Name: ________________________________ Class: S6 _____ Class Number: ______

Part 1: Multiple Choice Questions

INSTRUCTIONS

This paper consists of TWO parts, Part 1 (Multiple Choice Questions) and Part 2 (Section A and B Questions).

1. Read carefully the instructions on the Multiple Choice Answer Sheet and insert the information required in the
spaces provided.

2. When told to open this paper, you should check that all the questions are there. Look for the words “End of Part 1”
after the last question.

3. All questions in Part 1 carry equal marks.

4. ANSWER ALL QUESTIONS. You are advised to use an HB pencil to mark all the answers on the Answer Sheet,
so that wrong marks can be completely erased with a clean rubber. You must mark the answers clearly; otherwise
you will lose marks if the answers cannot be captured.

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

6. No marks will be deducted for wrong answers.

P.1
There are 25 questions in Part 1. Choose the BEST answer for each question.

1. Suppose the government now raises the effective price floor on Good X. Which of the following statements is
NOT correct?

A. Consumers’ spending on Good X may increase, decrease or remain unchanged.

B. The deadweight loss will increase.
C. The producer surplus will increase.
D. The amount of Good X sold in the market will decrease.

2. The following table shows the demand and supply schedule of Good X.

Price $6 $7 $8 $9 $10
Quantity demanded (units) 60 50 40 30 20
Quantity supplied (units) 20 30 40 50 60

Suppose the government imposes a per-unit subsidy of $2 on Good X. Which of the following statements is correct?

A. The new total expenditure is $360.

B. Producers’ total revenue (including subsidy) is $350.
C. Consumers share the same proportion of subsidy as producers.
D. The new market price is $9.

3. Suppose new production technology lowers the cost of production of surgery masks. The marginal benefit of the
last unit of surgery mask consumed will __________ and consumers’ total expenditure on surgery masks will
___________.

A. increase … increase
B. increase … increase or decrease
C. decrease … increase
D. decrease … increase or decrease

4. Which of the following policies will reduce the post-tax post-transfer Gini coefficient in Hong Kong?

(1) Raising the amount of Comprehensive Social Security Assistance Schemes (綜合社會保障援助計劃).
(2) Raising the standard tax rate on salaries tax.
(3) Introducing the general sales tax.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

5. Recently, the Legislative Council has passed the bill on implementing the municipal solid waste charging (都市固
體廢物收費). This is a __________ solution to tackle the pollution problem in Hong Kong as it can reduce the
quantity of waste generated by _____________ of waste disposal.

A. market … raising people’s marginal private cost

B. market … lowering people’s marginal private benefit
C. government … raising people’s marginal private cost
D. government … lowering people’s marginal private benefit

P.2
6. Consider the following Gross Domestic Product (GDP) data about a country.

Components $ million
Private consumption expenditure 380
Government consumption expenditure 450
Gross domestic fixed capital formation 230
Decrease in inventory 50
Subsidies 30
Depreciation 40
Total exports 130
Total imports 170

The GDP at market price is $________ million.

A. 970
B. 1010
C. 1040
D. 1070

7. To calculate the gross national income of Hong Kong, which of the following items should be deducted from the
gross domestic product of Hong Kong?

A. The salary paid to a British native English teacher who has been teaching in a Hong Kong school for two
years.
B. The capital gain earned by a Japan resident from investing in the shares of a Hong Kong company.
C. The rental income earned by a Hong Kong resident from leasing his flat in Hong Kong.
D. The dividend paid by a Hong Kong listed company to a US resident.

8. Consider the following information about an economy:

Growth rate (relative to previous year) (%)

Year 1 Year 2
Nominal GDP -1 -1
GDP deflator 3 1
Population 1 0

Which of the following about the economy is correct?

A. The general price level decreased in Year 2.

B. The real output increased in Year 2.
C. The nominal GDP in Year 2 was the same as that in Year 1.
D. The per capita real GDP decreased in Year 2.

9. Suppose in 2020, the number of unemployed persons and underemployed persons in an economy was 60 000 and
30 000 respectively. Given the unemployment rate was 5%, what is the number of employed persons in the
economy in 2020?

A. 1 110 000
B. 1 140 000
C. 1 200 000
D. 1 260 000

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10. The following diagram shows the GDP deflator in October 2020 to July 2021.

Which of the following statements is correct?

A. Deflation occurred in the above period.

B. The nominal GDP decreased in the above period.
C. The general price level increased in a slow rate in the above period.
D. The living standard decreased in the above period.

11. The government carried out the following two policies:

Policy I: Reduce the progressivity of the salaries tax rate.

Policy II: Increase the subsidy on developing innovation and technology.

Which of the following AD-AS diagrams could most likely show the effect on aggregate output caused by the
above two policies?

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12. An inflationary gap

(1) implies that the output level in the short run is above the full-employment level.
(2) implies that the price level is above the long run equilibrium price level.
(3) will be widened if the central bank prints and injects more money into the public circulation.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

13. Which of the following is/are progressive tax(es)?

(1) (2)
Tax payment Tax payment

0 Income 0 Income

(3) (4)
Average tax rate Average tax rate

0 Income 0 Income
A. (3) only
B. (4) only
C. (1) and (2) only
D. (2) and (3) only

14. If the government increases the expenditure on building infrastructure, which of the following are the long run
effects on the economy?

(1) The aggregate demand increases.

(2) The potential output increases.
(3) The price level increases.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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15. Under which of the following situations may a fiscal deficit and a trade deficit be eliminated at the same time?

(1) a decrease in the required reserve ratio

(2) an increase in profits tax
(3) an imposition of embargo on imports from several countries

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

16. Billy wants to make a deposit of $300 000 for three months. Which of the following financial institutions in Hong
Kong may accept his deposit?

(1) licensed bank

(2) restricted licence bank
(3) deposit taking company

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

17. Which of the following are the functions of Hong Kong Monetary Authority?

(1) issue currency notes

(2) act as the lender of last resort
(3) determine the best lending rate in the market

A. (2) only
B. (3) only
C. (1) and (2) only
D. (1) and (3) only

18. Which of the following statements is/are correct?

(1) Money should be homogeneous so that they can be easily recognised.

(2) All kinds of deposits are good store of value as they are interest-bearing.
(3) Diamonds are good form of money as they are limited in supply and divisible.

A. (1) only
B. (3) only
C. (1) and (2) only
D. (2) and (3) only

19. Which of the following will result in a rightward shift of asset demand for money curve?

A. The nominal interest rate increases.

B. The general price level increases.
C. People expect the bond price to rise in the future.
D. Economists warn that the risk of bursting of the assets bubble is very high.

P.6
20. Danny withdraws HK$300 000 from his time deposit account with a licensed bank. He then uses half of the amount
withdrawn to buy a negotiable certificate of deposit issued by a deposit-taking company, and keeps the remaining
half in the safe at the bank.

What will be the immediate effect of the above actions on the Hong Kong dollar money supply?

A. M1 will increase by HK$300 000.

B. M2 will decrease by HK$300 000 and M3 will decrease by HK$150 000
C. M2 will decrease by HK$150 000 and M3 will increase by HK$150 000.
D. M1 will increase by HK$150 000 and M2 will decrease by HK$150 000.

21. Refer to the following balance sheet of a banking system. Its excess reserve is $50 million.

Assets ($ million) Liabilities ($ million)

Reserves 200 Deposits 750
Loans 550

Which of the following statements is NOT correct?

A. The actual banking multiplier is 3.75.

B. The amount of deposits will become $700 million immediately after the public withdraws $50 million
deposits.
C. If the banks are fully loaned up, the increase in deposits will be the same as the increase in loans.
D. The banking system may expand its loans to a maximum of $1 000 million.

22. Refer to the following information about an economy.

Deposits in the banking system $1 000 000

Actual reserve ratio 20%
Reserve shortage $50 000
Cash held by non-bank public $30 000

What is the monetary base of the economy?

A. $225 000
B. $230 000
C. $235 000
D. $1 300 000

23. Which of the following will lead to an increase in monetary base?

A. A commercial bank purchases government bonds from another commercial bank.

B. Commercial banks lend out more excess reserve.
C. More cash are remitted to the economy from overseas.
D. The public deposits more cash into the banking system.

24. Which of the following will reduce the size of actual banking multiplier?

A. More popular use of e-payment system.

B. The economy grows fast and investment opportunities flourish.
C. The interest rate of bank deposit increases.
D. The amount of cash leakage from the banking system increases.

P.7
25. Suppose the nominal interest rate and the expected deflation rate are 4% and 3% respectively. The nominal rate of
return of holding money will be __________ and the real rate of return of holding money is expected to be
__________.

A. 0% … -3%
B. 0% … 3%
C. 4% … -3%
D. 4% … 3%

--End of Part 1—

P.8
 ECONOMICS Name:

Part 2: Short Questions Class:

Class number:
Question-Answer Book

This paper must be answered in English.

Question No. Marks

INSTRUCTIONS 1 /6

1. Write your name, class and class number in the spaces 2 /3

provided on the front cover of this Question-Answer Book.
3 /4
2. Answer ALL questions in this section.
4 /3
3. Write your answers in the spaces provided in this
Question-Answer book. Do not write in the margins.
5 /6
Answers written in the margins will not be marked.

4. Supplementary answer sheets will be supplied on request. 6 / 19

Write your name, class, class number and question number
on each sheet, and put them INSIDE this book. 7 / 21

5. No extra time will be given to students for writing your Total / 62

name or question number after the ‘Time is up’
announcement.

P.9
Section A (22 marks)
1. Explain, with the aid of Figure 1 below, how an increase in the effective quota improves economic efficiency.
(6 marks)

Price ($) Figure 1

0 Quantity

2. The diagram below shows the changes in unemployment rate and GDP growth rate of Country A over the past
few years.

Identify the phase of business cycle which Year 2 was in. Apart from the changes in the unemployment rate
and GDP growth rate, list TWO other general economic phenomena which occur in this phase. (3 marks)

P.10
3. Refer to the following charts:

Chart 1: the value of 1 Bitcoin (in terms of US$) between October 2020 to October 2021
Value of 1 Bitcoin (in US$)
65 000
60 000
55 000
50 000
45 000
40 000
35 000
30 000
25 000
20 000
15 000
10 000
5 000

(Source: https://coinmarketcap.com)

Chart 2: the value of HK$1 (in terms of US$) between October 2020 to October 2021

Value of HK$1 (in US$)

2020 2021

(Source: https://www.exchangerates.org.uk/HKD-USD-exchange-rate-history.html)

(a) Compare the stability of the value of 1 Bitcoin (in terms of US$) and HK$1 (in terms of US$) between
October 2020 and October 2021 shown in Chart 1 and Chart 2 respectively. (1 mark)

(b) Based on your answer in (a), explain why Hong Kong dollar is a better standard of deferred payment than
Bitcoin. (3 marks)

P.11
4. Mandy had borrowed a one-year bank loan $200 000 at an annual interest rate of 5% last year. She expected the
inflation rate to be 2%. However, the inflation rate over the past year turned out to be 4% unexpectedly.

Mandy repaid the bank loan plus interest after one year. Explain whether she would gain or loss. (3 marks)

5. The following is a news extract about the eating of meat.

How does eating meat harm the environment?

When land is used to raise animals instead of crops, precious water and soil are lost, trees are cut down to make
land for grazing or factory-farm sheds, and untreated animal waste pollutes rivers and streams. It has such a
devastating effect on all aspects of our environment.

(a) Based on the above news extract, explain, in terms of externality, why the production of meat may result in
inefficiency. (4 marks)

(b) Suppose the government imposes a 15% consumption tax on the price of the meat to discourage people from
eating meat. Explain whether such consumption tax is a progressive, proportional or regressive tax. (2 marks)

P.12
Section B (40 marks)
6. Suppose Country A is experiencing a deflationary (output) gap. The following is the balance sheet of the
banking system of Country A:

Assets ($ million) Liabilities ($ million)

Reserve 2 500 Deposits 10 000
Loans 8 000

Suppose the public always hold $100 million cash and the banks do not hold excess reserve. The central bank
now announces to lower the required reserve ratio by 5% to narrow down the deflationary (output) gap.

(a) Briefly describe the process of credit creation/contraction resulting from the above change in the required
reserve ratio. (3 marks)

(b) Calculate the maximum possible money supply of Country A. Show your workings. (4 marks)

(c) A student suggests that other than lowering the required reserve ratio, open market operations may also
help to narrow down the deflationary (output) gap. Justify his suggestion with the aid of Figure 2.
(8 marks)

(d) To achieve the same effect on the deflationary (output) gap as in part (c), an economist argues that
increasing the transfer payment to the low-income group would be a better tool than using monetary
policies. Briefly discuss ONE advantage and ONE disadvantage of this alternative policy on Country A as
opposed to the monetary policies. (4 marks)
Figure 2
Price level
SRAS

AD
0 Output

P.13
P.14
7. Since the outbreak of COVID-19, the unemployment situation in Hong Kong has raised public concern.

Source A: Hong Kong’s unemployed population and unemployment rate in 2020

300,000 7.00%

250,000 6.00%
Unemployed population

Unemployment rate
5.00%
200,000
4.00%
150,000
3.00%
100,000
2.00%
50,000 1.00%

0 0.00%

Unemployed population Unemployment rate

(Source: Census and Statistics Department, HKSAR Government)

Source B: Comment of the Financial Secretary on public finances in 2020

Mr Paul Chan, the Financial Secretary, said that public expenditure on investment and training to labour
would be increased to ease the impact of economic recession on society.
(Source: various newspapers)

Source C: Current unemployment assistance policy

Currently, under the Comprehensive Social Security Assistance (CSSA) scheme, the monthly standard rate
for an unemployed adult is HK$2,685 as from February 2021. Applicants with assets amounted to HKD
$66 000 or below* are eligible to apply for the CSSA.

*Note: The asset limit has been doubled in the context of COVID-19, but it is in a temporary basis.
(Source: research publication by the Legislative Council of HKSAR)

Source D: Opinions from different stakeholders on the unemployment problem

If the labour learn more new skills, hopefully, fewer people will be unemployed.

A government official
Providing re-training programmes to the unemployed may help them in the future,
but may not ease their life immediately.

A representative of
labour union

P.15
 I am not eligible to apply for the unemployment assistance under the CSSA, as I
have exceeded the asset limit. I need to find a job as soon as possible.

Unemployed person A
The unemployment assistance providing by the government currently is too low
for me to maintain my life.

Unemployed person B

(a) Refer to Source A. Explain ONE possible effect on the government revenue based on the change in the
unemployment rate. (3 marks)

(b) Refer to Sources A and B.

(i) Was there an inflationary / a deflationary (output) gap in Hong Kong in 2020? (1 mark)

(ii) Explain, WITHOUT using a diagram, under what condition the output gap will be narrowed down
after implementing the public finance policies mentioned by the Financial Secretary. (3 marks)

For part (c), candidates are required to present their answer in essay form. Criteria for marking will include
use of sources and economic theories, relevant content, logical presentation and clarity of expression.

(c) Suppose the government would like to spend a further sum of money to help the people who have been
unemployed for three months or longer. Below shows two different strategies:

Strategy I: Providing an additional one-off unemployment assistance with no more than $3000 to all
eligible unemployed in Hong Kong.

Strategy II: Providing subsidies to schools and organisations which provide short-term re-training
programmes to the eligible unemployed in Hong Kong.

With reference to the above sources and your own knowledge in Economics, discuss the effects of each
strategy on the following variables in order to evaluate the two strategies. (14 marks)
- aggregate output
- unemployment rate
- equity

P.16
P.17
--End of Part 2--

P.18
 Supplementary Answer Sheet:
Question No: ________________

--End of Paper--

YUEN LONG MERCHANTS ASSOCIATION SECONDARY SCHOOL

First Form Test, 2021-2022

P.19
Secondary: 6 Subject: Economics Suggested Answers

Section A: (25 marks ➔ 30 marks)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
C C D A C A D D B A C B A A C B C A D D
21. 22. 23. 24. 25.
D B C D B

Section B: (60 marks ➔ 70 marks)

1. Verbal elaboration:
- The increase in effective quota would raise the supply (1)
- and thus raise the quantity transacted and reduce the price. (1)
- The gap between marginal benefit and marginal cost is reduced as the quantity produced is increased
toward its efficient level. / The deadweight loss becomes smaller.
(1)

Indicate in the diagram:

- Rightward shift of the supply curve corresponding to an increase
in quota (1)
- Reduction in P and a rise in Q (1)
- Correct position for the reduction in deadweight loss (area wxyz)
(1)

2. Recession (1)

Phenomena:
- falling inflation rate or deflation occurs
- falling business confidence
- falling consumption/investment level
- accumulating/increasing inventory level
[1 mark per point ; mark the first two points only]

3. (a) The change in value of 1 Bitcoin is more volatile than the change in value of HK$1. (1)
OR
The change in value of HK$1 is stabler than the change in value of 1 Bitcoin. (1)

(b) As the value of Hong Kong dollar is much stabler than that of Bitcoin, it implies that the purchasing
power of Hong Kong dollar is less likely to fluctuate over time. To preserve the purchasing power of
future receipts, people are more willing to accept Hong Kong dollar as future payment than Bitcoin.
(3)

4. She would gain. (1)

As the realised/actual real interest rate she paid (5% - 4% = 1%) is lower than the expected real interest
rate (5% - 2% = 3%). (2)

5. (a) When people consume meat, it may cause pollution to the environment / cut down of trees, and meat
consumers would not compensate for it. (1)
This causes an external cost. (1)
The external cost implies that the marginal social cost is higher than the marginal social benefit at
quantity transacted (1)
The production of meat is above efficient level. / There is overproduction of meat and a deadweight
loss (1)
(b) Regressive tax (1)
As the tax payment for purchasing the same amount of meat is the same for all people, the tax rate
will decrease when people’s taxable income increase (1)
P.20
6 (a) After lowering the required reserve ratio, there is excess reserve in the banking system. (1)
Banks will lend out the excess reserve. (1)
The bank loans are then re-deposited into the banking system. (1)
The process goes on and on until there is no excess reserve in the banking system.

(b) Original required reserve ratio = $2 500m / $10 000m x 100% = 25% (1)
New required reserve ratio = 25% - 5% = 20%
Maximum money supply = $100m + $2 500m x 1/20% = $12 600 million (3)

(c) Verbal elaboration:

- By open market purchase of government bonds, (1)
- more money is injected to the banking system, leading to a higher money supply. (1)
- The nominal interest rate will thus decrease. (1)
- Aggregate demand increases due to higher consumption and investment. (1)
- Aggregate output increases towards the full employment level, and the deflationary (output) gap
can be narrowed down (1)

Indicate in the diagram:

- Correct position of LRAS curve to
indicate the original deflationary gap (1)
- Rightwards shift of aggregate demand
curve (1)
- Smaller deflationary gap (1)

(d) Advantage: Pros of the transfer payment policy OR Cons of the monetary policy
- The increase in transfer payment will raise the disposable income of the lower income group,
while that of higher-income group is not affected. This may help to narrow down the income
gap, while the monetary policies will not have such an effect.
- Increasing transfer payments have a more direct and immediate effect on the aggregate output,
while monetary policies take longer time in adjusting the nominal interest rate and thus raising
the aggregate output.
- Money supply may not increase after the implementation of monetary policies if banks decide
to keep the excess reserve / cannot loan out the excess reserve, as a result, the aggregate output
cannot be stimulated, while the transfer payment policy will not be affected by the action of
commercial banks.
- any other relevant point
[2 marks ; mark the FIRST point only]

Disadvantage: Pros of the monetary policy OR Cons of the transfer payment policy
- The monetary policy increases output level via investment which will help enhance present and
future productivity, which may boost both the short run and long run output level, while the
transfer payment policy mainly boosts the short run output level only.
- The increase in transfer payment may worsen the fiscal balance of the government due to the
increase in government expenditure, while the monetary policy will not have such an effect.
- any other relevant point
[2 marks ; mark the FIRST point only]

7. (a) The increasing unemployment rate (1)

may imply that more people fall out of the salaries tax net. (1) / they have lower taxable income
and thus a lower salaries tax payment. (1)
The government tax revenue would decrease (1)

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(bi) Deflationary gap (1)

(bii) The increase in public expenditure on investment and training to labour would raise the investment
expenditure and government consumption expenditure, leading to an increase in aggregate demand.
(1)
When labour receive more training, the labour productivity in the future will be higher, leading to an
increase in long run aggregate supply. (1)/ The public expenditure on investment will increase the
capital and productivity, leading to an increase in long run aggregate supply.
When the increase in aggregate demand is greater than the increase in long run aggregate supply, the
deflationary gap will be narrowed down. (1)

(c)

The maximum mark for content is 12 marks.

Answers may include the following:

Aggregate output
Strategy I:
The one-off unemployment assistance may increase the disposable income of the unemployed, and
thus boosting the private consumption expenditure and aggregate demand (AD). Since Hong Kong
has a deflationary output gap, the increase in AD will increase the aggregate output in the short run.

Strategy II:
Providing subsidies to schools and organisations will lower the production cost of those firms so the
short run aggregate supply (SRAS) will decrease, shifting the SRAS curve downwards. Since Hong
Kong has a deflationary output gap, the increase in SRAS will increase the aggregate output in the
short run.
Providing subsidies on holding re-training programmes may raise the labour productivity of the
unemployed, and thus raising the long run aggregate supply in the future. The aggregate output could
then be raised in the long run.

Evaluation:
Strategy II may be better than Strategy I, as it may boost in the aggregate output in the long run.
When those unemployed learn new skills, their productivity increase and may benefit the overall
production capacity for a longer time and stimulate the economic growth. In comparison, Strategy I
is only a short-term measure.

P.22
Unemployment rate
Strategy I:
Providing a one-off unemployment assistance may not help the unemployed in finding new jobs,
therefore it is less likely to affect the unemployment rate.
OR
Providing a one-off unemployment assistance may lower the cost of being unemployed so it provides
a disincentive effect for the unemployed to find jobs. It may not help to lower the unemployment
rate.

Strategy II:
The unemployed may equip themselves with more skills when joining re-training programmes, so
that they will be able to work for more different kinds of jobs in the future. This may increase a
chance for them to find a job successfully and possibly lower the unemployment rate.

Evaluation:
Strategy II may be better in lowering the unemployment rate, as there is no significant effect on
lowering the unemployment rate by Strategy I.

Equity
Strategy I:
Providing unemployment assistance may help improving equity by equalising income, as the
disposable income of the unemployed, which may usually be lower-income group, increases. With
the disposable income of the higher-income group remains unchanged, the income gap can be
narrowed down.

Strategy II:
Providing subsidy on re-training programmes may help to improve equity by equalising
opportunities. The unemployed will not be deprived from receiving re-training opportunities and
learning new skills because of their background (i.e. low income / unemployed). This may increase
their future productivity and thus their income-earning power.

Evaluation:
Strategy I brings a more immediate effect on equity as the disposable income of the unemployed
(lower-income group) can be raised once they receive the assistance. In contrast, Strategy II takes
longer time to raise the unemployed (lower-income group)’s disposable income, as they need to spend
time to attend the retraining programmes and find a new job.

However, Strategy II may be better as it may benefit the unemployed (lower-income group) in long
term. Once these people learnt new skills, they can use these skills in the future and increase their
future productivity. They may be able to find jobs with higher skills requirements and earn higher
income in the future. But for Strategy I, the unemployed can only be benefited by the one-off increase
in disposable income. Once they have spent the assistance received, their income return to normal
level and their future income-earning abilities are not raised.

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