The Independent Institute of Education 2016: Additional Instructions

The Independent Institute of Education
2016
MODULE NAME:
MODULE CODE:
ECONOMICS 1B
PMAC6112
ECONOMICS 1B
PMAC6112d
ECONOMICS 1B
PMAC6112e
ECONOMICS 1B
PMAC6112f
ECONOMICS 1B
PMAC6112p
ECONOMICS 1B
PMAC6112w
ECONOMICS B (MACRO)
ECMS6212
ECONOMICS B (MACRO)
ECMS6212d
ASSESSMENT TYPE:
EXAMINATION (PAPER AND MEMORANDUM)
TOTAL MARK ALLOCATION:
120 MARKS
TOTAL HOURS:
2 HOURS (+10 minutes reading time)
INSTRUCTIONS:
1.
Please adhere to all instructions in the assessment booklet.
2.
Independent work is required.
3.
Five minutes per hour of the assessment to a maximum of 15 minutes is dedicated to
reading time before the start of the assessment. You may make notes on your question
paper, but not in your answer sheet. Calculators may not be used during reading time.
4.
You may not leave the assessment venue during reading time, or during the first hour or
during the last 15 minutes of the assessment.
5.
Ensure that your name is on all pieces of paper or books that you will be submitting. Submit
all the pages of this assessments question paper as well as your answer script.
6.
Answer all the questions on the answer sheets or in answer booklets provided. The phrase
END OF PAPER will appear after the final set question of this assessment.
7.
Remember to work at a steady pace so that you are able to complete the assessment within
the allocated time. Use the mark allocation as a guideline as to how much time to spend on
each section.
Additional instructions:
1.
This is a CLOSED BOOK assessment.
2.
Calculators are allowed.
3.
For multiple choice questions, give only one response per question. The marker will ignore
any question with more than one answer, unless otherwise stated. You should, therefore, be
sure of your answer before committing it to paper.
4.
Answer all questions.
5.
Show all calculations, where applicable (marks may be awarded for this).
The Independent Institute of Education (Pty) Ltd 2016

Page 1 of 22
2016
Section A: Multiple choice questions
(Marks: 40)
Question 1
(Marks: 40)
Multiple-choice questions: Select one (1) correct answer for each of the following. In your answer
booklet, write down only the number of the question and next to it, the letter of the correct
answer.
Q.1.1
Q.1.2
Banks can create money by

(a)
Printing additional bank notes.
(b)
Paying interest to their depositors.
(c)
Offering financial services, such as money market accounts.
(d)
Making loans that result in additional deposits.
(2)
When taxes are increased, disposable income ________ and hence, consumption
(2)
_________.
Q.1.3
(a)
Increases; increases.
(b)
Increases; decreases.
(c)
Decreases; decreases.
(d)
Stays the same; stays the same.
The demand for money is:

(a)
(2)
The amount that the various participants in the economy plan to hold in the
form of money balances;
(b)
The interest that is earned when the money is used to purchase bonds;
(c)
The amount of money that the various participants in the economy want to
hold in the form of money balances;
(d)
The money balances that are held by various participants in the economy.

Page 2 of 22
Q.1.4
GDP is defined as the

(a)
Value of all final goods produced in a country in a period of time.
(b)
Value of all goods and services produced in a country in a period of time.
(c)
Value of all final goods and services produced in a country in a period of
2016
(2)
time.
(d)
Q.1.5
Value of all services produced in a country in a period of time.
The government provides households and firms with ___________ goods and
(2)
services, and to finance these goods and services, households and firms pay to
_____________ the government.
Q.1.6
Q.1.7
Q.1.8
(a)
Private, taxes.
(b)
Public, taxes.
(c)
Taxes, transfer payments.
(d)
Public, transfer payments.
Which one of the following will reduce the size of the multiplier?
(a)
An increase in the marginal propensity to consume.
(b)
A decrease in the marginal propensity to save.
(c)
An increase in the level of government spending.
(d)
An increase in the tax rate.
A contractionary fiscal policy will

(a)
Lead to a rightward shift of the AD curve.
(b)
Lead to a leftward shift of the AD curve.
(c)
Lead to a rightward shift of the AS curve.
(d)
Lead to a leftward shift of the AS curve.
The extent to which imports increase for a given increase in income depends on
(a)
Net exports.
(b)
Marginal propensity to import.
(c)
Income.
(d)
Prices.
(2)
(2)
(2)

Page 3 of 22
Q.1.9
2016
The decision lag is ___________ for fiscal policy and _________ for monetary
(2)
policy.
Q.1.10
(a)
Long; short.
(b)
Short; long.
(c)
Long; extremely short.
(d)
Extremely long; extremely short.
Assuming a constant level of aggregate demand, the short-run effects of an
(2)
adverse supply shock include
Q.1.11
Q.1.12
Q.1.13
(a)
An increase in the price level and a decrease in real output.
(b)
An increase in the price level and an increase in real output.
(c)
A decrease in the price level and an increase in real output.
(d)
A decrease in the price level and a decrease in real output.
Openness of an economy is
(2)
(a)
The extent to which a country is involved in international trade and finance.
(b)
The degree to which a country generates its economic growth.
(c)
The degree to which a country generates its income.
(d)
The extent to which a country is involved in tourism.
Inflation can harm

(a)
Retirees on flexible pensions.
(b)
Borrowers who have long-term loans with fixed interest rates.
(c)
Wage earners whose incomes grow slower than inflation.
(d)
Wage earners whose income grow faster than inflation.
If the CPI was 108 in 2009 and 115 in 2010, the inflation rate in 2010 was
(a)
115%
(b)
108%
(c)
7%
(d)
6.48%
(2)
(2)

Page 4 of 22
Q.1.14
Q.1.15
Q.1.16
2016
The production method of measuring GDP is calculated by summing up the

(a)
Income earned at each point of production.
(b)
Profit made at each level of production.
(c)
Value of all production.
(d)
Value added at each level of production.
(2)
People who do not have jobs and are not looking for work are considered
(a)
Unemployed.
(b)
Out of the labour force.
(c)
Underemployed.
(d)
Overemployed.
(2)
Anna voluntarily quits her job as a school teacher to earn a BCom degree full-time.
(2)
With her degree, she is now searching for a position in Management. Anna
presently is
Q.1.17
Q.1.18
(a)
Cyclically unemployed.
(b)
Structurally unemployed.
(c)
Frictionally unemployed.
(d)
Not a member of the labour force.
If the real interest rate is negative, then

(a)
The inflation rate is larger than the nominal interest rate.
(b)
The inflation rate is smaller than the real interest rate.
(c)
The inflation rate is smaller than the nominal interest rate.
(d)
Lenders will gain.
Economic growth is measured by changes in

(a)
Nominal GDP.
(b)
The money supply.
(c)
Real GDP.
(d)
Unemployment rate.
(2)
(2)

Page 5 of 22
Q.1.19
2016
According to Keynesian economists, during a boom in economic activity
Q.1.20
(a)
The quantity of money should be increased.
(b)
Interest rates should be cut.
(c)
Government should increase its spending.
(d)
Tax rates should be raised.
(2)
According to supply-side theorists, the aggregate supply curve will shift to the
(2)
right when
(a)
The quantity of money increases.
(b)
Marginal tax rates rise.
(c)
Government spending on on-the-job training increases.
(d)
Unemployment benefits are increased.
Section B
(Marks: 50)
Answer all the questions.
Question 1
(Marks: 10)
Q.1.1
Define inflation.
(2)
Q.1.2
Explain why credit cards are not considered to be money.
(2)
Q.1.3
Name any three (3) differences between the consumer price index (CPI) and
(6)
producer price index (PPI).

Page 6 of 22
2016
Question 2
(Marks: 20)
Q.2.1
Name and discuss any four (4) fundamental causes or sources of long-run economic (8)
growth.
Q.2.2
Define structural unemployment and name any four (4) policies that can be used to
(6)
reduce unemployment.
Q.2.3
Discuss the criteria for a good tax.
(6)
Question 3
Q.3.1
(Marks: 20)
Suppose the following information describes the economy of Capricorn:

Consumption function:
= 108 + 0.5Y
Investment spending:
= 400
Government spending:
= 200
Exports of goods and services:
= 300
Imports of goods and services:
= 200
Proportional tax rate:
=20%
(Assume imports are purely autonomous)
Q.3.2
Q.3.1.1
Calculate the total autonomous spending.
(2)
Q.3.1.2
Calculate the equilibrium level of income.
(5)
Assume that the economy of Pluto only produces coke, chips and beer. The following
table consists of the market prices and quantity of these products produced for the
years 2005 and 2010.
Product
Prices
Quantity
Price
Quantity
(2005)
(2005)
(2010)
(2010)
Base Year
Coke
R 2.50
10 000
R 3.00
units
Chips
R 9.00
4 000 units
11 000
units
R 10.0
5 000 units

Page 7 of 22
Beer
Q.3.3
2016
R 1.40
5 000 units
R 2.00
6 000 units
Q.3.2.1
Calculate real GDP for 2005 and 2010.
(6)
Q.3.2.2
Calculate the real growth rate between 2005 and 2010.
(3)
It is widely accepted that there are other channels, besides the interest rate
(4)
channel, through which monetary policy can influence the price level and real
output. One of the channels is the exchange rate channel.
Briefly explain the exchange rate channel as a monetary transmission mechanism,

when the SARB raises the repo rate.

Page 8 of 22
2016
Section C
(Marks: 30)
Question 1
(Marks: 30)
Q.1.1
Suppose that the South African government decreases the income tax rate.
Q.1.1.1
Classify the above policy action and further state whether it is
(2)
expansionary or contractionary.
Q.1.1.2
Using the AD/AS model, illustrate and explain the impact of this policy
(8)
on the price level and income level.
Q.1.2
Explain, with the use of the Phillips curve, the relationship between inflation rate
(6)
and the unemployment rate.
Q.1.3
List any two (2) basic assumptions of the simple Keynesian model and their
(4)
implications.
Q.1.4
Explain, with the use of a diagram, what would happen to the rand/ dollar
(7)
exchange rate, if more South African firms decided to invest offshore in US

companies.
Q.1.5
Select the correct words to fit the sentence:
(3)
If the rand were to appreciate against the dollar, export prices (in dollars) would
Q.1.5.1 increase/decrease, while import prices (in rand) would Q.1.5.2
increase/decrease. This would cause the current account in SA to Q.1.5.3
improve/worsen.
END OF PAPER

Page 9 of 22
2016
Section A
(Marks: 40)
Memorandum: Question 1
(Marks:40)
Award marks as indicated below.
M.1.1
Ref: LU2 p.267
(2)
(d)
M.1.2
Ref: LU7 p.340
(2)
(c)
M.1.3
Ref: LU2 p.262
(2)
(a)
M.1.4
Ref: LU5 p.235
(2)
(c)
M.1.5
Ref: LU1 p.51
(2)
(b)
M.1.6
Ref: LU6 p.343
(2)
(d)
M.1.7
Ref: LU8 p.372
(2)
(b)

Page 10 of 22
M.1.8 Ref: LU7 p.353
2016
(2)
(b)
M.1.9
Ref: LU8 p.372
(2)
(a)
M.1.10 Ref: LU8 p.366
(2)
(a)
M.1.11 Ref: LU4 p.300
(2)
(a)
M.1.12 Ref: LU9 p.385
(2)
(c)
M.1.13 Ref: LU9 pp.382-383
(2)
(d)
M.1.14 Ref: LU5 p.236
(2)
(d)
M.1.15 Ref: LU10 p.400
(2)
(b)

Page 11 of 22
M.1.16 Ref: LU10 p.401
2016
(2)
(c)
M.1.17 Ref: LU9 p.385
(2)
(a)
M.1.18 Ref: LU11 p.410
(2)
(c)
M.1.19 Ref: LU11 p.412
(2)
(d)
M.1.20 Ref: LU8 p.378
(2)
(c)

Page 12 of 22
2016
Memorandum: Section B
(Marks:50)
(Marks:10)
M.1.1
Ref: LU9 p.382
(2)
Inflation is defined as a continuous and considerable rise in prices in general (2).
M.1.2
Ref: LU2 p.258
(2)
Demand deposits are not created when a person is issued with a credit card (1),
the card is simply a convenient means of making purchases by obtaining a shortterm loan from the bank or other financial institution which has issued the
card (1).
M.1.3
Ref: LU9 p.383
(6)
Any 3 of the following (1)
Consumer price index
Producer price index
Pertains to cost of living (1)
Pertains to cost of production (1)
Basket consists of consumer goods
Basket consists of goods only (no
and services (1)
services) (1)
Capital and intermediate goods
Capital and intermediate goods
excluded (1)
included (1)
Prices include VAT (1)
Prices exclude VAT (1)

Page 13 of 22
2016
(Marks:20)
M.2.1 Ref: LU11 pp.414-416
(8)
Any 4 of the following.
Natural resources (1): If there is an increase in the exploitation of the

available natural resources (1) OR
If minerals are discovered by accident or by exploitation (1) OR
Because minerals are non-renewable or exhaustible assets, the deposits
may be exhausted or too expensive to exploit, leading to a decline in
economic growth (1).
Labour (1): improving the quality of the labour force could lead to
economic growth (1) OR
Increasing the size of the labour force or supply of labour could lead to
economic growth (1).
Capital (1): Increasing the quantity and quality of the countrys capital
Economic growth requires more and better capital equipment (1) OR
Applying new technology to capital equipment leads to economic growth
(1).
Entrepreneurship (1): As more people are able to identify opportunities
and exploit them, there is economic growth (1) OR
Fostering entrepreneurial talent will improve economic growth (1).
Domestic demand (1): Expansion of domestic demand would increase
economic growth (1) OR
Increase in investment; government spending would lead to economic
growth (1).
Exports (1): An increase in exports raises the growth rate and also relieves
the balance of payments constraint (1) OR
Stimulation of exports is seen to promote economic growth (1).
Import substitution (1): Reduce imports by manufacturing previously
imported goods domestically could contribute/lead to economic growth
(1).

Page 14 of 22
M.2.2
2016
Ref: LU10 p.402
(6)
Award 2 marks for the definition.
Structural unemployment occurs when there is a mismatch between worker

qualifications and job requirements (2) OR
When jobs disappear because of structural changes in the economy. It is usually
confined to certain industries, sectors or categories of workers (2).
Any 4 of the following policies

Limit population growth (1);
Stricter immigration control (1);
Policies to improve quality of labour, for example through education and
training (1);
Raising the aggregate demand for goods and services (1);
Stimulating consumption spending by lowering taxes (1);
Stimulating investment spending by lowering interest rates (1);
Raising the demand for domestically produced goods and services by
increasing the demand for exports (1);
Increasing the labour intensity of production (1);
Government can embark on special employment programmes that are
aimed at employing as many people as possible (1);
Promote small businesses and the informal sector (1);
Tax incentives or subsidies to stimulate employment (1).
M.2.3
Ref: LU3 pp.293294
(6)
Award a maximum of 6 marks.
Neutrality means that the taxes should not influence taxpayers behaviour (1).
Put differently, taxes should not affect relative prices and thereby distort
economic behaviour (1).

Page 15 of 22
2016
Equity means that the taxes should be fair (1). There are two notions of equity:
horizontal equity and vertical equity (1). Horizontal equity means that people in
the same position should be taxed equally (1). Vertical equity means that people
in different positions should be taxed differently. For example, rich people
should pay more than poor people (1).
Administrative simplicity means that the taxes should be simple to calculate and
administer (1). The purpose is to keep both the collection costs and the
compliance costs as low as possible (1).
(Marks:20)
M.3.1.1
Ref: LU7 pp.337 357
(2)
M.3.1.2
Ref: LU7 pp.337 357
(5)
= 1/[1-c(1-t) + m] (1)
OR
= 1/ [1-0.5(1-0.2) + 0] (1)
= 1/ [1-0.5(0.8)] (1)
=1/ [1-0.4] (1)
=1/0.6 (1)
=1.67 (1)
(1)
Y=x
OR
Y = 1.67 x (808) (1)
Y = 1346.67 (1)

Page 16 of 22
2016
M.3.2.1
Ref: LU5 p.240
(6)
M.3.2.2
Ref: LU5 p.240
(3)
Real growth rate = (GDP 2010 GDP 2005)/GDP 2005 x 100

= (80900 68000)/68000 x 100
= 18.97%
M.3.3
Ref: LU8 pp.370-371
(4)
Award a maximum of 4 marks, the sequence is very important do not award

marks for the incorrect sequence.
Exchange rate channel increase in repo rate

When the SARB raises the repo rate, the market interest rates increase
(1).
If the foreign interest rates remain unchanged, there will be an increase
in net capital inflows (1).
The rand appreciates against other currencies (1).
Exports decline and imports increase (1 mark) OR net exports decline (1).
Aggregate demand decreases (1).
Memorandum: Section C
(Marks:30)
(Marks:30)
M.1.1.1
Ref: LU8 pp.363 367
(2)

Page 17 of 22
2016
Expansionary fiscal policy (2)
M.1.1.2
Ref: LU8 pp.363-367
(8)
Award 5 marks for the graph and 3 marks for the explanation. Award 1 mark
for the correct axes, original AD and AS curves and original equilibrium point.
Award 1 mark for illustrating the rightward shift of the curve. Award 1 mark for
illustrating an increase in production. Award 1 mark for illustrating an increase
in price. Award 1 mark for illustration the new equilibrium.
A decrease in the income tax rate, will increase the consumers disposable
income (1). This will increase the quantity of goods and services demanded in
the economy i.e. aggregate demand increases (1). This will result in a
rightward/outward shift of the AD curve (1).

Page 18 of 22
M.1.2
2016
Ref: LU10 p.405
(6)
Award 3 marks for the graph and 3 marks for the explanation
Award 1 mark for correctly labelling inflation rate on the vertical axis.
Award 1 mark for correctly labelling unemployment rate on the horizontal axis.
Award 1 mark for the downward-sloping Phillips curve.
The Phillips Curve suggests that inflation and unemployment can be traded off
against each other (1). If the nation wishes to achieve a reduction in the level of
unemployment (say, from 3% to 2%), it will need to accept a rise in the general
price level (1). If the nation wishes to achieve a reduction in the general price
level (say, from 4% to 2%), it will need to accept a rise in the level of
unemployment (1).

Page 19 of 22
M.1.3
2016
Ref: LU6 p.317
(4)
The economy consists of households and firms only (1): Total spending
consists of consumption spending and investment spending (1).
There is no government (1): The model cannot be used to analyse
government spending or taxes (1).
There is no foreign sector (1): The model cannot be used to analyse
exports, imports, exchange rates, trade policy and exchange rate policy
(1).
Prices are given (determined outside the model) (1): The model cannot be
used to study inflation (1).
Wages are given (determined outside the model) (1): The model cannot be
used to study the workings of the labour market (1).
The money stock and interest rates are given (determined outside the
model) (1): The model cannot be used to study the financial markets or
monetary policy (1).
Spending (demand) is the driving force that determines the level of
economic activity (1): Production (supply) adjusts passively to changes in
spending (demand) (1).

Page 20 of 22
M.1.4
2016
Ref: LU4 pp.305 & 308 (Table 16-1)
(7)
Award a maximum of 7 marks (3 for the diagram, 4 for the explanation). Explain,
with the use of a diagram, what would happen to the rand/dollar exchange rate,
if more South African firms decided to invest offshore in US companies. Award 1
mark for the initial equilibrium correctly labelled curves and axis. Award 1 mark
for the correct shift of the curve. Award 1 mark for the new equilibrium exchange
rate and quantity.

Page 21 of 22
2016
The original supply (SS), demand (D0D0), equilibrium price of R12,00/$

and quantity of $8 billion per day (1).
As more South African firms invest offshore in US companies, this will lead
to an increase in the demand of dollars (1). This is shown by a shift of the
demand curve to D1D1 (1).
The new equilibrium is reached at E1, at a price (or exchange rate) of
R14,00/$1 and the equilibrium quantity increases to $10 billion (1).
The dollar has appreciated against the rand, OR the rand has depreciated
against the dollar (1).
M.1.5
Ref: LU4 p.308
(3)
Select the correct words to fit the sentence:
If the rand were to appreciate against the dollar, export prices (in dollars) would
M.1.5.1 increase (1), while import prices (in rand) would M.1.5.2 decrease (1).
This would cause the current account in SA to M.1.5.3 worsen (1).
END OF MEMORANDUM

Page 22 of 22

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The Independent Institute of Education

EXAMINATION (PAPER AND MEMORANDUM)

TOTAL MARK ALLOCATION:

2 HOURS (+10 minutes reading time)

The Independent Institute of Education (Pty) Ltd 2016