Model Paper 07

General Certificate of Education (A/Level) Examination 2015

ECONOMICS-PART 02
Introduction to Economy, Market Operation, Theory of Firm, National
Income, Marco Economy Money and Banking and Public Economy

Time: Three Hours

Answer five questions only selecting two questions from sub section A and two questions from sub
section B

SUB SECTION A
1.

a. What are the reasons for every society to make choices? Explain the basic choices
which every society has to face.

(04 Marks)

b. Assume a concave production possibility boundary with milk powder on vertical

axis and cloths on horizontal axis.With reference to the above P.P.C. explain the
following events in separate diagrams.
i. The foreign countries have suspended buying milk powder from the above
country due to the trade hindrance.
ii. Under the trade hindrance the economy will suspend the inputs and capital
equipments.
iii. Productivity gap of the above economy
iv. The economy is facing a long term economic depression.
v. Ethnic and tribunal changes can be seen in the economy.
(02 Mark each = 05 units)
c. The following production possibility curve illustrates an economy with full
production and full employment. The production points of the curve are given below.
Medicine
0
1
2
3
4
5

Food
30
28
24
18
10
0

i. Demonstrate with production possibility curve

(02 Marks)
ii. What is the feature of opportunity cost? What are the reasons for this shape?
(04 Marks)
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2.
a. The following informations are given to you about demand and supply of oranges.
Demand Equation Qd
Supply Equation Qs

= 24 -2P
= 2P

i. Calculate equilibrium price and quantity.

(02 Marks)
ii. If government levis a tax of Rs. 2/= on consumers, compute the new
equilibrium price and quantity.
(03 Marks)
iii. Compute the consumer price and the producers price after leving the tax
(03 Marks)
iv. Explain the tax incidence of consumer and producer
(03 Marks)
v. Explain the economic inefficiency and the social cost since the tax is leviedon
consumers
(04 Marks)
b. Define Elasticity of Demand and explain the importance of taking management
decisions.
(05 Marks)
3.
a. The following equations are given to you.
Demand Equation Qd=96-2P
Supply Equation

Qs= 12 + 4P

Government has decided to implement a minimum price with a guaranteed price

polivy for producers and buy the excess supply. The minimum price is decided as Rs.
10/=
a. Compute the changes in consumers surplus under the guaranteed price.
(02 Marks)
b.Compute the changes in producers surplus under the guaranteed price
(02 Marks)
c. Computer the total welfare effects
(02 Marks)
b. Distinguish between theory of demand and law of demand
(03 Marks)
c. The law of supply explains the positive relationship between the price and the
quantity supply. Explain the reasons for the law of supply.
(03 Marks)
d. To reduce the externalities government impose taxes and provide subsidies Except
These what are the other measures to reduce externalities ?
(03 Marks)
e. Explain the difference between Cross Elasticity of Demand and Income Elasticity of
Demand inclusive of all types .
(05 Marks)
4.
a. Define opportunity cost and explain how it is important to take management
decisions.
(4 marks)
b. Explain the difference between abnormal profit and abnormal losses using diagrams.
(4 marks)
c. Why does the Average Fixed Cost curve takes Rectangular Hyperbola
(2 marks)
d. What are the main reasons for increasing returns to scale and decreasing returns to
scale?
(4 marks)
e. Mention the features of perfect competition and explain the impacts of them(6 marks)
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f. Explain the differences between Perfect Competition and monopoly.

(4 marks)

5.
a. The following data of a macro economy are given to you. All the figures are in Rs.
Million
The output of Agricultural Sector
8000
The output of Industrial Sector
2000
The output of services Sector
12000
Value of inputs in agricultural sector
200
Value of inputs in industrial sector
10000
Gross domestic fixed capital formation 4000
Inventories
2000
Government purchases
4600
Private consumption
10000
Import of goods and services
3200
Export of goods and services
4000
Receipts of foreign factor income
800
Payments for foreign factor
900
Net fixed capital formation
3800
Net foreign transfers
2000
Using relevant data, compute
i. Gross Domestic production.
ii. Gross National production.
iii. Disposable National income
iv. Current account balance of B.O.P.
v. National Saving

(02 x 5 = 10 Marks)

b. Explain the drawbacks of domestic production approach

(03 Marks)
c. Gross Domestic production only includes the market economic activities Explain
(03 Marks)
d. Government administration Cost inclusion of National Accounts creates a wrong
picture. Do you agree? Explain with reasons.
(02 Marks)
e. Suppose an employee taken to the housework instead of housewife. Does this impact
on GDP? Explain.
(02 Marks)

SUB SECTION B
6.
a. You are given the following informations.
Consumption C = 40 + 0.6 yd
Investment I = 150
Government Expenditure G = 200
Exports X = 70
Imports M = 44 + 0. 28y
Transfer Payments Tr = 40
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Taxes T = 0.2Y
Using the above data, Compute,
i.
Macro economic equilibrium
ii.
Trade balance in equilibrium
iii. Budget deficit or surplus
iv.
Government investment multiplier.
v.
If government reduces tax rate by 5% compute the macro economic equilibrium
(03 Marks each part 03x05 =15)
b. What are the stages of business cycle? Explain briefly using a diagram.(03 Marks)
c. Savings always equals to the Investment. Do you agree? Explain with reasons. .
(02 Marks)
7.
a. The following informations of public finance are given to you( All figures are in the
billion)
Non tax
500
Tax revenue
2000
Transfer Payments
850
Interest Payments
900
Payments for goods and services
1000
Capital expenditure and net lending 250
Foreign Loans
150
Loans from CBSL
50
Loans from commercial banks
200
Loans from non banking sources
100
Using the relevant data, compute,
i.
Current account balance
(02 Marks)
ii. Overall balance
(02 Marks)
iii. Primary account balance
(02 Marks)
iv.
Financing the overall balance
(02 Marks)
v.
Inflationary impact of financing the budget
(03 Marks)
b. Explain the following cannons of taxation
i.
Equity
(02 Marks)
ii. Neutrality
(02 Marks)
c. What are the new taxes introduced in the interim budget?
(01 Marks)
d. Explain the difference between Net Cash Deficit and Primary account Balance
(04 Marks)
8.
a.
b.
c.
d.
e.

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Distinguish between interim budget and the vote on account.(04 Marks)

What are the distinctive situations to present a vote on account ? .(03 Marks)
Explain sensitivity (buoyancy) coefficient of government tax income.(04 Marks)
Explain the reasons for poor performances of government tax collection.(03 Marks)
Explain the difference between merit goods and demerit goods production using
graphs.
(06 Marks)

9.
a. Assume a competitive commercial banking system operates at a statutory ratio of
20holds Rs. 2000 million of demand deposits and has created loans amounted to Rs.
1600 million' In addition to this, the general public of this economy in which the
banking system operates, possesses coins and notes amounted to Rs. 800 million,
Using relevant data, answer the following questions
i.
Draw the balance sheet of the banking system assuming that it has only demand
deposits, required reserve amount & loans
(3 marks)
ii. Compute the narrow money supply (M1) of the economy.
(4 marks)
iii. Assume that the general public withdraws Rs. 200 million from the banking systemto
increase their holdings of coins & notes. Construct the new balance sheet of the
banking system.
(4 marks)
iv.
What will be the value of the narrow money supply (M1) after all these adjustments?
(4 marks)
b. Explain the difference between Underlying inflation and headline inflation(3 marks)
c. Why dont you consider credit card as money? Explain
(2 marks)
10.
a. Modern Sri Lankan monetary policy is known as a monetary policy framework of
inflation targeting. How do you explain this new trend using monetary policy tools,
operating target, intermediate target & ultimate targets of the current monetary
policy?
(4 marks)
b. How does the central bank of Sri Lanka introduce Reserve money to the Sri Lankan
economy?
(3 marks)
c. What do you meant by near money? What are the main components included in M4?
(4 marks)
d. How does the money supply change impact on aggregate demand? Explain. (4 marks)
e. Explain the differences between new and previous interest rate corridor? (3 marks)
f. What is the importance of new interest rate corridor?
(2 marks)

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