2003-CE ECON PAPER 1 HONG KONG EXAMINATIONS AND ASSESSMENT AUTHORITY HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2003 ECONOMICS PAPER 1 8.30 am ~ 10.00 am (1% hours) This paper must be answered in English 1. This paper consists of two sections, A and B. 2. Section A contains eight questions. Attempt ALL questions. The whole section carries 38 marks for content and 2 marks for effective 3. Section B contains three questions. Attempt any TWO questions Each question carries 23 marks for content and 2 marks for effective communication 2003-CE-ECON 1-1 28 Section A (40 marks) Attempt ALL questions. 1. Arreporter wrote: *... The government has not allowed families with an income of more than $21 000 a month to buy a living unit under the Home Ownership Scheme (HOS). Nevertheless, there are not enough living units under this scheme available for applicants.” (a) Use your knowledge of demand and supply to describe the HOS living units market Tustrate your answer with the aid of a diagram. (b) Ifthe income restriction on the applicants is lowered to $18 000, explain the effect on the HOS living units market by using the diagram in (a). (7 marks) 2. (@) State the law of diminishing marginal returns. G marks) (b) The following table shows the input-output relationship of a firm. Explain why the table illustrates the law in (a). Machine (Unit Labour (Unit) ‘Average output of machine (Unit) 2 is ieeeeeta| 14 B (8 marks) 3. John is running a firm with Peter. Since Peter has not been running the firm properly, both of them have had to sell their personal property to cover the firm's debts. ‘To what type of business ownership does the above firm belong ? List TWO features ofthis type of business ownership. (G mark) 2003-CE-ECON 1-2 294. Give TWO characteristics of the market structure under perfect competition, (arts) 5. The lowing able shows dat conceming cea county. ative it [2002] Consumption Expenditure ($ million) | _ 2 500 2679 [Feito | Prise Index iw [9s | Based on the above data, explain in which year, 1992 or 2002, the country had a higher general living standard, Show your workings. (6 marks) 6. Suppose a number of civil servants retire under the government's voluntary retirement scheme. Explain whether this will increase the unemployment rate in Hong Kong, (4 marks) In some Asian countries, the prices of goods and services in tourist areas are expressed in US dollars. Suppose tourists pay cash in US dollars for their purchases. (a) Name TWO functions of money performed by the US dollar as illustrated in the above situation, (2 marks) (b) Name and explain the other TWO functions of money, (4 marks) 8. Give TWO reasons to explain why the direct tax revenue of the Hong Kong government would decrease in times of economic recession (4 marks) END OF SECTION A 2003-CE-ECON 1-3 30 Section B (50 marks) Attempt any TWO questions, 9. Deflation has occurred in Hong Kong since 1998. (a) A government offical has said, ‘Deflation in Hong Kong would stimulate ts exports." With the aid of a diagram, explain under what condition would deflation increase Hong Kong's total export value (in terms of the Hong Kong dolla). (7 maris) (b) Firm A is a local manufacturer in Hong Kong producing goods for export only. (Give TWO reasons to explain why the contribution of this firm to Hong Kong's gross domestic product (GDP) in 2003 could be smaller than the total export value of this firm in 2008, (4 marks) Gi) Suppose Firm A establishes retail shops to sell its products in Hong Kong. Explain what type of expansion this is and suggest TWO possitle motives for such a type of expansion (6 marks) (©) Explain whether the following persons would gain or lose in times of unexpected deflation, (@) Suppose an individual has borrowed a housing mortgage loan from a bank at a fixed interest rate Gi) Suppose a retired civil servant receives a fixed monthly pension from the government. (6 marks) 22003-CE-ECON 1-4 310, In the production of textbooks, different people perform different duties, For ‘example, there are editors, typists, proofreaders etc (a) What economic principle is illustrated by this practice ? Suggest THREE reasons why the application of this principle can increase labour productivity. (4 marks) ) Suppose the price of paper falls drastically and the number of school children increases, (i) Explain why the supply of and the demand for textbooks would be affected by these changes. ii) With the aid of a diagram, explain under what condition the price of textbooks would decrease. (8 marks) (©) Suppose the output of paper and cars per unit of resources of Country A and Country B are as follows Paper (units) Cars (units) ‘Country A 10 OR 10 Country B 1s oR 30 (@) Explain which country has a comparative advantage in the production of paper. Calculate the total gain fo the two countries from trading one unit of paper. (S marks) (Gi) Suppose a newly developed Country, X, now offers paper for sale with an exchange ratio of 1 unit of paper to 0.5 units of cars. Explain ‘whether Country B would import paper from Country A. (3 marks) (4) ‘The first registration tax on a newly imported car isa fixed percentage of the car's value, Explain whether the tax is proportional (3 marks) 12003.CE-ECON 1-5 32 1H. Many information technology (IT) companies in Hong Kong have closed down in recent years, (a) Explain whether each of the following should be included in the calculation of Hong Kong's GDP. (i) the resale value ofthe furniture and equipment of the above companies (2 maris) (Gi) the fee paid to Hong Kong accounting firms in liquidating the above companies (@ marks) (b) Suppose the closing down of many companies leads to a sharp decrease in demand for loans. As a result, some banks cannot lend out their excess (i) Explain how the decrease in demand for loans would affect the ‘opportunity cost to these banks of holding excess reserves. (4 marks) (ii) Using the process of deposit creation, explain how a decrease in demand for loans could affect the deposit creation ability of the banking system, (4 matis) (©) Suppose the banking system has an excess reserve of $50 million and its balance sheet is as follows Assets (Sm) Liabilities (Sm) Reserves 250 | Deposits 1000 Loans 750 ‘What is the maximum possible amount of total deposits in the banking system if no banks hold excess reserves ? Show your workings. (4 marks) (@) With the aid of a diagram, explain how the closing down of IT companies would affect the wage rate and employment level of the professionals inthe IT industry. (6 marts) END OF PAPER 2003.CE-ECON I-6 3