ECS1601 October/November 2012

SECTION A [50 MARKS]

QUESTION 1

[8]

(i)

(4)

Name four basic properties an "item" must have in order to serve satisfactorily as money.

Study guide
Activitity 2.2 page 20.
Short questions.
(a) List four properties a commodity must have in order to serve as money.
Checklist. page 29
Concepts. I am able to "list the properties of money".
(ii)

List four arguments for the use of trade barriers.

(4)

Study guide
Activitity 4.2 page 53.
Short questions.
(c) What are the arguments for and against the use of trade barriers?

Checklist. page 59
Explanations. I am able to "argue for and against the use of trade barriers" .
QUESTION 2
(i)

Use the Phillips curve to illustrate on the following diagram the trade-off between inflation
and unemployment.

Study guide
Activitity 10.6 page 161.
Short questions.
(a) Illustrate and explain the Phillips curve, ...

Checklist. page 163

Diagrams. I am able to show on a diagram "the Phillips curve figures 22-2 and 22-3" .

Open Rubric

[12]

(2)

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(ii)

Given the AD-AS model:

Illustrate on the following diagram how both unemployment and inflation can be decreased
at the same time. Remember to label your diagram.

(3)

Study guide
Activitity 9.4 page 150.
Short questions.
(b) Explain, with the aid of diagrams, what policy measures can be used to combat cost-push
inflation ...
Checklist. page 153

Diagrams. I am able to explain with or without the aid of a diagram "the impact of measures
taken to get rid of demand-pull and cost-push inflation" .
Note: An increase in supply, illustrated by a rightward shift of the AS curve, will have the desired effect.

Give one possible reason or policy measure that could result in the simultaneous reduction
of both unemployment and inflation.

(1)

Study guide
Activitity 9.4 page 150.
Short questions.
(b) Explain, with the aid of diagrams, what policy measures can be used to combat cost-push inflation ...

Checklist. page 153

Diagrams. I am able to explain with or without the aid of a diagram "the impact of measures taken to
get rid of demand-pull and cost-push inflation".
Note: Increase in productivity, etc.
(iii)

Given the AD-AS model, use the following diagrams to illustrate the monetary transmission
mechanism. Assume an increase in the interest rate. Remember to label your diagrams.

(6)

Study guide
Activitity 8.2 page 138.
Short questions.
(c) *Use the AD-AS model and explain, with the aid of diagrams, how an increase in the interest
rate will affect the level of prices, production and income in the economy.
Checklist. page 140

Diagrams. I am able to explain with or without the aid of a diagram " the transmission
mechanism figure 20-6" .
Note: The solution is given on page 138 of the study guide.
"(c) Start by drawing diagrams similar to those in figure 20-6(a) and figure 20-6(c). An increase in the
interest rate will lead to a decrease in investment. Spending decreases, leading to a decrease in aggregate
demand (the AD curve shifts to the left), while prices, production and income will also decrease."

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QUESTION 3
(i)

[10]

Given the following diagram of a Keynesian model of a closed economy without a government:

Note. This question is based on Activity 6.7 and 6.8 in the study guide. To calculate the multiplier see
Activity 6.8 on pages 89-90 AND the solution on pages 98-99. The calculation of the value of full
employment level of income is base on Activity 6.7 (f) on page 89 "*Calculate the impact of an increase
in investment spending of R100 million in an economy without a government and a foreign sector if the
marginal propensity to consume is ....". See also the answer given on page 98.

Calculate the multiplier. (Show all your calculations.)

= 2.5
or
c = slope of A curve =
and the multiplier

A 8000 3200 4800 3

=
=
= = 0,6
Y
8000 0
8000 5

(2)

1
1 c
1
=
1 0,6
1
=
0,4
= 2.5

Give the equation of the total expenditure line A.

(2)

A = A + cY
or
A=C+I
= C + cY + I

Assume an increase of 400 in autonomous spending will ensure that the full employment
level of income (Yf) will be reached. Calculate the value of the full employment level of
income. (Show all your calculations.)

(2)

The increase of 400 in A will increase the income level with

A =

Y = A
= 2.5 x 400
= 1 000

Full employment level of income = 8 000 + 1 000 = 9 000.

(ii)

Given the following information:

autonomous consumption spending
investment spending
government spending
exports
autonomous imports
multiplier

=
=
=
=
=
=

R300 m
R200 m
R350 m
R250 m
R100 m
2

Calculate (Show all your calculations.):

Note. The question on the value of total spending at equilibrium is based on question 6 (iv) of the selfevaluation exercise on page 180 of the study guide AND the solution on page 184.

the equilibrium level of income.

(2)

= 2 x (300 + 200 + 350 + 250 100)

= 2 x 1 000
= 2 000

total spending if the economy is at equilibrium.

(2)

At equilibrium, total spending equals total income, A = Y. The equilibrium level of income is 2 000
(see above), and therefore, total spending is also 2 000.

QUESTION 4
(i)

[20]

Distinguish between nationalisation and privatisation.

(2)

Study guide
Activitity 3.4 page 36.
Short questions.
(a) Distinguish between nationalisation and privatisation, and give a practical example
of each.
Checklist. page 45

Explanations. I am able to "explain nationalisation and privatisation ".

(ii)

The South African Minister of Trade and Industry has recently stated that a weakening of
the rand against the dollar will benefit exporters. Explain why you agree/disagree with his
statement.

(3)

Study guide
Activitity 4.4 page 55.
True/False questions.
(8) A depreciation of the rand against the US dollar will reduce the competitiveness of American
goods and services in South Africa.
(10) If the rand appreciates against other currencies, South African exports will become more
competitive.
(12) A depreciation of the rand against other currencies will raise the prices of imported capital
goods.
Checklist. page 59

Explanations. I am able to " explain the impact of changes in the rand/dollar exchange rate table
17-5".

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(iii) Define fiscal policy and explain how the equilibrium level of income can be raised through
fiscal policy in a Keynesian model of the economy.

(8)

Study guide
Activitity 7.4 page 110.
Short questions.
(a) Define fiscal policy and explain how the equilibrium level of income can be raised
through fiscal policy in a Keynesian model.
Checklist. page 127

Diagram. I am able to explain with or without a diagram " the impact of fiscal policy on the
equilibrium level of income".
Note: The solution to activity 7.4 (a), and therefore this question, is given on page 121 of the study guide
(iv)

Briefly discuss two factors which impact on the effectiveness of monetary policy in the ADAS model.

(2)

Study guide
Activitity 8.2 page 135.
Short questions.
(e) *The following statement is made in the prescribed book: To summarise: The smaller the
interest elasticity of investment demand, and also the steeper the AS curve, the less effective an
expansionary monetary policy will be as a means of stimulating the economy . Do you agree?
Checklist. page 140

Diagram. I am able to explain with or without a diagram "the transmission mechanism ".
(v)

Explain how the government benefits from inflation via the tax system.

(3)

Study guide
Activitity 9.3 page 149.
True/False questions.
(5) The fact that taxpayers are taxed on their nominal incomes, irrespective of what happens to
their real incomes, could give rise to bracket creep (as in South Africa).
Short questions.
(a) *Explain why policy makers regard inflation as a problem.
(b) Distinguish three main types of costs of inflation, and give examples of each.
Checklist. page 153

Explanations. I am able to "distinguish between the main types of costs of inflation ".
(vi) Distinguish between cyclical and seasonal unemployment.
Study guide
Activitity 10.3 page 160.
Short questions.

(2)

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(a) Distinguish between frictional, seasonal, cyclical and structural unemployment and give an
example of each type.
Checklist. page 140
Explanation. I am able to "distinguish between the different types of unemployment ".