciation of the Euro leads to a decrease in Hong Kong’s exports to European
countries.

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Mock Paper (2014 February) (Paper 1)
19. Which of the following events can most likely improve efficiency?
A. The competition from Supermarket W leads to a decrease in Supermarket P’s profits.
To reduce competition, Supermarket P takes over Supermarket W.
B. The government in Country B has banned all production that involved pollution.
C. The government in Country C has introduced minimum wage laws.
D. Due to the light pollution created by a department store, Mr Chan has installed a
window curtain.

20. To promote fair use of broadband services, the government of Country A banned the
provision of unlimited broadband service plans and set the maximum data usage at 2
gigabytes per person. If the policy is effective, which of the following statements is
correct?
A. The policy must lead to underconsumption of broadband services.
B. The price of limited broadband service plans will decrease.
C. Efficiency can be improved if people are allowed to sell their data plan quotas to
others.
D. The total revenue of broadband services providers will decrease.

21. The following diagram shows Island H’s Lorenz curves before and after the introduction
of universal suffrage (普選).

100
Cumulative percentage of income

Before universal suffrage

45-degree line
After universal suffrage

0 100
Cumulative percentage of households

Based on the above diagram, we can conclude that after universal suffrage:
A. people on Island H live better than before.
B. the Gini coefficient of Island H has decreased.
C. the income level of the poor has increased.
D. the income distribution on Island H has become fairer.

NSS Exploring Economics (Second Edition) 8 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Paper 1)
22. The problem of income inequality Hong Kong is serious. Which of the following is
LEAST likely the source of the problem?
A. The progressive salaries tax
B. The uneven ownership of capital
C. Population ageing in Hong Kong
D. The youth unemployment rate is higher than the overall unemployment rate.

23. Which of the following incomes should NOT be included in Hong Kong’s GNP?
A. Income of a Hong Kong parallel trader from taking more than two cans of milk
powder illegally out of Hong Kong
B. Salary of a French designer from a permanent position of chief designer at a Hong
Kong firm
C. Salary of a British education consultant who is employed by a secondary school in
Hong Kong on a three-month contract
D. Salary of a Japanese chef who has worked for a Japanese restaurant in Hong Kong for
three years

24. Refer to the following production chain.

Dried Honey jujube
jujubes($8,00 Herbal tea tea($300,000) Hong Kong
Online shops on house in
0) customers
TaoBao China Hong Kong
( 淘寶中國 )

Honey jujube
Honey($2 Tourists
Honey farm tea($100,000)
0,000)
in Shatin

The value-added of the above herbal tea house is ____________ and the contribution of
the above production chain to Hong Kong’s GDP is ____________.
A. $272,000 … $280,000
B. $372,000 … $392,000
C. $372,000 … $400,000
D. $400,000 … $392,000

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Mock Paper (2014 February) (Paper 1)
25. The following table shows Hong Kong’s gross domestic product information in 2012.

$ billion
Private consumption expenditure 1,300
Gross domestic fixed capital formation 539
Decrease in inventories 8
Government consumption expenditure 185
Exports of goods 3,592
Imports of goods 4,116
Exports of services 998
Imports of services 448

Suppose Hong Kong’s population in 2012 was 7 million. Hong Kong’s per capita GDP in
2012 was
A. $291,714.
B. $294,000.
C. $419,714.
D. $422,000.

26. Refer to the following data for Country Y.

Unemployed population 1,200,000

Unemployment rate 25%
Underemployed population 120,000

Country Y’s underemployment rate is

A. 2%.
B. 2.5%.
C. 5%.
D. 10%.

NSS Exploring Economics (Second Edition) 10 © Pearson Education Asia Limited 2014
Mock Paper (2014 February) (Paper 1)
27. Study the following aggregate demand (AD) curve.
Price level

AD

0 Aggregate output

Which of the following can explain the movement from Point A to Point B?
A. When the price level falls, people can buy more goods with the same amount of
money. Thus, people’s consumption expenditure increases and so aggregate demand
increases.
B. When the price level falls, the interest rate will increase. As people earn more interest
income, their consumption expenditure increases.
C. When the price level falls, the cost of research decreases. Firms will increase their
expenses on research and development. As a result, the full employment output level
increases.
D. None of the above

28. Which of the following events will raise Country U’s price level and aggregate output in
the short run?
A. Country U imports oil mainly from Country R. Recently, Country R has stopped
exporting oil to Country U.
B. Country U has exploited a new oil field.
C. Country C is the major trading partner of Country U. Recently, Country C has
experienced rapid economic growth.
D. Country U has made a great advance in technology.

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Mock Paper (2014 February) (Paper 1)
29. Refer to the following diagram about an economy’s aggregate demand (AD) curve, short
run aggregate supply (SRAS) curve and long run aggregate supply (LRAS) curve.
Price level
LRAS
SRAS
B D

AD

0 Aggregate output

Suppose the economy is at Point A. Which of the following statements is correct?

A. In the long run, the LRAS curve will shift rightwards, and intersect with the SRAS
and AD curves. As a result, Point A also represents the long run equilibrium.
B. In the long run, the SRAS curve will shift upwards, and intersect with the LRAS and
AD curves. As a result, Point B represents the long run equilibrium.
C. In the long run, the AD curve will shift leftwards, and intersect with the SRAS and
LRAS curves. As a result, Point C represents the long run equilibrium.
D. The inflationary gap is equal to the distance BD.

30. Suppose an economy is initially at the long run equilibrium and does not have a trade
deficit or surplus. Which of the following events can lead to the problem of
unemployment and a trade deficit at the same time?
(1) The domestic currency appreciates.
(2) The government reduces its expenditure.
(3) The income of trading partners decreases.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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31. At the end of December 2013, France’s Constitutional Council approved the
“millionaire’s tax”. Under this new tax, companies will be taxed at a rate of 50% for the
portion of wages above €1 million in 2013 and 2014, capped at 5% of a company’s sales
revenue.

The millionaire’s tax

A. is an indirect tax.
B. is a proportional tax.
C. cannot help reduce income inequality in France.
D. does not necessarily increase government revenue.

32. Which of the following policies is LEAST likely expansionary?

A. The central bank of Country J decides to maintain the growth rate of money supply at
2%.
B. The government of Country S decides to ban the import of movies from Country J.
C. The government of Country C decides to raise taxes to settle its foreign debts.
D. The government of Island H raises taxes to finance the construction of a new bridge.

33. Nowadays in Hong Kong, more and more retail shops welcome the use of renminbi (人民
幣) by customers to settle payments. We can conclude that:
A. Renminbi is ‘money’ in Hong Kong as it is accepted by some retail shops.
B. Renminbi can serve as a store of value in Hong Kong.
C. The problem of inflation is becoming more serious in Hong Kong.
D. Renminbi has a higher intrinsic value than Hong Kong dollars.

Study the following case and answer Questions 34 and 35.

Susan receives a remittance equal to HK$480,000 from her eldest daughter in the US. She
decides to deposit the money into a deposit-taking institution to earn interest. She needs the
money in one month for her youngest daughter’s bride money (嫁妝).

34. Into which institution may Susan deposit the money?

(1) The Hong Kong Monetary Authority
(2) A restricted licence bank
(3) A deposit-taking company
A. (2) only
B. (1) and (3) only
C. (2) and (3) only

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 D. None of the above
35. What are the immediate effects on the money supply if the money is directly remitted into
Susan’s savings account with a licensed bank?
A. M1 increases by HK$480,000, but both M2 and M3 remain unchanged.
B. Only M2 and M3 increase by HK$480,000.
C. Only M3 increases by HK$480,000.
D. M1, M2 and M3 all increase by HK$480,000.

36. Suppose the required reserve ratio is 10% and the public initially holds $100 cash. The
following is information about Country H’s banking system.

Assets ($) Liabilities ($)

Reserves 180 Deposits 900
Loans 720

If the public no longer holds any cash, the total amount of deposits will increase by
__________ and the maximum amount of money supply is __________.
A. $1,720 … $2,700
B. $1,900 … $2,800
C. $1,900 … $2,900
D. $2,000 … $2,800

37. Island J’s nominal interest rate and expected inflation rate are 2% and 1%, respectively. If
the inflation rate turns out to be -3%, then
A. debtors will gain.
B. the cost of holding money must increase.
C. the actual real rate of return on holding money is 3%.
D. the actual real interest rate is 3%.

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Mock Paper (2014 February) (Paper 1)
Study the following diagram about Country H’s money market and answer Questions 38 and
39. The money market equilibrium moves from Point X to Point Y.
Interest rate
MS1 MS2

Md

0 Quantity of money

38. Which of the following events can explain the above change?
A. The central bank has raised the required reserve ratio.
B. The central bank has sold government bonds on the open market.
C. The public prefers to hold more cash than before.
D. Commercial banks keep less excess reserves than before.

39. What is the possible effect of the above change on Country H’s economy?
(1) Its employment level will increase in the short run.
(2) Its output level will increase in the long run.
(3) Its price level will increase in the long run.
(4) Its price level will decrease in the short run.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (2) and (4) only

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40. Suppose Country H’s nominal GDP increases by 10% in the long run. Based on the
quantity theory of money, its ___________ must also increase by 10%.
(1) price level
(2) velocity of money
(3) real GDP
(4) money supply
A. (3) only
B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

41. Study the following diagram about the income tax system in Country G.
Tax payment ($)

0 Taxable income ($)

The government of Country G has launched a free user-friendly, tax-computing software

so that people can easily determine the taxes they owe.

Country G’s income tax is ___________ and the above action of the government
illustrates the ___________ principle of taxation.
A. regressive … certainty
B. regressive … convenience
C. progressive … convenience
D. progressive … economy

42. If Japanese yen significantly depreciates against US dollars,

A. Japan’s total revenue (in Japanese dollars) from exporting beef will increase only if
the demand for Japanese beef is elastic.
B. the quality of Japanese beef imported into Hong Kong will increase.
C. Hong Kong’s total expenditure (in Hong Kong dollars) on imported Japanese beef
will increase if the demand for Japanese beef is elastic.
D. Japanese yen may appreciate against Hong Kong dollars.

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Mock Paper (2014 February) (Paper 1)
Study the following table and answer Questions 43 and 44. The table shows the amounts of
beef (B) and animation (A) that China and Japan can produce with all resources allocated to
the production of each good.

Beef (units) Animation (units)

China 40,000 or 100,000
Japan 4,000 or 8,000

43. Based on the above table, we can conclude that:

(1) China has an absolute advantage in producing both beef and animation.
(2) China has a comparative advantage in producing both beef and animation.
(3) Japan has a comparative advantage in producing beef.
A. (3) only
B. (1) and (2) only
C. (1) and (3) only
D. None of the above

44. Suppose the terms of trade is 1B = 2.25A and the transport cost for 1B is 0.30A. Which of
the following statements are correct?
(1) The two countries will not trade with each other as it is not possible for trade to be
mutually beneficial.
(2) The beef trade will take place only if the two countries are willing to share the
transport cost evenly.
(3) The net gain (after deducting the transport cost) from trading 100B is 20A.
(4) If both countries adopt complete specialisation, their total output of one of the
goods will decrease.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (3) and (4) only

45. In 2013, the Philippines suffered from Typhoon Haiyan (海燕). Hong Kong raised
HKD1.4 million for the relief work undertaken by the Hong Kong Red Cross. This item
was included in Hong Kong’s ___________ account and it caused ___________ in Hong
Kong’s balance of payments.
A. current; an improvement
B. current transfers; a deterioration
C. capital and financial; a deterioration
D. income; a deterioration

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Mock Paper (2014 February) (Paper 1)
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